This is a guest essay from Jon A. Anda, President of the Environmental Markets Network, an organization within Environmental Defense focused on legislation to create an efficient carbon market. He was previously a Vice Chairman of Morgan Stanley.
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Bjorn Lomborg's forthcoming book says to Cool It about global warming. I am anxious to read the detailed rationale when the book is released in September. Based on his interviews about the book, as well as insights from bloggers who have read it, some preliminary commentary is worthwhile.
Pecking order has long been Lomborg's weakness. Business provides a good analogy. If a company has two projects with good risk-adjusted returns, and selects only the one with the highest return, they fall victim to the flawed thesis of "pecking order investment." The company would have been better off selecting both projects. Similarly, if AIDS and global warming both have a risk-adjusted net benefit, then society is better off addressing both. Some might argue that we can't afford both projects. That thesis, though, doesn't hold if markets are efficient and society is rational. Why preclude a project that makes us better off?
Lomborg advocates spending 0.05% of GDP on low-carbon R&D. That's about $7 billion a year for the U.S. He also advocates a maximum $2.00 per ton carbon tax. That values U.S. CO2 emissions at about $13 billion a year. To put those numbers in perspective, just consider a single statistic: Exxon alone is worth half a trillion dollars. Lomborg doesn't want Exxon's cash flow redirected by climate policy because he believes society will overspend. Instead he prefers government-backed R&D to pick the technology winners of the future.
I would ask him to ponder how it came to pass that he can find this blog by searching on an inexpensive internet-ready global PDA. Military-industrial complex fanatics aside, most recognize it's not a product of government-funded R&D. Our grandchildren might need a similar breakthrough technology in energy ... one we can provide if we open the floodgates to private low-carbon capital.
Innovation requires linking capital to ideas; without carbon limits that process is blocked. Reducing carbon emissions by up to 2% per year from current levels, over a 40 year period, will deliver more technology and potentially at less cost than his proposal. But what if Lomborg is right and limiting CO2 now is more expensive than waiting? Well ... the choice of policy depends on the nature of the risk. Science points to climate outcomes that are statistically skewed towards worst-case, and irreversible, outcomes. (Specifically, the distributions of both the sensitivity of climate to greenhouse gas concentrations and the damage function are both lognormal.) That argues for stringency now and leniency later. If ex-post, capping emissions now turned out to be more expensive, we still made the right choice given the nature of the risk we faced.
Let's take a simple example. Lomborg's preference is to leave future generations more cash and less technology. Our grandchildren can easily go back to burning coal if climate turns out to be manageable. But how easily can they spend the extra cash if the Greenland ice sheet is irreversibly melting? Lomborg assumes they will spend it scaling up government-led innovations. That is an unnecessarily risky bet given the skewed distribution of climate risks alongside the powerful potential of privately funded innovation.
Capping (and trading) CO2 emissions creates an option to hedge climate risk. The cost of the option is the incentive provided for new technologies. And when we consider the resource constrained, and resource concentrated, world in which we live ... that looks like a pretty valuable option.
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Comments
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GreyFlcn Posted 8:46 am
23 Aug 2007
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sunflower Posted 8:58 am
23 Aug 2007
Capital institutions are threaten from the tipping points of global warming and should focus on the extinction of coal power plants. Carbon markets derived from gas and oil are less important. Those fuels are destined to be mined and burned eventually. Our best chance for survival is to leave the coal in the ground.
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Biodiversivist Posted 4:57 pm
23 Aug 2007
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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MikeB Posted 6:54 pm
23 Aug 2007
What amazes me is that anyone would choose to publish any of his stuff after his previous work was shredded so conclusively by pretty much anyone who knew anything about the subject. Oh wait - lots of idiots bought the book and everyone made money..
Gentlemen, start your blogs...
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MikeB Posted 6:58 pm
23 Aug 2007
Is it about time that Grist starts talking to Powells?
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odograph Posted 11:42 pm
23 Aug 2007
Other than that, on this:
Lomborg advocates spending 0.05% of GDP on low-carbon R&D. That's about $7 billion a year for the U.S. He also advocates a maximum $2.00 per ton carbon tax. That values U.S. CO2 emissions at about $13 billion a year. To put those numbers in perspective, just consider a single statistic: Exxon alone is worth half a trillion dollars. Lomborg doesn't want Exxon's cash flow redirected by climate policy because he believes society will overspend. Instead he prefers government-backed R&D to pick the technology winners of the future.
That's a misunderstanding of what carbon taxes are for. They aren't to hurt corporations, they are to change user behavior. The interesting question (is there an economist in the house?) is whether a $2.00 per ton carbon tax would be sufficient to do that.
I'd think not, but that would be a different sort of proof than just how much money Exxon has.
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sunflower Posted 12:18 am
24 Aug 2007
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odograph Posted 12:24 am
24 Aug 2007
FWIW, I think a gas tax can be much higher because it is so easily avoidable. Buy a Prius and fuggetaboutit.
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jonaanda Posted 12:29 am
24 Aug 2007
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amazingdrx Posted 1:07 am
24 Aug 2007
Lognormal? Any hedge fund inside traders know what this means? Nope, they don't have to.
They manage their risk by cheating the market with inside information. When they are wrong, as with the junk mortgage crisis, the central banks bail them out. Too big to fail.
But the climate of planet earth offers no such protection. Check out the year without a summer. And 300+ mph tornadoes. And killer floods along side record drought and fires.
The "lognormal" fantasy world does not match the real world.
Now let's put meters on our leaders,financial and political, and see how much oxygen they are breathing and charge them 40% of their income for it.
This would be a progressive tax rate. Only the wealthy and powerful would be charged for air. Pay up inside trader hedge fundies, board roomies,exxon mob, and oval office cronies or no more air. is this too cruel? hehey.
http://amazngdrx.blogharbor.com/blog
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Mostirritatingnewaccoundever Posted 7:53 am
16 Oct 2007
This is how I see the future: Every single person being so greenwashed that we sit in unheated homes, eating cold soy product, as super ethenol tankers drive by, origionally designed to save the planet but ended up replacing fossil fuels as the leading source of pollution. Nanotechnologies that were railroaded through the system to address environmental concerns being used to compost the dead to be fed introveniously to the living.
We can't solve problems with the same thinking that created them. Albert Einstein said that. We can't use super technologies to keep an unrealistic standard of living, because it only results in super disasters and a lower standard of living. Chemichal pesticides were created to solve food shortages. They failed. What we come up with next will fail. Fossil fuel failed, and so will ethenol and bio-fuel and "safe" nuclear energy. The reason: what do you think? Major corporations turn everything into a disaster. We could have used fossil fuel for hundreds of years without anything bad happening. But instead of pulling out oil as we needed it, we pulled out everything all at once, as cheap as possible and got everyone to use it as much as possible. Untill we address our acceptance of this as the standard business model, we could destroy the environment with cute bunny rabbits, bubbles and sandals.
I hope I can sum it up with this: Corporations have no intention of changing themselves. They have every intention of changing us. To them, the waste they produce is neccissary, the waste we produce is not. They will come up with figures that say its more environmental to continue polluting, and create less, than to stop polluting and make more. And we will accept these figures.
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