On the Economics of Climate Change Mitigation

2014 is Setting a Global Temperature Record

NOAA’s National Climate Data Center has now published its global analysis for September 2014. Globally, the first nine months of 2014 tie with 1998 and 2010 as the warmest such period on record. If the world continues to post temperatures that come in as much above average as has happened over the first nine months, 2014 will be the warmest year on record; as it is, the 12 months from October 2013 to September 2014 is the warmest 12 month period ever recorded. Yes, Virginia, climate is still changing, no matter what the weather in central Ontario has been like.

 

And, while weather is not climate, NOAA has just published weather maps showing a generally milder winter in North America. Of course, the maps, being American, show weather patterns that magically cease at the Canadian and Mexican borders. We Canucks are used to having to interpolate.

Maps for temperature (left) and precipitation (right) during December through January 2015, showing the probability of being warmer or cooler, wetter or dryer than average. If correct, my winter should be back to normal or a bit warmer, and dryer than average. I hope so.  Images courtesy NOAA.

The Changing Pattern of Climate Change Discussions

It used to be that discussion of climate change began with the physics of greenhouse gas effects on temperature, and then moved on to likely impacts on environment. The goal was to explain the processes and likely ramifications, before moving on to suggest that the coming changes would have major impacts on the quality of human life. That was largely the approach I took in writing Our Dying Planet. Discussion of this type continues here, in the media, in countless books, films and other formats. Our knowledge concerning the processes warming the planet is growing. So too, our understanding of the environmental and human impacts, and it is important that this new knowledge be disseminated widely.

In the early days, there was a perhaps naïve expectation that once people appreciated what was happening, self-interest would ensure that plans would be made and action taken to stem the worst of the changes likely to be coming. That logical application of common interest has been far slower and far less effective than many may have originally expected. The long and sorry parade of expensive UN climate change conferences that seem to yield only tiny increments of progress attest to that.

When national leaders show that they do not take climate conferences seriously, it adds to the inevitability of failure. It also reveals the pure self-interest that drives most international negotiations. Cartoon © Graeme MacKay, Hamilton Spectator

Governance, particularly on a global scale, is not a rational, science-based process of decision-making for the common good. As a consequence of the lack of real progress, there has been growing discussion of how to get the message out more effectively, how to reach that sizeable group of humanity that seems unconcerned or simply denies the messages being delivered from the scientists, and how to bring about the global-scale actions that are needed. Countering these efforts, there has been a growing push-back in the form of climate change denial – a more-or-less coordinated effort, but probably not a tightly integrated conspiracy, to argue that the science is in error, being deliberately misused, or is beholden (for some obscure reasons) to nefarious hidden agendas designed to destroy our economy and civilization; and to conclude that under these circumstances it would be wisest to seek more confirmation before taking any actions that might prove ultimately unnecessary or counterproductive.

 

As an ecologist, I began to look at climate change once I recognized the impacts it was having on my own favorite ecosystems, and because I understood the ramifications likely from increased warming to changed climate, to changed ecology, and to changed quality of life for humanity. I now find myself wondering about why so many people have not responded to the message of climate change, about how to change perceptions in a community, and about how political and business decisions are made in this messy, complicated world we all live in. Because, over the years, the underlying message of climate change has only grown worse – we are bringing about substantial changes to the world’s climate, changes that will persist well into the future and have immense consequences for our lives.

 

Just imagine what would unfold if humanity, and our economic activities were magically to be removed from the planet tomorrow morning. The changes we have caused through our GHG emissions would cause global temperature to continue to rise for most of this century, cause sea level to continue to rise for at least two centuries, and cause ocean pH to continue to alter in substantive ways for perhaps a thousand years! Such are the time lags in the planetary system. If we remain on the planet, as I am sure we will, we will have to live with these, and additional changes due to our continued releases of GHGs. If we are wise, we will be working to reduce our impacts as quickly as possible because our civilization is best suited to a planet with a climate, and an ecology like the one it developed in over the past 5000 years. We have enough difficulties bringing a reasonable quality of life to the billion poorest people on the planet without having to battle with the disruptive effects of a changing climate.

