Inequality, Sunk Costs, and Climate Policy

By Frank Ackerman

Fifth in a series on climate policy; find Part 1 here, Part 2 here, Part 3 here, and Part 4 here.

Climate change is at once a common problem that threatens us all, and a source of differential harms based on location and resources. We are all on the same boat, in perilous waters – but some of us have much nicer cabins than others. What is the relationship of inequality to climate policy?

The ultimate economic obstacle to climate policy is the long life of so many investments. Housing can last for a century or more, locking residents into locations that made sense long ago. Business investments often survive for decades. These investments, in the not-so-distant past, assumed continuation of cheap oil and minimally regulated coal – thereby building in a commitment to high carbon emissions. Now, in a climate-aware world, we need to treat all fossil fuels as expensive and maintain stringent regulation of coal. And it is impossible to repurpose many past investments for the new era: they are sunk costs, valuable only in their original location or industry.

If we could wave a magic wand and have a complete do-over on urban planning, we could create a new, more comfortable and more sustainable way of life. Transit-centered housing complexes, surrounded by green spaces and by local amenities and services, could offer convenient car-free links to major employment sites. Absent a magic wand, the challenge is how to get there from here, in a short enough time frame to matter for climate policy.

Space is the final frontier in energy use. Instead of shared public spaces for all, an ever-more-unequal society allows the rich to enjoy immense private spaces, such as McMansions situated on huge exurban lots. This leads to higher heating and cooling costs for oversized housing, and to higher infrastructure costs in general: longer pipes, wires and travel distances between houses. And it locks in a commitment to low population density and long individual commutes. Outside of the biggest cities, much of the United States is too sparsely settled for mass transit.

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Prices Are Not Enough

By Frank Ackerman

Fourth in a series on climate policy; find Part 1 here, Part 2 here, and Part 3 here.

We need a price on carbon emissions. This opinion, virtually unanimous among economists, is also shared by a growing number of advocates and policymakers. But unanimity disappears in the debate over how to price carbon: there is continuing controversy about the merits of taxes vs. cap-and-trade systems for pricing emissions, and about the role for complementary, non-price policies.

At the risk of spoiling the suspense, this blog post reaches two main conclusions: First, under either a carbon tax or a cap-and-trade system, the price level matters more than the mechanism used to reach that price. Second, under either approach, a reasonably high price is necessary but not sufficient for climate policy; other measures are needed to complement price incentives.

Agribusiness Is the Problem, Not the Solution

By Jomo Kwame Sundaram

Cross-posted at Inter Press Service.

For two centuries, all too many discussions about hunger and resource scarcity has been haunted by the ghost of Parson Thomas Malthus. Malthus warned that rising populations would exhaust resources, especially those needed for food production. Exponential population growth would outstrip food output.

Humanity now faces a major challenge as global warming is expected to frustrate the production of enough food as the world population rises to 9.7 billion by 2050. Timothy Wise’s new book Eating Tomorrow: Agribusiness, Family Farmers, and the Battle for the Future of Food (New Press, New York, 2019) argues that most solutions currently put forward by government, philanthropic and private sector luminaries are misleading.

Methane Measurements and Short Attention Spans

By Frank Ackerman

Third in a series of posts on climate policy.  Find Part 1 here and Part 2 here.

Carbon dioxide (CO2) represents most, but not all, greenhouse gas emissions. In EPA’s Greenhouse Gas Inventory for 2016, CO2 represented 82 percent of gross U.S. GHG emissions, while methane represented 10 percent (measured as CO2-equivalents). The top three sources of methane are agriculture, the energy industry, and waste management.

As fascinating as some of us may find such details, the general public has a short attention span for new information about climate change. Within that constraint, what do we want to communicate? For methane, there are two choices, an introductory and an advanced message.

The introductory message emphasizes that methane, the principal component of natural gas, is an important cause of global warming under any version of the data. It is therefore crucial to reduce and eliminate all fossil fuels, gas included, as soon as possible, replacing them with efficiency, renewables and energy storage.

Climate Damages: Uncertain but Ominous, or $51 per Ton?

By Frank Ackerman

Second in a series of posts on climate policy.  Find Part 1 here.

According to scientists, climate damages are deeply uncertain, but could be ominously large (see the previous post). Alternatively, according to the best-known economic calculation, lifetime damages caused by emissions in 2020 will be worth $51 per metric ton of carbon dioxide, in 2018 prices.

These two views can’t both be right. This post explains where the $51 estimate comes from, why it’s not reliable, and the meaning for climate policy of the deep uncertainty about the value of damages.

On Buying Insurance, and Ignoring Cost-Benefit Analysis

By Frank Ackerman

First in a series of posts on climate policy.  

The damages expected from climate change seem to get worse with each new study. Reports from the IPCC and the U.S. Global Change Research Project, and a multi-author review article in Science, all published in late 2018, are among the recent bearers of bad news. Even more continues to arrive in a swarm of research articles, too numerous to list here. And most of these reports are talking about not-so-long-term damages. Dramatic climate disruption and massive economic losses are coming in just a few decades, not centuries, if we continue along our present path of inaction. It’s almost enough to make you support an emergency program to reduce emissions and switch to a path of rapid decarbonization.

But wait: isn’t there something about economics we need to figure out first? Would drastic emission reductions pass a cost-benefit test? How do we know that we wouldn’t be spending too much on climate policy?

In fact, a crash program to decarbonize the economy is obviously the right answer. There are just a few things you need to know about the economics of climate policy, in order to confirm that Adam Smith and his intellectual heirs have not overturned common sense on this issue. Three key points are worth remembering.