House of Lords - Economic Affairs

Select Committee on Economic Affairs Minutes of Evidence

Memorandum by Professor Colin Robinson, Emeritus Professor of Economics, University of Surrey

My interest in the economics of climate change comes about because, for over 40 years, my main research efforts have been in the field of energy economics and policy. The production, distribution and consumption of energy products all have impacts on the environment and so energy policy has, in recent years, come to be dominated by environmental issues and, in particular, by the view that governments and international institutions should take action to combat the effects of human activities on world climate. In the British government's February 2003 White Paper on energy[1], for example, the principal theme is that an expensive programme of promoting "renewable" sources of energy, combined heat and power and energy conservation is justified by the need to ". . . put (the UK) on a path towards a reduction in carbon dioxide emissions of some 60 per cent by about 2050"[2].

In various recent publications[3], I have expressed scepticism about the predicted extent of global warming and about the counter-measures proposed. In this brief memorandum, I summarise the reasons why one should look critically at the global warming consensus that now so influences policy in many countries and I suggest some issues that the Committee might wish to consider. The memorandum is intended to help set the scene for the Committee's deliberations.

1. APOCALYPTIC FORECASTS

To set in context present-day predictions of climate change effects, one issue I suggest the Committee should consider is whether the present prevailing wisdom about climate change is another example of the apocalyptic forecasts that have a long history in energy markets and that have so far proved greatly exaggerated[4].

These forecasts of doom have usually concerned the depletion of fossil fuel resources (coal, oil and natural gas). In recent times the outstanding example has been the consensus that formed in the 1970s and early 1980s that energy depletion, especially of crude oil resources, was proceeding at an excessive pace[5]. It was argued that the world faced potential disaster in the foreseeable future which could be averted only by massive centralised action by national governments and international institutions: coal, nuclear power and synthetic fuels, in particular, should be promoted by governments to make the switch away from oil that proponents of this view argued was urgent, and economic growth rates should be reduced to conserve resources. "The days of cheap energy are gone for ever" is a well-known catchphrase of the times. In the event, the excessive energy depletion hypothesis turned out to be misguided and, probably fortunately, the associated calls for massive central action met little response. Government action was very limited, but by the early 1980s, 10 years after the first "oil shock", decentralised energy market forces had turned apparent scarcity into apparent surplus, the world was awash with oil and the Organisation of Petroleum Exporting Countries was meeting to try to prop up the price of crude oil.

Although the present consensus concerns pollution rather than resource depletion, it may, ex post, appear as part of a doomster tendency with a long history[6]. Prophets of doom have their benefits: they serve a useful function if they help to stimulate the innovations that eventually solve the problems they foresee. However, they can also be dangerous if they force on to the community today costs that need never have been incurred because these problems would have been solved at less cost by normal decentralised market processes and associated technological advance. The underlying issue is that, with some reflection, any intelligent person can think of all manner of problems that might afflict the world in the future but to which solutions do not at present exist. But, as Dennis Gabor remarked, "The problems of 50 years hence will not have to be solved by our present-day technology but by that which we shall possess in 20 or 30 years' time"[7].

I would also point out that past experience suggests that once a consensus emerges and passes into the conventional wisdom—as the climate change consensus has done—it is difficult to dislodge by the normal processes of scientific challenge because an "industry" appears that is dedicated to preserving the consensus. Governments make statements about the need to deal with the problems the consensus identifies. The scientific establishment comes to depend on research grants which are most easily obtained if research projects appear to deal with accepted problems. Consultants gear their efforts to advise on these same issues. The media constantly run stories that appear to reinforce the consensus. For all these reasons the consensus is highly resistant to change.

Of course, I am not suggesting that the prevailing wisdom about climate change should be dismissed because in earlier times the consensus has been incorrect. My point is that past experience should make us wary of accepting the scientific consensus without very critical examination. As part of that examination I would suggest the following.

