Trading Emissions: Full Global Potential by Simon Linnett

Simon Linnett's plan, written for the Social Market Foundation, for a global response to the threat of anthropogenic global warming (PDF) is entirely misconceived. At each stage it chooses the worst possible path forward from its analysis of the threat, to the manner of the response, to the scale at which it is organised.

Framing the problem in terms of changes we 'must' make

Lurking in the background in this study, and in many other doubtful contributions to environmental policy thinking, is Sir Nicholas Stern's study on climate change. This was the study that most successfully pushed the idea that climate change is not just one more challenge that threatens to impose particular costs on the world economy and humanity at large but instead a likely catastrophe warranting a messianic response.

The TaxPayers' Alliance study The Case Against Further Green Taxes (PDF, Box 1.3) summarised how his analysis has not stood up to scrutiny well at all. Stern's study took no account of the possibility of adaptation, chose an unrealistically low discount rate and cherry-picked the most pessimistic predictions of future conditions. This left him proposing that we take dramatic policy steps in order to make an uncertain contribution to conditions not ten or a hundred years from now but in the distant future - more than half the harms described in the report are expected to occur after 2800. As I set out some months ago, when looking so far beyond the horizon it is absolutely important not to assume that technologies and societies are fixed, as Stern does, and discount harms for an inventive society's ability to adapt to them.

At no point does Linnett even consider the case that the earlier approach to climate change economics might be correct. He clearly has decided that the time for such debate is past and prefers to move onto the loftier task of proposing theoretical trasnational institutions. Unfortunately, not considering the more established literature in climate change economics leaves him with an absolutist view of the kind of measures that are needed which leaves little room for the balancing of costs and benefits that should inform a sensible response to any external threat.

'Cap and trade'

Cap and trade can sound, at first, like a very sensible, market-based solution. This is how Linnett describes it. After all, it implies "trading" and creates a market. Unfortunately, that picture is very misleading.

Emissions trading schemes have had a very poor record so far. Again, a more detailed summary of the case against them is contained in the TaxPayers' Alliance The Case Against Further Green Taxes report (chapter six). The European Union Emissions Trading Scheme has been a complete farce so far with oil and electricity generation companies making a profit and NHS hospitals facing big bills. Negotiations towards the establishment of Phase II suggest that little improvement can be expected any time soon. Cap and trade schemes in America have had little more success with erratic prices, thanks to the political nature of the market, making business planning impossible and killing the incentive to invest.

Cap and trade does not involve the private sector more than a carbon tax. The key difference between the two is that with a carbon tax the Government sets a price for carbon dioxide emissions and then the market is free to use or not use as much carbon as is economical, where the benefits outweigh the costs of increased climate change. This means that an incentive to greater efficiency is created but the market is also involved in deciding the level of carbon emissions at which the social cost is balanced against the benefits. By contrast, with cap and trade the absolute amount of permissible carbon emissions is set by Government, which needs to reach some political understanding of the costs of carbon emissions cuts - and sometimes also to allocate emissions permits between different providers - and the market is only involved to try and seek an efficient means of cutting emissions. Cap and trade is not the market solution.

Failing to stare the costs of cutting emissions in the face

This entire scheme is predicated on Government capping emissions and then the market miraculously making the actual cuts. It takes no account of the cost of emissions cuts for two reasons discussed already: First, Stern's hyperbolic account of the costs of climate change is designed to forestall a meaningful balancing of costs and benefits - and Linnett's study is predicated on Stern's analysis. Secondly, cap and trade - as a mechanism - takes no account of the cost of cutting carbon emissions as it is centred around absolute limits to emissions. The cost of meeting those limits is a problem left to industry.

This is another fatal flaw in Linnett's report. Any meaningful plan for a global reduction in emissions has to deal with the central problem that to do so with today's technology would be incredibly expensive. He argues, at one point, that to join this scheme would be in China and India's interests as the scheme would aim to base emissions allocations on population and that would give them a valuable resource - emissions permits - to trade. This just can't be reconciled with the kinds of brutal arithmetic that combining a growing world economy with big cuts in emissions implies:

"Even if you were to miraculously cut developed world emissions to zero, complete de-carbonisation, the developing countries would still need to cut their emissions by 9.5 gigatones, 46 per cent. Growth in poor countries will mean that the rich world just can't do all the work in cutting emissions. If your cut in developed world emissions is more realistic, two-thirds for example, then the developed countries would need to make a 74 per cent cut."

