Wednesday, November 08, 2006

Why Peter Franklin is wrong on Nigel Lawson; Green Articles That Can't Rebut Lawson #2

Peter Franklin's response to Lawson misses rather a lot of points:

"Given Nigel Lawson’s record on economic stability, I’m pretty disinclined to accept his judgement on climate stability.


Twenty years ago Nigel Lawson decided that the best thing for Britain would be to shadow the Deutschmark. Twenty years later he is urging us to shadow the Chinese rate of carbon emissions. He is as wrong now as he was then."

"Some years ago Churchill decided that the best thing for Britain would be to return to the Gold Standard at the pre-war level. Now he is urging us to fight on against Nazi Germany. He is as wrong now as he was then". Plenty of politicians capable of sound judgement have fallen under the spell of fixed exchange rates and a strong pound. This is just lazy ad hominem.

"This is just wrong. The bulk of the carbon savings that we need to make will come from greater energy efficiency, not from changes in the way we generate energy. By saving energy we will also save money. And with energy prices on the rise there is more money to be saved than ever."

Lawson made these points. He pointed out that Stern was wrong to assume that energy intensity would rise where most, sensible people, expect it to fall and this would mean the human contribution to climate change would be less than Stern expects. As such, greater energy efficiency can be expected but this is a part of Lawson's case and not a rebuttal to it.

"Energy efficiency and economic progress go hand in hand. The more primitive a society the more energy inefficient it is. Just think about the sheer wastefulness of an open fire, where most of the heat escapes uselessly into the atmosphere. To take a more contemporary example, Chinese homes and factories waste a lot more energy than their western counterparts."

Again, this supports Lawson's case. If economic progress leads, in the end, to greater efficiency, the Kuznets curve, this strengthens the case that we should not risk economic growth in attempting to combat climate change.

"And yet even in the most advanced economies opportunities to save energy go unclaimed. For instance, Britain has millions of homes where proper loft insulation would pay for itself in a couple of years and go on saving substantial amounts of energy, money and carbon year after year. So why do so many people fail to insulate their homes properly? It’s because, contrary to simplistic economic theories, people don’t always act in an economically rational way. Sometimes they need a prod in the right direction."

There are costs to getting loft insulation put in beyond the capital cost of getting it installed. People are busy, it's an interruption to their lives, they might have to miss work to be at home and watch over the building work. There are opportunity costs to spending time improving your home's energy efficiency as well as the straight financial cost. As the money savings are often fairly small amounts it is a mistaken assertion that people are being irrational. In order to see a significant rise in energy efficiency improvements you will need the economic incentives to change and that is, apparently, what Franklin doesn't want to do.

"That’s why I’m opposed to most forms of environmental taxation, which tends to be a blunt instrument that rarely achieves its ostensibly environmental purpose. What we need are sophisticated policy tools designed for a particular purpose and used for no other (such as the raising of tax revenues). For instance we could have a system of energy efficiency credits, which enterprises could earn by implementing various energy efficiency solutions such as insulating a given number of homes or selling a given number of energy efficiency light bulbs. Polluters such as power stations would have to buy a given number of certificates. A market would then operate, generating profits for those supplying the most attractive energy efficiency solutions at the lowest cost. The polluters would have to pay the cost of kick starting the market, but, in aggregate, money would be saved and put to a better use than wasting energy."

This is still an energy tax, it will still hit unavoidably energy intensive industries, force them to relocate to places like China and thereby do, at best, nothing to help the climate change situation.

The difference is that you then have a plan to spend the money on subsidising technologies or investments that you like. Unfortunately, government is rubbish at choosing technologies in this way. It would probably give loads of the money to wind farms, certain forms of biofuel, electric cars or any of the other phony green solutions which turn out to be a lot less efficient than they first appeared but do well through government support. If you genuinely want to save money I would trust to the efficiency of the market far sooner than that of government; saving money is what the market does best.

"Ah yes, the old 2% argument i.e. Britain is only responsible for 2% of humanity’s carbon emissions so what difference can we make?

The first thing to understand is that the purveyors of this argument are either deliberately or ignorantly blurring the distinction between the stock and flow of carbon emissions. Atmospheric concentrations of CO2 are already at a level unprecedented in human history thanks to an industrial history that goes back a lot further in the developed world than the developing world. Thus Britain has contributed 6% not 2% of the accumulated problem to date, with other developed nations contributing almost all of the rest.

So while China and the other developing giants are making a growing contribution to the future problem, there is strong moral case for the West to get the ball rolling in terms of a solution. There’s a strong practical case too – because there’s an awful lot of money to be made here."

I have no problem with understanding the difference between stocks and flows but that makes little difference to this debate. Lawson did acknowledge that this was largely a developed country created problem and cited this as the reason we had a moral responsibility help poor countries, in the most effective way possible, by helping them adapt to changing climate conditions.