2. HOW ROBUST IS THE SCIENCE?

First, I would urge the Committee to solicit evidence from some of the scientists who dissent from the consensus. In the past, minority views have often been nearer the truth than the consensus (for instance, in the cases of the over-depletion scares of the 1970s and the wildly over-optimistic consensus views in the 1960s and 1970s about the future of nuclear power).

More generally, although economists are not qualified to comment in detail on the methods used by scientists to model global climate, they are used to modelling complex situations in which human intervention plays a major part, where the nature of the system being modelled is poorly understood and where there are difficult multivariate problems to be solved (that is, there are many determining variables at work, possibly interacting, and the separate influences of these determinants are very hard to disentangle by statistical methods). Climate modelling, like economic modelling, relies on highly simplified representations of a very complex and only partially understood system which apparently responds to human action but where feedback mechanisms are often unclear. In view of the complexities of the system and the huge uncertainties that remain, I would suggest the Committee—without going into details of the science—probes scientific witnesses about how robust they believe their models to be, and asks for information about the sensitivity analyses they have carried out to test what differences in the results emerge if changes are made in the structures of the models and in the assumptions made about critical variables.

Two issues in particular are worth examining:

(i) how confident are the scientists that they have identified a warming trend?

There has clearly been a succession of relatively warm years in recent times. But world climate appears to fluctuate considerably so that what has been observed could be merely a cycle that will be reversed. The matter is of some importance. If the warming tendency is likely to be reversed naturally, action by governments to reverse it might do more harm than good, perhaps bringing about excessive cooling of the kind feared by many scientists only 30 or so years ago.

(ii) how much confidence do they have in the correlation between global warming and the release of greenhouse gases, which appears to be a particularly awkward problem in multivariate analysis?

In other words, given the variability of world climate and incomplete understanding of its determinants, with what degree of confidence is it possible to identify the effects of manmade influences such as greenhouse gas emissions?

3. THE PROJECTIONS OF THE IPCC

The International Panel on Climate Change (IPCC), which is a subsidiary of the World Meteorological Organisation and the United Nations Environment Programme, is the main source of projections of climate change and its possible effects. The IPCC has produced three massive reports and is in the process of producing number four. Its projections appear to have been broadly accepted by many governments and they are widely quoted. The bases for its scenarios, which of course include economic factors, need to be examined carefully: this Committee is particularly well qualified to make such an examination.

The starting point for the latest IPCC report is the Special Report on Emissions Scenarios (SRES) that projects emissions almost a century ahead, to 2100, linking them to projections of world output, world energy use and the carbon-intensity of energy sources. Projections that far ahead should, of course, be viewed with extreme scepticism. Even short and medium term projections in the energy field have, in my experience, usually been so far from the out-turn that they have been of little value. But these very long term projections may be a useful aid to thought if the scenarios used are internally consistent, if the principal determinants are carefully considered and if outside observers can see exactly what has been done and can play a role through constructive criticism. Unfortunately, in the case of the IPCC scenarios it is rather uncertain whether these conditions have been met.

Two economists who have looked in detail at the IPCC scenarios[8], David Henderson and Ian Castles, have been very critical of them[9]. Their main single criticism concerns the economic growth projections for developing regions. The scenarios assume the initial (1990) gap in income per head between these regions and OECD countries is substantially closed. Castles and Henderson argue that the extent of this 1990 gap is greatly over-stated through the use of market exchange rates, rather than purchasing power parities, in deriving comparative figures for GDP per head in that year. By assuming the closure of an over-stated gap, the scenarios yield projections of GDP for developing regions that are improbably high. The corresponding projections of emissions are also therefore too high, according to Castles and Henderson. I would add, on the subject of these rapid growth rates, that it is not clear to me that the IPCC authors have considered whether they are feasible in terms of the resources—natural, human and man-made—that would have to be used to sustain them.