This brutal arithmetic, and the clear implication that developed country cuts won't be enough, is the result of developing world growth that swamps any change in developed world emissions.

The cuts mentioned would all need to be on top of the continued improvements in energy efficiency that we should expect regardless of climate change policy as companies seek to avoid expensive fuel bills. Unless we can find some new and miraculous source of energy efficiency those cuts in emissions will require commensurate cuts in national incomes. Massive sacrifices of economic growth and living standards. All this and more was set out in a presentation by the White House Council on Environmental Quality and illustrates just how challenging it will be to cut carbon emissions on the scale thought necessary by those proposing deep emissions cuts.

Linnett found space in his report to discuss where his proposed World Environment Agency's offices should be, London apparently, but doesn't even mention these massive, intractable challenges that any such institution would face. The scale of the cuts needed to meet the targets thrown around in so cavalier a fashion illustrate why countries will have every incentive to interfere, seek advantage and screw with a World Environment Agency. This brings us on to the final, critical flaw in Linnett's plan.

Transnationalism

This organisation removes yet another element of policy from the sovereignty of national parliaments. Linnett does little to address the problems such a move creates. The lack of accountability that plagues all existing supranational institutions, particularly the EU and the UN; the extremely watered down nature of any democratic involvement; the establishment of government by an international, bureaucratic aristocracy. This institution would be Tranzi central.

Beyond that, by creating a single organisation with so much power and little accountability you create a superb target for interest group capture. Whether led astray by intense lobbying, nations threatening to leave or actual corruption a World Environment Agency's power is unlikely to be used in an enlightened matter, even if it is set up with the most benign of intentions. The stakes would be too high for powerful interests not to get involved and try to sway decisions.

Conclusions

Linnett's analysis and proposal both have severe problems. The best policy response to climate change remains the following three-pronged strategy, set out in more detail here:

1) Technology - cutting emissions to the level Al Gore, Zac Goldsmith or even Chris Huhne would like isn't impossible. It just requires a miracle. Fortunately science has a history of providing what, to previous generations, would have seemed miracles. There are economical steps we can take that don't screw over our economy and might make such a miracle, or just an incremental technology that reduces our emissions a bit, more likely.

Prizes for technological discovery, an alternative to patents that was very successful in encouraging important developments during the Industrial Revolution, were proposed by Jim Manzi in a recent National Review article and might offer a good way of encouraging green technologies.

2) Adaptation - we can make sure our flood defences are in order, our crops will respond well to the new seasons and take other steps to prepare for the challenges of a warmer world. We can help poor countries do the same. This needn't be particularly expensive and we should avoid doing too much while we don't know precisely what we'll be adapting to but adaptation is clearly a central response to climate change under any sensible programme.

3) Resilience - Manzi put it well: "Wealth and technology are raw materials for options". The most important thing to do in order to be able to withstand an ecological crisis is make sure you're rich to start off with. Rich countries are so much better able to withstand the harms of global warming. If we screw up our economy in a vain attempt to avert climate change future generations will not thanks us.

Group Polarization and Credulous Bayesians

Ed Glaeser is a very smart man. I can think of a lot of groups that this paper (PDF) describes quite well, there is a deep ring of truth to it all:

"Unlike perfect Bayesians,Credulous Bayesians treat offered opinions as unbiased and independent and fail to adjust for the information sources and incentives of the opinions that they hear. There are fourproblems here. First, Credulous Bayesians will not adequately correct for the common sources of their neighbors’ opinions, even though common sources ensure that those opinions add little new information. Second, Credulous Bayesians will not adequately correct for the fact that their correspondents may not be a random sample of the population as a whole, even though a non-random sample may have significant biases. Third, Credulous Bayesians will not adequately correct for any tendency that individuals might have to skew their statements towards an expected social norm, even though peer pressure might be affecting public statements of view. Fourth, Credulous Bayesians will not fully compensate for the incentives that will cause some speakers to mislead, even though some speakers will offer biased statements in order to persuade people to engage in action that promotes the speakers’ interests.

[...]

