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Thomas Paine

To argue with a person who has renounced the use of reason is like administering medicine to the dead.

Saturday, January 12, 2013

12 January - Economics Logic

Multiplayer Game, Virtual Currency Monetizatio...Multiplayer Game, Virtual Currency Monetization Platform (Photo credit: IvanWalsh.com)
Met Police AGWMet Police AGW (Photo credit: kenjonbro)

Finally, one of Gore’s trained presenters debates a climate skeptic

Monetizing the Effects of Carbon

.....Over-riding everything in this question is the unthinking, un-acknowledged destruction from jacking up energy prices. This always hits the poor hardest, as I have discussed elsewhere. Energy taxes, including carbon taxes and “monetizations” are the most regressive tax of all. 

Let me recapitulate my two main objections to carbon monetization. The first is that for many issues, including carbon, there is no agreed upon way to establish the monetary values. In the case of CO2 there are questions about the very existence of such costs, much less their value. As the NYT article points out, there is great disagreement over the $21 figure even among those who agree that there is some social cost to CO2. Since there is no actual evidence of any actual costs, this is all merely claims and counterclaims, even between adherents. There is no objective way to settle the disagreements.
My second objection is that while people are often in a hurry to monetize the social costs of something, they rarely take the necessary other step. They rarely are in a hurry to monetize the social benefits of something. But if you do one, you have to do the other. After all, this is why it’s called a “cost/benefit” analysis …
...PPS—Note that I’ve only considered one single social benefit, the increase in plant production. Since their claimed costs relate to claimed future temperature rises, how about the benefit of increased ice-free days at the northern ports if temperatures do rise? And the longer growing seasons if temperatures increase? How much are they worth worldwide? They likely have included the extra costs from air-conditioning to fight the fabled future heat, but have they included the reduction in winter heating? I could go on, but I’m sure you get the point. The whole thing is an exercise in fantasy, shifting sands with no clear answers.

john robertson says:
Quick submit our invoice to the UN, $100 billion now,bill for other benefits to follow, payable by all non emitter who have growing plants.
Wait, UN practices, bill the UN for $300 Billion and promise the $200billion back when the imagined harm is proven.
I was thinking more of the costs to society, of this UN grab for power using CO2 emissions as a cover, when I read the title.

Climate Ace says:
Elsewhere there have been various attempts by economists to demonstrate that AGW adaptation is cheaper than prevention.
This line is taken by luminaries such as Lomberg and Moncton. IMHO, they have failed miserably because they demonstrate a complete inability to address threshold AGW issues, non-linear AGW issues, or to provide a time frame for their ‘demonstrations’. RIRO.
The post above also avoids these three critical issues in any discussion of benefits and disbenefits of CO2 emissions.
That apart, I take issue with a common meme of BAU boosters, that action on carbon dioxide is ‘unfair’ to the poor. This approach conflates two issues (AGW and poverty) in a way that appears to be designed to undermine motivation to carry out desirable action on either. There is a handy rule-of-thumb test about whether the issue is being addressed in a comprehensive and therefore credible fashion. It involves addressing the following issue: ‘What are the impacts on the poor of BAU fossil industries?’
This enables BAU boosters to assume uncritically that failure to act on carbon dioxide is somehow not unfair on the poor whereas acting on it is unfair to the poor. Cute. This assumption is never made explicit and it is never discussed. It is palpable nonsense. The reality is that whatever system of distribution of the benefits and disbenefits of carbon dioxide, the poor will end up copping the short end of the stick.
The issue is poverty. The issue is AGW.
The logical sequitor is action against both the maldistribution of wealth and resources, and reining in the growth of CO2 emissions.
It is the evident aim of BAU boosters to change neither.

