02 February 2012

A Conversation With an Economist on Magical Solutions

Economist: I think you are way too optimistic that investments in technological innovation funded by a low carbon tax can lead to accelerated decarbonization of the economy. That is why I favor a high carbon price.

Me: But isn't the point of the high carbon price to stimulate innovation?  The question is thus how to stimulate or motivate that innovation. I think a high carbon price is politically impossible, which is why I argue for starting low with investments in innovation as part of the package.

Economist: A high carbon price will create incentives to change people's behavior. If prices are set appropriately the market will take care of the rest.

Me: But if you do not think that technological innovation can lead to an accelerated deacrbonization of the economy, what difference would it make if that innovation is stimulated by pricing or direct investment?

Economist: Pricing has reduced pollution in many areas. We just need to get the carbon price right.

Me: But I am curious about the causality implicit in your argument -- let me ask, of the four levers in the Kaya Identity [Population, Per capita wealth, Energy intensity, Carbon intensity] which ones do you see will be influenced by carbon pricing in a way that reduces emissions?

Economist: Well ... I guess carbon intensity and energy intensity.

Me: So then you do think that technological innovation can lead to accelerated decarbonization since carbon intensity and energy intensity are modulated by innovation?

Economist: Well, no, not at all. I don't think that the solution can be technological. I do think that pricing makes a lot more sense than focusing on technology.

Me: Can you believe all the rain?

21 comments:

  1. If by 'change people's behavior' the economist means 'overthrow the government', then he is probably right.

    This hypothetical exchange nicely illustrates the problem with a profession that imagines the world as a series of equations and people as just another variable to plug into them. In the real world the denominators can go to zero without warning!

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  2. So is there any literature that's not behind a pay wall on the Kaya identity where someone's looked at it at a level more complex than middle-school algebra? I mean, as it's stated it's basically meaningless, and doesn't seem to be worth very much considering that the four variables are definitely interconnected in ways that are not simple linear combinations.

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  3. The carbon credit exchange and similar enterprises, both private and especially public, increasingly resemble the sale of indulgences. I imagine that people who are predisposed to succumb to the prevailing guilt and shame also share a common faith as did their counterparts from yesteryear; and for the same reason: they defer blindly to a self-established authority. This has proven to be a largely unproductive and unsustainable path once people realize they have been deceived.

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  4. This isn't a hypothetical. It's based on a real conversation as seen from Roger's perspective but not from the economist in question's perspective (not me but I was there). The problem is that Roger says let's have a low carbon tax and fund innovation with it. But he doesn't know whether that would generate enough innovation to reach the targets. There's no modelling and no numbers. Not that you can rely on modelling of course in any precise way...

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  5. -2-David Stern

    Thanks for the comment, and it was nice to meet you, I am a fan of your work ...

    There are no guarantees in policy analysis, economic modeling or not ;-) See:

    http://rogerpielkejr.blogspot.com.au/2010/10/new-bridge-column-no-guarantees-in.html

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  6. I'm increasingly leaning towards this type of policy myself but my comment here tries to summarize what the economist in question was trying to ask you (as he says) based on the information in your talk. I think part of it might also be down to what different people mean by "technological change".

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  7. I'm guessing that the economist was really arguing that the low carbon tax means the government must choose between competing projects while the high price forces industry itself to look for alternatives (in the way that small diesel engines were developed in Europe due to high taxes).

    Both are optimistic, but only the high carbon price stands the chance of doing more harm than good, and as such is more optimistic.

    But we are already experiencing higher energy prices, in part due to new CO2 regulations and punishments, so the introduction of any new carbon tax either low or high is already academic.

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  8. Is David Stern accurately point out Roger Pielke Junior's position

    I thought that it was

    a) high carbon prices will be politically unacceptable and so will not be instituted
    b) people will not trade affluence and hope for costly (and likely ineffective) solutions
    c) what is needed is a low cost way to address the problem
    this can be done by technological research
    d) apply a low carbon tax to fund this research
    other factors will include the increasing cost of carbon energy with falls in supply. As a result pri ces will rise to meet falling costs of no carbon energy

    This seems to me to be quite different from what David Stern describes.


