Modeling climate change reduction strategies

National Post Dinosaur-in-Chief Terence Corcoran has nothing but bile to spew at the David Suzuki Foundation and its recent report on carbon pricing. With characteristic bombast, he still seems to think that global warming is a vast left-wing conspiracy to overthrow capitalism.

But Terry is right about one thing. All of the modeling for greenhouse gas reduction scenarios comes from a single source: Mark Jaccard and a crew of his past students, using the CIMS model that integrates energy and economics. It would certainly be of benefit to have some competing models, but then again making it so is a rather complex and time-consuming undertaking. So in the absence of alternatives, it is pretty easy to say “if you are so smart where is your model?”

I have tried to enhance my understanding of the CIMS model for this very reason. My initial assumption was that the model was simulating changes in behaviour due carbon pricing (whether a carbon tax or cap-and-trade), so the key question or uncertainty was around the elasticities of response to the price. But I was wrong – that is not how the model works.

Instead, the CIMS model is based on the notion of capital stock turnover. That is, at certain points in time corporations replace and upgrade their machinery and equipment, and households replace their furnaces, hot water heaters and cars. By estimating cost curves based on available or likely-to-be-available technologies the CIMS model then can insert various paths of carbon prices that change the nature of the decision when it comes time.

I’m simplifying here and still have not seen the blueprints behind the model. But what is fascinating about this approach is that it highlights a major avenue by which we can reduce our carbon emissions: the steady shift over the course of decades to less carbon-emitting technologies. This is an important insight.

On the other hand, the model will not be able to capture changes that result from new technologies that are not around yet, nor will it be able to handle deeper structural changes such as urban design plans that facilitate greater walking and bicycling if people can live closer to where they work. But if anything this means the model understates the potential for GHG reductions, perhaps not a bad thing.

The recent Suzuki report is actually somewhat different. It starts with CIMS and incorporates it into a computable general equilibrium (CGE) model. And the analysis tests scenarios of carbon pricing plus various revenue recycling options. Personally, I am pretty skeptical of CGE modelling. It tends to reflect the assumptions of the person doing the modeling in the choice of parameters. And there is a lot of guesswork involved where we to not have a clear empirical understanding about elasticities, functional forms and so forth. Plus assuming perfect competition in all markets is highly problematic when compared to the real world.

Of course, it is easy to criticize from the sidelines. One of the authors of the report, Dave Sawyer, is going to be on a PEF panel on carbon pricing this June at the Canadian Economics Association meetings in Vancouver. So we can get into it more then! My read of the paper is that they authors understand the nuances but one needs to model this somehow.

Back to Sir Terence, who says:

Different things happen, depending on the policy. If the government used 14% of the carbon tax money to subsidize green energy and carbon capture technology, gave 40% to industry and used the remaining 46% to reduce payroll or income or other taxes, then there might be offsetting benefits. But not enough to offset the losses from the tax, which would still leave the economy in the red by upwards of $45-billion a year, a figure that increases annually with the loss of compounding growth.

The Suzuki report spends a lot of time ventilating the idea that there might be a “double dividend” in a carbon tax. Bring in a tax, the government recycles it back to taxpayers, and then everybody collects an environmental dividend. In the end, though, the report concedes (most clearly in a footnote) that there is a growing consensus in economics that the prospect of such a double dividend is “weak.”

The Suzuki-Jaccard study is premised on the theories of Arthur C. Pigou, a 20th-century economist who believed you could use taxes to change behaviour. Mr. Jaccard calls his tax the “Pigovian carbon price.” The trouble with Pigovianism is that it requires revival of the ancient and discredited economic art of central planning, using taxes as substitute for prices. But a tax is not a market price. It’s a bureaucratic planning device–as Mr. Jaccard’s elaborate economic modellings prove. And it’s no way to run a market economy.

What’s interesting about this critique is that rather than specify a percentage of GDP, Terry chooses to go with a big-sounding number to bolser his case. But while $45 billion is big to you and me, the Canadian economy is about $1.5 trillion, and will be closer to $1.8 billion in 2020 (real terms, 2003$). Thus, $45 billion is about 2.5% of GDP, a one-time hit that means we hit a certain GDP a year later than we otherwise would have.

But Corcoran is disingenuous as he chooses the worst case of all scenarios modeled and at the highest carbon price. Overall, the scenarios average out to a one-time cost in the neighbourhood of 1% of GDP (in fact most of the scenarios have results that cluster closely together and the one higher cost scenario is the one chose by Corcoran). In fact, the scenario cited by Corcoran above is one of the 1% of GDP scenarios; it is a lump-sum transfer that has the worst outcome of 2.5% of GDP at a carbon price in 2020 of $200. Even though this is the “outlier” the difference between a 1% reduction in what GDP would have been in 2020, and a 2% reduction, does not keep me awake at night, especially if the latter led to a better distribution of income (which other distributional modeling by the Congressional Budget Office and others finds is the case).