Chris Riley says:
Welcome to my bandwagon. The following is excerpted from a comment I made here a couple of years ago.
It seems increasingly likely that the primary contribution that the AGW community will have made to society after the scientific debate over AGW is concluded will be in the field of economic education. Classical economics teaches (see Pigou,Stigler) that socially optimal resource allocation and use occurs only when the price of the resource is equal to the total (including social) marginal cost of the resource. If we assume, as we have for the last few decades, that a net negative social externality exists as a consequence of converting C into CO2, then social optimality can be achieved most efficiently by charging a fee on top of the fuel price in order to raise the price to a point where both the private and social marginal costs are borne by the user and hence reflected in the quantity of fuel demanded. I believe that the AGW community has done an excellent job of increasing public awareness of this fundamental economic principle, and, with the development of Cap and Trade schemes, have devised a politically palliatable strategy for implementing such a program.
Any members of the AGW community that are motivated primarily by collectivist or Malthusian political beliefs are not however, likely to enjoy much pride-in-accomplishment from this if it turns out that CAGW is nonsense. Symmetry exists in economics. If we assume that the negative component of social cost inherent in the oxidation of carbon is eventually found to be trivial, then the positive effects documented would predominate, and the net externality inherent in the burning of carbon would be positive. Users of fossil fuel would, in the absence of intervention, be paying more than the total marginal social cost of that fuel, causing them to burn less than the socially optimal amount. Optimality could best be achieved by subsidizing the consumption of fossil fuel. The cost of the subsidy, in order to equate the price of agricultural commodities with their actual total marginal cost, thus achieving socially optimality, would have to be collected in the form of a fee from all people who eat. Since we in the U.S.A. produce about three times the amount of CO2 than we consume in the form of food, this would result in substantial income coming into this country which would accrue to GDP and relieve balance trade worries. The developing world would also benefit as the increased CO2 production induced by the subsidy, would push up agricultural productivity worldwide.
The increase in the price of food that results from the “food tax”would decrease the quantity of food demanded worldwide, which, along with the increase in agricultural productivity would create and expand agricultural surplus’s which are the foundation of all the economic development that has ever occurred anywhere.
I am looking forward to that sunny day when the science really is settled, and we can replace talk of “Cap and Trade” with an economically efficient and socially responsible “Burn and Earn” program. We can then begin the task of beating the eyesores we refer to as windmills into ’68 Pontiac GTO’s, and melting the famine-promoting solar panels down and re-casting them into 100 inch flat screen 3d TVs.

eco-geek says:
.Many commercial growers pump CO2 into their greenhouses to improve plant growth so it seems there is a real greenhouse effect after all, and yes it should be taxed.
It would be reasonable that the money so raised should be returned to the fossil fuel suppliers so that in turn they and the consumers can increase this proven benefit via lower fuel costs, this way we can collectively green the planet.
I never thought I would find myself in such agreement with the alarmists.
Stay cool!

Economic Analysis of EU 20/20/20 Climate Plan

  • Cost of '20/20/20' Policy will be in the region of €210 billion annually
  • Benefits add up to just €7 billion
  • Raising the target to 30% would cost €450 billion a year
Opinion articles by Bjørn Lomborg about this research paper:
Historiens dyreste symbolpolitik, Jyllands-Posten (External Link)
The EU's response to global warming is a costly mistake, The Telegraph (External Link)

You can download the full report,  or read it with Issuu below:
July, 2010
The Copenhagen Consensus Center has released new research revealing that the European Union’s official ‘20/20/20 policy’ will cost hundreds of billions of Euros but yield only tiny benefits.
The policy aims to cut 2020 greenhouse gas emissions 20% under 1990 levels and ensure there is 20% renewable energy by 2020.
Prominent climate change economist Professor Richard Tol undertook a cost-benefit analysis, using some of the best economic models, of both the 20/20/20 target and of a tougher 30% target that has been advocated by the European Commission.
The EU recently stated that it would cost just €48 billion a year to meet its emissions target.
Professor Tol’s research shows this figure to be implausibly optimistic. Using the average of the best-regarded economic models, he shows that the net cost to Europe will be in the region of €210 billion annually. This corresponds to 1.3% of GDP.

......The reason it costs so much to reduce carbon emissions is that the green alternatives aren’t close to being ready to replace oil and other fossil fuels.”


