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Climate Change Workshop Presentation


Climate Change Workshop Presentation Rod Duncan Charles Sturt University Institute for Land, Water and Society What is an economist not going to talk about? – PowerPoint PPT presentation

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Title: Climate Change Workshop Presentation

Climate Change Workshop Presentation
  • Rod Duncan
  • Charles Sturt University
  • Institute for Land, Water and Society

What is an economist not going to talk about?
  • The science of climate change

What can an economist add to this debate?
  • Developing institutions to deliver a solution to
    a social problem is one of the core uses of
    economics- What do economists do?
  • Changing laws about flood insurance can encourage
    developers to put fewer homes in flood plains.
  • Fixing Federal and State regulations governing
    hospitals can lead to lower costs for delivering
    medical services.
  • Implementing an emissions trading scheme can
    change behaviour and lead to lower levels of
    carbon emissions.

What can an economist add to this debate?
  • Economists use complex models predicting human
    behaviour to develop institutions to achieve a
    social goal. Our climate change policies fall
    squarely in this realm.
  • Economics can not inform your decision about
    whether climate change is happening, but
    economics can inform you about whether proposed
    policies might slow down or speed up climate
  • Given a long history of policy analysis in
    economics, what do economists know? What tends
    to happen? The good and the bad.

What our models say? IPCC AR4
The bad Humans are crap at prediction!
What happened next? Picking on economists
  • Moral Humans are terrible at predicting the
    future. Economists- who predict for a living-
    are also terrible!
  • My concern is that our love of prediction and our
    possession of models gives us a false sense of
    security. There is an illusion of control that
    comes with prediction. The future may be far
    better or far worse.
  • Prediction of climate change impacts relies on
    our prediction of
  • Events 100 years in the future
  • Human behaviour
  • Advances in technology

Terrible predictions 1
  • Anyone who was around in the 1980s remembers the
    Japan is taking over the world panic.
  • What is your bet about the current China is
    taking over the world panic?

Terrible predictions 2
  • (From the 1972 version of Ehrlichs book)
  • a minimum of ten million people, most of them
    children, will starve to death during each year
    of the 1970s. But this is a mere handful
    compared to the numbers that will be starving
    before the end of the century. (p. 3)

Terrible predictions 3
  • An informal group calling itself the Club of
    Rome and academics at MIT predicted a future of
    resource shortages and rapidly-rising populations
    leading to an environmental collapse by early
    21st century.

Limits to growth?
  • Turner (2008) re-ran the Club of Rome simulations
    and plotted in observed reality (the purple
  • In Figure 7, the standard run for LtG had
    production of food per capita collapsing around
  • Time to buy grains futures?

Why are we so bad at prediction? Long stretches
of time
  • This is a view of Oxford Street, Sydney, in 1910.
  • About a great a stretch of time separates us from
    1910 as separates us from 2100.
  • Would we in 1910 have been successful at
    predicting the world in 2010?

This image is from the City of Sydney's Sydney
Streets exhibition http//www.cityofsydney.nsw.g
Human behaviour is hard to predict (see GFC)
  • Its much easier if our models do not include
    humans (or at least human choices) at all.
  • Ehrlich and the Club of Rome failed to include
    human choices and behaviour in their models.
  • Our global climate models (general circulation
    model or GCM) painstakingly model the physics
    and chemistry of climate change but have no
    humans in them. Carbon emissions grow at 6 per
    annum or some other assumption.

Predicting future technology
  • Humans are truly awful at predicting what paths
    technological progress will follow. According to
    this TV show, in the 23rd century we have
  • Faster than light travel
  • Phaser weapons
  • Ugly polyester uniforms?
  • No cellphones or iPads?
  • No huge flatscreen displays?
  • Webcams? Facebook?

The good news Costs of change
  • We also know that costs of change are often far
    lower than estimates made before the change
  • Humans believe that a change will be more
    difficult than the change usually turns out to
  • Humans under-estimate human ingenuity our
    capacity to learn and change and our capacity to
    solve problems.

