Another very helpful analysis from Dave Heatley. Of course we should adopt the least costly mitigation measures first. This issue has obviously been afflicted with political agendas, where a certain class of people in politics, media, planning and bureaucracy see an opportunity in climate change, to push an agenda they wish to impose anyway. For example, a general distaste for freedom, cars, roads, and decent family housing at an affordable price that allows the Proles too much scope to breed. So in the name of "carbon mitigation" we heavily subsidize public transport, a majority of which (routes, times of day) operate LESS efficiently than an average car with only the driver on board.
Wherever one finds an unwillingness to simply price carbon and let free people and markets pursue 1000 different solutions, one finds a crypto-totalitarian mindset that is just using climate change as a pretext. Or, if they are in good faith and just don't understand the complexities, they are the wrong people to be anywhere near the levers of decision making for society. There is an evident problem already, in that the people intent on forcing higher-density living on the population, refuse to see their responsibility for housing now costing a family three times as much over their lifetime, as it used to in "the bad old days".
There is another big conceptual problem with the whole issue, in that there is no honest confrontation of the cost of mitigating ALL temperature rise, as opposed to hysterical promotion of mitigation measures that the establishment regards as "desirable", using language that sounds as though doing these things will avert the entire climate disaster, rather than delay it a few weeks or some fraction of a fraction of 1 percent, if at all. And furthermore, there is no honest comparison of this cost versus the cost of ADAPTING. There is really 3 costs to include in the analysis: the cost of mitigation, the cost of adaptation, and the cost of impacts against which we fail to mitigate or adapt. So far, despite the hysteria with which rail investment, public transport investment, and urban intensification are promoted, we would not by these means avert more than a tiny fraction of the "costs of climate change", if at all. It is not just that there are a lot of people on the planet who might not follow our noble example, it is that these strategies are little more than tokenism anyway. There is also a downside in that impacts of climate events may well be costlier to populations who have been concentrated IN harm's way instead of out of it. More "urban sprawl" rather than less may well be a cost-reducer in the whole equation. If free people were simply changing their behavior in response to price signals, and technology and entrepreneurship were responding to the price signals, many people may well end up living close to nature at low density, there are numerous "sustainability" mechanisms that are a good fit with this, while "concrete jungle" elite-approved urban form foregoes numerous opportunities that might be LOW cost mitigation.
Thanks Phil. As you point out, there are higher level issues here. As well as the mitigation vs. adaptation trade-offs you rightly mention, there are, for example, poorly chosen proxies for emissions-reducing behaviour, and free-rider problems at every level - from countries down to households. I hope to explore some of these in future Asymmetric Information posts.
I agree with you Phil. As a Wellingtonian, I wonder about both the social and environmental benefits of building a 12 story concrete apartment blocks at $15,000 p.s.m vs building a row of wooden houses in Upper Hutt at $4500 p.s.m. Instinctively, I feel the apartment block is a) creating homelessness in that it raises the price of housing and b) consumes too much carbon emitting concrete and other materials. see attached NYT article on Houston as an example. https://www.nytimes.com/2023/11/22/opinion/homeless-houston-dallas.html?smid=nytcore-ios-share&referringSource=articleShare.
I agree with Peter Davis that it would be good to see a worked example - would CS ferries be a good case study?
The biggest contributor to the higher cost of housing under anti-sprawl land-rationing planning, is the cost of land, which is derived by a completely different mechanism when land is rationed, versus when it is not. The economics profession has disgraced itself by failing to identify this. The price of rationed land works backwards from what consumers of space can be price-gouged. Cheshire et al from the LSE calculated that by 1984, the UK Town and Country Planning system had inflated the price of urban land 300-fold (not 300 percent, 300 FOLD) compared to counterfactuals in the USA where automobile-based, market-led sprawl had simply continued. This is why no dense city has housing affordability, and all the affordable cities now and in history, had larger and larger average new house and section sizes for a constant real price (the median multiple of 3 seems to be a constant under the circumstances that low cost rural land was able to be converted to housing with no regulatory-induced price-gouging mechanism).
