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.

Gloom Ahead of World Economic Storm

By Jomo Kwame Sundaram and Anis Chowdhury
Cross-posted at Inter Press Service.
In light of the uncertainty caused by the US-China trade war, the IMF expects the US economic growth to slow from a three-year high of 2.9 per cent in 2018 to 2.5 per cent in 2019, while China’s expansion has already slowed in recent years, albeit from much higher levels.
Trump stimulus dissipates
US President Trump and the previous GOP-controlled US Congress claimed to be breathing new life into the US economy with generous tax cuts. The US economy is now overheating, with inflation rising above target, causing the Federal Reserve to continue raising the federal funds rate to dampen demand.
As most families hardly gained from the tax changes, US purchases of houses and consumer durables continued to decline through 2018. Instead of investing in expanding productive capacity, US companies spent much of their tax savings on a $1.1 trillion stock buy-back spree in 2018.
Hence, the positive impacts of tax cuts were not only modest, but are also diminishing. Nearly half of 226 US chief financial officers recently surveyed believe that the US will go into recession by the end of 2019, with 82 per cent believing that it will have begun by the end of 2020. Wall Street’s biggest banks, JP Morgan and Bank of America, are also preparing for a slowdown in 2019.
As if to confirm their concerns, both the Dow Jones Industrial Average and the S&P 500 had their worst ever December performance since 1931, when stocks were battered after the Great Crash.

UN Backs Seed Sovereignty in Landmark Peasants’ Rights Declaration

By Timothy A. Wise

Cross-posted at Food Tank.

On December 17, the United Nations General Assembly took a quiet but historic vote, approving the Declaration on the Rights of Peasants and other People Working in Rural Areas, by a vote of 121-8 with 52 abstentions. The declaration, which was the product of some 17 years of diplomatic work led by the international peasant alliance La Via Campesina, formally extends human rights protections to farmers whose “seed sovereignty” is threatened by government and corporate practices.

“As peasants we need the protection and respect for our values and for our role in society in achieving food sovereignty,” said Via Campesina coordinator Elizabeth Mpofu after the vote. Most developing countries voted in favor of the resolution, while many developed country representatives abstained. The only “no” votes came from the United States, United Kingdom, Australia, New Zealand, Hungary, Israel, and Sweden.

“To have an internationally recognized instrument at the highest level of governance that was written by and for peasants from every continent is a tremendous achievement,” said Jessie MacInnis of Canada’s National Farmers Union. The challenge now, of course, is to mobilize small-scale farmers to claim those rights, which are threatened by efforts to impose rich-country crop breeding regulations onto less developed countries, where the vast majority of food is grown by peasant farmers using seeds they save and exchange.

Taking Away the Ladder

By Jomo Kwame Sundaram and Anis Chowdhury

Cross-posted at Inter Press Service.

The notion of the BRICS (Brazil, Russia, India, China, and later, South Africa) was concocted by Goldman Sachs’ Jim O’Neill. His 2001 acronym was initially seen as a timely, if not belated acknowledgement of the rise of the South.

But if one takes China out of the BRICS, one is left with little more than RIBS. While the RIBS have undoubtedly grown in recent decades, their expansion has been quite uneven and much more modest than China’s, while the post-Soviet Russian economy contracted by half during Boris Yeltsin’s first three years of ‘shock therapy’ during 1992-1994.

Unsurprisingly, Goldman Sachs quietly shut down its BRICS investment fund in October 2015 after years of losses, marking “the end of an era”, according to Bloomberg.

Growth spurts in South America’s southern cone and sub-Saharan Africa lasted over a decade until the Saudi-induced commodity price collapse from 2014. But the recently celebrated rise of the South and developing country convergence with the OECD has largely remained an East Asian story.

A Blueprint for Linking Trade to Full Employment and Domestic Industrialization

Second part of a series, 2018 TRADE AND DEVELOPMENT REPORT: Interview with UNCTAD’s Richard Kozul-Wright, from the Real News Network.

RICHARD KOZUL-WRIGHT: Here’s a big question that I think needs to be honestly and frankly addressed. If state ownership, technology transfer agreements and subsidies work to sustain growth and eliminate poverty and these policies have taken 500 million people out of poverty in China, and by implication, because of China’s connections to other developing countries, another 100 million people out of poverty in other parts of the developing world: Why do advanced economies want to deny their use to other developing countries? Given their success, given what they have achieved in terms of economic performance and social performance, why would you want, why would you want to eliminate these options from the policy toolkit of developing countries? It’s a very serious question that needs to be, I think, asked in a more frank and honest way than has so far been the case.

Obviously, for us least in terms of the TDR, it’s about rethinking multilateralism in progressive ways. It’s a plague on both your houses This is not an issue of do we support regressive nationalism, which we’ve already seen in various formations. Nor is it a support for the kind of corporate cosmopolitanism that has dominated the multilateral discussion for the last…We need some kind of alternative that is neither of these options. And I’ll finish here. We, in the Trade and Development Report this year, have gone back to the Havana Charter, which as many of you know, was the forerunner of the GATT, indeed more ambitious of the multilateral discussions in 1947 and 1948 than the GATT, that was signed up to by 50 odd countries, both developed and developing. Indeed, the majority of countries that signed up the Havana Charter were from the developing world. It was eventually rejected by the U.S. Congress and was shelved, but it is a remarkable document.