A couple of weeks ago I appeared before the California State Assembly and told legislators that the cost of the State’s cap-and-trade legislation, which comes into full effect in August this year, will be $450 billion over a decade.
This was a deliberate underestimate. I bent over backward to see whether the Californian proposal could ever make any economic sense. The results, when I ran them through my simple model, confirmed what many have long suspected but few have calculated until now: that attempting to mitigate our sins of emission is one of the most cost-ineffective wastes of taxpayers’ money ever devised.
I had multiplied the $182-billion annual cost of California’s scheme and associated mitigation measures not by 10 but by 2.5 – a quarter of the true gross cost over a decade. The reason for effectively dividing the stated costs of California’s mitigation policies by four is that some had criticized the paper from which I obtained the $182 billion annual cost – Varshney & Tootelian, 2012 – for overstating the costs.
I should really have applied a minimum intertemporal discount rate of at least 5%, which would bring the cost down to $410 billion. In the updated figures I present in this posting, I have correctly applied that discount rate.
My model is simple and excludes costs and benefits external to CO2 mitigation: however, unlike other methods reported in the literature, it does count as a benefit of mitigation the cost of the climate-related damage caused by the warming that would occur if we did not act at once on CO2.
On the benefit side of the account, too, I have bent over backwards to try to be generous to those proposing mitigation measures. I have taken the generally exaggerated estimates of the welfare loss from climate inaction that are in the Stern report on the economics of climate change.
Briefly, Stern says that if the manmade warming of the 20th century is the 3 Celsius degrees (or 6 F°) that is the IPCC’s central projection the cost of the climate-related damage will be 0-3% of 21st-century GDP (actually, he says, “now and forever”, but that is not economic analysis: it is political rodomontade: as Margaret Thatcher might have said, “Don’t be silly, dear!”).
So the mean cost of the welfare loss estimated by Stern on the basis of 3 C° total manmade 21st-century warming is the average of 0 and 3%, i.e. 1.5%, of 21st-century GDP. This too should be discounted at 5% over the ten-year life of the scheme, giving a benefit of just 1.27% of GDP over the period.
Now, given the errors, exaggerations, and failures of prediction in the IPCC’s documents, I do not for a moment think we are going to see anything like as much as 3 C° of manmade warming by 2100. Even the IPCC expects only half of that, or 1.5 C°, to occur by 2100 as a result of the CO2 that we emit in this century. Yet it is only that 1.5 C° that CO2 mitigation measures such as those in California can possibly affect to any discernible extent.
That 1.5 C° is the maximum 21st-century warming that we could have prevented even if we had shut down all CO2 emissions in the year 2000. The remaining 1.5 C° – about half of it from non-CO2 greenhouse gases and half from warming already in the pipeline because of our past emissions – will happen regardless of measures such as those which California is trying to take.
On that basis, one should really halve the benefit that arises from preventing Stern’s mean 1.27%-of-GDP inaction cost. But let us – again generously – stick with a benefit equivalent to 1.27% of GDP if we prevent all CO2-driven warming in the 21st century.
Should the model take account of the possibility that California’s cap-and-trade scheme will create opportunities for job growth? I think not. The Friedman Multiple applies: every job artificially created via taxation destroys two jobs among the taxpaying classes: and, according to a recent Scottish report, each “green job” provided at taxpayers’ expense destroys getting on for five real jobs elsewhere.
Why has Intel said it will never again build another plant in California? Why has production of oil from the Monterey Shale been cut by more than a third since 1990, though proven reserves have increased? Why has there been a near-total moratorium on offshore oil and gas drilling in California for nigh on 40 years?
Why are there 11% jobless in California – a higher proportion than anywhere in the US except Nevada? Why are 50% unemployed in the construction industry that is supposed to benefit from retrofitting buildings with “green” technology?
Why does the State Treasury have a deficit of $6 billion for 2012/13? Why does California have unfunded pension liabilities of $250-200 billion to its senior citizens, and how is it going to pay for them if it goes on as it is?
