Thursday, July 19, 2007

Climate change: a view from the right

We have to thank the Green Left for energetically bringing the issue of Climate Change to our attention. But now that we are starting to understand the problem we need to develop an Economic Rationalist solution. The views of the Green Left on how to solve the problem are not just wrong, they are dangerously wrong.

The message from the Green Left is that we have to sacrifice and suffer. If we suffer enough from higher energy prices from renewable sources, and from reduced energy consumption then that will solve the problem. Suffering is necessary and sufficient, they say. Does this sound familiar? Sacrifice and suffering is what religious leaders have been prescribing to appease the gods from the beginning of humanity. It taps into an instinct to sacrifice for the good of the community. We are all good at pretending to do it, while hoping that others do more. However it is completely irrelevant to solving Climate Change because it is not necessary, and because the sort of sacrifices being proposed, for example by Al Gore at the end of "An Inconvenient Truth", are nowhere near sufficient.

The first mistake is to see the solution in terms of specific regulations, penalties and subsidies. That always creates lots of busy work for government without making real progress on the issue. What we need to do is impose a cost on activities we want to reduce. I'll call that a tax. We want to give money for activities we want to encourage. I'll call that a negative tax. The Carbon Tax Base (CTB) will be the estimated cheapest marginal cost of removing 1 tonne of carbon from the air. Some fraction of the CTB will be applied to fossil fuels as they come out of the ground, and to imported fossil fuel (unless there is an intergovernmental agreement with the source country). The same fraction of the CTB will be paid, as a negative tax, to activities that permanently remove carbon from the air. Turning grassland into forest might be the cheapest way to do this, but it is a one-off and is not renewable. There may be a renewable solution here if the wood is regularly harvested and treated so that it won't rot. There will be in between cases where there is payment for CO2 taken out of the atmosphere (as wood in this case), and the money is repaid as positive carbon tax as the CO2 is returned (by rotting).

This proposal opens up every option to solve the problem. Energy costs are increased, so people will favour activities which use less. Fossil fuel is made less attractive as an energy source relative to alternatives. And finally people can put their minds to ways to remove CO2 from the atmosphere and get rewarded by that (and the continuing burners of fossil fuel will have an advantage in doing this, since they will have a more concentrated stream of CO2 to work with).

Initially the tax will bring in more than is paid out to those removing CO2. Indeed the aim will be to take 20 years to reach equality. During this period there will be a surplus, but the aim will be for the carbon tax to be revenue neutral. The excess will be returned to the people in the form of a negative poll tax (in other words equally to everyone). This will be quite close to an equitable way of helping people handle the increased costs. It would be silly to return the money in a way that gave more to those who use more energy since that would just subtract from the effect of the carbon tax.

There is basically just one parameter which needs to be adjusted in the scheme: the product of the CTB and a fraction chosen for policy reasons. This would be set by an independant body, following the very successful model of interest rates. The legislation would set Australia's aim for CO2 levels in the atmosphere. The independant body would aim to hit a net rate of emission/removal which would aim to hit the legislated target in about 50 years if all other countries were cooperating. It would work up to that cruising rate over an initial 20 year period.

Carbon Trading is another market based approach to greenhouse emissions. It is a left wing bureaucrats idea of how to do it. It targets the emissions, which need not be fossil fuel derived. It should target the fossil fuel extraction because that all ends up as CO2 eventually, and it is easy to police. Existing schemes don't seem to distinguish between renewable extraction of CO2 and one-off actions like reafforestation (which then needs to be policed to see that it isn't undone). Still this is an international system and the best way for Australia to use it would be to act as a single entity, with our verified CO2 extraction (paid for as negative tax) attracting carbon trading credits for Australia as a whole. We could then use these to encourage other useful activity world wide. And of course we should push for a more sensible international system, and make reciprocal agreements with other countries that are carbon-taxing fossil fuel mining.

The Green Left would say that the aim of combatting climate change is to return the world and its climate to its natural state. This is a terrible idea. With 6 billion mouths to feed, and counting, we need to manage the climate and keep it at an optimal level. Nature is just as capable as humanity of messing up the climate.

If you look at a graph of the world's temperature over the last 100,000 years or so you'll see this little straight bit in the top right. That's 8000 years of stable warm wet climate. Before that it jiggles around all over the place, and nearly always much colder and much drier than it is now. Very unstable, very cold and very dry is the worlds natural state since the age of the glaciers started half a million years ago. It is more important to avoid a return to those normal conditions than it is to avoid global warming. Of course global warming is much more urgent.

There is a lot of misleading comment around associating "warm" with "dry" climate change. Naturally the warmer the ocean is, and the higher the sea level, the more water evaporates, and the more rain that falls eventually. That's why the world's climate is either cold and dry during ice ages, or it is warm and wet during interglacials like the one we are enjoying. The reason the warm-dry combination gets mentioned is that climate change is not uniform. A British study based on simulations claims global warming will make 2/3 of the world wetter and 1/3 drier. However accurate that is, there are reasonable general arguments as well as simulations to suggest that global warming will make the southern half of Australia drier. Outside Australia the concerns about drier conditions seem to be only based on particular simulations and seem to be taken more seriously than they should.

Another popular misconception is that there was this CO2 in the atmosphere, just sitting there at a particular level, then we added more. In fact CO2 moves into and out of the atmosphere at quite a high rate. So, the fact that the level of CO2 has remained quite stable over long periods means that the rates of.CO2 entering and leaving are the same. But it means more than that. The world settled into a stable equilibrium of atmospheric CO2. If the amount of CO2 increases, say from a volcanic erruption, then the processes taking CO2 out of the atmosphere also increase, and similarly any decrease encouraged the processes that put CO2 back. We can imagine the state of the world as a balling rolling on a plane that isn't flat. It will roll down hill, following the course that water would take. Eventually it comes to rest in a depression. Whichever way it is pushed it wants to roll back to the lowest point of the depression.

Continuing our analogy, suppose we give the ball a push in a direction that we might call "higher CO2". Eventually we might push it over the lip of our local depression and the ball might start rolling again looking for a new depression: a new equilibrium point. However there is no guarantee that it will keep rolling in that direction. It might go around and end up in the other direction from the way it was pushed. In other words, a push in the direction of greater warming might tip us into an ice age, though perhaps not as fast as in "The Day After Tomorrow". I've been assuming that the push back force is well behaved like gravity. It might not be and it might force the ball back towards the low point, but then overshoot. In that way it might find a much lower lip that it can easily get over and then keep heading towards the other stable equilibrium that we know exists that puts the world into an Ice Age.

Suppose we set our CO2 target at 350ppm. Perhaps in 40 years the CO2 level will start to fall rapidly. If we've set up a flexible mechanism then that mechanism will react to support the CO2 level. When the carbon tax goes negative then business might go back to those abandoned gas fields and make money just by venting methane.

This plan doesn't involve government telling everyone what to do, it just readjusts economic incentives in the same way that interest rate adjustments do. This plan doesn't involve handing control back to mother nature, instead it takes a necessary step to control her. This plan doesn't involve any necessary sacrifice, it is designed to come in sufficiently slowly that it can leverage ongoing economic growth. These three things might annoy Bob Brown, but that is just a subsidiary benefit. The main point is that we need to solve Climate Change, and only rational economic policies will do it. If we don't do it then the Left will be pleased to take the reins, causing economic mayhem, and failing to address the problem.