So Let’s Talk about the Economics of Climate Change

On Thursday 2nd October, Saskatchewan premier Brad Wall formally opened the Boundary Dam coal-fired power plant fitted with carbon capture and sequestration (CCS). The plant had commenced operation late on September 30th. With significant ($250 million) Federal government support, SaskPower, the provincially-owned power generation company spent in the vicinity of $1.3 billion to renovate one of four generation units at the 45 year old coal-fired power plant, extending its lifespan another 30 years, and upgrading it with CCS capability. CO₂ is separated from other gases (chiefly nitrogen and water vapor) in the plant’s exhaust steam, pressurized and then either stored underground, or shipped by pipeline to Cenovus Energy Inc which is using it for enhanced oil recovery (EOR) at nearby fields. SaskPower expects to capture 90% of CO₂ released, or about 1 million tonnes CO₂ per year.

Unit #3 of SaskPower’s Boundary Dam coal-fired power plant is now renovated and fitted with CCS. It produces 110 megawatts of power using lignite coal, stripping out and compressing 90% of the CO₂ emitted in the process. It’s expected to sequester 1,000,000 tonnes per year of CO₂ deep underground.  Photo © SaskPower.

While it is good to see Canada leading the world, for once, in the struggle to keep CO₂ out of the atmosphere, it’s important to note that this venture is barely profitable, even with the CO₂ that is captured being sold to Cenovus for use in oil extraction. Apart from anything else, the energy required to capture, compress and bury the CO₂ represents 20% of the output of the plant. Indeed an uncharitable climate Grinch would say that this expenditure has used lots of government funding to extend the life of a coal-fired power plant by 30 years, and facilitate the extraction of additional oil through EOR – not exactly a way to wean us off the use of fossil fuels. A more favorable perspective is that somebody needed to pilot the process at scale, and Canada has done that. Future technological innovations may make the process more economic, and Canada may even gain on patents on the technology as CCS is applied to more coal-fired plants. It’s nice to see our Harper government engaged, in even a small way, in something other than the endless advertising of our ‘ethical’ oil, and stripping away of any and all regulations that might slow the activities of our rapacious fossil fuel industry.

 

SaskPower may have been driven to the decision to pioneer CCS because it had a need to continue to generate electricity, coal sources nearby, no other source of energy available in the vicinity, and an oilfield nearby using EOR (in which gases injected underground force residual oil from a formation) that might be a client for the CO₂ recovered. Indeed, sale of the CO₂ for use in EOR appears to be the practice in other CCS plants being developed in the US, and a necessary component in keeping the economic cost of the power generated within reasonable bounds. CCS may well become an important process to minimize the negative impacts of coal, but it’s not really there yet.

 

Notable at the opening of the Boundary Dam project were some comments by Premier Hall. He argued for the continued use of coal because of its relatively low cost. He suggested it was time to stop talking about carbon taxes. And he argued that we should be looking for technological solutions to the climate problems posed by coal, rather than seeking to replace coal with more environmentally sustainable power sources. Sounds very much to me like a politician who has been totally captured by the fossil fuel industry, and that leads to my next topic.

Getting Ourselves off Fossil Fuels is Going to be Just as Difficult as Quitting Smoking

The cost of the Boundary Dam project was borne by the Federal government ($250 million) and SaskPower, a Saskatchewan crown corporation. Governments have also invested heavily in CCS projects (most of which are now dead in the water) in Alberta. Industry has been less active. With no regulations governing climate impacts by the oil and gas industry in Canada, and only weak regulations on coal (existing plants can continue to operate at no cost for emissions), there has been little incentive for fuel producers or power generators to invest in unproven technologies to reduce emissions.

 

More generally, that is the reason why knowledge about the effects of GHGs on climate has not led to a substantial effort by industry to shift towards environment-friendly solutions. So long as emitting CO₂ or other GHGs carries no financial penalty, those parts of our economy that do emit GHGs will continue to do so, while paying lip-service to the idea of mitigating climate change. So long as governments are heavily committed to ensuring their economies do not collapse overnight, which usually translates as being committed to help large currently profitable portions of the economy continue to be profitable, they also will talk about mitigation, but spend only small amounts towards this goal. The Canadian governmental spending on CCS technology is more about keeping the powerful fossil fuel sector profitable than it is about climate mitigation. It’s one part of a program of support for the energy sector which includes the often promised but long-delayed “made-in-Canada” regulatory regime for our oil and gas industry.

