Cross Post: Peter Lang – Why carbon pricing will not succeed Part I

1      Introduction

Proponents of carbon pricing argue it is the least cost way to reduce greenhouse gas (GHG) emissions.  Their argument is based on assumptions that are appropriate for a theoretical exercise but unlikely to be achieved in practice, let alone sustained for the time the policies would need to operate (i.e. centuries).  Significantly, little research has been done to investigate the probability that carbon pricing can be implemented and deliver the projected benefits in the real world.

Uncertainty about the problem (man-made climate change) is a given; but uncertainty about the chosen solution is inexcusable. This is to say, we should be confident that our solutions are going to be effective, and the more expensive the solution the more confident we should be.  In short, big responses require high levels of confidence that they will work.  There seems to be a lack of credible evidence to demonstrate carbon pricing passes this test.

The questions examined here is the likelihood of carbon pricing being successful.

The following sections explain why:  carbon pricing cannot succeed unless it is global; and global carbon pricing is unlikely to be achieved.

2      Carbon pricing cannot succeed unless it is global

Analyses by Professor William Nordhaus, a long-time advocate of carbon pricing and a world authority on estimating the costs and benefits of climate change, greenhouse gas mitigation policies and carbon prices, shows why carbon pricing must be global or the cost would be prohibitively for participants.  Nordhaus (2008), p198, says:

Complete participation is important because the cost function for abatement appears to be highly convex. We preliminarily estimate that a participation rate of 50 percent instead of 100 percent will impose a cost penalty on abatement of 250 percent.

What this means is, if only 50% of GHG emissions are included in the global carbon pricing scheme, the cost penalty for the participants would be 250%. The 50% participation could be achieved by, for example, 100% of countries participating in the scheme but only 50% of the emissions in total from within the countries are included, or 50% of countries participate and 100% of the emissions within those countries are included in the scheme (i.e. taxed or traded).

The explanation for the convex abatement cost penalty curve is as follows.  With a high level of participation the least cost abatement options are used first.  However, if there is less participation, some low cost options are not available, so higher cost options have to be used to achieve the same emissions reductions.  Figure 1 shows the ratio by which the abatement cost would increase for less than full participation.  For example, at 50% participation, the cost penalty would be a factor of 3.5 (i.e. 250%) higher than with full participation (ref. ‘A Question of Balance’, Ch VI, pp116-122).

Figure 1:

Lang 1

 

In reality, the cost penalty for the participants would be higher than Nordhaus has estimated because the compliance cost of carbon monitoring, reporting, policing and disputation has not been included.  The compliance cost per unit of GHG emissions would escalate as smaller and smaller emissions sources are included.

Given the above, we should consider what level of participation could realistically be achieved and what the compliance cost would be.  Furthermore, given the cost penalty for the participants, we need a persuasive case that there is a high probability of a global agreement to price carbon being implemented and maintained for as long as necessary to achieve the projected benefits (i.e. reduced climate damages).

Nordhaus explains that the assumptions used for the cost-benefit analyses, which are used to justify global carbon pricing, are theoretical; arguably, they are unrealistic for the real world.  He says, p68:

“We should provide a word of caution about the optimal case. It is not presented in the belief that an environmental czar will suddenly appear to promulgate infallible canons of policy that will be religiously followed by all. Rather, the optimal policy is a benchmark to determine how efficient or inefficient alternative approaches may be. This is the best possible policy path for emissions reductions, given the economic, technological, and geophysical constraints that we have estimated.”

In other words, the assumptions that underpin the economic analyses used to justify carbon pricing are appropriate for a theoretical modelling exercise but unrealistic, impracticable and highly unlikely to be achieved in the real world.  Some key assumptions that underpin the analyses are:

  • There will be negligible leakage (of emissions between countries, between industries and between emissions sources)
  •  All GHG emission sources are included (all countries and all GHG emissions in each country)
  •  There will be negligible compliance cost and negligible fraud
  •  There will be an optimal carbon price and it is implemented globally in unison
  • All countries act in unison to increase the optimal carbon price periodically and continue to maintain the carbon price at the optimal level for all of this century (and beyond).

If these conditions are not met, the projected benefits of carbon pricing would not be achieved.

