Thursday , October 17 2019
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Scarcity makes climate change interesting

Summary:
A couple weeks ago, Paul Gorman asked me what New Zealand could do about climate change in a world where there were infinite resources.  There is no problem with climate change in a world of infinite resources. You could build kit that pulls CO2 from the atmosphere (current cost of pulling carbon out that way is about 0/tonne) and solve it that way - or we could all costlessly flip over to electric cars with enough new costless non-carbon electricity generation to make it all work.Scarcity makes it interesting because you have to think about trade-offs and getting the most value out of limited resources.I sent Paul a pretty lengthy answer; he was only able to use part of it in the story for obvious reasons. I gave it more for background, and to help me lay out my own thinking. So

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A couple weeks ago, Paul Gorman asked me what New Zealand could do about climate change in a world where there were infinite resources. 

There is no problem with climate change in a world of infinite resources. You could build kit that pulls CO2 from the atmosphere (current cost of pulling carbon out that way is about $100/tonne) and solve it that way - or we could all costlessly flip over to electric cars with enough new costless non-carbon electricity generation to make it all work.

Scarcity makes it interesting because you have to think about trade-offs and getting the most value out of limited resources.

I sent Paul a pretty lengthy answer; he was only able to use part of it in the story for obvious reasons. I gave it more for background, and to help me lay out my own thinking. So I'll copy it here so I can find it later if I need it - and so you can tell me what I've messed up if I've messed anything up.

You’ve specified an uninteresting question. If we had infinite, unlimited resources, then there’s no problem at all. There is existing technology that can scrub CO2 from the atmosphere for about $100/tonne. So if we had infinite money, we could build a pile of those plants and just suck the CO2 out of the atmosphere. Problem solved; next question.

The problem is only interesting because we have limited resources. And that’s what makes it an economic problem – economics is the science of figuring out how to deal with scarcity.

Here are my starting premises, which I don’t think are at all controversial.

  1. Neither the government nor anyone else really knows any individual company or industry’s cost of mitigating GHG emissions. For some companies in some industries, there will be low-hanging fruit where it’s cheap to mitigate, but that is not true for all firms or industries.

  2. Opportunities for mitigation vary by country. In some places, it’s relatively cheap to reduce GHGs. In others, not so much.

  3. What makes most sense will depend a lot on what other countries are doing too. When countries do not coordinate, it is easy to wind up in scenarios where GHG mitigation in one country results in greater global emissions because production shifts to places where there production involves more GHG emissions.

  4. Getting poorer countries to come to the table either requires making low-GHG tech really cheap for them, or carbon-equivalent tariffs to make it as though countries without a price on carbon have one in their export markets, or both.

  5. Mitigating inequities resulting from any first-best carbon-charging regime is important not just for equity, but also for the durability of any institutions that are built to mitigate GHGs so they aren’t just abolished on the next flip of the electoral cycle.
Those are my premises. From those premises, we can derive some conclusions. Some of those conclusions will be controversial. I think they flow directly from the premises and from first-principles in economics.
  1. Premise 1 tells us that we need to have a price on GHG that allows people to adapt in the ways that makes most sense given their own particular circumstances of time and place. It’s an argument for using either carbon taxes, or a strengthened version of the ETS, rather than command-and-control regulations running sector-by-sector. The government might have guesses about whether it makes the most sense to reduce emissions in transport, or in agriculture, or in industrial heating – but it just can’t really know. Getting a common price for CO2 equivalents across all sectors, comprehensively, is the only way to be sure that we’re doing the most good we can do. Under a carbon price, we encourage abatement activity that costs up to the current carbon price. With regulatory approaches, we risk paying much much more. Like a hundred or a thousand times more – that’s the kind of range of costs experienced in international studies of this stuff. That means that those approaches do 1/100th or 1/1000th as much good as could have been done if the effort had been coordinated through a carbon price instead.
    • So: strengthen the ETS. Get agriculture into it, completely, with methane charged as its carbon-equivalent. But be VERY CAREFUL to incorporate the equity considerations in 5, below, and the international considerations in 3, below.