    Isn't the point that there is no linkage (at least in any explanations that I have seen, that link high prices to innovation. it is just an assumption built into the economic models to convert prices to technological innovation. This assumption may be part of the models but what can be said the validity of the validity or accuracy of the specific parameters that are placed in the models. The utility of economic models can be seen in the recent occurrence of the breakdown of the accepted linkage between economic growth and job growth. The economy is expanding but job levels re stagnating. Economists describe this linkage and could place it in their models. The linkage turns out to be contingent on factors for which the economists were unaware. The job growth predictions are inaccurate in the current economy

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  9. -7-djvjbsl

    Thanks, yes your characterization is far more accurate;-)

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  10. Roger
    As a fellow Hartwellian I had many similar conversations to the one you describe. David Stern makes the point about missing models and numbers, thus incidentally linking to the other thread about the value of economic models.

    The opening statement on that thread is that quick modelling is often misleading but seems to be (become?) the preferred way of communicating economic relations. You object to this practice on the grounds that this is shoddy science. If this is true, it seems that you are left with a choice of (a) proper modelling or (b) no modelling.

    (a) is costly and time consuming and will not tell you much more about what we already hypothesize (cp. to the GCMs). (b) leaves you in a weaker position compared to someone who has models. As they say, you can't beat something with nothing! Hence the lure of quick and dirty models.
    What's wrong with a back of the envelope calculation?

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  11. -10-Reiner Grundmann

    Thanks ... Galiana and Green have done proper modeling for an innovation led approach. It is far more than back of an envelope and covers the ground well. Thanks!

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  12. The posting recounts a conversation between Pielke and the Economist. The use of a conversation between characters to illuminate an issue is an old one. What I see being illuminated here is not the modeling but a disagreement over the political acceptability of high carbon taxes.

    Both Pielke and the Economist are of the opinion that current technology does not provide a solution to the AGW problem. Both agree that technological innovation must be funded. However, Pielke is confident that technology can be found that can address the issue while the Economist is doubtful that a technological solution is possible. Pielke argues that a high carbon tax will affect affluence and the hope for affluence and will not be accepted politically. Therefore he proposes a low carbon tax that can be realistically instituted to fund the innovation that can address the problem while maintaining affluence and the hope for affluence. The Economist does not see technology as a solution and therefore proposes high carbon taxes to restrict consumption, change lifestyles and reduce affluence. This restriction on affluence is to be done to achieve a greater good.

    What I urge politicians and others in this debate is to be candid. I hear many stories about how carbon taxes can be imposed to make drastic changes to the economy and the way we live our lives but with the assurance that this will not affect affluence or the way we live our lives. Very few people actually believe these assurances. They may support AGW taxes because they agree with the greater good but they do not believe that this can be done without great cost. I would urge politicians and policy makers to be candid about this. If you are not candid then people will see through the talk and will be unable to trust you. The current AGW impasse is clear evidence of this.

    There was a recent referendum in British Columbia Canada on the continued existence of a valued added tax (called the HST or harmonized sales tax in Canada). The ruling Liberals had stated in the previous election campaign that they had no plans to impose a VAT and then imposed it as the first order of business after the election. Naturally this caused a great furor and opponents were able to do the almost impossible task, against consistent government stonewalling, of gathering enough support across the province to force a referendum on the tax. Business and government trotted out learned economists who gave complicated and long winded explanations of how a VAT would be good for the BC economy and would make everybody richer. The opponents claimed that the VAT/HST would shift the proportion of taxes paid by business and consumers onto the consumer side. Consumers would pay a proportionately much higher fraction of total tax in BC. Naturally this is true because that is the point of the VAT. Taxes are removed from business so that they will be more competitive and therefore the economy and the prospect for jobs and affluence will improve. Consumers may be paying a higher proportion but are paying it out of higher and more secure incomes. The learned economists and politicians could not bring themselves to admit that this was the case. They would not explain the simple logic behind the VAT to make business more competitive and everyone richer. Instead they provided long and obscure explanations that tried to say that but not admit it. No one could understand these rationalizations and the VAT was defeated in the referendum.

