Market Forces

When dealing with global warming, the size of the risk matters

Shortly after September 11, 2001, Vice President Dick Cheney gave us what has since become known as the One Percent Doctrine: “If there’s a 1% chance that Pakistani scientists are helping al-Qaeda build or develop a nuclear weapon, we have to treat it as a certainty in terms of our response.”

It inspired at least one book, one war, and many a comparison to the "precautionary principle" familiar to most environmentalists. It’s also wrong.

One percent isn’t certainty. This doesn’t mean that we shouldn’t take the threat seriously, or that the precautionary principle is wrong, per se. We should, and it isn’t.

Probabilities matter.

Take strangelets as one extreme. They are particles with the potential to trigger a chain reaction that would reduce the Earth to a dense ball of strange matter before it explodes, all in fractions of a second.

That’s a high-impact event if there ever was one. It’s also low-probability. Really low probability.

At the upper bound, scientists put the chance of this occurring at somewhere between 0.002% and 0.0000000002% per year, and that’s a generous upper bound.

That’s not nothing, but it’s pretty close. Should we be spending more on avoiding their creation, or figuring out if they’re even theoretically possible in the first place? Sure. Should we weigh the potential costs against the social benefit that heavy-ion colliders at CERN and Brookhaven provide? Absolutely.

Should we “treat it as a certainty” that CERN or Brookhaven are going to cause planetary annihilation? Definitely not.

Move from strangelets to asteroids, and from a worst-case scenario with the highest imaginable impact, but a very low probability, to one with significantly higher probability, but arguably much lower impact.

Asteroids come in all shapes and sizes. There’s the 20-meter wide one that unexpectedly exploded above the Russian city of Chelyabinsk in 2013, injuring mored than 1,400 people. And then there are 10-kilometer, civilization-ending asteroids.

Size matters.

No one would ask for more 20-meter asteroids, but they’re not going to change life on Earth as we know it. We’d expect a 10-kilometer asteroid, of the type that likely killed the dinosaurs 65 million years ago, once every 50-100 million years. (And no, that does not mean we are ‘due’ for one. That’s an entirely different statistical fallacy.)

Luckily, asteroids are a surmountable problem. Given $2 to $3 billion and 10 years, a National Academy study estimates that we could test an actual asteroid-deflection technology. It’s not quite as exciting as Bruce Willis in Armageddon, but a nuclear standoff collision is indeed one of the options frequently discussed in this context.

That’s the cost side of the ledger. The benefits for a sufficiently large asteroid would include not destroying civilization. So yes, let’s invest the money. Period.

Somewhere between strangelets and asteroids rests another high-impact event. Unchecked climate change is bound to have enormous consequences for the planet and humans alike. That much we know.

What we don’t know — at least not with certainty — could make things even worse. The last time concentrations of carbon dioxide stood where they are today, sea levels were up to 20 meters higher than today. Camels lived in Canada. Meanwhile global average surface temperatures were only 1 to 2.5 degrees Celsius (1.8 to 4.5 degrees Fahrenheit) above today's levels.

Now imagine what the world would like with temperature of 6 degrees Celsius (11 degrees Fahrenheit) higher. There’s no other way of putting it than to suggest this would be hell on Earth.

And based on a number of conservative assumptions, my co-author Martin L. Weitzman and I calculate in Climate Shock that there might well be a 10% chance of an eventual temperature increase of this magnitude happening without a major course correction.

That’s both high-impact and high-probability.

Mr. Cheney was wrong in equating 1% to certainty. But he would have been just as wrong if he had said: "One percent is basically zero. We should just cross our fingers and hope that luck is on our side."

So what to do? In short, risk management.

We insure our homes against fires and floods, our families against loss of life, and we should insure our planet against the risk of global catastrophe. To do so, we need to act — rationally, deliberately, and soon. Our insurance premium: put a price on carbon.

Instead of pricing carbon, governments right now even pay businesses and individuals to pump more carbon dioxide into the atmosphere due to various energy subsidies, increasing the risk of a global catastrophe. This is crazy and shortsighted, and the opposite of good risk management.

All of that is based on pretty much the only law we have in economics, the Law of Demand: price goes up, demand goes down.

It works beautifully, because incentives matter.

Gernot Wagner serves as lead senior economist at the Environmental Defense Fund and is co-author, with Harvard’s Martin Weitzman, of Climate Shock (Princeton, March 2015). This op-ed first appeared on Mashable.com.

