Posted by: bmeverett | April 15, 2015

The Leontief Prize Lectures


Tufts University, where I teach, hosts the Global Development and Environment Institute (GDAE), a 1993 merger of Tufts’ Program for Sustainable Change and Development and the Fletcher School’s Center for Environmental and Resource Policy. GDAE (or gee-day as we call it) is staffed by intelligent and hard-working people who are great friends and colleagues. There is, however, something troubling about the principle that underlies the Institute. According to GDAE’s website “Throughout all of its activities, theoretical advances at GDAE are informed by the Institute’s applied and policy work, while its practical applications of economics are enhanced by a growing theoretical understanding of what is required to promote socially and environmentally just and sustainable development.” There is an inherent conflict of interest between research designed to understand and research designed to promote. One seeks the truth while the other seeks useful arguments in support of a political agenda. Climate science has fallen into this trap, and climate economics is right behind.

On Monday, March 23, GDAE celebrated the awarding of the 2015 Leontief Prize to Professors Duncan Foley and Lance Taylor of the New School for Social Research for their work on climate economics. The webcast of the award lectures by Profs. Foley and Taylor, as well as the slides and Q and A session can be found at http://ase.tufts.edu/gdae/about_us/leontief15.html. These talks were interesting since they highlight some of the main problems with the economic analysis offered by the Climate Community.

Professor Foley’s talk was entitled “Global Warming and the Pitfalls of Welfare
Economics”. His main argument is “It is very commonly assumed that climate change can be brought under control only by means of a sacrifice on the part of the present generation. … But actually, no sacrifice on the part of current generations is necessary.” The idea of costless decarbonization has enormous appeal to the Climate Community. But how exactly does Prof. Foley accomplish this miracle? His argument is as follows: “Because the emission of greenhouse gases that leads to climate change and climate damage is a ‘negative externality’ (in the language of welfare economics), the ‘business-as-usual’ path on which the world makes no effort to control climate change is inefficient.” In essence, Prof. Foley’s argument is that the damage from greenhouse gas emissions will be so bad that mitigating this damage must of necessity pay for itself, leaving us all better off.

There are two problems with this argument. First and foremost, Prof. Foley is assuming that the impacts of increased atmospheric carbon will be large and negative. Second, he is assuming that climate policy is a simple dichotomy – we either prevent climate change or we don’t. Suppose, by way of analogy, that your doctor tells you that you have a disease which will kill you in six months and proposes an experimental treatment (not covered by your insurance) that will cost $500,000. Poverty is better than death, so the treatment seems, by definition, cost-effective. This conclusion, however, depends entirely on whether the doctor’s diagnosis is correct and whether the experimental treatment will in fact cure you. If there is any uncertainty around either of these questions, the cost-benefit calculation is not so obvious.

To an audience of climate true believers, Prof. Foley’s assumptions are articles of faith and not to be questioned. In reality, however, both assumptions are highly debatable. As discussed often in this space, the science behind catastrophic climate change is weak. The externality of additional carbon may actually prove to be positive, bringing longer growing seasons, higher crop yields, fewer deaths from cold exposure and other benefits. Second, even if the externality proves to be large and negative, none of the mitigation measures currently being proposed by the Climate Community would bring any meaningful reduction in atmospheric carbon concentrations.

In fact, Prof. Foley is offering us no more than a truism: you can spend a lot of money if you can be sure that the expenditure will allow you to avoid certain disaster. If, on the other hand, the disaster is not so certain or if the proposed mitigation steps wouldn’t solve the problem, then his analysis fails. If we assume nuclear war, a strike by a massive meteor or an invasion by hostile extraterrestrials, any macroeconomic model will project severe economic losses. The model would give us no insight, however, into either the probability of these events occurring or the effectiveness of possible mitigation measures.

Let’s turn now to Prof. Taylor’s lecture entitled “Greenhouse Gas: Long‐Run Growth and Collapse”. Prof. Taylor’s argument is that greenhouse gas emissions will constrain long-term economic growth, leading to an economic collapse in 6-7 decades when atmospheric CO2 concentration reaches about 750 ppmv with a resulting temperature increase of 5-6° C. According to this argument, global economic output cannot increase past that point without a decrease in CO2 concentration. He notes that much of the economic growth in the industrial world over the past 200 years is the result of applying energy to labor. Since energy use emits CO2, then, without mitigation measures, productivity growth will eventually stop or else “CO2 accumulation will overwhelm the economy.” In the Q and A session, Prof. Taylor explains that his macroeconomic model contains a “damage function” which specifies the cost of climate change through increased storms, rising sea levels, etc. The assumptions built into the “damage function” fully determine the model results, and these assumptions accept climate catastrophe as a foregone conclusion. His analysis does not consider the possibility that rising CO2 levels might in fact have positive impacts or that the climate feedback loops which are required to generate a 5-6° C temperature increase may not exist. In other words, he has accepted uncritically the most severe scenarios offered by the Climate Community. As a result, his model produces a tautology: if CO2 limits growth, then CO2 will limit growth.