The IPCC's reaction to this critique seems to have been defensive and to have tried to discredit Henderson and Castles, describing them as spreading "disinformation" and referring to them as "so-called independent commentators"[10]. This is clearly a matter on which the Committee should probe the IPCC which, if it is confident of its methods, has nothing to fear from the normal process of scientific debate[11]. I understand Professor Henderson is appearing before the Committee and will therefore explain his critique of IPCC (only part of which I have summarised), and that Dr Pachauri will appear to explain the IPCC's position.

4. WILL CLIMATE CHANGE REDUCE WELFARE?

If it could be established that there is a climate change trend that will continue into the future and that human activities are primarily responsible, does it follow that in the absence of government and international action world welfare will be reduced? If that were an established fact, there would be a prima facie case for centralised action. (The case would not be fully made because, as explained in 5 below, the imperfections of government and international action would also have to be taken into account.)

The impact on world welfare of a global warming trend is a difficult issue. It depends on the details of how the warming occurs—for example, whether minimum temperatures increase at the same rate as maximum temperatures and whether cold regions and warmer regions are affected similarly. From an economic point of view, the distribution of gains and losses is important. The chances are that, with a warming trend, there would be considerable numbers of both winners and losers. Thus to decide whether the world as a whole would be better or worse off becomes a heroic task in which gains to winners would have to be offset against losses to losers by using some weighting system (which could only be subjective).

Furthermore, some analysts have argued that, on balance, the likely increase in carbon dioxide emissions and, more broadly, the likely extent of global warming, however caused, would be beneficial. Robert Bradley, for example, after reviewing the evidence, argues that ". . . the balance of evidence leans more towards climate optimism than climate pessimism"[12]. Whether or not one subscribes to this optimistic view, there clearly are many uncertainties about how increased greenhouse gas concentrations (assuming they occur) will affect different people in different parts of the world, as also about the impact of global warming. There is also the question of the extent to which people in different areas might be able to adapt to climate change without serious costs. I would suggest that the Committee questions witnesses about what distribution of losses and gains from climate change they expect, how they would assess the net effect and what is the capacity for adaptation.

5. IS COLLECTIVE ACTION REQUIRED AND, IF IT IS, WHAT SHOULD IT BE?

In terms of standard economic theory, the case for collective action to combat climate change may appear to be clear. The standard case is that individuals and organisations that burn fossil fuels have little incentive to reduce the ensuing emissions of carbon dioxide because they bear merely the private costs of their actions (the price of the fuel and associated costs): these private costs are less than the full social costs of those actions, including the adverse impact on world climate. Hence the costs they do not bear ("external costs") should be incorporated, directly or indirectly, by governments and international institutions, thus applying a price to use of the environment. A solution that can often be applied to environmental problems—to allocate and enforce property rights so that the holders of those rights will defend them against polluters—is, it is argued, inapplicable in this case because of the difficulty of allocating property rights to global assets such as the earth`s atmosphere. So, to avoid over-use of the atmosphere as a sink for wastes, it should be priced.

However the standard argument, as is often the case, seems to me to assume more scientific knowledge than actually exists. Without further evidence it appears uncertain whether a warming trend has been established; if there is such a trend its future course and the contribution to it of carbon dioxide and other greenhouse gases seem very unclear; and there are doubts, virtually impossible to resolve, about whether costs to losers will in aggregate exceed benefits to gainers. Thus, estimating the appropriate price is virtually impossible.

Moreover, there are two issues I have not so far discussed. The first is what the costs might be of action to combat climate change. "Costs" in this case mean not only the direct costs to consumers and taxpayers of subsidies, taxes, administrative controls and other devices designed to avoid climate change and/or to modify its effects, substantial though those direct costs might be[13]. Such actions will inevitably affect choices made by producers and consumers, causing economic distortions, and will have unintended consequences that will increase the full opportunity costs of government actions[14]. The Committee will no doubt want to enquire into the likely size of these costs.

The second matter is that we must expect any national government or international action to be flawed because governments, as well as markets, are "imperfect". Indeed, there are reasons of principle to doubt whether governments in representative political systems have a long enough view to be efficient and effective protectors of the environment. They are generally reluctant to impose costs on voters for actions that will produce any benefits only in the very long run during the administrations of far distant governments.