We then turn to the possibility that an individual’s friends and social networks are not a random sample of the population. A group of people might have skewed views on questions of policy or fact, and group members may not sufficiently adjust for that fact. We formalize this possibility by assuming that noise terms in the sample are correlated, rather than independent, as they could be if the group has been selected on some attribute or taste. Credulous Bayesians underestimate the correlation of the signals and act as if their neighbors are a random sample of the population as a whole. In this case, Credulous Bayesianism again causes more extremism and more error. Here too, larger group sizes (so long as they do not produce representativeness) can make decision-making less accurate. For a wide range of parameter values, more correlation decreases accuracy. This is our first result favoring intellectual diversity."

Glaeser's suggestion is that most people are actually pretty easily influenced by the opinions of those around them. This might sound cynical but if you consider just how long it takes to become genuinely informed about an issue from facts alone we do need to accept that most people will access truth socially. That means that when you socialise with those you agree with it is really easy to become convinced of radical ideas; the extreme ideas you here sound entirely normal because everyone around you holds them.

The lesson is clear: keep plenty of people you disagree with within your social circle (both in real life and on the blogs). It'll keep you sane.

Douglas Carswell thinks about an anti-Tranzi rebellion

This piece, for CentreRight.com, is incredibly provocative. The very idea of a "Pim Fortuyn moment" when an outsider crashes down a political class consensus that the wider population have little time for is incredible coming from an MP, and in a country so used to stability and incrementalism.

"Voters sense Britain is becoming a state of failure; billions of pounds go into a health service riddled with delays and MRSA. More money on schools has seen standards actually decline. The criminal justice system is often useless. Government has lost control of our borders - as well as its own agencies and quangos.

[...]

Ponder the possibilities. A popular mood of radical anti-politics mixed with the internet; it could get interesting...."

Setting up new parties in a first past the post electoral system is foolishness and we're a very different country to the Netherlands so a British "Pim Fortuyn moment" wouldn't look like the Dutch one. Most likely it would either be within a current party or non-party. However, there are opportunities. Imagine if an MP had really taken the Government - and the wider political class - to task for their pathetic response to the Danish Cartoons crisis; their lamentable failure to defend free speech against threats and religious hysteria. I think there were signs in the polls that they might have found a very receptive audience.

Out of sparks like that it might be possible to build a movement that would build upon deeply felt nationalism, discontent at an increasing decline in personal sovereignty and robust attachment to Western values.

Shady dealings in support of Red Ken at the LSESU

Remember Fadhil Bakeer Markar? He was last seen on this blog sending an inflammatory and highly biased letter about Israel to every LSE fresher. Now he's abusing his position again, this time in support of Red Ken. Signing a letter to the Guardian with not just his own name but also that of the LSE Students' Union. This is an abuse of his position and quite possibly a breach of charity law. Here's an article that was published in the latest issue of the LSE's student newspaper - The Beaver (not online elsewhere I'm afraid) - which sets it all out:

Case for resignation
The signing of the letter in The Guardian supporting the re-election of Ken Livingstone by two SU representatives is illegal and unconstitutional
by Alex Teytelboym

This week The Beaver has kindly pointed out that Fadhil Bakeer Markar, our already disgraced General Secretary, and Ruhana Ali, the hitherto low-profile Education and Welfare officer, signed a letter to The Guardian newspaper supporting the mayoral re-election of Ken Livingstone (can be found on the Guardian Unlimited website).

Livingstone is not a particularly pleasant character. Dubbed 'Red Ken' for his notoriously left-wing views and support for Venezuelan rogue socialist regime, he was nevertheless popular among Londoners. The signatories of the letter claim that Livingstone has "championed a policy of tolerance, understanding and mutual respect of communities." That policy famously expired when Livingstone was suspended from office for four weeks in March 2006 for intentionally calling a Jewish Evening Standard reporter a 'concentration camp guard'. According to his lawyers he was not acting in official capacity. Of course he was not. Nor was Mel Gibson.

Livingstone's nasty character is entirely beside the point. The point is that the letter was signed thus: "Ruhana Ali, Fadhil Bakeer-Markar, LSE students union". From a point of view of a casual Guardian reader, it may seem as if the LSE SU, a charity, supports a political candidate. But the Charity Commission states very clearly on their website: "Following the principles, it is acceptable for a charity to advocate support for a particular policy, even if that policy solution is advocated by a political party or candidate, providing the the policy is in furtherance of the charity's purposes. However a charity must not support a political party or candidate". No mention of clear policies in the letter, by the way.

