Climate Change 101: Separating Scientific Facts and Fictions

This is a guest post by Greg Shinsky from Monash University, Australia . An earlier blog post from Greg can be found here.

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The inquisitive nature of scientific study necessarily means that the details of something as complex as climate change can never be completely agreed to or understood. For example, the Hadley Centre recently released data demonstrating that the warmest year since records began was 1998.[1] On a straight reading, twelve years without a new record would, according to sceptics, be rather a large lull in what is supposed to be a rising trend. However, because heat can be trapped in other parts of the climatic system (such as the oceans) and not show up for a long time, modelling often shows the occasional decade in which no rise in surface temperatures is recorded.

This lack of scientific certainty does not however mean that policymakers and popular media outlets should be ignorant of established scientific principles – namely the reality of the much quoted but perhaps not widely understood ‘greenhouse effect’.

As demonstrated by the diagram below, the greenhouse effect is determined by two primary forces: (1) the amount of incoming shortwave solar radiation that strikes the earth, and (2) the amount of outgoing longwave radiation that is retained by the atmosphere. Within this system, the earth’s atmosphere, consisting of various gases, plays the vital role of a greenhouse. The atmosphere is essentially a blanket which selectively balances and traps the unequal wavelengths of radiation and remits them back to warm the earth’s surface.

The gases within the atmosphere, such as carbon dioxide (CO2), methane, nitrous oxide and water vapour, exist naturally and are very effective at absorbing thermal radiation expelled from the earth’s surface. However, small changes in the concentrations of these gases can drastically alter the heat-trapping capabilities of our atmosphere. Moreover, these gases have different lifetimes ranging from a few days to centuries.

The continual accumulation of these gases in the atmosphere (with CO2 being the largest by far), since the commencement of the industrial revolution, has led to a disruption of the carbon cycle.

This means the earth’s carbon ‘sinks’, such as forests and oceans, are no longer able to naturally absorb the amount of greenhouse gases emitted, with the result that concentrations of CO2 (in terms of parts per million [ppm]) are now approximately one third higher than pre-industrial levels. At the same time the earth has experienced a 0.6ºC increase in mean global temperature over the past century with most of this increase, according to the IPCC, being “attributable to human activities”.[2]

However, as temperature follows concentrations with a time lag, the full effect of current emissions is yet to be felt and is estimated to fall anywhere between 1.4 to 5.8ºC by the year 2100.[3]

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[1] See ‘The Economist’, January 9^th – 15^th article on p.70-71.

[2] International Panel on Climate Change (2001), Climate Change 2001: Synthesis Report, Summary for Policymakers. Available from http://72.14.207.104/search?q=cache:pQvAnSohe-8J:www.ipcc.ch/pub/un/syreng/spm.pdf+ipcc+2001+climate+change+summary+policymakers&hl=en&gl=us&ct=clnk&cd=2

[3] Ibid

Copenhagen and the Economics of Climate Change

This is a guest post by Greg Shinsky from Monash University, Australia . It is based on a paper Greg is working on right now. He talks about the role of public goods, coordination games, free riding and the sufficiency of the current international response under the United Nations Framework Convention on Climate Change. An earlier blog post from Greg can be found here.

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Economists view climate change (CC) as a market failure, derived from under provision of the global public good represented by a stable atmosphere. This in turn is manifested as a negative externality which is neither time nor location specific.

At its source, this market failure stems from the inability of governments to coordinate policies that equalise the marginal private and social costs of greenhouse gas (GHG) usage. This is, however, no easy feat as the diffusive nature of GHGs means that the level of emissions from any one State will ultimately be borne by all other States. Therefore, the amount of the global public good per se that any one State receives is dependent on how many (and how much) GHGs the largest emitter or, in the context of CC, the weakest link emits.