    If the political class had just been candid about the VAT/HST with its benefits and costs then I think that it would have been very likely to have been accepted by the public in BC. However they could not bring themselves to do that. They could not trust the public to be adult and intelligent enough to do the right thing. As a result, the public, quite rightly, lost faith in the politicians and economists and so their VAT/HST was rescinded.

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  13. Continuing from my previous posting

    I see the issue of candor as the real lesson of the Pielke/Economist conversation. The Economist will not explicitly state his policy. He will not admit that it is intended to reduce affluence. Instead he hides behind talk of complicated models that ordinary people cannot understand. I see that AGW has reached an impasse because people cannot accept the lack of candor shown by the political class on this issue. As Mike Hulme writes people are not fools. They have their own minds and are not going to accept blind assurances especially when there is an obvious lack of candor on the side of the proponents

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  14. -12- dljvjbsl,

    I think that from Roger's point of view, it's not that he is necessarily confident that a low tax will deliver on the innovation, but that he's confident that no matter how much more effective a high tax is, it will not happen. So better to try something with a possibility of failure than dooming yourself to a sure failure.

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  15. re 14 Matt

    In World War 2, Britain suffered under the blitz. Morale did not crumble. There was a determination of defeat Hitler and win the war. The King and the Prime Minister remained in London to face the bombing along with everyone else. There was sense of common purpose that justified the sacrifices that people had to make.

    Consider the situation today. The world faces what is said to be serious threat. There is no sense of common purpose. The rich and the, the elite do not share with the masses of people. They are not even candid with them about the implications of their polices. They want to price in new behavior but with the knowledge that any price increase will have no effect on them. Copenhagen - private jets for global warming.

    So I disagree with the idea that a high carbon price is not possible. People will accept that as they accepted the need to endure nightly bombing. However this requires a candor of which the current political and scientific elite seems to be incapable.

    The AGW failure is not that of an ignorant mob incapable of understanding the issue. it is a failure of leadership. It is a moral failure of the elite.

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  16. Can technological innovation change human nature and human behavior with respect to always seeking more and more energy usage rather than less or making sacrifices? Has it ever really done so in the past?

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  17. -15- dljvjbsl,

    That's fine. I was just observing something based on Roger's oft-repeated Iron Law, and pointing out a subtle difference between what I perceive to be a pretty consistent message from Roger and what you read from the conversation.

    I would agree that once the true Global Warming Blitzkrieg begins, people will change their attitudes. Unfortunately for advocates of the high taxes (but fortunately for the rest of us!), any of their scenarios that rise to the level of threat as a Nazi World War seem to be pure fantasy.

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  18. I can summarize that conversation in 20 words:

    Economist: A will not work, therefore we must do B
    Pielke: B will never happen, therefore we must do A

    Further argument fits the definition of "talking past each other":

    Economist: But B will work
    Pielke: But A is possible

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  19. re 17


    Matt

    I don't disagree with you on the distinction that you are making. However, I have read many statements from AGW proponents that the world is facing a challenge the magnitude of which it has not seen before. To me, these statements cannot stand in the face of the challenges the world has faced in the genocides and mass murders of World War 2 or the threat of nuclear annihilation in the Cold War. It does not match the challenges that the world is facing as globalization and technology take hold and increase income inequality to 19th century levels. With that society will have to make changes much more drastic than anything that the AGW proponents are describing.If the word standard of living has to be reduced to that that it was in the 50s, 60s, or 70s, then I find it hard to believe that people will not make the adaptation. If people must forego cheap vacation flights and SUVs, their world will not be crushed. That is nothing to the rigors of nightly bombing and people in the '70s thought that they were very well off.