Ultimately, we would want to set all of this against the costs of doing nothing, which as the Stern Review found, is greater than doing something.

Finally, Corcoran’s appeal to a “market economy” is strange given that economists argue that GHG emissions are an externality and that by internalizing it the price mechanism would work better in terms of resource allocation. What Corcoran is defending is not a market economy but capitalism as we know it.

8 comments

  • Some excellent points Mark. Funny that you post this story today as a major report came out today from Canada’s Environment Commissioner, who had a lot of negative things to say about successive Government’s response to climate change.

    I feel somewhat vindicated, as one point that I have been harping on in this blog with regard to climate change is the relative lack of information available on the various dimensions of the economics and the environment. I do recall a quite scathing review of how little we information we collect on the environment in one of these posts.

    This lack of information was one of the main issues that the report of the commissioner raise issue with. Typically from a statistical program perspective we speak of data gaps and other such short falls within a said field and its quantification requirements. While according to the commissioner’s report, we are not talking gaps here, we are talking canyons. How does one plan and implement change with a virtual lack of monitoring or confirmation ability.

    Which brings me back to the current state of modeling within this field. How can we expect to have efficient models when the data for tasks is virtually non-existent. I know I will get a lot of flack for making this statement, but I am a data guy and I have been close to the production of data for a long time and the modeling of various complex constructs at a societal level. I will freely admit that I am still a bit of an environmental newbie, but essentially who isn’t.

    I respect these modeling endeavors but I would hope that we could all agree and push, like this commissioner’s report has recommended, for a much needed rethinking on this dimension of the environment.

    Task force for renewal and rebuilding of information and statistics within this field is a necessity. It must go hand in hand with action and provide us with the ability to assess.

    pt

  • Good point on the data needs for modelling. I always say that all modelling is crap (especially the stuff I do cause I know the warts), but what did we learn? This tends to be the best way to provide policy advice. Keep you eyes off the numbers and look to the learnings. But then again, people so love numbers that it is hard to keep this focus.

    And Marc thanks for pointing out Corcoren used the highest scenario, I had not looked closely at what he said. His use of the highest number possible highlights the danger of modelling I mention above. Our approach in the Suzuki report was to present a range of outcomes to compare low and high carbon prices. This approach then lends itself to someone taking the highest number and using it for distortionary reporting. But this danger is outweighed by the benefit — that the modelling shows that the outcomes (preferred policy) holds at all emission prices, and simply good policy is good policy regardless of stringency.

  • Above we have three competiting ideas – are we expected to favor one over another ? To do that would miss the oppertunity to take ALL the information and points made , and to come to a concensus plan that will most likely be better than any one of the plans .
    There can be no denial that a Carbon Tax will hurt the cash flow of moderate and lower income Canadians most of all . Just one point – many live outside urban areas and have no choice but to drive to work . Many can’t afford the newer fuel efficient car – so they continue on with the fuel guzzler . Many of these same folks heat with oil as natural gas doesn’t flow along the country road they live on in most of Canada. Thus another reduction in disposible income due to the carbon tax on heating oil . These are only two of the real problems that will surely affect these Canadaians from a Carbon tax . There are many more ways the tax will affect disposable incomes negatively .
    I have been promoting a federal plan that would see a mass change of home , business heating and domestic water heating to geo thermal heating assisted by the sun when it is available . Much like there was rural electrification over much of the country early in the 1900s . A mass plan will bring the costs asociated down a great deal . I’ll not go into details herein about how that would be financed , but I will say that changing to this type of heating will increase the disposible incomes of lower income earners in canada , as it will for all earners . People being what we are , will spend some of that , while others will now be able to send children to University or some such other place of higher learning . Some might be able to put some aside for retirement .
    And yes we have a scheduled plan to rid the country of gas guzzling older cars and trucks . Real plans for real Canadians .

  • Terence Corcoran’s distinction between true market prices and “centrally-planned” prices (apparently anything subject to any kind of commodity tax) is ridiculous. It supposes an ideal of an absolutely free market in which it would be a sin for government to alter relative prices in any way. If it is sinful for government to alter prices by a tax, what about the much more direct interference it causes when it actually bans a potential product or service ? And if government should not ever ban a product or service, then we could, I suppose, resume the slave trade, or tolerate organized burglaries (conducted by publicly-listed “burglary corporations” perhaps) , contract killings, sale of disguised poisons etc. Perhaps the Mafia or Al Qaeda could list themselves on the NYSE !

    No efficient market could exist in that kind of state of anarchy, as Adam Smith (and more recently) F.A von Hayek, George Soros and Warren Buffet, hardly socialists any of them, have made so clear. Civilized societies have standards, and one of them is (or ought to be):

    “Thou shalt not help thyself unreasonably from the global ecological commons of natural capital”

    Governments “interfering” with relative prices through, e.g. carbon taxes, are simply looking for an efficient, market-friendly way to save buccaneer capitalism from its own baser instincts, and thus itself, from itself. In so doing, it may save the rest of us from the kind of privately rational, collectively irrational “collapses” that Jared Diamond described in his well-known book.