Economic Analysis of the Promise of 'Green Jobs'
Research Paper by Gürcan Gülen
February, 2011
Energy Security: An Impact Assessment of the EU Climate Policy for 2020
Research Paper by Christoph Böhringer and Andreas Keller
May, 2011

The Stern Review on the Economics of Climate Change: A Comment by Richard Tol

There are arguments for low discount rates (it is the right thing to do) and there are arguments for high discount rates (it is what people use). That is not my point, however.
HM Treasury has clear guidelines on discounting. In fact, they recommend a discount rate that falls over time -- so that problems like climate change are not discounted away.
The Stern Review violates the guidelines of HM Treasury. This is most peculiar, as the Stern Review was written by civil servants of HM Treasury. This is bad procedure.
In my work, I typically present results for a range of discount rates -- and let the reader make her own choice.
The Stern Review does not allow this choice. This is bad style.
Posted by: Richard Tol at October 31, 2006 08:47 AM

This is not quite right. The discount rate in the Green Book is a public sector discount rate to be used in appraising public investments. It is not an estimate of the social rate of time preference - the rate at which future consumption ought to be discounted to make it equivalent in social value to consumption today. The major reason for the difference between the concepts is that public sector investment may be at least in part at the expense of private sector investment rather than current consumption. Theoretically the best way to proceed is is to work out the relevant consumption streams and then use the social raten of time preference, but it is common practice to use a public sector discount rate that incorporates an average amount of crowding out of investment. I owe my understanding of these issues in part to an exceptionally clear article published in the 1960s by none other than David Henderson (noted critic of the IPCC). Since Stern is dealing explicitly with the consumption streams it is entirely right to use the social rate of time preference as the discount rate rather than the public sector discount rate.
Posted by: mike phelps at October 31, 2006 09:57 AM
It looks like Dr. Tol has consistently reversed his C/CO2 conversions- e.g. "it is unlikely that the marginal damage costs of carbon dioxide emissions exceed $50/tC [$14/tCO2] "
14t C ~ 50t CO2, not the other way around.
I don't know if he has simply reversed then number, or if he has miscalculated- $50tC would be about $183/tCO2
Incidentally, carbon taxes of this magnitude would be way lower that the current petrol taxes in the industrial world- $100/ tC would work out to about $0.10/ kilogram carbon, or about $0.06 per liter ($0.22 per gallon).
Posted by: Lab Lemming at October 31, 2006 02:15 PM

1 g C = 0.083 mole CO2 = 3.664 g CO2
$85 * 3.664 = $311
$85 * 3.7 = $314
Posted by: Roger Pielke, Jr. at October 31, 2006 02:18 PM