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Big Rigs: Will the Climate Benefit from Switching Diesel Trucks to Natural Gas?

Originally posted on EDF's Energy Exchange.

16058670001_80994ae935_zThe surge in natural gas production that has reshaped the American energy landscape has many in the commercial transportation sector considering whether to start shifting their heavy-duty vehicle fleets from diesel to natural gas fuel. Many are looking to an advantage in carbon dioxide emissions to justify the higher cost and reduced fuel efficiency of a natural gas vehicle.

But in fact, a study published today in Environmental Science & Technology finds that while there are pathways for natural gas trucks to achieve climate benefits, reductions in potent heat trapping methane emissions across the natural gas value chain are necessary, along with engine efficiency improvements. If these steps are not taken, switching truck fleets from diesel to natural gas could actually increase warming for decades.

Methane, the main ingredient in natural gas, has 84 times more warming power than CO2 over a 20-year timeframe. Reducing emissions throughout the natural gas value chain is an important opportunity to reduce our overall greenhouse footprint.

Growing Body of Research

The new study examines several different types of engine technologies, and both liquefied and compressed natural gas fuels, and concludes that a conversion from diesel could lead to greater warming over the next 50 to 90 years before providing benefits to the climate.

These results align with an earlier paper published by EDF scientists in 2012 in the Proceedings of the National Academy of Sciences (PNAS), but reach these conclusions through updated and more detailed data, as well as analysis tackling a wider scope of vehicle sizes, engine technologies, and fuel types.

Pathway to Positive Climate Benefits

By examining a range of assumptions, the new study finds there are indeed pathways for heavy duty natural gas vehicles to achieve climate benefits, provided methane emissions across the value chain are reduced both upstream and at the vehicle level.

Improvements in fuel efficiency could help ensure these vehicles are climate friendly. Today’s natural gas truck engines are typically five to fifteen percent less efficient than diesel engines. Consuming more fuel for each mile traveled reduces the relative CO2 savings. If that efficiency gap can be closed, natural gas trucks will fare that much better compared to diesel.

Upcoming Policy Opportunities

While emissions in the natural gas value chain are a serious challenge, they also represent an opportunity to achieve significant, cost-effective reductions in overall greenhouse gas emissions. Several policy mechanisms are in play that could improve the climate prospects of natural gas trucks. These include recently announced federal upstream methane regulations and upcoming federal fuel efficiency and greenhouse gas standards for heavy trucks.

More information is needed to estimate with confidence the current climate footprint of trucks, and to get a better understanding of methane loss along the natural gas value chain. Significant research is underway to update estimates of methane emissions across the U.S. natural gas system, including the ambitious scientific research effort to publish 16 field studies launched by EDF and its partners.

Advancing Understanding

The paper released today is distinct from this ongoing effort and does not use any data from those studies, but it serves complementary purposes: First, it emphasizes the importance of gathering more and better data on methane loss; second, one of its major contributions is the various “sensitivity analyses” it presents.

These ranges of potential results are designed to understand the implications of changing underlying assumptions about methane emissions and efficiency. Our new paper creates a framework to evaluate the climate impacts of a fuel switch to natural gas in the trucking sector as we gain better data on the magnitude and distribution of leakage and as both leakage and vehicle efficiency evolve due to policy changes and market dynamics.

Policymakers wishing to address climate change should use caution before promoting fuel switching to natural gas in the trucking sector until we are more certain about the magnitude of methane loss and have acted sufficiently to reduce emissions and improve natural gas engine efficiency.

For more detail on the paper released today, please see our Frequently Asked Questions.

Image Source: Flickr/TruckPR

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New Climate-Economic Thinking

By Gernot Wagner and Martin L. Weitzman

Each ton of carbon dioxide emitted into the atmosphere today causes about $40 worth of damages. So at least says standard economic thinking.

A lot goes into calculating that number. You might call it the mother of all benefit-cost analyses. It's bean-counting on a global scale, extending out decades and centuries. And it's a process that requires assumptions every step along the way.

The resulting $40 figure should be taken for what it is: the central case presented by the U.S. Government Interagency Working Group on Social Cost of Carbon when using its preferred 3% discount rate for all future climate damages. But it is by no means the full story.