Why have 50,000 high-net-worth Californians (one-third of the total) fled in just two years, according to the Sacramento Bee? Why did twice as many firms flee California in 2011 as in 2010? Why did Globalstar, Trizetto and eEye flee in just one month last year? Why have Boeing, Toyota, Apple, Facebook, DirecTV, Hilton Hotels, and Thomas Bros. Maps all fled?
It would be wrong to imply that these decisions to flee were a direct result of California’s cap-and-trade law, and I did not do so. The truth is that California – long dominated by entrenched, hard-Left unions and a frankly Marxist legislature – is already notorious as far and away the least business-friendly State in the Union. Cap-and-trade will merely make matters a great deal worse. The wagons are already rolling eastward: soon they will become a stampede.
When I testified in Sacramento, the first point I put to the legislators was that the declared aim of their cap-and-trade scheme is to abate 25% of California’s CO2 emissions over the decade during which it will run. But California’s emissions are only 8% of total US emissions, which in turn are only 17% of global emissions.
So, even if the cap-and-trade scheme is every bit as successful as its promoters would wish, only 0.34% of global emissions – one-third of one per cent – will be abated. There is nothing in the least controversial about this figure, except that no one seems to have pointed it out before. The legislators’ faces were a picture when I told them.
Because so small a fraction of global emissions will be abated by the scheme, simple calculations based on the IPCC’s central assumptions about how much warming will occur this century (which, for the sake of argument, I simply accepted as correct) show that as a result of the full and successful operation of the scheme global CO2 concentration will fall from 410 to – er – 409.93 parts per million by volume by the end of the decade.
Manmade radiative forcing abated would thus be less than 0.001 Watts per square meter, and the warming prevented would be – wait for it, wait for it – a staggering 0.001 Fahrenheit degrees (almost). Yup, less than one-thousandth of a Fahrenheit degree of global warming prevented, at a cost of $410 billion even after discounting to present value.
Is that a bargain for the already over-taxed, over-regulated citizenry of California? We report – you decide.
It is important to understand why measures to attempt to mitigate CO2 emissions are always going to be unaffordable. First, as the California example demonstrates, regional mitigation measures do not noticeably change the global CO2 concentration. Therefore manmade radiative forcing is scarcely altered.
So, in turn, California’s attempt to stop global warming will cause so tiny a cooling – in the present instance, under one-thousandth of a Fahrenheit degree – that no modern instrument or method can detect it. Even if California’s scheme succeeded in cutting as much as 25% of the State’s emissions (which it won’t), the State would have no way of measuring that it had succeeded in causing global cooling.
You might say, as some commentators on my presentation to the California legislators have said, that of course California cannot make much difference by going it alone. Everyone else must follow California’s leadership in closing down as much of their economies as possible. So let us cost that unattractive option.
A little further elementary math will show that the cost of abating 1 Fahrenheit degree of global warming by worldwide measures as spectacularly cost-ineffective as those of California will be close to $640 trillion – rather more than the $454 trillion I had originally estimated, because I had been too generous with the value of the centennial-scale climate-sensitivity parameter.
Its value should not exceed 0.4 Kelvin per Watt per square meter, whereas I had generously adopted the bicentennial-scale parameter at 0.5 Kelvin per Watt per square meter that is implicit in IPCC (2007), p. 13, Table SPM.3.
To put all of this in context, the cost of abating the one-third of a Fahrenheit degree of warming that the IPCC imagines will happen over the decade of the scheme, if everyone worldwide were crazy enough to adopt measures as laughably cost-ineffective as these, would be $25,000 per head of the world population, or one-third of global GDP over a decade. This would be 26 times the cost enduring the welfare loss that might arise from the global warming we fail to prevent if we do nothing.
I deliberately used very cautious assumptions in my presentation to the Assembly in Sacramento, and told the legislators that action would only cost 11 times inaction.
For various reasons, I should expect the cost-ineffectiveness of California’s scheme (which is by no means untypical of such schemes) to be considerably worse than any of the figures I have cited above.