Beyond the fundamental issues of climate science, analysis of the cost and efficacy of mitigation measures is critical here. Prof. Foley suggests that mitigating the impacts of climate change would cost about 2% of GDP annually. Prof. Taylor is more specific, assuming that mitigation would require a carbon tax (or equivalent) of $44 per metric tonne (mt) of carbon dioxide. He uses this number since it represents the “mid-range of current estimates”, without considering whether any of these estimates has any validity.

The Climate Community talks very glibly about the low costs of mitigation, but let’s apply some simple logic tests. A gallon of gasoline emits 8.9 kilograms of CO2. Burning 112.4 gallons of gasoline thus generates one mt of CO2, and a $44/mt tax is equivalent to about $0.39 per gallon. To put this number in context, over the last 20 years, average US gasoline prices have varied from a low of $0.96/gallon in February of 1999 to a high of $4.11/gallon in July of 2008, a range of $3.15. Average prices have fallen by $0.94/gallon over just the last six months. In other words, the proposed carbon tax is a fraction of the normal market variation in gasoline prices. Why should we assume that such a tax will have a transformative effect on the US private transportation market?

Europe has had high fuel excise taxes for decades – averaging $2-2.50 per gallon above American levels. Europeans may drive smaller cars fewer miles, but they still rely on private vehicles for most of their travel, and they still drive cars powered by conventional internal combustion engines. European carbon emissions have declined slightly in recent years, but Europeans drivers are still major emitters of CO2. If high taxes have not transformed the European automotive industry, which is world-scale and technologically innovative, why should we expect a different result from much smaller taxes in the US, a society of far greater distances with an economy built on and held together by low cost transportation?

How about electricity? The marginal source of electricity in the US is new combined cycle natural gas-fired power plants. Using the Energy Information Administration’s data base and assuming 15% return on equity, 80% financing at 6% interest and a load factor of 85%, power generated from natural gas costs about 4½¢ per kilowatt-hour (kWh). Without subsidies, solar photovoltaic power, which is the darling of the Climate Community, costs about 16¢ per kWh. Prof. Taylor’s $44/mt carbon tax would increase the cost of gas-fired power by about 1½¢/kWh, less than 15% of the differential with solar. Other renewable energy sources show large gaps as well. On what basis should we assume transformative effects from such a tax?

Europe has spent heavily on renewable electricity with only modest impacts. Many EU countries are now reevaluating the costs and benefits of renewables as a way to reduce carbon emissions. Germany decided to accelerate the shutdown of its nuclear power industry after the Fukushima accidents of 2011, but the shortfall has been filled not by wind and solar, but by inexpensive but high-carbon imported coal.

Even though the impact on the structure of the US energy industry would likely be small, the macroeconomic impacts of a $44/mt carbon tax are potentially serious. The US currently emits roughly 6 billion mt of CO2 annually. The initial impact of Prof. Taylor’s tax (before any resulting change in consumer behavior) would be $264 billion annually. Since there are roughly 110 million households in the US, this tax would amount to about $2,400 per year per household. A tax of this magnitude would probably reduce US CO2 emissions primarily by economic contraction, rather than by efficiency improvements or switching to zero-carbon technologies. If the carbon externality turns out to be positive, rather than negative, such a tax would result in a dead loss to the economy.

Prof. Foley offers a solution to this problem, one that has been discussed often by the Climate Community. He proposes offsetting the carbon tax with a reduction in the income tax. This idea makes sense only to people who have never spent much time in Washington. Our elected officials enact taxes not to solve social, economic or environmental problems, but to increase the revenue available to distribute to favored constituencies. “Revenue neutrality” is a common theme on the campaign trail, but it is anathema to Washington politics.

One final point, which needs constant reiteration. Prof. Taylor states that a mitigation cost of 1.25% of GDP would be roughly twice the level of worldwide energy consumption subsidies. The subsidization of fossil fuels is a myth widely believed only because it is so often repeated. If current global GDP is about $60 trillion, then 1.25% would be $750 billion, implying that global energy subsidies are about $375 billion. In fact, net worldwide taxes on crude oil and petroleum products (taxes minus subsidies) are currently over $2 trillion per year. (For more information on this issue, see my posting of July 8, 2010, entitled “Taxing the Oil Industry”.

On balance, the lectures by Profs. Foley and Taylor offer little value added. All we really see from their modeling efforts is that disastrous assumptions produce disastrous outcomes. The issues of carbon impacts and mitigation are complex, and the assertions made by Profs. Foley and Taylor should have been challenged. As you can see from the Q and A session, they weren’t.

GDAE really should consider hosting forums where a range of viewpoints are offered, and the audience is forced to think hard about these problems. Too often on the climate issue we see a single view offered to an audience of the faithful, inclined to accept highly debatable points uncritically. Under these circumstances, accolades come too easily, and the extra work required to prepare scholarly work for defense against legitimate challenges by colleagues is simply not done. Instead of tight, rigorous argument, we get instead glib and unsupported assertions. That is the inevitable result of an effort to promote rather than to understand.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: