The importance of uncertainty to climate change

Climate change policy must be discussed in terms of the uncertainty of future outcomes. Climate policy discussion now hinges on long-term scientific or economic forecasts which are, by their nature, imprecise. The reality is that is that it is difficult to precisely predict changes in climate, economies, and geopolitics over the time-scales involved (e.g. 50-100 years). Complex statistical models can give some idea of the range of possible outcomes, but the likelihood of specific outcomes is hazy. There is a small, but unknown risk of catastrophic consequences. It is the uncertainty in the chance of catastrophe that is particularly concerning to scientists. Discussion of climate change needs to include acknowledgement of this uncertainty. Climate change policy should be dictated by the risk aversion of the public, or how much risk is acceptable for the costs of reducing it.

The importance of risk aversion is noted in this MIT debate on the release of emails, code, etc from the Climate Research Unit at the University of East Anglia. The debate is the most interesting commentary I have seen of that event, as it contains varied viewpoints on the implications for science and climate change policy. It is noted in the debate that individuals’ opinions on climate change policy are already largely informed by their aversion to environmental risk. This implies that the acceptability of different levels of environmental risk to the general public should be a central component of how nations approach the challenges of climate change. This requires discussing openly the unknown factors in predictions of the future, and not relying on ‘most likely’ outcomes.

This is not to deride predictive models as worthless. They are vital to give an indication of where the world is headed. However the extremities of probability are notoriously hard to predict, and may not be predictable within a time-frame that the prediction is useful. Neither does this mean that discussion of climate change policy should simply be spun to emphasise extreme events and catastrophic destruction. A better approach may be to accept that science tells us the general direction the world is headed, but there is great uncertainty as to where specifically within a spectrum of possibilities. The fact that science is uncertain of the exact outcome may in fact make the general public more inclined to mitigating climate change. Firstly, it is honest. Addressing the uncertainties involved in the scientific predictions may be more convincing compared to the typical approach of more radical environmentalists – hysterical alarmism. Secondly, aversion to small risks with significant consequences has often been a powerful driver for human action. It is risk aversion that makes insurance companies successful, and encourages people to follow safety regulations.

Why Australia moved too quickly on the stimulus

The Australian stimulus bill is mostly a mistake. Firstly, it is (as yet) an unnecessary measure for our economy, as there is still adequate control through monetary policy. Furthermore, the stimulus of a direct hand-out is an ineffective method of boosting the economy compared to other options. These errors are slightly mitigated by the international political benefit of the stimulus.

The stimulus is unnecessary at this stage because Australia can still actively change monetary policy. Our central bank interest rates are as of writing at 3.25%, leaving a lot of room to adjust them downward without hitting the 0% boundary. Because we still have access to this simple and effective tool for economic adjustment, we don’t need to rely on a fiscal policy of government stimulus.

This is unlike the situation in the United States and Europe. There, a fiscal stimulus is justified as an economic measure, due to the lack of ability to strongly affect monetary policy. Currently both the US and the EU have central bank rates so close to zero as to effectively allow no possibility of stimulus by a downward adjustment of interest rates.

Lack of control over interest rates is why the US has tried unconventional expansionary monetary policies, such as the direct purchase of corporate debt by the Fed. Unfortunately, this has had less effect than Ben Bernanke might have hoped, leaving little ability to increase the supply of money. For these reasons, a large stimulus bill can legitimately be justified in the US (and EU countries) as the only way to significantly boost demand.

Within Australia, as noted, we don’t have the same constraints on our policy. The Australian Reserve Bank prudently adjusted rates upwards during the boom years. This has allowed sufficient room for adjustment for the current crisis, preventing the need for unconventional stimulus methods.

The error of implementing a stimulus now is emphasised by the nature of the decline in the Australian economy. We haven’t yet had a significant collapse in our domestic demand. Instead, the majority of decline has been due to the collapse of the international commodity markets, affecting our mining and resources sector. This has lead to loss of jobs in mining and associated consulting work, but we haven’t seen a decline in employment of the order experienced overseas. While this may yet feed back into the rest of our economy, causing more job losses, it isn’t yet justification for unconventional policies.

The sole advantage provided by the current government’s stimulus bill is the effect internationally. When other countries implement stimulus policies, we implicitly benefit from their spending, due to a boost in demand for our exports. Because the current financial crisis truly is global in scope, and is likely to be offset by stimulus in many countries, we can work with our international partners towards a global stimulus. While this may not be necessary on a domestic level, the political benefits may justify this.

However, the approach to stimulating the economy through direct hand-outs is an ineffective one (and a shamelessly populist move), as some will always be spent paying off debt instead of boosting demand and supplying jobs. If and when stimulus is really necessary, a better method than cash hand-outs would be well-planned government projects in infrastructure, health, and education. These options would do better at providing jobs and boosting long-term economic growth.

This is even more important if the global downturn is sustained for a number of years, as appears to be predicted by many prominent economists. Then, the money wasted on the current stimulus would have been better aimed at providing meaningful employment for those who lost their jobs in the resources, construction, and finance sectors.

The government hasn’t properly explored the options available. For example, an increase in funding for technical retraining and professional education would have fed back equally into the economy, but would have sped up the rate at which those who have lost their jobs to retrain in skills that are in demand.

The current stimulus bill has too many risks currently to be justified. It risks being unnecessary spending for the Australian economy when we have other economic policies available. It may prove to be an ineffective way to boost demand due to the nature of the stimulus. And as with all large increases in deficit spending, there is increased reliance on the good perception of our economy by international investors, a particular concern in times of such volatility. Finally the rush to pass a stimulus now runs the risk that when this poorly-planned piece of legislation proves ineffective, it removes this policy tool from our options in the future, when it could be truly necessary.

Re-zoning Australia’s cities

By re-zoning residential areas near city centres to higher density, Australia could benefit from reduced carbon emissions and improved economic efficiency. Reduced emissions would come from the lower use of cars and other transport for long distance commutes, as well as likely reduction in electricity usage. Economic improvement would come from the decrease in the amount of time wasted by the population on travel. The same would apply to other OECD countries, such as the US and Canada, where in recent decades cities have grown as large suburban sprawls.

High density living has been looked on for a long time as a cause of emissions, as cities are an immediately obvious example of humans having a major effect on their surroundings. This opinion is wrong, and changing – recent studies show that there are environmental benefits from living in highly urbanised areas. A report from the Harvard Kennedy School indicates that urban areas produce lower emissions than their suburban counterparts (for many cities in the US). A similar study from the International Institute for Environment and Development said that cities are unfairly blamed for a disproportionate amount of the world’s greenhouse gas emissions, and that cities instead should be part of the solution to the problem of climate change.

Developing higher density cities is particularly important for Australia, Canada, and the United States, which have the highest per capita emissions in the subset of highly developed countries. Their high emissions are partly due to their particularly low population density, which results in energy wasted from transportation of goods and supply of services over long distances. This wastage could be offset in part through encouragement of increased urbanisation, and aiming for high density urban areas instead of large tracts of suburban housing.

Low density living near the inner-city has been a carryover from times of lower population. When cities were smaller, and the inner-city was smaller, it was reasonable to have suburban houses close to the centre. The demand to replace these areas with higher density apartment complexes is present and growing; when areas are re-zoned, they are re-developed quickly. However, partly because of the political incentives against re-zoning (most residents don’t like apartment blocks being built next to their houses), and partly because of considerations of preserving houses built in a ‘traditional’ style, re-zoning proceeds much slower than is desirable.

Urban planners in cities characterised by large suburban sprawls would be wise to pursue long-term plans to increase inner-city density. The demand for inner-city accommodation will increase over time, due to increase in population and a rising cost of fuel – when the price of crude oil was high in 2008, there was a trend of paying a premium for accommodation with lower travel distance. As the cost of electricity increases from implementation of emissions trading schemes, there will also be a drive towards housing that requires less electricity. One example would be apartments, which generally use less electricity for heating/cooling and lighting.

Increasing the population of inner-city areas would reduce problems with the transportation system. Australian cities already have major traffic problems, which will be magnified if cities grow in area. These troubles would be eased by encouraging migration from the suburbs to the city, and discouraging additional outward growth. Higher-density living would also simplify planning for public transport networks. Part of the difficulty in encouraging the use of public transport is ensuring accessibility and timeliness of transport services, which is complicated when a city’s population is spread over a huge area of land.

Encouraging high-density living would take some time to have an effect, and it may not be politically favourable to immediately re-zone large areas. The benefits would be compelling, however, so effective plans for Australia’s cities should increase inner city density, and they should aim to do so sooner rather than later.

Government subsidies – some alternatives

Subsidies can be useful for encouraging the growth of specific technologies, but they risk detrimentally affecting more general aims, and can make changes in the future difficult. In my previous discussion of the flaws in policy for distributed solar photovoltaic power, I touched on some of the problems with government subsidisation. It may be useful to explore the problems with subsidisation in a broader sense, and propose some alternative ways to accomplish the same goals.

Subsidies make emerging technologies much more economical for the end consumer, encouraging uptake of the technology by the general public. This is a great way to help make specific products or services more affordable for everyone. For more general goals, it is more useful to adopt generally supportive measures instead of specific subsidies. Moreover, subsidies become problematic as emerging technologies begin to take over in marketshare, and a situation develops where the dominant technology that is used is uneconomical and needs to be supported with government subsidisation. Subsidies then tend to remain, because of the political fallout from revoking them.

This problem is neatly illustrated in subsidies for fossil fuel electricity generation. While it might seem convenient now to take the point of view that some subsidies are good (ones that support saving the earth for example), and others are bad, one should pause and consider that at most points when subsidies have been enacted as part of government spending, they’ve seemed like a good idea. And once the government money starts being paid out, it’s hard to stop.

So if subsidies are something that should be avoided, how can we progress towards emissions-free energy generation? If renewable energy is to be broadly implemented as an electricity source sooner rather than later, some government encouragement is needed. Even the most effective renewable electricity costs on the order of twice that of fossil-fuel based power. The difference between the two needs to be made up somehow for there to be an economic incentive for the implementation of renewables.

The option that causes the least uneven market distortion, and the lowest costs to the government is adding costs to the technologies that are unfavourable (in this case energy generating lots of emissions). This causes consumers to start using cleaner technologies because they’re comparatively less expensive. This is what most countries are looking at doing variously through carbon taxes, emissions trading schemes, etc. But what about when you want the clean technologies to be adopted as quickly as possible, and you don’t want to put such high costs on fossil fuel power as to cause lots of job losses from power plant closures? Here are some ideas:

• Government-backed, low-interest loans for renewable energy technologies
  One of the biggest difficulties experienced by renewable energy technology companies is high project capital costs coupled with difficulty getting loans from banks for not-yet-proven commercial concepts. The government could assist here by providing some loans instead of direct subsidisation. Where banks would normally charge high-interest on the loans to offset the risk, the government could charge lower interest (with a view for the long-term benefits than for short-term profits).
• Increased research spending
  A lot of renewable energy technology companies can benefit from broad government support. This type of research would be aimed at providing information that helps all companies in a specific field; clear examples of this include compilations such as geothermal heat and solar flux maps, as well as research into energy storage technologies. The latter would benefit many different renewable energy technologies, as well as electric and hybrid vehicles (from battery-type storage).
• Funding pilot-scale projects
  For pilot-scale projects of unproven technologies, even low-interest loans might not be sufficient to get things underway (particularly if the pilot-scale project is unlikely to have commercial value in its own right). In these cases, where there is reasonable potential for the concept, the government could provide direct funding. If the project is successful, the funding could be converted into a government loan; if unsuccessful, the government could get ownership of all equipment and IP, using them to further renewable energy development.
• Temporary tax-exemption status
  While giving tax exemptions is similar to giving subsidies, it doesn’t work in quite the same manner. Where subsidies spend money from the budget towards a technology (that may or may not bring result in equivalent value to the country), tax exemptions don’t cost money directly. Instead, if the technology is of commercial value, there is a decrease compared to potential income for a period of time; if unsuccessful, there is no significant loss to the government. Critical to this idea is that an unmodifiable deadline is defined, so the benefits can be factored in to the companies’ finances.
• Direct investment matched to market capitalisation
  The government could also periodically invest in emerging renewable technologies directly; this would help provide some of the capital to get them started, with an expected payback in the long-term. This would need to be done in a manner that doesn’t rely on bureaucrats picking companies or technologies for investment. Ideally government funds would go to a pool to be paid out in response to bids from companies arbitrated by an independent panel.

Each of these possibilities have their own advantages and disadvantages. In particular, government support in ways where an expected financial gain might be expected in the long term are risky in that they encourage government intervention. They offer some interesting alternatives to subsidies, however.

The failure of solar photovoltaic policy

Ineffective environmental policies affect both the economy and environmental causes detrimentally. They damage environmentalism through the harm to public opinion, and the false image that aiding the environment is more costly than it truly is. They slow economic growth through their inherent costs, which decreases our future potential to affect the world in beneficial ways. Solar photovoltaic (PV), or solar cells, are a power source more expensive than equally green alternatives (it is perhaps the least cost-effective of currently deployable renewable energy technologies). Government subsidisation and direct funding of solar PV is in general misguided, and should be redirected to either support other green power sources, or focus on research to improve the future potential of PV technologies.

Solar PV policies are an example of policymakers moving quickly (and laudably) in support of sustainability, renewable energy and the environment, but unfortunately neglecting to appropriately weigh up the competing options. Even in countries such as Australia, which both are particularly sunny, and have low population density, solar PV is overshadowed by other power generation technologies such as wind power, or even concentrated solar thermal power. For countries with lower solar flux, such as Germany, the comparison is far starker.

As a quick illustration of the ineffectiveness of this particular policy, the Australian Government’s solar homes and communities plan is a good example. This program is aimed at using 150 million AUD to subsidise small-scale distributed solar implementation through a rebate of 8000 AUD for the first kilowatt of installed capacity. This would support a total of 18.75 MW of installed capacity over the lifetime of the plan. Generally wind power costs on the order of 2000 AUD per kilowatt of capacity. It’s pretty clear from this cost discrepancy that if renewable energy generation is the goal, government funding would be much better spent directly on other sources. This is even excluding the cost to the citizens deploying the solar PV panels on their homes – even with the government rebate scheme, and generous feed-in tariffs for electricity fed to the grid (which are an almost equally misdirected piece of policy), solar PV tech in Australia can take longer to pay itself off than the lifetime of the equipment.

All of this is not to say that solar PV is completely useless – it is a great technology for locales that are sunny, remote, and geographically (or otherwise) isolated. There are many opportunities for effective use of solar PV in remote towns powered by diesel generators, and regions where the delivery of electricity from the grid is insecure. Examples of the latter scenario are the usage of solar PV in US military bases, and for power in Baghdad. Photovoltaics are also an appropriate technology for mobile electricity sources. Consider though, that for these implementations, solar PV is either more cost effective or convenient than both fossil-fuel-based power and other renewables, so subsidies are not necessary. The problematic policy is subsidisation of solar PV in large urban areas, where the cost is much higher than other renewable energy, without any other significant advantages.

There are two common reasons that are often presented as the benefits of solar PV subsidies: their ability to spark a market for the technology; and their encouragement of innovation and development. Creating a market for the technology is credited with causing an economy-of-scale effect, where the cost rapidly decreases as more people buy solar panels and the cost of manufacturing them in large factories goes down. Unfortunately current commercial solar PV panels rely on polycrystalline silicon as a raw material, the supply of which is reasonably inelastic. Because of this, subsidies for solar panels around the world have caused a demand spike in silicon, leading to a rise in the cost of solar panels, instead of a decrease. The other argument, that demand caused by subsidies will encourage innovation and development of the technology is partially true. It is, however, a misleading selling point for government subsidisation of the technology. If additional development of the technology is the goal, government spending would be much more effectively targeted at supporting research and development efforts, instead of subsidising the technology itself.

Solar PV will have an important place in any future energy mix (particularly as it becomes more cost-effective over time), but current government subsidies of commercial and residential implementations are a dangerous trap. The government resources would be better allocated to other, more cost-effective renewable technologies (the obvious contender is concentrated solar thermal power), or on increased research and development spending on solar PV to make the technology more broadly economically competitive in the future. As a more general consideration, government policy should not just pursue admirable goals, but needs to do so in a manner that maximises the benefits.

Australia’s emissions reduction targets

There has been some criticism from environmental groups that the Australian Government’s recently unveiled emissions targets are far too low (the government white paper on the emissions reduction scheme is available here, and includes emissions targets). While these criticisms may be accurate, or the environmentalists may be underestimating the economic impact of government policy on the matter, discussion of the exact limits is probably misguided. More important is ensuring that the emissions reduction scheme for Australia has the characteristics I discussed in my post earlier today: transparency, accountability, and adaptability.

If these characteristics are inherent in the scheme, emissions targets can be modified in an ongoing manner in response to public opinion, economic effects, and environmental concerns. It is clear that the scheme has some incorporated flexibility, with targets changing depending on international cooperation. However additional thought might be given to add accountability with regards to emissions permits for ‘emissions-intensive trade-exposed’ and ‘strongly-exposed’ industries. It would be foolish to make the same mistake as made in the first round of emissions trading in the European Union, where too many permits were given to highly-polluting industries, resulting in the trading system being ineffectual.

Discussion should focus, for the time being, less on exactly how much emissions should be reduced by, and more on creating a long-term system allowing for effective control of Australia’s emissions in a changing future. The proposed scheme is mostly a step in the right direction. It may need to aim higher, as argued by the environmentalists, but more importantly, it needs to be ensured that the system is robust and not open to subversion by special interests.

The fine line of emissions reduction

I touched briefly in my previous post on the effect of the current economic crisis on future environmental policy . It is important to consider that emissions reduction and the promotion of renewable energy cut a fine line on the boundary between two competing public interests. Any emissions reduction scheme must meet some balance between environmental benefit gained, and economic productivity and prosperity lost.

There has been a troubling trend recently in the promotion of environmentalism without discussion of the costs involved. Greenhouse gas emissions reduction schemes and government spending towards renewable energy are likely in the best interest of the general public. However, they should be discussed with a full disclosure of the both the benefits and the costs. The tendency among both environmentalists and politicians of treating a green revolution as a panacea to both economic and environmental woes is false and should stop. Here’s why: an overreaching scheme sold to the public without full discussion of the economic consequences is at far greater risk of catastrophic failure.

It is self-evident that emissions reduction schemes designed to directly protect the environment aren’t going to benefit the economy in the near future. Any company that can improve their profitability by ‘going green’ will invariably already be doing so. Setting a price on emissions will have negative economic impacts in any energy-intensive sectors, particularly mining, minerals processing, and manufacturing. Due to the recent high commodity prices, many resource processing operations use low grade ores – now that the bottom has fallen out of the commodity market, these companies will likely struggle to stay afloat. Increases in electricity costs from emissions reduction schemes will hit these companies (and any others operating on very small margins) hard. This will have direct negative consequences for the economy in the short term.

Whether or not this is a bad thing is not necessarily clear cut. The loss is in short term economic prosperity. The benefits are in the longer-term shift towards a cleaner future, with the possibility for lost jobs being replaced by newer, greener options (specifically through changes in the market, not government spending). The point here is not whether this is a worthwhile tradeoff; it is that proposed environmental policy needs to be discussed from this perspective. Any new policies will have immediate effects as well as long-term ones, and they should be discussed in the public sphere. Marketing a policy to the public without acknowledgment of the short term effects risks a backlash.

It can be hard to predict exact effects of the policies, particularly in unstable and volatile market conditions. any governments are looking at policies with a multi-decade time span. Because of this, any emissions reduction scheme needs to be designed to be both robust and adjustable in the long term. An effective system should therefore aim to incorporate three fundamental characteristics:

• Transparency: to ensure that the public knows how effectively the system is progressing, and where weak points are, the scheme should involve full public disclosure. This should cover both operation, and the expected impacts before implementation.
• Accountability – to prevent misuse and bias of the system, any scheme should both prevent political intervention on the basis of individual cases or companies, and should have capability to hold those running the system accountable.
• Adaptability – in the event of the system not meeting emissions reduction targets, or having far different economic impact than expected, it needs to have the capacity for adjustment. One could imagine a system similar to central bank interest rates, but instead involving a change in the cost of government permits or emissions caps.

Good government policy on emissions reduction will incorporate these characteristics. As climate change and environmental impacts become increasingly important topics, transparency and public accountability only grow more vital.

Education and the green revolution

The outlook for environmental policy looks progressively worse with the economic slowdown. There will be an inclination for politicians and policy-makers to hold back environmental legislation if it will cause losses of jobs or business closures. This would be a mistake. If legislators are continually reticent with implementing emissions policy improvements, the risk of policy being too little, too late grows. Commentary calling for economic stimulus packages to focus on green technologies haven’t been completely right either, however. Effective economic stimulus of the green sector will focus on non-technology specific methods – improving education is one possibility. While education has delayed effects, it will be necessary in the longer term. Because of this, increased support for education covering sustainability and clean technology needs to begin now.

Coverage has already appeared in the media discussing the likely setbacks to clean energy and emissions reduction due to the economic crisis. The response of environmentalists to the poor outlook is to call for government economic stimulus packages to focus on supporting clean and renewable technologies. Some elements of the proposed plans are on the money, such as expenditure on infrastructure such as improving freight and public transport networks and electricity grids. These will be effective at both stimulating the economy and reducing marginal costs to businesses. This will help reduce the risk of business closures due to the combined economic slowdown and impacts of emissions reductions policies. It will also improve the outlook for new green technology development and implementation.

More concerning are proposals for government spending directly in the green sector itself. This relies on able government selection of economically worthwhile projects – an area where there is cause for concern. Clear examples of poor government management of ‘green’ programmes are biofuel subsidies in the USA, and solar PV subsidies in Australia. Government support of the sector itself should be limited to providing support in non-selective ways. One example might be a scheme aimed at decreasing the difficulty in raising capital from the private sector in the current economic climate. Some direct spending might be warranted in cases where small expenditures might allow for pilot plants. However, this needs to be coupled with robust transparency and a clear benefit to the taxpayer (the obvious technique is for know-how gained through government spending to be publically available).

Improved education is a key area where economic stimulus could assist the green sector. A lot of discussion focuses on creation of green jobs, but equally important is providing workers with the skills required by the developing sector. Some government expenditure should focus on improving related high-school level subjects (mid-level maths, general sciences, and English), and towards a range of tertiary-level degrees (particularly science, engineering, law, and business) that include sustainable practices and green technology. This would go a long way towards providing the skilled workers necessary for a ‘green revolution’. It would also ensure that the graduates of tomorrow are not obsolete in a changing world. The high overall level of education in countries such as Sweden and Japan helped them to undergo rapid development and change in their economies in the past; forward-thinking nations will learn from this historical example.