The advocates of denser cities have no evidence at all that systemic affordability can be maintained; whether they are now flat-out lying after decades of evidence, or simply still don't understand how real life mechanisms thwart their utopian intentions, they shouldn't have a shred of credibility with elected representatives or the public. I would go as far as to say now, that there is so much evidence of "unintended consequences" that the planning / Statist / social engineering classes do not understand, that Hayek was right. The kind of mind attracted to micro-managing society is inevitably so incapable of understanding real life mechanisms, that failure and misery is the inevitable result. Failure even in their own stated objectives.
It has taken the NYT a very long time to wake up that people like Randal O'Toole, Wendell Cox, and Tory Gattis have been right all along about the benefits of Houston-style policies. But there are a few dozen US cities that still manage a median multiple not far above "3", with an average new house several times larger than in NZ, Houston is just the favorite example.
"What is more important here is how to interpret and use SC-CO2 in policy decisions. $350 is not a target for what other prices should be. Rather, it is an *upper limit*, that is, the most society should be willing to pay to avoid a tonne of carbon emissions" (my emphasis)
This is incorrect. Only if we had an *infallible* estimate of the SCC would it follow that abatement that costs more than the SCC would be reduce aggregate well-being. But we don't have such an estimate. This is from the Rennert et al. piece you quote:
"A limitation of this study is that other categories of climate damages—including additional non-market damages other than human mortality—remain unaccounted for. The inclusion of additional damage sectors such as biodiversity, labour productivity conflict and migration in future work would further improve our estimates. Current evidence strongly suggests that including these sectors would raise the estimates of the SC-CO2, although accounting for adaptation responses could potentially counteract some of that effect. Other costs of climate change, including the loss of cultural heritage, particular ways of life, or valued ecosystems, may never be fully valued in economic terms but would also probably raise the SC-CO2 beyond the estimates presented here."
In light of these serious limitations, it would be a mistake to treat the $350 as an "upper limit" in the way you suggest in the post.
A useful reminder that important concepts such as the social cost of carbon (SCC) may be very difficult to estimate in practice.
I respectfully suggest that infallibility is too high a bar. The parameters underlying climate models are not infallible, yet the models are useful. No-one should be suggesting we abandon them for not being perfect. The same logic applies to economic models.
The wider point I was making was that conceptually, the SCC is an upper limit, not target. And the existence of an upper limit means that not every project that offers carbon emissions should be pursued. Specific projects, of course, require specific analysis.
Hi again Dave. Thanks for your reply. I do not agree that "conceptually, the SCC is an upper limit." Suppose Region R(ich) has emitted the vast majority of CO2, and got rich in doing so. And suppose Region P(oor) suffers the brunt of climate change, which exacerbates other injustices that Region R perpetrates against Region P. Now imagine that if R abates its current emissions, more aggregate well-being would be lost in Region R per ton of abatement than would be created in Region P by that abatement. Nevertheless, it may be that requirements of justice call for Region R to bear those well-being losses, in order to make amends to those in Region P who are much poorer, and who are poorer precisely because of unjust policies the helped to make region R richer in the first place.
It therefore does not follow that "if all options to reduce carbon emissions cost more than SC-CO2, then society would be better off accepting global damage than reducing carbon emissions." Even if an SCC estimate could reliably indicate when an abatement action's well-being costs would be less than its well-being benefits, it may be that requirements of fairness or justice call for the bearing of those costs. Whether/when this is the case is not something that economics itself can determine. (The IPCC makes this point; see AR5, Working Group 3, chapter 3, section 3.4. https://www.ipcc.ch/report/ar5/wg3/ )
I have an ethics book forthcoming on the SCC that makes these points (and more). Happy to share the manuscript if you're interested.
Hi Paul. Adding in a requirement to compensate for historical injustices goes well outside the model discussed in my post.
Still, to reach your conclusion, I expect you would need 2 further constraints: (a) R had exhausted all emissions-reduction options cheaper than the SCC; and (b) R had exhausted all compensation-payment options preferred by P over further emissions-reduction by R.