At last week's UGM, Bakeer Markar was very angry with me for pointing out that he potentially broke the law. He claimed that he and Ali signed the letter "in a personal capacity". If Tony Blair signed a letter to Vladimir Putin saying "You suck!" and signed it "Tony Blair, Prime Minister of Her Majesty's Government of the United Kingdom, in personal capacity", what do you think the repercussions for the Anglo-Russian relationship would be? How do you think it would be reported to Vladimir? And would Vladimir ever bother to read a letter from any old Tony?

The same logic applies here. Bakeer Markar and Ali abused their positions as elected sabbatical officers and trustees of this Union and betrayed its members. Last year our students voted for them in the confidence that they would use their positions for the betterment of the Union. These two sabbaticals have used our trust to advance their own political goals. As Daniel Finkelstein pointed out on the Comment pages of the Times in October: "Charities are allowed to engage in limited political activity but only to support their genuinely charitable, non-political objectives and only if they are careful not to allow these activities to to dominate their work, becoming the main way of achieving their objectives." Politics has dominated the agenda of Bakeer Markar and Ali since before their re-election, although their precise associations remain unclear. It is no secret that they received ardent support from murky, fraternity-like NUS organisations, such as the Student Broad Left and former sabbaticals.

Bakeer Markar and Ali must reveal who approached them to sign the letter. On 3 January a letter appeared in the Guardian Comment is Free section. It was signed by 63 prominent individuals and charities, of which about a third are closely linked to fundamentalist Muslim organisations according to the Centre for Social Cohesion. Lord Falkner challenged The Guardian to publish a list of Muslims supporting the other candidates. Instead, two days later the letter, signed by our sabbaticals, appeared in the newspaper. Bakeer Markar refused to answer questions from The Beaver reporters about the letter and reveal who approached them to sign the letter. Ali invented a new deadline for quotes and went to consult him. This conspiratorial behaviour suggests that Bakeer Markar and Ali may have some embarassing political associations and influences, including the signatories of the first letter.

It is in my opinion, that Bakeer Markar and Ali signed the letter under instructions from someone, who is closely connected to the mayoral office. It shows no signs of independent thinking, rather a following of orders. Both of them appeared at a party recently thrown by the mayoral office for London students' union sabbaticals. I wonder how much of this article has been censored. Last time a key quote from my new investigation on Bakeer Markar mysteriously dissapeared. He then pressured The Beaver to install "in my opinion" in front of almost every controversial statement on these pages. The Beaver executive editor bravely defended my article.

Bakeer Markar has something in common with Livingstone. They both refuse to apologise and admit their mistakes. In the denial of wrongdoing, they both look pathetic. As Livingstone should have two years ago, Bakeer Markar and Ali should resign today.

Network versus Human Capital

Chris Dillow's post explaining what Tony Blair brings to Zurich Insurance is very interesting. Essentially, Chris accepted the argument Bryan Appleyard made that it wasn't Blair's, rather dubious, experience with climate change policy. He set out how what Blair really brought was 'network capital'.

The colloquial term Chris uses for this contribution is 'contacts'. I'm not so sure that captures what Blair brings to Zurich. Phone numbers aren't hard to get hold of and despite Blair's clearly fine networking skills I doubt he has a personal relationship with a significant number of people that Zurich would want to influence. I think that Blair's reputation is likely to be the major source of his network capital.

Even people who do not know him personally will want to be a part of the Blair 'club' (not everyone, but enough important people to justify his salary). As one of the longest serving Prime Ministers, Quartet envoy to the Middle East and now director at J P Morgan Blair is a big deal. People don't need to have a personal relationship with him already. They'll want to form one because it will make them feel honoured, respected or otherwise special to have an undeniably big cheese like Blair getting in touch.

Reputation isn't always so thoroughly divorced from skill. Plenty of people have a reputation for possessing a certain useful human capital. However, reputations do have a life of their own and, particularly among the big cheeses, have value beyond the immediate profession or environment in which they were initially earned. As such, while reputation can be a signal for real human capital I think that it is, more broadly, a part of network capital.

Chris's post discusses how valuable and important network capital can become. This set me to thinking about my own situation - at the dawn of my career as Blair's enters its twilight. My real wealth at the moment is almost entirely tied up in expected future earnings. They are likely to be larger than my earnings right now and will take place over more years. Any change in the size of the roughly 40 years of future earnings that I can reasonably expect in the years to come is likely to swamp the financial returns to my job right now.