    I don’t believe democratic constitutionalism gives us a mechanism for making collective choices that is perfect, or that is consistently superior to market allocation in all situations. But in exactly the same way as it grossly inefficient to try to supplant each and every market allocation process with a government allocation process; it would be equally inefficient for government to refrain from any act that could possibly influence relative prices. That is a recipe for anarchy – and only very primitive markets, and a very primitive economy, can exist in a truly anarchic society.

  • Definitely D.Wilson, government policies that “suggest” to citizens to adopt lower footprint consumer goods and habits than they otherwise would, need to be crafted so they don’t target those on the low income spectrum disproportionately. Being green is societally beneficial but not at the expense of transportation, food and other necessities. That problem was addressed in B.Clinton’s 1998 Kyoto plan: http://usinfo.state.gov/journals/itgic/0498/ijge/gj-02.htm
    Somewhere down the middle of the article a $3 billion annual federal fund is mentioned to assist low income earners with buying Energy Star appliances and such forth. Unfortunately, some theocratic Republican level of the US government cancelled B.Clinton’s Kyoto plan. The decade old idea is also part of the Liberal’s environment platform, from what I remember nosing around their website.

    This is alot being asked of environmental economists by the (in many cases unknowing) oil lobbyists: to rewrite capitalism. Those who really know economics know GDP measures an economy’s income statement and not its balance sheet, its P/E and not its book value.
    Underlying economic, ecological qualities like regular weather patterns, stable sea levels and known growing seasons, aren’t addressed in GDP. Now that North America’s failure to elect governments amenable to mitagating climate change is exposing these “hidden” environmental benefits as novel “costs”, it is all of a sudden the eco-freaks impetus to explain and account very difficult overlapping social and physical fields. In reality it is oil lobbyists (who are unwilling to capture renewable energy sectors and don’t want to see energy conservation; here the global oil industry functions analogous to the American health care system by overprescribing power) and rich people (who will inevitably see their tax-rates steepen) who should take the time to learn how externalities work, and how 22nd century economics works, as they are the primary obstacles to addressing global warming and the primary reason we need these new economic accounting systems sooner rather than later.

  • Good Points Phillip,

    Can we ever design a capitalism that will account for the environment in a means that will provide us with a stable footing to tread ever so softly on the face of the planet with the weight of our needs and wants. That little biosphere is but just a slim little glimmer, separating being and knowing from nothingness. Is it a robust enough that it will never fall no matter how hard we pound on it with our capitalist/communist/socialist economic sledge hammers.

    You are right though imagine expecting a whole new system of accountability having to be built into almost every transaction of valuation that will be required to meet this challenge head on. Similar to a market determined or centrally planned valuation, it is quite the complex task of devising such a system.

    I am not saying it cannot be done, but dragging along the powers that be, kicking and screaming every deniable inch of their way, with their deep pockets filled with all the gold is making the task that much harder, for the rest of us for sure.

    I think that similar transformations within our history should be looked at with some powerful microscopes for guidance.

    If you are going to use markets as the model recall that it all starts by somehow commodifying the object. Recall what that has done to labour. Stripped it of its very essence and changed it for most into something they would rather not be. (working their ass of every day for a pittance, if they are lucky)

    So what will those forces do to nature, most likey the same. Essentially that is how we got here in the first place, commodifying nature or land as you would have it. Kind of a bit of a circular argument I guess. Recursion is something that one does have to admire, in a sense, but hopefully one day we get over our fascination with it.

    Pt.

  • Good Points Phillip,

    Can we ever design a capitalism that will account for the environment in a means that will provide us with a stable footing to tread ever so softly on the face of the planet with the weight of our needs and wants. That little biosphere is but just a slim little glimmer, separating being and knowing from nothingness. Is it a robust enough that it will never fall no matter how hard we pound on it with our capitalist/communist/socialist economic sledge hammers.

    You are right though imagine expecting a whole new system of accountability having to be built into almost every transaction of valuation that will be required to meet this challenge head on. Similar to a market determined or centrally planned valuation, it is quite the complex task of devising such a system.

    I am not saying it cannot be done, but dragging along the powers that be, kicking and screaming every deniable inch of their way, with their deep pockets filled with all the gold is making the task that much harder, for the rest of us for sure.

    I think that similar transformations within our history should be looked at with some powerful microscopes for guidance.

    If you are going to use markets as the model recall that it all starts by somehow commodifying the object. Recall what that has done to labour. Stripped it of its very essence and changed it for most into something they would rather not be. (working their butt off every day for a pittance, if we are lucky)

    So what will those forces do to nature, most likey the same. Essentially that is how we got here in the first place, commodifying nature or land as you would have it. Kind of a bit of a circular argument I guess. Recursion is something that one does have to admire, in a sense, but hopefully one day we get over our fascination with it.

    Pt.

  • The CIMS model suggests we should be looking at CCA incentives instead of cap (and trade) systems or carbon taxes.

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