I'd like to offer an institutional perspective that might address Prof. Tol's stated puzzlement about HM Treasury's behavior, a couple comments on key economics issues, and then ask a fundamental question of political economy.
From 1988-98 I was a staff economist in the Office of Information and Regulatory Affairs, Office of Management and Budget. Among other things, I reviewed major draft regulations and wrote guidance on regulatory impact analysis. Our guidance was mostly Econ 101 level. However, in many instances agencies performed analysis to justify decisions, not to inform them. So OMB guidance was often disregarded if it was necessary to do so to reach the prescribed answer.
I see no reason why HM Treasury would behave differently. In the US, OMB acts as a predecisional peer reviewer and has a high level of ability to detect mischied, a much lower ability to correct it, and virtually no ability to prevent it. I do not believe that UK has an analogue, but if it does it faces the same set of problems. It's reasonable to believe that policy decisions were made before the Stern report was outlined, much less written.
I am unsympathetic in practice to using the social rate of discount. In my experience, this was a magic wand waved to supplant OMB's default discount rate (7% real when I was there) with however low it needed to be to yield net benefits.
I prefer to use the consumption rate of interest for whomever bear the costs. Poor people have higher discont rates than rich people. If costs are going to be borne by poor people (either as a matter of policy or because it cannot be avoided), then a high discount rate is necessary to protect them from predation by the rich. A low discont rate has the effect of forcing the poor to value the future as highly as the rich. When the poor want current consumption, the rich force them to save.
I am amazed that we are having a serious discussion about a phenomenon whose alleged mean damage is 5% of GDP and whose 95% CIs are 0.3% and 33%. The dominant policy option is sure to change several times over that span. That makes policy choice a crap shoot.
If GCC were a problem of only national scope, there is a serious risk that government would enact an aggressive carbon tax (or its emission allowance equivalent) just to collect the revenue. The history of governments enacting Pigouvian taxes is limited. Inevitably, the government becomes more interested in collecting the revenue than solving the problem for which the tax was instituted. Solving the problem kills the revenue. Because of the Master Settlement with State AGs, many have become financailly dependent on tobacco tax revenue and are now partners with the tobacco insustry, sharing a common desire to maintain cigarette smoking. Once government secures carbon tax revenue, it no longer will be interested in (say) replacing carbon-based energy technologies.
But GCC is a problem of international scope. Non-adpative interventions, such as transferrable permits, require well-defined property rights, easy contracting, and very low transactions costs for enforcing propery rights and contracts. Both are impossible in most of the world, yet without them transferrable permits will fail.
And here's the killer: property rights in carbon allowances, and contracts to buy and sell them, must be inviolable by government. The market cannot work if governments can expropriate property rights or void contracts.
I keep reading these reports that say what needs to be done to avert climate disaster. But they all practice magical thinking. None seems to ever acknowledge that if the problem is that great, and the strategy to avert disaster is a regulatory one, then success probably requires a relentlessly authoritarian government capable of exercising itas authority mercilessly world-wide.

The shape of things to come; Snailbats, HALsays, Scarems, LewPapers and DickPols.

Environmental alarmism is by now a well established phenomenon with nearly a four decade long history. In that time, we’ve been on the receiving end of doomsday predictions as diverse as holes in the ozone layer, overpopulation, resource wars, acid rain, a new ice age and the most successful one of all, global warming.
Since there has been no upward change of global temperatures in over the last decade and a half, that scare had become embarrassingly untenable. In response, the alarmists switched from screaming about global warming to hyperventilating about climate change. That was an explicit admission that their specific prediction of a looming thermogeddon was wrong, which is why skeptics should never use the term climate change but keep on sticking it to them with reminders about the global warming us humans were supposed to be causing, which never actually materialised.
The advantage about the rebranding away from a specific threat to a vague umbrella term, was that there are potentially a myriad of things which could be blamed on climate change, because climate does actually change. If it got colder, fine, that’s climate change in action. If it actually got hotter, that’s climate change as well. Whether it got wetter or drier, either could be attributed to climate change. It’s a wonderfully flexible scare.

The Snailbat, HALsays and Scarem proofs rely on the very understandable but very erroneous human perception that the environment not only shouldn’t change, but also something strange is happening if it is. Too much of environmental thinking on all sides is unconsciously based on something I called the steady-state environment delusion in a previous piece. There’s a link to it below, but the following paragraph from it summarises the essence of the idea.
We look at our world and the universe with human eyes and more importantly, with a human lifespan. In terms of the latter, we see an apparently ageless and unchanging view but it’s a false impression. When looked at through the eyes of “deep” time, it is dynamic, violent and forever changing. There is no ideal static harmonious state which must be maintained. There never was and there never will be either.
The reality is that the Earth’s climate, like the entire universe, has always, is, and will always change. The fundamentally dishonest thing about all these proofs, is the insistence that we’re the cause behind any change.

Skeptic win: UK Met Office quietly drops prediction by 20%, hopes no one notices

War, Twitter, and anonymity of social media bring out the crazies, propagandists

| November 16, 2012 | 2 Comments
War, Twitter, and anonymity of social media bring out the crazies, propagandists First, there was the Hamas propaganda video that purportedly showed buildings ablaze and people injured somewhere in Gaza, allegedly the result of an Israeli attack … in retribution to Hamas firing about 1,000 rockets into Israel this year, alone. Now, online social media’s anonymity is bringing out the crazies.