Now, I am certainly improving my human capital; I'm learning a lot. However, it seems quite plausible that my gain in reputation and contacts is worth more than this. That when a report of mine does well it boosts the value of my reputation and contacts by more than the experience of preparing the report boosts the value of my human capital.

I'm not sure if my understanding of all the various concepts is sound. Still, the ideas underlying it all are interesting.

Health service productivity continuing to fall

The picture emerging from today's report (PDF) on health service productivity, by the Office for National Statistics, is stark:

"From 2001 to 2005, productivity fell, as high growth in health care was lower than even higher growth in inputs. Even with the available adjustments for quality change in output, productivity fell by 2.0 per cent a year, on average, between 2001 and 2005. Without quality adjustment for output, productivity over the same period would have fallen by 2.5 per cent a year on average"

That's a pretty substantial fall.

The quality improvements are a little questionable. They consist of things like falls in waiting lists - very vulnerable to manipulation - instead of actual improvements in health outcomes. If we're going to focus on output productivity instead of improvements in health outcomes the straight 'quantity' measure is more instructive. It tells you about the direct return - in terms of consultations with doctors and drugs bought, for example - we're getting for our money. If those activities have become more useful that is an important, but separate, issue.

If you want a measure of actual outcomes then you should look to our report (PDF) Wasting Lives: A statistical analysis of NHS performance in European context since 1981 which studies mortality amenable to healthcare.

Those 2.5 per cent falls in output might seem marginal but they become very significant over time. The crucial table is this one, part of Figure 2:

What that shows is that productivity value has fallen from 100 to 89.8 over the period. This means that we're getting 10 per cent less today from every pound we spend on the NHS than we were in 1995.

Given how much we're spending that fall in productivity implies a massive waste of money and the failure to get the improvements in output we might have hoped for had productivity performance been better implies a massive waste in lives. The step change in healthcare performance we were told we would get for our money hasn't arrived - neither has the end of mixed-sex wards, another promise. The Government's healthcare policy has failed.

Cross-posted from the TaxPayers' Alliance blog.

New European Central Bank research on the economic effects of big government

The European Central Bank has, today, released a new study "Government size, composition, volatility and economic growth" (PDF) which examines the effect of big government on the rate of economic growth. It finds a substantial effect:

"In particular, a percentage point increase in the share of total revenue (total expenditure) would decrease output by 0.12 and 0.13 percentage points respectively for the OECD and for the EU countries."

This is big. The numbers might sound small but Chris Dillow explains how, if correct, the study implies that the growth of Government here in the UK in recent years is set to put a big dent in our national wealth:

"This implies that the rise in government spending we've had in the UK since 2000 (from 37.2% of GDP to 42%) would, if sustained take half a point off GDP growth, making us more than 5% worse off in 10 years' time than we would have been had spending stayed at 2000's levels."

One surprising result is that indirect taxation, such as VAT, does the most to undermine growth. Other work, such as the dynamic model (PDF) commissioned by the TaxPayers' Alliance from the Centre for Economic and Business Research has suggested that cutting corporation tax would be particularly effective.

This is a powerful contribution to the debate over the size of Government and shows the medium to long-term price we pay for the expansion of Government spending over time. It makes the case for tax cuts more pressing.

Cross-posted from the TaxPayers' Alliance blog.

"Fundamental principle of the NHS" proves its lethality

This is a really tragic case. Colette Mills has not lost her case in the legal fight to be able to buy the drug Avastin - that could have doubled the chance of her breast cancer not spreading - without the NHS cutting off support for the rest of her treatment. However, during the four month trial the cancer has spread and it would now be too late for the drug to do much good.

The Department of Health are sticking to their guns and insisting that top-up payments would violate a "fundamental principle of the NHS, now supported by all the main political parties, that treatment should be free at the point of need". This is a disgracefully weak reason to let someone die. They can't go on pretending that this is a binary choice between free treatment and copayment. In Colette Mills' case it was a choice between copayment and no treatment at all. If the NHS cannot provide a drug, if the free treatment option is not on the cards, then denying her the chance to better her chances is not principled but brutal.

Beyond that, as research (PDF) for Doctors for Reform pointed out, the principle the Department of Health appeal to is already violated throughout the NHS.

I can't make this case as well as Mills herself:

"Mills, a 58-year-old former nurse, said: “I am just absolutely gutted. I just cannot believe people make these decisions about other people’s lives.

“It wasn’t going to cost them. I was going to pay for it. How can they say this policy is far more important than somebody’s life?"