Those circumstances would leave emissions-reducing projects with a cost higher than the SCC as R's only option to fulfil its compensation commitments, despite the wellbeing losses those projects would create.
This scenario may not be what you had in mind -- if that's the case I suggest you email me via nzae@substack.com. Perhaps we could collaborate on a post to explore this further.
Hi Dave. Yes, that's the sort of example I had in mind.
The way you put the first part of your last reply usefully isolates the main issue I was trying to raise. You now say that the ethical considerations I raised are "well outside the model discussed in my post." But recall that originally you said the SCC is "the most society should be willing to pay to avoid a tonne of carbon emissions." This second statement reads as a statement about what policy should look like, and not merely a statement about what comes out of model that studiously ignores some important ethical considerations. But what policy should look like is a question that can be answered only by taking all all policy-relevant considerations into account. If one's model excludes some of these, then the model results should not be interpreted as policy recommendations. Yet that is how you presented the results of the SCC-based models you wrote about. That is what I objected to.
It would be worth having a fully-worked example using at least one of the two major sources of New Zealand's emissions, namely vehicle traffic (the other being agribusiness).
I always assumed that the NZ ETS price was so low because it is just politically too hard to raise the cost of vehicle emissions and thus, by inference, persuading people to switch either to public transport or EVs or other modalities (like walking). For New Zealand it's much easier to be a free rider on the international system (we are small and who will notice anyway) and concentrate on adaptation.
If you were serious about vehicle emissions you would put some kind of impost on fossil fuel and use that as a price signal to massage down ICEV vs EV use and possibly also as a cross-subsidy to keep public transport user costs low and ensure that the alternative is fuelled by renewables. But that is unlikely to happen because of the pushback - remember the gilets jaunes in France - and so the only alternative is other forms of intervention, like banning ICEV imports after a certain date and/or taxing ICEVs and/or subsidising EVs, mass transit and other modalities like cycling and walking. But that requires a considerable shift in values and politics, and there is little prospect of that in the near future. Until that time we are buying offsets internationally and quietly biding our time. An expensive caper.
What may get us moving is the other main source of emissions - agribusiness - if the EU and other countries start taking seriously whether products they are importing come from countries that are pulling their weight on emissions reduction and impose import penalties accordingly. Fingers crossed.
Thanks Peter. You raise a lot of potential policies, and each deserves more analysis that I can
offer here. Some quick thoughts:
Fuel prices bite hardest on those who drive the most - and fortunately changing their behaviour has much more impact on emissions than do changes to the behaviour of average-and-low distance drivers. Almost without exception, all the taxis and Uber vehicles I see in NZ are hybrids, reflecting high distances driven and fuel price sensitivity. I take this as pricing policies having an impact in the situations where it makes the most difference. Such targeted responses are exactly what you want from a pricing policy, and offer one reason pricing policies can outperform blunter forms of intervention.
The ETS price adds little to the price of transport fuels - the current price of $70/t corresponds to just 16 cents/litre of petrol, or 19 cents/litre of diesel. I don't think that say double that price would be "politically too hard", though politicians might disagree. That said, if NZ can meet its emissions commitments with a $70 ETS price, that's better than meeting the same commitments at a higher price. (And, all else equal, a lower cost of abatement makes it easier for governments to increase the stringency of their commitments.)
Higher ETS prices might be more politically acceptable if the revenue raised was returned to consumers in a more visible or tangible form. I think this is a policy direction that's also worth exploring.
Plenty of food for thought in your piece about pricing carbon.
What I feel you overlook/under-rate is the lack of choice many people have in meeting their daily mobility needs because of the lack of effective public transport and safe active transport; coupled with the lack of money to purchase anything other than an old gas gobbling dunga to get around in.
Getting the prices right to send a signal is of little use when people do not have the resources to respond to those signals and/or when there are no (in the case of mobility, for example) good public and safe active transport options available.
