I have been surprised over decades, on the lack of power of important economic models to investigate the policies that interested me. My proposal for modifying VAT to create employment (in 1978) could not be tested on the Treasury Model because its labour market segmentation was not rich enough. I understand it is still the case that the Treasury Economic Model cannot investigate this and similar proposals which can actually be specified quite simply.
In the 1990s, a grant from the European Commission enabled Professor Kim Swales and colleagues to create a more sophisticated model than the one that I had constructed. The results showed the VAT with Rebate proposal was very promising. A proposal with some similarities, which has increasing support in the USA, is the one for a Carbon Fee and Dividend aimed at cutting carbon emissions from fossil fuels.
We propose an initial fee of $15/ton on the CO2 content of fossil fuels, escalating $10/t/y, imposed upstream at their point of extraction and collected upon entry into the economy. All revenues, less administrative costs, are rebated to U.S. households in the form of monthly dividends.
The full dividend drives new wealth into hiring, particularly among lower income groups. The rate of change in fossil fuel-dependent areas will be gradual, unfolding at the pace of “normal” economic evolution but in the direction of reduced fossil fuel dependence.
The Scottish Government funded economic research from the University of Strathclyde, The economic and environmental impact of the introduction of a carbon tax in Scotland. This concluded
when revenues from the tax are recycled to reduce taxes on employment there is a reduction in emissions accompanied by an increase in Scottish GDP and employment. Extensive sensitivity analysis allows us systematically to compare our results with others reported in the literature.
The effect to increase Scottish GDP and employment is similar to that reposted for the USA in the REMI modeling.
Studies show increased employment and GDP but …
Both these carbon tax proposals show increased employment, increased GDP – and, of course, reduced carbon emissions. The reduction in carbon emissions are largely modeled for the power sector. This does not take account of all the carbon emissions caused by our consumption.
In the USA, the REMI study estimates the Carbon Fee and Dividend policy will reduce carbon emissions from 5,000 million tons CO2 in 2015 to almost half by 2035. On a per capita basis this means they estimate current emission to be 15.7 tonnes CO2 per annum. Shrink That Footprint (STF) give the average emissions of CO2e for USA citizens as 26.3 tonnes. Why the large difference?
Difficulties in the measurement of carbon footprints
This difference between the REMI and STF figures may start with a choice between production and consumption emissions. STF calculated carbon footprints on a consumption basis which estimates the size of the CO2 emissions caused by the annual consumption of the average person. This include emissions embodied in goods imported for consumption in the USA. Did the REMI study include this? e.g. Did they include the CO2 emissions in China created by the manufacture of goods to be consumed in the USA?
Another difference may be whether it was CO2 that was estimated or the enhanced measure, CO2 equivalent (CO2e). CO2e includes the effect of other greenhouse gases such as methane. Methane is the second most important greenhouse gas and many times more powerful than CO2. The Kyoto protocol in 1997 in set the power of methane at 21 times CO2. The IPCC in 2014 set the power of methane at 34 times CO2.
A further possible difference could be the lifetime over which the power of methane compared to CO2 is measured. The figures above are for 100 year lifetimes. Several scientists now argue that 20 years is a better liftime to use given the immediacy of climate change. Over 20 years methane is 84 times more powerful than CO2.
When methane is measured over 20 rather than 100 years, carbon footprints increase. One area where this is important is agriculture, particularly livestock farming. This is reflected in a wide range of estimates for agriculture’s carbon footprint. For livestock alone, these vary from 9% to 51% of global greenhouse gas emission. STF reports estimates for the carbon footprint of food (including livestock?) put it at 20% of global greenhouse gas emissions but if land use change is incorporated, it is 32%. (Global land use change is mostly forests being converted to agricultural land so might be added to the food carbon footprint).
The summary is that carbon footprints are complicated, often underestimated and the underlying methodology is sometimes unclear. For example, how does the REMI study account for the greenhouse gas emissions from livestock?
Two degree climate target is not safe
In November, Aljazeera reported Former UN climate chief says ‘no such thing as safe rise’; scientists fear tipping point will be passed
Scientists, environmentalists and world leaders alike have generally agreed that capping Earth’s temperature rise at 2 degrees Celsius would prevent the worst effects of climate change — a cutoff touted again in the latest report by the Intergovernmental Panel on Climate Change (IPCC).