  2. Premise two tells us that we absolutely have to either have an internationally linked ETS allowing trading in carbon units across countries, or a ‘dirty float’ ETS that sets the ETS cap to target prices in stringent European countries (basically, making sure that carbon prices here are not higher than in Europe). Why? For the same reason as that expressed in (1), above. If we have a carbon price of $25/tonne in New Zealand, and it’s possible to mitigate GHGs in other places for a carbon price of $2.50/tonne, we do only 1/10th as much good by focusing all of our efforts domestically. I’m not kidding here – there’s work suggesting that protecting Amazon rainforest costs less than $1.70USD/tonne for CO2 equivalent GHG effects. That’s about a tenth of the price in New Zealand. Even if that estimate is wrong and the real cost is double, it’s still a fifth of the price in New Zealand. If we care about doing the most good possible on limited resources, we have to be looking for the options that do the most good per dollar spent. Looking only within New Zealand is then a mistake.

  3. Premise three reminds us that, even if we aren’t considering abatement options that come from efforts abroad, we have to be considering how the rest of the world works when setting up optimal policy here. Agriculture is the most concrete example. In a first-best world, you’d want a common price on CO2 equivalents across everything, and agriculture would be in the ETS. But if agriculture doesn’t face a carbon charge in places where producing milk or meat comes with more GHG, then you wind up reducing emissions in New Zealand while increasing production in worse places overseas. How do you deal with that? Potentially with a regime that has agriculture in the ETS, but with rebates on the ETS charge for exports into markets that either don’t face a carbon charge or where other countries’ goods are sold that don’t themselves face a carbon charge. That will be tricky to set up. But we risk doing harm if we don’t think about it.

  4. New Zealand is not in a position to force the technology curve in any real ways in transport or electricity – we just don’t have the economies of scale to do it. In other places like the US, there can be productive debates about whether massive government funding into tech around solar panels can make them cheap enough that poorer countries will find them the best option for new electricity generation because they’re cheaper than anything else. Those debates are contentious. But irrelevant for a country like New Zealand except in one area: ag tech. New Zealand research has been working, for some time, on improved pastoral systems for reducing agricultural GHG emissions. That research is hindered by the de facto ban on doing that kind of research in New Zealand. But if anything comes of it, it would be very much worth releasing all of the research, for free, to anyone in the world who wants to use the newly developed ryegrasses. New Zealand’s research funding would then help reduce emissions globally rather than just here. On carbon-equivalent tariffs, those are best considered as part of the OECD rather than something NZ should go it alone on as it’s just too easy for other countries to use those things for protectionist purposes rather than to try to re-create the effects of a carbon price for the products of places that don’t have one.

  5. Finally, equity. If we are serious about this, and about the durability of ETS institutions over time, our starting point should be an allocation of ETS credits to every existing emitter to cover their status quo emissions over an extended period, then Crown buy-backs of permits through the ETS to get us to the cap. That builds in a just transition so those who flip out of carbon-intensive forms of production to other activities are compensated for the change immediately. Currently, agriculture’s accession into the ETS is a hack-job. Everyone expects that exposing the agricultural sector to a $25/tonne carbon price would bankrupt the sector, so we use fudges that require purchasing credits for only a fraction of emissions. The big problem we have is that the price of agricultural land, often purchased under high leverage, incorporates expectations around whether farms will need to pay for CO2 emissions, for water, or for nutrient emissions. Start imposing carbon charges, water charges, or emissions charges, and all the numbers on which the mortgages are based will fall apart and you’ll have a massive problem. Big numbers of bankrupted farms – farms that played straight by every rule that they ever faced – would be obviously inequitable and would immediately have National promising to tear up the charging regime. If you instead allow a just transition by providing allocation of credits to existing emitters, but having agriculture fully within the regime (subject to 3, above), there wouldn’t be bankruptcies. There’d instead be marginal farms that realise they can make more by shifting to other forms of production and selling their credits back into the system. And that’s a far easier situation to be in – one that’s consistent with ETS institutions that can be binding and real and durable over time.
On the 'can pull CO2 out of the atmosphere for around $100/tonne' bit, see here on direct air capture.

Implication: it is vastly stupid to enact policy that costs more than $100/tonne to pull CO2 from the atmosphere because we could just build those kinds of plants instead.

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