Another very helpful analysis from Dave Heatley. Of course we should adopt the least costly mitigation measures first. This issue has obviously been afflicted with political agendas, where a certain class of people in politics, media, planning and bureaucracy see an opportunity in climate change, to push an agenda they wish to impose anyway. For example, a general distaste for freedom, cars, roads, and decent family housing at an affordable price that allows the Proles too much scope to breed. So in the name of "carbon mitigation" we heavily subsidize public transport, a majority of which (routes, times of day) operate LESS efficiently than an average car with only the driver on board.
Wherever one finds an unwillingness to simply price carbon and let free people and markets pursue 1000 different solutions, one finds a crypto-totalitarian mindset that is just using climate change as a pretext. Or, if they are in good faith and just don't understand the complexities, they are the wrong people to be anywhere near the levers of decision making for society. There is an evident problem already, in that the people intent on forcing higher-density living on the population, refuse to see their responsibility for housing now costing a family three times as much over their lifetime, as it used to in "the bad old days".
There is another big conceptual problem with the whole issue, in that there is no honest confrontation of the cost of mitigating ALL temperature rise, as opposed to hysterical promotion of mitigation measures that the establishment regards as "desirable", using language that sounds as though doing these things will avert the entire climate disaster, rather than delay it a few weeks or some fraction of a fraction of 1 percent, if at all. And furthermore, there is no honest comparison of this cost versus the cost of ADAPTING. There is really 3 costs to include in the analysis: the cost of mitigation, the cost of adaptation, and the cost of impacts against which we fail to mitigate or adapt. So far, despite the hysteria with which rail investment, public transport investment, and urban intensification are promoted, we would not by these means avert more than a tiny fraction of the "costs of climate change", if at all. It is not just that there are a lot of people on the planet who might not follow our noble example, it is that these strategies are little more than tokenism anyway. There is also a downside in that impacts of climate events may well be costlier to populations who have been concentrated IN harm's way instead of out of it. More "urban sprawl" rather than less may well be a cost-reducer in the whole equation. If free people were simply changing their behavior in response to price signals, and technology and entrepreneurship were responding to the price signals, many people may well end up living close to nature at low density, there are numerous "sustainability" mechanisms that are a good fit with this, while "concrete jungle" elite-approved urban form foregoes numerous opportunities that might be LOW cost mitigation.
Thanks Phil. As you point out, there are higher level issues here. As well as the mitigation vs. adaptation trade-offs you rightly mention, there are, for example, poorly chosen proxies for emissions-reducing behaviour, and free-rider problems at every level - from countries down to households. I hope to explore some of these in future Asymmetric Information posts.
I agree with you Phil. As a Wellingtonian, I wonder about both the social and environmental benefits of building a 12 story concrete apartment blocks at $15,000 p.s.m vs building a row of wooden houses in Upper Hutt at $4500 p.s.m. Instinctively, I feel the apartment block is a) creating homelessness in that it raises the price of housing and b) consumes too much carbon emitting concrete and other materials. see attached NYT article on Houston as an example. https://www.nytimes.com/2023/11/22/opinion/homeless-houston-dallas.html?smid=nytcore-ios-share&referringSource=articleShare.
I agree with Peter Davis that it would be good to see a worked example - would CS ferries be a good case study?
The biggest contributor to the higher cost of housing under anti-sprawl land-rationing planning, is the cost of land, which is derived by a completely different mechanism when land is rationed, versus when it is not. The economics profession has disgraced itself by failing to identify this. The price of rationed land works backwards from what consumers of space can be price-gouged. Cheshire et al from the LSE calculated that by 1984, the UK Town and Country Planning system had inflated the price of urban land 300-fold (not 300 percent, 300 FOLD) compared to counterfactuals in the USA where automobile-based, market-led sprawl had simply continued. This is why no dense city has housing affordability, and all the affordable cities now and in history, had larger and larger average new house and section sizes for a constant real price (the median multiple of 3 seems to be a constant under the circumstances that low cost rural land was able to be converted to housing with no regulatory-induced price-gouging mechanism).