What is likely to be the cost of the
Murray-Darling Basin Plan?
  • The MDBA is planning to acquire 3,000-4,000 GL of
    irrigated farm water through purchases and
    efficiency measures (30-40 of current total
  • The debate has focussed on the loss in
    agricultural output. (Ignoring the benefits from
    a healthier MDBP, the costs of poorly misspent
    taxes for farm irrigation efficiency and many
    other factors.)
  • The MDBA estimates that with a reduction of
    30-40 in water allocations, the gross value of
    irrigated output will drop 13-17 or 0.8-1.1
    billion per year.

But is this likely to be true? How costly is a
30-40 reduction?
  • Weve already had a natural experiment in
    reduction of water use in the MDB. The recent
    drought in the MDB reduced irrigator water
    allocations. From a Wentworth Group press

2000-01 2007-08 Reduction
Irrigation water used in MDB 10,500 GL 3,000 GL -70
Gross value of irrigation in MDB 5.09 bn 5.08 bn -20 in real terms
A drop of 13-17 in farm incomes is likely an
  • If gross farm income falls by 20 due to a 70
    reduction in water allocation, how much of a drop
    in income will a 30-40 drop in water allocation
    in the MDB cause?
  • Remember also this is gross, not net, farm
    income. The impact on net farm incomes will be
  • The water rights will be purchased from the
    farmers. Farm incomes (including water sales)
    will be higher than without the Plan.
  • Over longer time periods, and without the
    uncertainty of a drought, farmers will change the
    way they farm, introduce new technologies and new
    crops and adjust to the lower water allocations.

But the over-estimation of costs of change is a
persistent pattern
  • The US Office of Technology Assessment (1995)
    review of OSHA found a pattern of over-estimation
    of costs of adoption for workplace safety rules.
  • Harrington, Morgenstern and Nelson (1995)
    reviewed EPA and OSHA rules and found that, where
    economic incentives were used, costs of
    compliance were uniformly over-estimated.
  • Chestnut and Mills (2005) found that the
    estimated costs for SO2 and NOx reductions in
    the US in 2010 were half the level predicted in
    1991. They cited flexibility and new technology
    as key.

Supply versus demand of new technologies (some
  • My bet We will not solve climate change by
    un-inventing technologies. Humans are far too
    attached to the benefits of technology. We need
    a technological solution. What it is, we dont
    know. See prediction of new technology.
  • But we can increase the supply and demand for
    technological solutions. Government subsidy of
    research increases the supply of new
    technological solutions.
  • But we should also be thinking about increasing
    the demand for solutions.

Benefits of a low carbon tax
  • A carbon tax would prompt the private sector into
    thinking about solutions- increasing the demand
    for solutions.
  • Even a low carbon tax is an improvement over a
    free price for carbon emissions.

What is the biggest (short-term) risk to an ETS?
  • Any climate change policy faces a large political
    risk in an environment where the political
    parties are so divided on the issue.
  • When the opposition gets into power, what will
    happen to a carbon tax or ETS?
  • If you were a power generator, one of your assets
    may be the emissions permits you have purchased.
    What happens to the value of those assets when
    government policy changes?

  • From WSJ July 12, 2010
  • This is the market price for SO2 emissions
  • A court decision in 2008 altered the way the
    Federal EPA could regulate SO2 emissions-
    requiring less market-based solutions and more
    direct regulation.
  • The market for emissions allowances collapsed.
    What had been a success story for market-based
    programs was ended by a court decision.

Peeing in the public pool
  • Argument Australia is a small emitter of carbon
    on a world-wide scale. What is the value of
    Australia acting unilaterally?
  • Argument If I pee in a public pool, its just a
    small release of urine in a large pool. What
    difference does it make to people also swimming
    in the pool?
  • Its the same argument.