Experience tells us that actions by governments and international agencies are likely to be influenced by all manner of objectives as well as concern for the environment and that they have unintended consequences. Thus it is uncertain whether, even in the case that collective action is justified and does not seem unduly costly, it will make matters better rather than worse.

6. POLICIES TO COPE WITH THE UNCERTAINTIES ABOUT CLIMATE CHANGE

Subject to the evidence the Committee receives, it seems to me that a possible policy approach might be as follows. The intention would be to avoid free use of the global environment but to minimise the potential for government failure.

Probably the best argument that can at present be mustered in favour of collective action to combat apparent climate change is on insurance lines. This case admits current ignorance, accepting that the future extent of climate change and its consequences are inherently unknowable, but acknowledges that, if significant change were to occur, the economic and social effects might be severe. Thus, the argument proceeds, governments should insure their citizens against these possible consequences. The difficulties of effecting such insurance efficiently are obvious: in our present state of knowledge the consequences and their probabilities of occurrence are unclear and the attitude of "society" towards risk is unknown. Thus only arbitrary calculations of the premium it would be worth paying are possible.

However there is a case, in terms of insurance, for employing a general economic instrument to deal with carbon emissions—a tax on carbon or better an emissions trading scheme (as instituted by the EU in January 2005). A trading scheme requires the initial setting of the aggregate amount of the permitted emissions and their allocation among emitters (preferably by auction to minimise government failure). Subsequent trading would then "discover" a price for carbon and allow a decentralised response to the emissions problem. The quantity of emissions permitted could be adjusted over time, with governments selling more permits or buying them back. "Conservationists" and others could also purchase permits, if they wished.

This kind of trading scheme is likely to be a more efficient way of reducing carbon emissions than the strategy of "picking winners" (such as renewables) that has been resurrected by the British government in its 2003 energy White Paper. In my view, it would also represent a more considered, cheaper and flexible response to an issue which may or may not turn out to be a serious problem than the drastic and costly programmes of centralised action that the more alarmist observers, like doomsters of earlier times, are urging should be adopted in the immediate future.

5 January 2005

1 Department of Trade and Industry, Our Energy Future: Creating a Low Carbon Economy, Cm 5761, 2003. Back

2 Ibid. para 1.10. Comments on the size of the programme and its unintended consequences are in Eileen Marshall, "Energy Regulation and Competition after the White Paper", in Colin Robinson (ed), Governments, Competition and Utility Regulation, Edward Elgar, forthcoming, 2005. Back

3 For instance, "Gas, Electricity and the Energy Review", in Colin Robinson (ed.) Successes and Failures in Regulating and Deregulating Utilities, Edward Elgar, 2004. Back

4 Going back at least to the mid-nineteenth century. See, for example, W S Jevons, The Coal Question, 1865, reprinted Augustus M Kelley, 1965. Back

5 One of the forerunners of these predictions was D L Meadows et al, The Limits to Growth, Earth Island, 1972 that forecast shortages of most raw materials by the end of the twentieth century. Back

6 Colin Robinson, The Technology of Forecasting and the Forecasting of Technology, Surrey Papers in Economics, 1972, pp 8-9. Back

7 Dennis Gabor, Inventing the Future, Secker and Warburg, 1963. Back

8 The Special Report on Emissions Scenarios (SRES) is prepared for the IPCC's Working Group III. Back

9 See, for example, Ian Castles and David Henderson, "Economics, Emissions Scenarios and the Work of the IPCC", Energy and Environment, Vol 14, No. 4, 2003. Back

10 IPCC Press Release, Milan, December 2003, now posted on the Panel's website. Back

11 An IPCC response in the literature is Nebojsa Nakicenovic et al, "IPCC SRES Revisited: A Response", Energy and Environment, Vol 14, Nos 2 and 3, 2003, but it does not deal satisfactorily with the main points made by Castle and Henderson. Back