The advocates of denser cities have no evidence at all that systemic affordability can be maintained; whether they are now flat-out lying after decades of evidence, or simply still don't understand how real life mechanisms thwart their utopian intentions, they shouldn't have a shred of credibility with elected representatives or the public. I would go as far as to say now, that there is so much evidence of "unintended consequences" that the planning / Statist / social engineering classes do not understand, that Hayek was right. The kind of mind attracted to micro-managing society is inevitably so incapable of understanding real life mechanisms, that failure and misery is the inevitable result. Failure even in their own stated objectives.
It has taken the NYT a very long time to wake up that people like Randal O'Toole, Wendell Cox, and Tory Gattis have been right all along about the benefits of Houston-style policies. But there are a few dozen US cities that still manage a median multiple not far above "3", with an average new house several times larger than in NZ, Houston is just the favorite example.
You write:
"What is more important here is how to interpret and use SC-CO2 in policy decisions. $350 is not a target for what other prices should be. Rather, it is an *upper limit*, that is, the most society should be willing to pay to avoid a tonne of carbon emissions" (my emphasis)
This is incorrect. Only if we had an *infallible* estimate of the SCC would it follow that abatement that costs more than the SCC would be reduce aggregate well-being. But we don't have such an estimate. This is from the Rennert et al. piece you quote:
"A limitation of this study is that other categories of climate damages—including additional non-market damages other than human mortality—remain unaccounted for. The inclusion of additional damage sectors such as biodiversity, labour productivity conflict and migration in future work would further improve our estimates. Current evidence strongly suggests that including these sectors would raise the estimates of the SC-CO2, although accounting for adaptation responses could potentially counteract some of that effect. Other costs of climate change, including the loss of cultural heritage, particular ways of life, or valued ecosystems, may never be fully valued in economic terms but would also probably raise the SC-CO2 beyond the estimates presented here."
In light of these serious limitations, it would be a mistake to treat the $350 as an "upper limit" in the way you suggest in the post.
Thanks Paul.
A useful reminder that important concepts such as the social cost of carbon (SCC) may be very difficult to estimate in practice.
I respectfully suggest that infallibility is too high a bar. The parameters underlying climate models are not infallible, yet the models are useful. No-one should be suggesting we abandon them for not being perfect. The same logic applies to economic models.
The wider point I was making was that conceptually, the SCC is an upper limit, not target. And the existence of an upper limit means that not every project that offers carbon emissions should be pursued. Specific projects, of course, require specific analysis.
Hi again Dave. Thanks for your reply. I do not agree that "conceptually, the SCC is an upper limit." Suppose Region R(ich) has emitted the vast majority of CO2, and got rich in doing so. And suppose Region P(oor) suffers the brunt of climate change, which exacerbates other injustices that Region R perpetrates against Region P. Now imagine that if R abates its current emissions, more aggregate well-being would be lost in Region R per ton of abatement than would be created in Region P by that abatement. Nevertheless, it may be that requirements of justice call for Region R to bear those well-being losses, in order to make amends to those in Region P who are much poorer, and who are poorer precisely because of unjust policies the helped to make region R richer in the first place.
It therefore does not follow that "if all options to reduce carbon emissions cost more than SC-CO2, then society would be better off accepting global damage than reducing carbon emissions." Even if an SCC estimate could reliably indicate when an abatement action's well-being costs would be less than its well-being benefits, it may be that requirements of fairness or justice call for the bearing of those costs. Whether/when this is the case is not something that economics itself can determine. (The IPCC makes this point; see AR5, Working Group 3, chapter 3, section 3.4. https://www.ipcc.ch/report/ar5/wg3/ )
I have an ethics book forthcoming on the SCC that makes these points (and more). Happy to share the manuscript if you're interested.
Hi Paul. Adding in a requirement to compensate for historical injustices goes well outside the model discussed in my post.