In today’s chaotic mainstream news media world, tell your own news stories!

| November 27, 2012
In today’s chaotic mainstream news media world, tell your own news stories! Time matters when a reputation or a brand image is at stake. In today’s nanosecond-driven digital environment, nimble, often quick, strategic communications make a difference. Here’s why …


 New Victims In The War On Painkillers - 1 day ago

Last year I wrote a three-part series for Huffington Post that asked some questions about the latest panic over opioid painkillers, and its effect on pain patients, doctors, and medical treatment. I r...

Bloomberg Slaps Down Criticism of Painkiller Restriction Plan

De Blasio Is Not Cool With Bloomberg’s Homeless Shelter Food Policy [Update]

Mayor Michael Bloomberg has another critic over his administration’s decision to ban food from homeless shelters, because, as CBS reported, the city “can’t assess their salt, fat and fiber content.” Public Advocate Bill de Blasio announced his opposition while challenging the basic rationality of the plan

De Blasio No Fan of Mayor’s New Homelessness Approach — UPDATED 7/20/10

Public Advocate Bill de Blasio thinks the city’s latest solution to homelessness might only make things worse. 
The New York Times today painted a pretty grim picture of the city’s struggles with rent subsidies and vouchers, and the public advocate’s office told The Observer says the city’s newest approach may be counterproductive.


Richard Tol, academic freedom and the ESRI.

In any case, yesterday the ESRI took what it described as the unprecedented step of withdrawing the (unofficial) working paper, declaring it to be in effect shoddy and error prone. It is now no longer on the ESRI working paper site, but the ever reliable Michael Taft has an extensive summary of it here and the entire paper can be downloaded here. Why it felt the need to create a precedent where none existed is unclear. This is worrying for those of us concerned with academic freedom. The ESRI press release states the ostensible reason for withdrawal as
“it has emerged that the underlying analysis requires major revision and that the paper’s estimates overstate the numbers of people who would be better off on the dole * than in work.”
This seems to me to fly in the face of how research works. The ESRI working paper series is like any other. Papers start as ideas, then go to drafts then to working papers and then after informal and formal critiquing at seminars and conferences may be submitted for publication where extensive peer review suggests major revisions and then perhaps eventual publication. If the ESRI are now to require all working papers to be error free then they should set up a journal. As a journal editor the only time I would countenance the withdrawal of a paper from any series or publication is if it becomes clear that there is plagiarism, fraud or unethical behavior. None are alleged here. What is clear is that the public debate spooked the ESRI.

 * That would make sense as a bureaucratic initiative to increase 'work'...i.e. 'job creation'. The withdrawal of the article then becomes a case of  'Dear, your panties are showing'

A more reasoned response from the ESRI might have been to note the unofficial, working paper nature, stress that it was part of an ongoing process, and to suggest that (as is always the case in social science) we cannot be sure and must weigh countervailing evidence. What has happened now is frank censorship – and that is not a good outcome. Nor is it feasible in the wired world.

 cormac says:

Interesting post, and many thanks for the plug.
I’m not sure I agree that the story is an issue of academic freedom. Given that ESRI publications are quite influential amongst politicians and civil servants, I would expect a high standard and was surprised to learn the paper in question is still in the revision stage as regards publication in an academic journal. I gather this is the norm, but that’s what surprises me – it’s a rather strange norm!
I would have thought papers from an important, influential body like the ESRI on sensitive economic topics would be of a standard well above your average academic paper, not below it. If it’s just an exploratory paper, then it received quite a lot of media attention, even before it was pulled. If there are any issues of methodology it’s very unfortunate that it should receive so much attention…

brianmlucey says:
Its the norm in every area. Working papers are the lifeblood. In the social sciences the turnaround times are so lengthy the only way to get material out for discussion is WP format

Jerry says:
There is not such thing as a paper that settles a question, whether published in a journal or in some official publication. Having worked at an institution and at universities, I can say that official institutions can be quite sensitive about subject matter and findings. It is not surprising. Regrettable but not surprising. ESRI is no worse than some U.S. institutions.