But many experts in the field, including former IPCC leaders, have said that even if global warming is kept to that limit, such a rise could nevertheless devastate the environment and endanger humanity — the very effects that the latest study warns will happen if the 2 C ceiling is breached.
“There is no such thing as a safe rise,” said Bob Watson, who was the chair of the IPCC from 1997 to 2002. “You will see food and water insecurity, human health problems, and sea level rise even with a 2 C rise.”
Climate models underpowered
Recent IPPC reports have been based on underpowered climate models (the CMIP5 models). The note from the Parliamentary Office of Science and Technology, Risks from Climate Feedbacks (POST-PN-454,January 2014) says
Compared to existing model estimates, it is likely that climate feedbacks will result in additional carbon in the atmosphere and additional warming. This is because the majority of poorly represented climate feedbacks are likely to be amplifying feedbacks. This additional atmospheric carbon from climate feedbacks could make it more difficult to avoid a greater than 2˚C rise in global temperatures without additional reductions in greenhouse gas emissions. The strength of many amplifying feedbacks is likely to increase with warming, which could increase the risk of the climate changing state. Some commentators suggest the uncertainties in our knowledge of carbon cycle and physical feedbacks may mean the Earth will warm faster than models currently estimate.
PwC: Projected emissions and carbon intensity. Four degrees of warming?
Government and businesses want economic growth, which means more consumption. A recent report from PwC will show how difficult it will be to “save the climate” on projected levels of economic activity. The report, Two degrees of separation: ambition and reality, Low Carbon Economy Index 2014, reports on trends and projections of Carbon Intensity. (Carbon Intensity is the amount of carbon dioxide emitted per dollar of GDP.) The report says:
The 2014 Low Carbon Economy Index (LCEI) shows an unmistakeable trend. For the sixth year running, the global economy has missed the decarbonisation target needed to limit global warming to 2˚C. Confronted with the challenge in 2013 of decarbonising at 6% a year, we managed only 1.2%
To avoid two degrees of warming, the global economy now needs to decarbonise at 6.2% a year, more than five times faster than the current rate, every year from now till 2100. On our current burn rate we blow our carbon budget by 2034, sixty six years ahead of schedule. This trajectory, based on IPCC data, takes us to four degrees of warming by the end of the century.
Do economic models of climate policies assume incorrect science?
The two economic models mentioned here from the University of Strathclyde and REMI avoid incorrect science by assuming none. They take targets specified by their sponsors, the Scottish Government and the Citizens Climate Lobby, respectively. They investigate projected emissions to find the tax regimes that will deliver a required reduction in carbon emissions, levels of employment and economic activity.
It is possible that some functionality is built into of the models to account for changing carbon intensity (as described by PwC) but it the emissions targets seem to be set as part of the briefs by the sponsors. The difficulties in measuring carbon footprints, the dangers of the 2 degree target and underpowered climate models suggests that these briefs are horribly optimistic.
Do the economic models have enough control variables?
A key question is: How would these economic models perform if the carbon reductions were made to a much tighter time scale and were cut by a much greater amount? The latter to the point where global carbon emissions became carbon extraction from the atmosphere. On one scenarios from James Hansen, arguably the most regarded climate scientist in the world, extraction of carbon dioxide is already a necessity. See Assessing ‘‘Dangerous Climate Change’’: Required Reduction of Carbon Emissions to Protect Young People, Future Generations and Nature.
The models are testing for desired outcomes for carbon emission reductions, employment and economic output over specific timescales. If the models use only a carbon tax with recycling, there may not be strong enough controls to achieve these targets. That is why, in the previous post, I suggest creating a combined system with another tax (e.g. VAT) with a carbon tax. The Carbon, Value Added and Rebate (CVR) scheme has more parameters to control an economy for carbon emissions and unemployment at the same time.
The addition of VAT to the carbon tax should enable a (much) faster reduction of carbon emissions without creating unemployment.
Politics and climate/economic research
The route from the results of the sophisticated Earth systems models of climate scientists to the sophisticated models of economists is via political channels. (Even the IPCC is political). In the two economic models mentioned here the scope of the studies are guided by their sponsors. In the case of Strathclyde’s work, it is the Scottish Government. In REMI’s case it is the Citizen’s Climate Lobby and while the CCL have a deep concern about the climate and future generations, their approach has been chosen to have the best political impact in the USA.
These limitations are madness. We need a richer toolbox of climate/economic policies than those constrained by the current political climate.
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