Still, to reach your conclusion, I expect you would need 2 further constraints: (a) R had exhausted all emissions-reduction options cheaper than the SCC; and (b) R had exhausted all compensation-payment options preferred by P over further emissions-reduction by R.
Those circumstances would leave emissions-reducing projects with a cost higher than the SCC as R's only option to fulfil its compensation commitments, despite the wellbeing losses those projects would create.
This scenario may not be what you had in mind -- if that's the case I suggest you email me via nzae@substack.com. Perhaps we could collaborate on a post to explore this further.
Hi Dave. Yes, that's the sort of example I had in mind.
The way you put the first part of your last reply usefully isolates the main issue I was trying to raise. You now say that the ethical considerations I raised are "well outside the model discussed in my post." But recall that originally you said the SCC is "the most society should be willing to pay to avoid a tonne of carbon emissions." This second statement reads as a statement about what policy should look like, and not merely a statement about what comes out of model that studiously ignores some important ethical considerations. But what policy should look like is a question that can be answered only by taking all all policy-relevant considerations into account. If one's model excludes some of these, then the model results should not be interpreted as policy recommendations. Yet that is how you presented the results of the SCC-based models you wrote about. That is what I objected to.
It would be worth having a fully-worked example using at least one of the two major sources of New Zealand's emissions, namely vehicle traffic (the other being agribusiness).
I always assumed that the NZ ETS price was so low because it is just politically too hard to raise the cost of vehicle emissions and thus, by inference, persuading people to switch either to public transport or EVs or other modalities (like walking). For New Zealand it's much easier to be a free rider on the international system (we are small and who will notice anyway) and concentrate on adaptation.
If you were serious about vehicle emissions you would put some kind of impost on fossil fuel and use that as a price signal to massage down ICEV vs EV use and possibly also as a cross-subsidy to keep public transport user costs low and ensure that the alternative is fuelled by renewables. But that is unlikely to happen because of the pushback - remember the gilets jaunes in France - and so the only alternative is other forms of intervention, like banning ICEV imports after a certain date and/or taxing ICEVs and/or subsidising EVs, mass transit and other modalities like cycling and walking. But that requires a considerable shift in values and politics, and there is little prospect of that in the near future. Until that time we are buying offsets internationally and quietly biding our time. An expensive caper.
What may get us moving is the other main source of emissions - agribusiness - if the EU and other countries start taking seriously whether products they are importing come from countries that are pulling their weight on emissions reduction and impose import penalties accordingly. Fingers crossed.
Thanks Peter. You raise a lot of potential policies, and each deserves more analysis that I can
offer here. Some quick thoughts:
Fuel prices bite hardest on those who drive the most - and fortunately changing their behaviour has much more impact on emissions than do changes to the behaviour of average-and-low distance drivers. Almost without exception, all the taxis and Uber vehicles I see in NZ are hybrids, reflecting high distances driven and fuel price sensitivity. I take this as pricing policies having an impact in the situations where it makes the most difference. Such targeted responses are exactly what you want from a pricing policy, and offer one reason pricing policies can outperform blunter forms of intervention.
The ETS price adds little to the price of transport fuels - the current price of $70/t corresponds to just 16 cents/litre of petrol, or 19 cents/litre of diesel. I don't think that say double that price would be "politically too hard", though politicians might disagree. That said, if NZ can meet its emissions commitments with a $70 ETS price, that's better than meeting the same commitments at a higher price. (And, all else equal, a lower cost of abatement makes it easier for governments to increase the stringency of their commitments.)
Higher ETS prices might be more politically acceptable if the revenue raised was returned to consumers in a more visible or tangible form. I think this is a policy direction that's also worth exploring.
Plenty of food for thought in your piece about pricing carbon.
What I feel you overlook/under-rate is the lack of choice many people have in meeting their daily mobility needs because of the lack of effective public transport and safe active transport; coupled with the lack of money to purchase anything other than an old gas gobbling dunga to get around in.
Getting the prices right to send a signal is of little use when people do not have the resources to respond to those signals and/or when there are no (in the case of mobility, for example) good public and safe active transport options available.