bossbutteringbee says:
All credit to you BL for addressing ‘Tol-dole-gate’ amid silence elsewhere. Thank you too for the hotlink to actually read the WP.
The central finding of the paper was that costs associated with conventional work patterns are now so high in Ireland that they pose a serious demotivation for many, given the alternatives. The extensive evasive action and attempted distortion of the working paper’s findings by many talking heads today when asked to engage with this issue is typical of the times we live in. And yes, the issue of academic freedom most definitely arises, in the face of propaganda, a barrage of circumstantial noise and distortion from vested interests.
Tol as a (occasional) truthteller about Irish economic issues challenges the sustainability of a number of things that have been done in Ireland in the name of public good but which were ill thought out and were implemented in a vacuum of strategic thought. In this case, just one of the root issues is commuting cost. This however is linked to parking charges, fuel and road tax pricing, uncoordinated and embryonic public transport, traffic calming policies and one of the most non-nuclear settlement patterns in the EU. And most of these latter issues reflect a major Irish problem with over-politicised state agences of patchy competence who struggle to deliver basic infrastructure in a cost effective manner.
Perhaps the unwelcome truth that Tol has drawn attention to, is that an increasing number of Irish people, faced with the choice between low paying salaried employment options with no tenure, or the uncertainties and sacrifices of self-employment/entrepreneurship, have simply decided to kick back and hibernate. As the state sector exacts increasing rents on use of public infrastructure and services for economic activity, to try and maintain an unreformed and unaffordable welfare state, more and more workers look at the cost/benefit aspects and decline to work.
I predict that extensive restructuring will come during the next five years, accompanied by deficit elimination, workshare schemes, substantial pay and pension reductions for public sector workers, reduced transfer payments. Much further ahead – a decade or two perhaps – we’ll finally see the retreat of the dead hand of the state from areas such as enterprise training and support, scientific and social research, utilities, higher education, air and sea links, housing and the many other areas in which it has no real business, and from which it has driven out entrepreneurs and replaced them with rent-seekers. When this has progressed to the extent that the costs of earning an honest living fall to core EU levels, Ireland may once again experience real-economy growth, in place of the sterile tax-shifting brokerage that seems to be the sole remaining value proposition. And perhaps then we will see fewer fear-driven responses when an outsider like Tol underlines home truths about how out of shape our economy has become.

bossbutteringbee says:
@Pangur Ban
“With respect that is not the central finding”
I would agree that it is not a robust finding given the age of the data on which its based. But in the years elapsed since 2005, costs associated with the popular forms of commuting have soared. Whatever about the relativities of welfare incomes vs nett salaried incomes today vs 2005, the dominating cost category of working for many – commuting cost and (for some) parking cost – is much higher today.
Tol’s observations (may we agree to call them that) would be very familiar to low paid commuters to metropolis cities all over the world – Shanghai, Chengdu, Mumbai, London, San Fran – static or deflating earnings and sharply rising commuting costs destroy work incentive.
It is unfortunate that ESRI has responded as it has done. If fair minded people gave the organisation the benefit of the doubt concerning Tol’s previous charges of political capture, any remaining perception that the organisation ( as distinct from its PI’s) is independent will drown in a sea of cynicism. In the private sector this would raise questions about leadership.
cormac says:
This is a very interesting discussion and a great blog. As a scientist who knows little of the world of academic economics, I’m still a little puzzled, not just at the withdrawal, but at the way this ‘working paper ‘ business works. Professor Tol himself has said somewhere that the paper in question is undergoing substantial revision at the bequest of a journal referee. Yet as a working paper at the ESRI, the original might have been influential in the formation of future policy.
In this particular case, it seems the the paper is saying something that either the Institute or possibly their political masters don’t want to hear; but I’m surprised that working papers don’t go through some sort of review process, if only to protect them from this sort of censorhip….

 Brian M Lucey
U.S. $ = C $.9837
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