Choose a different discount rate, get a different number. Yale economist Bill Nordhaus uses a discount rate of slightly above 4%. His resulting price is closer to $20 per ton of carbon dioxide. The Stern Review on the Economics of Climate Change uses 1.4%. The resulting price per ton is over $80.

And the discount rate is not the only assumption that makes this kind of a difference. In Climate Shock, we present the latest thinking on why and how we should worry about the right price for each ton of carbon dioxide, and other greenhouse gases, emitted into the atmosphere. There are so many uncertainties at every step—from economic projections to emissions, from emissions to concentrations, from concentrations to temperatures, and back to economics in form of climate damages—that pointing to one single, final number is false precision, misleading, or worse.

Of course, that does not mean that we shouldn't attempt to make this calculation in the first place. The alternative to calculating the cost of carbon is to use a big fat zero in government benefit-cost calculations. That's clearly wrong.

Most everything we know about what goes into calculating the $40 figure leads us to believe that $40 is the lower bound for sensible policy action. Most everything we know that is left out would push the number higher still, perhaps much higher.

It's not over 'til the fat tail zings

As just one example, zero in on the link between carbon concentrations in the atmosphere and eventual temperature outcomes. We know that increasing concentrations will not decrease global temperatures. Thank you, high school chemistry and physics. The lower bound for the temperature impact when carbon concentrations in the atmosphere double can be cut off at zero.

In fact, we are pretty sure it can be cut off at 1°C or above. Global average temperatures have already warmed by over 0.8°C, and we haven't even doubled carbon concentrations from preindustrial levels. Moreover, the temperature increases in this calculation should happen 'eventually'—over decades and centuries. Not now.

What's even more worrying is the upper tail of that temperature distribution. There's no similarly definitive cut-off for the worst-case scenario. In fact, our own calculations (based on an International Energy Agency (IEA) scenario that greenhouse gas concentrations will end up around 700 parts per million) suggest a greater-than-10% chance of eventual global average warming of 6°C or above.

Focus on the bottom row in this table. If you do, you are already ahead of others, most of whom focus on averages, here depicted as "median Δ°C" (eventual changes in global average surface temperatures). The median is what we would expect to exceed half the time, given particular greenhouse gas concentrations in the atmosphere. And it's bad enough.

But what really puts the "shock" into Climate Shock is the rapid increase in probabilities of eventual temperatures exceeding 6°C, the bottom row. While average temperatures go up steadily with rising concentrations, the chance of true extremes rises rapidly:

Climate Shock Table 3.1

That 6°C is an Earth-as-we-know-it-altering temperature increase. Think of it as a planetary fever. Normal body temperatures hover around 37°C. Anything above 38°C and you have a fever. Anything above 40°C is life-threatening.

Global average warming of 3°C wouldn't be unprecedented for the planet as a whole, in all of it geological history. For human society, it would be. And that's where we are heading at the moment—on average, already assuming some 'new policies' to come into play that aren't currently on the books.

It's the high-probability averages rather than low-probability extremes that drive the original $40 figure. Our table links greenhouse gas concentrations to worryingly high probability estimates for temperatures eventually exceeding 6°C, an outcome that clearly would be catastrophic for human society as we know it.

Instead of focusing on averages then, climate ought to be seen as a risk management problem. Some greenhouse gas concentration thresholds should simply not be crossed. The risks are too high.

This kind of focus on temperature extremes is far from accepted wisdom. We argue it ought to be.

Gernot Wagner and Martin L. Weitzman are co-authors of Climate Shock (Princeton University Press, 2015). First published by The Institute for New Economic Thinking.

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Stakeholders Gather to Discuss How Time-Variant Electricity Pricing Can Work in New York

Originally posted on EDF's Energy Exchange.

new-york-540807_640Last week, Environmental Defense Fund (EDF) co-hosted a successful forum on residential time-variant electricity pricing – which allows customers to pay different prices for electricity depending on when it is used – within the context of New York’s ‘Reforming the Energy Vision’ (REV) proceeding.’

Co-hosted with the New York Department of Public Service and New York University’s Institute for Policy Integrity, the full-day forum, “On the REV Agenda: The Role of Time-Variant Pricing,” brought together more than 150 regulators, utility executives, academics, and other stakeholders to explore how residential time-variant pricing works, what it can accomplish, and how best to implement it. Below is a recap of some of the high-level takeaways from the forum.