For a start, it is not at all likely that the scheme will succeed in abating 25% of California’s emissions. The EU and New Zealand schemes have failed to make any noticeable dent in emissions, and the EU scheme – for the fourth successive time – is collapsing as the cost of the right to emit a ton of CO2 has fallen below $8. It nosedived yet again earlier this week, and – if things go on as they are – could end up like the now-failed Chicago Carbon Exchange, where the unit price fell below 10 cents.
The EU’s dictators, of course, have the power artificially to cut the quantity of permits available and so boost the price. That is why cap-and-trade is not, repeat not, a market mechanism. It is a tyrant’s wet dream and a businessman’s nightmare, which is why heavily-emitting businesses are getting out of Europe, just as they will soon be joining the flood of businesses already fleeing California.
For these and many other reasons, my model actually tends to overstate the warming that any CO2-reduction policy may abate, and also to understate cost-ineffectiveness. For instance, the IPCC takes CO2’s mean atmospheric residence time as 50-200 years: if so, little mitigation will occur within the 21st century.
Also, my numbers assume that any policy-driven reduction in CO2 concentration occurs at once, when it would be likely to occur stepwise between the starting and ending years, halving the warming otherwise abated by that year and doubling the cost-ineffectiveness.
If the IPCC’s central projections (on which my figures are based) continue to exaggerate the warming that may arise from a given increase in atmospheric CO2 concentration, the cost-effectiveness may be less than shown.
So far, there has been no global warming at all since 2001. In fact, on the latest data from the Hadley Centre and the Climatic Research Unit at the University of East Anglia, there has been no statistically-significant warming for fully 15 years.
Of course, such periods of temperature stasis are quite frequent in the record. They do not imply there will be no further warming. But they do constrain the rate of warming, which has been and remains far too slow to come close to the IPCC’s unjustifiably alarmist central estimate.
Also, though CO2 emissions are rising in accordance with the IPCC’s A2 emissions scenario, CO2 concentration growth has been near-linear for a decade. Outturn by 2100 may well be considerably below the IPCC’s mean estimate of 700 ppmv.
The climate-sensitivity parameter that I use is centennial-scale: accordingly, over the shorter periods covered by the studies a lesser coefficient (allowing for the fact that longer-term temperature feedbacks may not yet have acted) is appropriate. Consequently, less warming abated would again reduce mitigation cost-effectiveness.
Finally, my calculations ignore all opportunity losses from diverting resources to global-warming mitigation. However, the businesses that are already fleeing the business-hating People’s Republic of California cannot afford to ignore such vital considerations. That is why any individual and any firm in California with any get-up-and-go is getting up and going or has already gotten up and gone.
The figures I have cited here are a deliberately much-simplified but nevertheless highly revealing method of combining the central climatological projections of the IPCC with the standard economic techniques of intertemporal analysis so as to allow even non-specialist policy-makers rapidly to reach a not unreliable first approximation of the costs and benefits of policies to mitigate CO2 emissions.
My method is unique in two respects. First, no one has previously combined the IPCC’s climatology with economic methods so straightforwardly before. Secondly, the method, for the first time, allows even localized policies to be evaluated and compared with competing policies on any scale.
If anyone would like a copy of the paper that explains the method and justifies the equations, please get in touch. (monckton at mail dot com) I’ll be happy to send it to you, and I’ll welcome your comments. I can’t post it up because, after I presented these ideas at the Third Santa Fe Climate Conference in November last year, I have been asked to submit the paper to a learned journal and the final draft is just about to go out to the reviewers.
One of my Noble Friends tells me he has sent the analysis to the chief economic adviser to the UK Treasury, which, however, cannot do much about it because all British environmental policy is now set by the unelected Kommissars of Brussels. His message to the mandarins: “As they say on the London insurance market, ‘When the premium exceeds the cost of the risk, don’t insure.’”
Since the opportunity cost of mitigation is heavy (just watch all those wagons rollin’ away from the extravagantly pointless over-regulation and over-taxation in California), the question arises whether CO2 mitigation should be attempted at all.
Economically speaking, the bottom line is brutally simple and entirely clear. CO2 mitigation policies inexpensive enough to be affordable are likely to prove ineffective, while policies costly enough to be effective will be unaffordable.