3      Global carbon pricing unlikely to be achieved

Professor Richard Tol, a long time advocate for carbon pricing and a leading world authority on estimating the damages of global warming, estimates the probability of achieving a global agreement at a UN climate conference  He said in November 2012:

The 18th UN Conference on climate change negotiations has just started in Doha. This column suggests that the probability of success is a mere 2.3%. Recently, over $100 million per year was spent on fruitless negotiations. Having flogged, ever harder for 18 years, the dead horse of legally binding emission targets, the UN should close that chapter and try something new.

 The article (and his Figure 1 reproduced below) explains why a meaningful global agreement is unlikely to be achieved.  For example he says:

“Game theory suggests that attempts to negotiate an international environmental agreement, aiming to provide a global public good such as greenhouse gas emission reduction, are bound to fail (Barrett 1991, Carraro and Siniscalco 1992, Carraro and Siniscalco 1993).”

Figure 1. The expected probability of negotiation success (solid line), its 95% confidence bound (dashed line) and the annual costs of climate negotiations (triangles).

Lang 2

Source: Richard Tol, 2012, “Global climate talks: If at the 17th you don’t succeed

The solid blue line shows the estimated probability of success of each round of the UN climate conferences since 1995.

An analysis like this might be used to estimate the probability of reaching agreement on a carbon pricing scheme that would deliver the projected benefits of reduced climate damages and survive until the job is done.

Richard Tol’s article reveals it was predicted back in 1991 the world would not agree to legally binding international agreements, such as carbon pricing or targets and timetables for emissions reductions with penalties for breaches of commitments.

4      Conclusions

The world is unlikely to agree to carbon pricing.  It cannot succeed unless it is global but global carbon pricing is unlikely to get implemented, let alone sustained for the time required to deliver the projected benefits.

This post originally appeared at Master Resource.

Peter Lang is a retired geologist and engineer with 40 years’ experience on a wide range of energy projects throughout the world, including managing energy R&D and providing policy advice for government and opposition. His experience includes: hydro, geothermal, nuclear, coal, oil, and gas plants and a wide range of energy end use management projects.

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26 Responses to Cross Post: Peter Lang – Why carbon pricing will not succeed Part I

  1. val majkus

    thanks Peter
    everyone else, when considering if you will support the Greens policy, check out this paper by Peter Lang

  2. JC.

    As always, great work Peter.

  3. Squirrel

    “Complete participation is important because the cost function for abatement appears to be highly convex. We preliminarily estimate that a participation rate of 50 percent instead of 100 percent will impose a cost penalty on abatement of 250 percent.”

    And that is the heart of the matter – as if other nations won’t act out of national self-interest, and as if statistics won’t be fudged and falsified, and monitoring regimes dodged and corrupted.

  4. Biota

    The gap between rhetoric and reality is so large now there is no chance of any global agreement. If global temperatures had risen in line with increasing atmospheric CO2 maybe a common conviction would have led to agreement. As it is, with global temps at a standstill for 18 years, despite the best efforts of the IPCC and associated greenfilth, I suspect that there is an underlying scepticism about the whole thing. The science wasn’t settled after all.

  5. Fred Lenin.

    Doubt of the truth of gullible Worming is now spreading among the people ,the grubby politicians are not pushing it now as they were when their cushy jobs were in danger from green religious beliefs . You always know when a belief is dying ,the political Rats abandon ship immediately,survival at the Public Trough involves speedy action.

  6. PeterF

    Two questions,no.1 Why do we keep writing articles on a subject ( global warming) that has been disproved,and 2, why is CO2 still referred to as “carbon”.

  7. Biota

    Two questions,no.1 Why do we they keep writing articles on a subject ( global warming) that has been disproved,and 2, why is CO2 still referred to as “carbon”.

    1. Because they think that if they say it often enough they will be believed in spite of contrary evidence
    2. Because CO2 is a clear odourless gas that is plant food (hence our food) and carbon is filthy black muck, nasty stuff to be avoided at all cost

  8. Peter from SA

    That’s a great use of game theory. You’ve got to wonder why so many believe that some global agreeement is possible. Is it idiocy or ideology? Both, perhaps.

    Even supposing the impossible is achieved, this is needed for it to work:

    There will be … negligible fraud

    Sure.

  9. MemoryVault

    Uncertainty about the problem (man-made climate change) is a given

    First sentence, second paragraph. You lost me right there.

    Uncertainty?
    It gets warmer then cooler in roughly 30 year cycles. No uncertainty about it.