How time-variant pricing (TVP) works

One of EDF’s objectives has been to improve the efficiency of the electricity industry by pursuing a market-based approach to electricity pricing. In most well-functioning markets, the cost of making a product and its relative scarcity is reflected in the price. For example, a door is more expensive than the wood with which it is made in order to reflect the labor costs involved. Similarly, strawberries are more expensive during the winter because they are less abundant during that time. Customers understand that prices vary with production costs and over time, yet neither of these elements gets reflected in how residential customers currently pay for electricity.

Read More »

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“Naomi Klein wants to stick it to the man. I want to stick it to CO2.″

By Jonathan Derbyshire, Prospect Magazine's The world of ideas.

Jonathan DerbyshireWhy is it so difficult to get people to worry about climate change? After all, the science is pretty unambiguous—pace the climate change “deniers”. Part of the problem, according to a new book, “Climate Shock,” by the economists Gernot Wagner and Martin L Weitzman, is that while what we know about global warming is bad enough, there are “unknown risks that may yet dwarf all else.”

Wagner, who is lead senior economist at the Environmental Defense Fund in the United States, visited London a couple of weeks ago. I caught up with him while he was here and talked to him about the difficulties of mobilising public opinion around the threats and challenges of climate change. 

GW: The big problem, frankly, is speaking the truth and talking about what scientists actually know and what they don’t know, which in many ways is even scarier. Saying the latest science out loud is [often taken to be] akin to catastrophising. That’s the big conundrum: on the one hand, “climate shock” shouldn’t be all that shocking—we’ve known this for quite a while. The problem is finding a way to state the scientific facts in a way that does not turn people off immediately.

JDSo it’s partly a public relations or political challenge then?

It’s more than that. Political, certainly. But it’s also a science communications challenge.

You mentioned scientific uncertainty just now. The book is, among other things, an attempt to deal with the challenge of climate change and the policymaking challenges from an economic perspective. But it’s also, it seems to me, a work of epistemology, almost—it’s a reflection on uncertainty and the implications that uncertainty has for policymaking.

Most books are written about what we know. This book is about what we don’t know. We clearly know enough to act. We’ve known enough to act for years, decades. Now, the more we find out, the more apparent it gets that what we don’t know is in fact potentially much, more worse. Choose you favourite analogy here—Nassim Nicholas Taleb’s “black swans,” Donald Rumsfeld’s “unknown unknowns”. That’s what it’s all about. The things we don’t know will most likely be the things that bite us in the back.

This is one of the things that makes climate change a public policy challenge unlike any other.

Climate change is uniquely long-term. It is uniquely global. It is uniquely irreversible and uniquely uncertain. You could probably identify other policy issues that combine two of those four factors, but none that I know of combines all four like climate change [does].

Continue reading in Prospect Magazine.

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Climate Shock in under 90 seconds

Think of the atmosphere as a giant bathtub. There’s a faucet—emissions from human activity—and a drain—the planet’s ability to absorb that pollution. For most of human civilization and hundreds of thousands of years before, the inflow and the outflow were in relative balance. Then humans started burning coal and turned on the faucet far beyond what the drain could handle. The levels of carbon in the atmosphere began to rise to levels last seen in the Pliocene, over three million years ago.

What to do? That’s the question John Sterman, an MIT professor, asked two hundred graduate students. More specifically, he asked what to do to stabilize concentrations of carbon dioxide in the atmosphere close to present levels. How far do we need to go in turning off the faucet in order to stabilize concentrations? Here’s what not to do: stabilizing the flow of carbon into the atmosphere today won’t stabilize the carbon already there at close to present levels. You’re still adding carbon. Just because the inflow remains steady year after year, doesn’t mean the amount already in the tub doesn’t go up. Inflow and outflow need to be in balance, and that won’t happen at current levels of carbon dioxide in the tub (currently at 400 ppm) unless the inflow goes down by a lot.

That seems like an obvious point. It also seems to get lost on the average MIT graduate student, and these students aren’t exactly 'average'. Still, over 80 percent of them in Sterman’s study seem to confuse the faucet with the tub. They confuse stabilizing the inflow with stabilizing the level.

Watch this video to avoid making the same mistake:

Excerpted from Climate Shock.

Posted in 1000 words, Climate science, International, Politics| Leave a comment
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