Hence, the coordination game of CC approximates a weakest link type global public good. That is to say, the overall level of GHG concentration is only as good as the worst (or highest) level of emissions in any given State. Accordingly, provision of this global public good represents a sequential game where any attempt to free-ride in the long-run is inefficient and irrational due to the inevitable harm that results if agents receive a ‘payoff’ less than their subjective valuation. Therefore, at least according to economic theory, international policy cooperation will ultimately be invoked in order to avoid a Pareto-inferior outcome.

The recent summit at Copenhagen demonstrates that mere goodwill and benevolent intentions, without market based mechanisms, will not solve the CC problem. Resolution of CC issues demands market-based approaches because there is a profound insufficiency of knowledge on how to deal with a problem of such unprecedented complexity. Ultimate resolution of the CC coordination game thus requires a common price signal which in turn permits the efficient equalisation of the marginal social cost of GHG usage with the marginal abatement cost. Such a mechanism, however, must also satisfy the additional hurdle of actual State participation. Such participation is likely to be forthcoming when an excludable stream of private goods, which necessarily mitigates prospects of free-riding, is associated with involvement.

It is questionable whether the 1992 United Nations Framework Convention on Climate Change (UNFCCC), its associated protocol and accord, are the requisite geopolitical policy solution to avoid a Pareto-inferior outcome. Firstly, although the UNFCCC might demonstrate some incremental progress, both the Kyoto and Copenhagen summits have failed to reach a much needed comprehensive legally binding agreement. Furthermore, seventeen years of discussions have only yielded some unilateral commitments to reduce emissions to levels which current science suggest, even if adopted collectively, are manifestly insufficient. These points are given particular salience due to the possible dire consequences associated with further protracted policy responses.

Whether the weakest link theoretical prediction of a CC resolution holds is uncertain. This stems from the unique characteristic of possible ‘irreversible consequences’ associated with CC – which is not normally associated with the provision of other public goods. With time literally being ‘of the essence’, it is essential that any positive mitigation action is collectively supported by the international community. However, any such policies must continue to adhere to the long held international legal principle recognising the ‘common but differentiated responsibilities’ of developed and developing States.

Stimulus ‘crowding in’ investment

A guest post by Greg Shinsky, a fellow resident at ISH and one of the smartest, engaging and intelligent persons I have met at ISH.

The Center for American Progress, a DC-based think-tank, hosted a conference today discussing the significance of sustained US public structural deficits in the medium to long-run. The panelists emphasized that although the stimulatory measures adopted by the Obama administration were necessary, the threat of sustained deficits would lead to damaging long-run consequences.  However, bringing the budget back into balance is no simple task.  The seriousness of this issue raises fundamental questions about the future sustainability of both spending patterns (namely in the areas of health, defense and social security) and raising revenues (through various tax measures).  Moreover, not only are both these elements of the deficit reduction equation fraught with sensitivity and complexity, the politics of Congress is unlikely to facilitate an appropriate compromise. 

The speakers agreed that current political procrastination, eventually leading to an abrupt policy amendment (for instance cuts in Medicare or Medicaid), will most likely affect those members of society least able to afford sudden changes – namely the poor.  For this reason, it is imperative that strong leadership addresses the problem sooner rather than later – this is especially so given that the magnitude of persistent structural deficits will only get larger with time.

Notably, Nobel Laureate Paul Krugman, dismissed arguments that we ought to be concerned about the massive fiscal stimulus ‘crowding out’ private investment.  In the alternative, Krugman argued that the severity of the crisis actually means that the current fiscal stimulus describes a situation of government ‘crowding in’ of private investment (i.e. public investment is supporting what otherwise would be a mass stagnation of private investment).  Skeptical of a political solution in the foreseeable future, Krugman also reasoned that there are potential budgetary savings to be realized in defense spending and the Waxman-Markey Climate Change Bill.

Krugman argues:

fiscal expansion does not crowd out private investment — on the contrary, there’s crowding in, because a stronger economy leads to more investment. So fiscal expansion increases future potential, rather than reducing it.

in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.

Crowding in raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.