    Problem?
    It’s nature. It’s natural. It’s been going on since we started coming out of the last glacial.
    Learn to live with it. It’s not as though you have any choice.

    Man-made?
    Right.
    And if a butterfly flaps its wing in the Amazon there will be rumours of things going astray . . .

    Don’t you people realise that even writing, let alone publishing, these lengthy treatises on how many angels can dance on the head of a pin, is playing straight into the greenfilths’ hands.

  10. JC.

    Is it idiocy or ideology? Both, perhaps.

    It’s a religion and religious believers have faith.

  11. Pyrmonter

    Sorry, but this is a classical example of a “hard scientist” running against what (good) economists understand, namely that markets (and prices) co-ordinate information that is dispersed and local, and allocate cost to low cost producers/avoiders, whether that be in the market for widgets or the market for GHG abatement:

    Proponents of carbon pricing argue it is the least cost way to reduce greenhouse gas (GHG) emissions. Their argument is based on assumptions that are appropriate for a theoretical exercise but unlikely to be achieved in practice, let alone sustained for the time the policies would need to operate (i.e. centuries). Significantly, little research has been done to investigate the probability that carbon pricing can be implemented and deliver the projected benefits in the real world.

    Uncertainty about the problem (man-made climate change) is a given; but uncertainty about the chosen solution is inexcusable. This is to say, we should be confident that our solutions are going to be effective, and the more expensive the solution the more confident we should be. In short, big responses require high levels of confidence that they will work. There seems to be a lack of credible evidence to demonstrate carbon pricing passes this test.

    The rest of the piece – that abatement costs are a convex function, and that universal application is probably the lowest cost means of abatement (at least if there is no admin costs, which as the author notes, there are) – is something any bright first year Econ student should be able to muster.

  12. Elizabeth (Lizzie) B.

    The rest of the piece – that abatement costs are a convex function, and that universal application is probably the lowest cost means of abatement (at least if there is no admin costs, which as the author notes, there are; and if there is no corruption which experience shows there would be) – is something any bright first year Econ student should be able to muster.

    Added that important bit for you there. Not a bright first year Econ student but.
    Too skeptical for that.

  13. maurie

    Those remaining sensible people & their descendants will be referring to the actions of these self entitled arrogant extremely dangerous excuses for community leaders for generations to come, & we can only hope enough people soon will loudly express their utter disgust at the selfish waste by these pointlessly attempting to eliminate the already reduced resource of nourishing plant food, while completely ignoring the decades old & growing issue of virus mutations currently presenting in the form of the dangerous (deadly) ebola. We’ve known for many years that Labor (union) puppets never perform to a need but only in order to be seen to be acting because they know very well more votes results from making noises & condemning their fabricated scapegoats (such as the Liberals) than really performing real tasks. We know very well the Muslim blackmailing of our food industry is met with nothing more that outright envy by the Union party. They also are well aware that the current government lacks the required bravery to close the ALP media arm known illicitly as the tax funded ABC, so they certainly won’t have the necessary to outlaw the Mafia style Muslim blackmailers who blatantly build up ample resources to feed & arm the middle easterner terrorists.

  14. jumpnmcar

    Struth!
    What a co-inky-dink, I was checking out Richard Tols’ stuff this morning.
    He has a blog he occasionally writes on too.
    His article on The Conversation 20/09/14 about Sterns 2.0 exaggerations.

    My fav quote from that article,

    The Stone Age did not end because we ran out of stones, but because we found something better: bronze. The fossil fuel age will end when we find an alternative. The current renewables are simply not good enough – except for the happy few who profit from government largesse.

  15. Fred Lenin.

    This terrible criticism of the great new industry”Gullible Worming “,which has been established by great struggle and copious numbers of lies ,by a coalition of gaiaist greens,opportunistic communists and carpet bagging con men. It’s destruction would cost hundreds of millions of jobs in Australia alone. The international effects would be catastrophic . So you can’t afford to eat because of your huge power bill, wear it comrade ,a bit of austerity never hurt any peasant.

  16. Rabz

    Is it idiocy or ideology? Both, perhaps.

    Ahem – that would be “Idiotology”.

  17. johanna

    Hey, Peter, have seen your comments at Judy Curry’s site for years, and we have chatted at times over there.

    Congratulations on this post. Like many readers, I don’t have the background, or the time, to dig to the bottom of it.

