The Economist needs to have more faith in markets

Because the comments section at the Economist has an excruciating registration process — I’ve attempted and failed to sign up at least three times now — I’ll ask this question here. Maybe the internet gods will get this back to the Economist blogger’s ear…

Why is “the purchasing of carbon credits” analogous “with medieval Catholic absolution”?

The Church was absolving sins in the name of God. It was obviously a racket; as if the negative of the sin could be somehow removed by a blessing and so many Hail Marys (and the lining of a pocket or two).

In the case of carbon credits, we can actually erase the sin of carbon emissions. Yes, the Vatican planting trees in Romania makes it hard for Romanians to plant trees (and offset carbon emissions). Trees aren’t the only way to offset carbon though. There’s lots of talk of artificial carbon sequestration. These techniques will become more and more profitable as a) demand for them increases and b) natural sequestration becomes more expensive.

You’re The Economist for criminy sakes. Have more faith in markets!

Clark shoots another one down

If you think “the switch from a self-sustaining organic economy to a mineral resource depleting inorganic economy was central to the British Industrial Revolution” then you’re wrong. The Industrial Revolution resulted in an increased demand for energy; it wasn’t caused by the availability of energy via some great technological advances in coal extraction.

So Prof. Clark argues, coal is not the reason Britain industrialized first. (That’s the fire-walled-even-though-the-research-was-supported-by-public-funds link and here’s the unlocked version. Also, check out Clark’s fancy new website.):

Productivity growth in English coal mining in the Industrial Revolution era was extremely modest even under upper bound assumptions on productivity gains. The enormous expansion of coal output owes to factors external to the industry: increased demands for coal from greater populations and higher incomes, increased demands following on improvements in iron smelting technology, reduced taxation of coal used for domestic purposes in cities like London, and declining real transport costs… English coal reserves, known and exploited since medieval times, simply found a much larger market in Industrial Revolution England.

I wonder if this historical lesson has any relevance today? Where today do we see demand driving changes in the supply of energy? Hmmm…

Of albedo, emissivity and Calvo pricing

I’ve said before that the climate change discussion reminds me a lot of macroeconomics. This similarity has driven my skepticism that the science is locked. I know we don’t have macroeconomics figured out; it seems unlikely we have the climate figured out.

Here’s a great discussion on the sensitivity of temperature to changes in CO2. The earth is absorbing energy and its emitting energy. Where these balance determines the temperature. The earth doesn’t perfectly absorb all the energy it receives and similarly it doesn’t perfectly emit energy. The efficiency of absorption is called the albedo and the efficiency of emission is called emissivity. Of course, the efficiency of absorption and emission determines the equilibrium temperature. There’s lots of factors that determine efficiency, albedo and emissivity, but a simplifying assumption is to assume they’re both constant. This is something economists are used to… “assuming all else is equal, blah blah blah.”

Assuming albedo and emissivity are constant is an ok thing to do as long as we’re talking about small changes in the climate.

Where climatologists talk about the relationship between CO2 and temperature, macro economists like to talk about the relationship between inflation and the economy’s output. The relationship comes about because prices companies charge and the wages people earn don’t change very fast to economic conditions. All else equal (!), we’d expect workers to demand higher wages the moment inflation is higher and we’d expect firms to change their prices just as quickly. But this doesn’t happen. It takes a while for workers to renegotiate their wages and it takes a while for companies to change the price tags on their goods. We call this sticky prices.

One way to model sticky prices is by assuming only a fixed percentage of firms can update their prices at a time (pdf). A random number of firms is selected each quarter. For those lucky firms the Calvo Fairy taps the firm’s managers on their shoulders and they swing in to action changing prices. They set their prices to the best prices today (to maximize profit) and they know the fairy may not visit them next time (or the time after that or the time after that) so they make sure to set the price to give them the highest expected profit in the future. The rest of the firms have to live with whatever prices they set in the past.

That the number of firms that update their prices is a constant fraction is an ok assumption as long as we’re talking about small changes in the economy.

However, as you can imagine, if inflation is really high firms will have a bigger incentive to raise their prices and the assumption that only a fixed number of companies will update their prices becomes unrealistic. Similarly, constant albedo and emissivity become unrealistic assumptions when big changes happen to the climate.

BTW, here’s another great write-up on that site about the long term connection between CO2 and temperature.

…but can we trust anything from a people that loves David Hasselhoff?

Global warming, again. Now that we’ve completely wrapped up the science (its definitely happening, duh!), we turn the question of whether or not it will do harm.

There is an optimal global temperature. Is it the one we have now? Is it a few degrees cooler? Is it a few degrees warmer?

(h/t ./. BTW, has the commentary sucked on slashdot lately or is it just me? The most insightful comment was this one and it wasn’t really about the post.)