    So I suppose that the statement that I am trying to make is that Pielke's Iron Law does not need to hold. If the political class can go against their nature and trust the public as intelligent individuals then they might be able to enlist the public in a common cause. However, if they, as they are doing now, choose the path of exaggeration (worse than we thought, 11C and 30m sea level rise by 2100) , dissembling (settled science, uncertainty limits that have no mathematical basis), and insult and exclusion (denier, fossil fuel funded shill) then the Iron Law will apply with a vengeance. It just does not have to be that way. However, given the demonstrated nature of the political class there is very little chance of it not holding.

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  20. Candor is a commodity rarer than platinum but experience has taught most voters to regard any utterance from politicians to be less than the full truth. That said, candor is being tried in some areas. For example, the governor of Maryland, re-elected two years ago, is proposing an increase in motor fuel taxes to generate more funds for road maintenance; he’ll probably get it and the money may go to maintenance. Or it may not.

    No matter the target at which taxes are levied, consumers will see higher prices when they purchase the product or service being taxed. Putting politics aside, the issue right now is that motor fuel prices are higher than a year or two ago ($3.50 per gal regular yesterday versus $2.84 a year ago, $2.40 two years ago, and $1.60 three years ago) and many utility bills are perceived as being higher and will likely remain so except for those geographically and technologically fortunate enough to use natural gas and/or face a mild winter.

    My point is that any federal tax intended to spur decarbonization will be a tough sell purely on the basis of economics of the pocketbook sort. But the proprietor of this blog understands that…

    Add to that the fact that the importance or acceptance of AGW has declined considerably in the public mind. That’s reality, whether one considers it prudent or not.

    I am not a policy wonk, merely a typical right-wing hatemonger, but I urge caution in using the proceeds of a decarbonization tax to spur development of alternatives. (I have some practical experience in funding and running startups, and can tell you more about Chapters 7 and 11 of the Bankruptcy code than anyone with even a smidgeon of optimism remaining should know.) The loan guarantees and grants to Solyndra and other alternative energy companies have caused a backlash, especially when at least one of the guarantees has a peculiar, possibly illegal provision allowing equity-holders to recover before taxpayers do. Ethanol subsidies and other support measures are doomed, and the EPA mandates for ethanol blends will probably evaporate soon.

    I don’t blame anyone or anything other than inertia and custom (the way we’ve done things in the past), although I’ll acknowledge the possibility of corruption now and then. We’ve also started doing some smart things that are possibly better in several ways: more likely to produce the results you’re looking for while offering fewer risks to taxpayers and, most importantly, the politicians that will end up having to push them through.

    What about competitions like those that NASA and DARPA have sponsored? Offer a big prize for some technical solution, maybe plant a bit of seed money, and see what happens. Such contests are transparent and appear to be effective.

    Furthermore, is not the explosion (figurative, fortunately) in shale gas instructive? What policy led to development so pervasive and widespread that natural gas prices are collapsing? From what I’ve read the absence of a federal presence -- read that as intrusion if you are so inclined -- allowed development of the techniques on private property by the little guys who’d not been burned by skyrocketing prices five years ago and saw the opportunity in creative approaches. They experimented with techniques on their own nickel, working with state and local oversight on private property after negotiating rights with property-owners. There’s a lesson here, no? Policymakers have some homework to do.

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  21. Mike, contrary to your description of federal presence as "absent" in the history of shale gas development, the government in fact played a key role in the development of the key technologies enabling the shale gas revolution.

    See this investigation: http://thebreakthrough.org/blog/2011/12/new_investigation_finds_decade.shtml

    As Dan Steward, who describes himself as "conservative as hell" and served as VP for geology for Mitchell Energy, the company that pioneered shale gas in Texas, recounts, "They [the government] did a hell of a lot of work, and I can't give them enough credit for that. [The Department of Energy] started it, and other people took the ball and ran with it. You cannot diminish DOE's involvement."

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