    But your general principles make sense to me, plus I know that you are a straight shooter from reading your comments over many years.

  18. Alfonso

    So our Tone’s refusal to stop all West African attendees from entering Australia has, perhaps , introduced Ebola. “She is from West Africa and was planning to stay in Australia indefinitely.”

    Way to go Tone, you and Obama and the UN know we deserve it for our wicked non internationalist ways.

    It’s a bit like CO2 abatement…..an incomprehensibly stupid idea that will oppress / and with Ebola, kill Australians …..but an ideologically racially correct decision, so no probs there.

  19. Andrew

    Gee, if only there was some way for the 58 economics PhDs in Treasury to have worked out that unilateral carbon pricing (sic) doesn’t work but only exports emissions to somewhere else.

  20. cohenite

    Peter and Martin Nicholson did a critique of the Stationary Energy Plan which was a pixie dust proposal by Beyond Zero Energy, a renewable group at Barry Brooks site.

    The critique was updated at Jennifer’s.

    BZE basically said Australia could run on renewables by 2020. Amongst other issues Lang and Nicholson found that could work if over 60% LESS energy was used; that is, only use power for 3 days of the week.

    They also looked at cost and calculated the transition to a renewable economy would cost $4.191 billion [see figure 9]. I’ve always wondered whether I was reading that right and that it should be trillion not billion.

  21. Peter Lang

    Thanks everyone for your contributions. This post was background. The best part comes tomorrow (I think). I hope to get feedback from economists if there is any serious flaw that would change the conclusions.

    I can’t respond to all, and most of the comments don’t want a response.

    Johanna, Thank you, I really appreciate your comments, always. You also re a straight shooter and you have excellent experience at the highest levels of policy advice to government and board level of the largest companies.

    Andrew, Treasury did the work and showed that the ETS would cost $1,345 billion in total (undiscounted) to 2050. But the buried this in what I believe is misleading wording of their documents. Henry Ergas exposed the $1,345 billion cost. This got me started on this venture, so credit to him. He also was very helpful to me when I was getting started on this analysis. But he’s not reviewed anything so any errors are mine.

    The economic cost to the nation, from Treasury’s figures, is explained in my submission to the Senate inquiry on repeal of the carbon tax legislation, see Submission No 2 here: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications/Clean_Energy_Legislation/Submissions .

    I also calculated the undiscounted and the discounted cost per person and per family. These are presented in a short post on Jo Nova’s web site here: http://joannenova.com.au/2013/08/in-the-next-37-years-labor-will-spend-60000-per-australian-to-change-the-weather/

  22. Peter Lang

    Cohenhite,

    Your comment was posted as I was writing mine. Dot points 2 and 3 (of seven) in the conclusions to the ZCA2020 critique say:

    ” – Our revised cost estimate is nearly five times higher than the estimate in the Plan: $1,709 billion compared to $370 billion. The cost estimates are highly uncertain with a range of $855 billion to $4,191 billion for our estimate.

    – The wholesale electricity costs would increase nearly 10 times above current costs to $500/MWh, not the $120/MWh claimed in the Plan.”

    So our estimate of the capital cost was 1.7 trillion, range $0.9 trillion to $4.2 trillion, compared with the BZE estimate of $0.4 trillion.
    http://bravenewclimate.com/2010/08/12/zca2020-critique/

  23. cohenite

    Thanks Peter; I was never good with noughts.

  24. Baldrick

    Peter – I understand you’re talking about pricing carbon dioxide, so why not call it for what it is, and not something it ain’t.
    Carbon and Carbon dioxide are two very different substances.

  25. Peter Lang

    Baldrick,

    Because if we do that, the people we are trying to debate the issue with read until they get to that and dismiss the whole article without even reading it. The label, C v CO2, is a separate arguments to the one I’m making which is, even using the default inputs (which are high estimates of climate sensitivity, damage function and GHG emissions projections), the climate economists own models show that costs of carbon pricing (the standard name for it throughout the world), exceed the projected benefits for all this century at any reasonable assumption about global participation rate.

    Furthermore, CO2 is no the only GHG gas. There are 23 Kyoto greenhouse gasses and all but one (from memory) are compounds of carbon. The one being SF6. So, [email protected] cannot be used to replace C. A better substitute would be “GHG (excluding H2O and Ar and others)”. See the issue?

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