Global warming will be good for U.S. agriculture

Researchers at MIT and UCSB (which by the way has a lovely campus) found small positive effects (an increase in profits of 4%) of global warming for U.S. agriculture.

First, they looked at historical trends in the relationship of temperature and precipitation on agriculture profits.
Weather’s impact on Ag profits
They then used a climate model to predict temperature and precipitation in the U.S. Plugging those weather predictions into their estimated profit equations gave the predicted increase in profits.

Their results couldn’t preclude the possibility that there will be no effect of global warming on agricultural profits. It seems the debate is between those that think there will be a positive impact and those that believe there will be no impact. There’s no reason to believe there might be a negative impact of global warming on American agriculture.

UC Davis Econ in the News

Prof. Knittel talks about gas prices. Consumers aren’t responding to the increases in gas prices as much as they did in the 70’s.

What’s different about the now versus the 70’s that consumers are so much less responsive to price changes? The obvious answer, at least to me, wasn’t mentioned in the article, but is discussed in the associated research paper:

Another hypothesis is that as incomes have grown, the budget share represented by gasoline consumption has decreased making consumers less sensitive to price increases. The price income interaction model presented here provides insight into this hypothesis. If increasing income results in a decrease in the consumer response to gasoline price changes, one would expect the coefficient on the interaction term of the model to have a positive sign. However, in both periods we find that the coefficient on the interaction term is negative suggesting that on average, gasoline consumption is more sensitive to price changes as income rises. This somewhat counterintuitive result is supported by the household gasoline demand analysis conducted by Kayser (2000) who also finds a negative coefficient on the price income interaction term. The hypothesis proposed by Kayser is that as incomes rise, a greater proportion of automobile trips are discretionary. Alternatively, at lower income levels, the amount of travel has already been reduced to the minimum leaving little room for adjustment to higher prices. Another possible explanation is that the number of vehicles per household increases with income. When the number of household vehicles exceeds the number of drivers, there is the possibility for drivers to shift to more fuel efficient vehicles within the household stock as gasoline prices rise. Whatever the explanation, the overall decrease in price elasticity despite growth in incomes suggests that these effects are relatively minor compared to other factors affecting gasoline demand.

These results are extremely important if one thinks its a good idea to raise gas taxes. If consumers don’t respond to the higher after tax price by buying less gas, then you’re getting all the bad stuff that comes with taxes (consumers are poorer with the tax so they buy less stuff) and your not getting any of the “good” change in behavior.

Global warming science?

See here:

1: Global mean temperatures have increased 0.5C-0.7C since 1900.
2: CO2 has increased from about 280ppm to 383ppm since pre-industrial times
3: Human CO2 emissions were about 24 billion metric tons in 2002
4: 24 billion tonnes would be about 0.8% of the 2.996×10^12 tonnes of CO2 in the atmosphere, or about a 383 ppm * 0.008 = 3ppm annual increase
5. The actual annual increase in atmospheric CO2 is about 2ppm, less than #4, so a “CO2 following temperature” can probably be ruled out for the current trend.
6: All other variables being fixed, every doubling of CO2 concentration would increase global temperatures by a fixed amount. (aka saturation of the infrared absorption of the CO2)
7. Because of #2 and #6, some part of the temperature increase in 1 should be caused by CO2 forcing.
8: Climate feedbacks can reduce or increase the affect of any given temperature forcing
9: According to Hansen et al in 2003 (missing my citation, sorry), the CO2*forcing is 3 degrees C per doubling of CO2 concentration
10: At the rate in #9 and a 3ppm rate of change (higher than current levels) in CO2 levels, in 2157 CO2 will be 832ppm and the temperature delta would be 4.7C.
11: The temperature delta in #10 would cause significant changes to ecosystems, food supplies, and economies.
12: Major changes are usually catastrophic, QED.

IMO, The so called “consensus” of climate scientists covers items #1-8 above. The part that starts to get really really iffy is item #9. Hansen himself revises his figure every few years, and has rather large error bars on it. Also, if Hansen’s numbers were correct for historical data, we would have seen a temperature delta of 1.35C, where we have only seen 0.5-0.7C—and that is ignoring that temperature does indeed correlate to solar forcing very well for about half of that temperature increase.

The only non-debatable issue is that there is some temperature increase due to human CO2 emission. The magnitude of CO2’s historical contribution to temperature is debatable, and the magnitude of future CO2 emissions is a step above guesswork (maybe two steps). Add to that the question of whether warming is bad in the first place (which is probably a function of how much warming we’re talking about, which is guesswork), and the question of what we can do about it anyway (not much without nuclear or draconian measures to change our energy consumption), and I think I can safely say that debate is still called for here. (emph. added)