However, this clearly makes no difference to the debate over whether we can stop climate change because our historical contribution to climate change has happened; it is a sunk cost and hence needs to be ignored. The important thing for now is that changes in Britain's emission levels are going to make next to no difference compared to the vast rises in emissions coming out of the developing world, and particularly China. Just like Lawson said the idea of our "getting the ball rolling" and the rest of the world gleefully following is at the CND end of the foolishness spectrum.

"For one thing, the developing giants are desperate to escape their dependency on fossil fuel imports, which is why Brazil is already leading the world in ethanol fuelled cars. The giants also have an appalling problem with the local pollution caused by fossil fuel use – just asks the organisers of the Beijing Olympics. As mentioned above, the developing world has even more to gain from energy efficiency than we have; and the micro-generation of energy could allow whole regions to leapfrog the expensive requirement for centralised energy networks in the same way that mobile phones are enabling them to dispense with fixed line telephony."

This is ridiculously naive. The main way, as Lawson highlighted, that China and India are getting away from fossil fuel imports is building coal power plants to make use of their plentiful reserves of that fossil fuel. China's pollution problem is a matter of having industrial plant sited too near, or in, major cities and is a legacy of a planned economy and has nothing to do with CO2, which is not an element in the clean/dirty air equation.

It may be that new technology will allow the developing world to avoid having as carbon intensive a development as we have. However, this again helps the case of those arguing against action to curb climate change as this technological development will make far more of a difference to the climate change outcome and does not demand the economic sacrifice of hurting energy intensive industry.

"We in the West have the expertise, the intellectual freedom and the capital to develop these solutions, but the developing giants have got the deepest need and the fastest growing markets. If you want proof, look to the investment community which is well ahead of the politicians. The hard-headed money men are convinced by the climate change science and they can see the business opportunities. As one of them said to me the other day, “we know this is going to be a massive area for capital formation because it bloody well has to be.”

So the question facing western governments is whether to give their economies a prod in this direction or whether to subsidise the dinosaur industries of the past by allowing them to pollute without paying."

To complete my fisk I should respond to the argument we are allowing the dinosaur industries to pollute without paying. Fortunately, Lawson has already done so. If we tax these industries they will not cease to exist or use energy; they will move.

More importantly, this last couple of paragraphs really sum up this article's central weaknesses. The problem is even unwittingly acknowledged "look to the investment community which is well ahead of the politicians". Exactly. So why are you trying to use the government to pick winners by manipulating the tax system towards favoured technologies and investments instead of trusting those investors to see what is efficient?

The argument that the market cannot be trusted to look after the environment makes some sense when the argument is that it can be uneconomical to do what is right for the planet. This is what Stern was arguing and Lawson was responding to. However, the argument that it is economical to do what is right for the planet but the market is just too useless to make it happen requires an extraordinary lack of faith in free markets and generous faith in government initiative and foresight for someone who claims to be a conservative. It requires us to believe that over the mass of small investment or technological decisions that will determine our society's energy usage the government knows better than individual decision makers. Hayek responded to the fallacy of state planning's efficiency some time ago and I don't think I really need to go over it again now.


Serf said...

"For one thing, the developing giants are desperate to escape their dependency on fossil fuel imports, which is why Brazil is already leading the world in ethanol fuelled cars.

This displays a complete lack of knowledge of the history of Brazil's ethanol industry.

Brazil set all this up a few decades back, in order to replace imported oil with locally produced fuel. It was a project aimed at self sufficiency, back when that was thought to be a good thing.

When oil prices fell, Brazil lost its enthusiasm for ethanol, but by then the infrastructure and industry were in place, with the lobbying power that goes with it.

Only recently has all this accumulated knowledge been reborn as an environmental activity, driven by high oil prices and global interest in biofuels.

Anonymous said...

As someone who grew up in Brasil when the ethanol cars were introduced, let me share a few little publicised thoughts. Yes the idea was to reduce dependence on imported oil. The problem that caused was that ethanol was to be distilled from sugar cane. All of a sudden there was a huge market for sugar. Landowners who for generations had been content to allow their land to be farmed by peasant farmers converted their land to huge single crop estates. Thousands of peasants were thrown off the land and migrated to the cities ( poverty, disease, crime etc etc etc) The land meantime becomes less and less fertile because of the mono culture, wildlife is displaced for the same reason. Other lands previously used for pasture are turned over to Sugar, the ranchers then move to the north and chop down the jungle to create new pasture lands. The jungle being infertile itself cannot support the change to pasture and soon becomes a dust bowl. Meanwhile the climate starts changing due to the huge emmissions of CO2 caused by burning the jungle and the loss of plant life that would otherwise absord it.

And this is held out by politicians in the UK as sustainable green technology???? Do me a favour