 

To be fair, the early discussion around climate change avoided talk of economics, partly because many of the environmental scientists concerned about climate change feared that shifting our economy away from dependence on fossil fuels was going to be a very expensive proposition. Better to avoid talking about the costs. But the exciting news that has not been getting out very well is that as time has passed, the cost of altering our economies has actually become a lot less than was initially supposed. In its recent report, Better Growth, Better Climate, the Global Commission on the Economy and Climate states that globally some $89 trillion in new investment in infrastructure – roads, rail, power, water and sewage lines, telecommunications, and so on — will be needed between now and 2030 whether or not we mitigate climate change. They estimate the additional cost of renewing our infrastructure in ways that permit moving to a 2^oC warmer world will be just $4.1 trillion, or 5% of what must be spent anyway. Their analyses even show that in the electricity sector, a low-carbon shift in energy sources could net a benefit of $1.8 trillion between now and 2035, primarily because renewable technologies have lower operating costs and longer lives. This $1.8 trillion net benefit is based on a full accounting, including some loss of value in stranded fossil fuel assets (the fuel in the ground that the energy sector was planning to exploit). We’d actually be a trillion dollars better off if we transferred electricity generation away from using fossil fuels!
Given that the global economy is worth around $80 trillion a year, that extra $4.1 trillion investment over 20 years amounts to 0.25%, one quarter of one percent of economic activity per year. I think we can manage to find the savings to afford that investment!

 

Better Growth, Better Climate is a comprehensive report that builds in many ways upon the Stern Review of 2006 (Nicholas Stern is co-chair and the lead economist). It provides a convincing argument that not only will mitigation of climate change not be a drag on the global economy, full mitigation in a move towards at most a 2^oC increase in average temperature is completely compatible with a growing global economy. The environmental consequences of such a transition, in addition, confer many non-economic benefits on the lives of people across the globe. This is a far more optimistic tale than was being told back when we were first discovering the risks inherent in climate change. But there is an important caveat – this is still a major transition to a very different economy, and some individuals and corporations are going to have to be nimble to avoid being losers as valuations of such things as farmland, forests, oil or copper deposits change. Either be nimble, or fight to delay the transition.

Climate conferences follow one after another, making tiny advances, as if there is no urgency to solve this problem. Cartoon © Nicholson, The Australian.

The Commission concludes its report with a 10-point Action Plan to bring about the transition that is required. The 10 points are all reasonable:

1. Accelerate a low-carbon transformation by integrating climate action and risk into strategic economic decision-making.
2. Create the confidence needed for global investment and climate action by entering into a strong, lasting and equitable international climate agreement.
3. Phase out subsidies for fossil fuels and agricultural inputs and incentives for urban sprawl.
4. Introduce strong, predictable carbon prices as part of good fiscal reform.
5. Substantially reduce the capital cost of low-carbon infrastructure investment.
6. Scale up innovation in key low-carbon and climate-resilient technologies and remove barriers to entrepreneurship and creativity.
7. Make connected and compact cities the preferred form of urban development.
8. Halt the deforestation of natural forests by 2030.
9. Restore at least 500 million hectares of degraded forests and agricultural land by 2030.
10. Accelerate the shift away from polluting coal-fired power generation.

 

The text amply explains what is meant by each of these, and why each is an important part of the whole. The Commission members clearly believe that by setting the situation out clearly, it should be possible for “national, sub-national and city governments, businesses, investors, financial institutions and civil society organisations” to each review the situation, identify the actions they need to take, and take them. The report notes the difficulties inherent in encouraging change of this magnitude, and talks repeatedly about the need for agreed international goals, firm national commitments (with transparent assessment of performance, and penalties for failure), and regulatory and other requirements to compel corporate action. However, the report offers relatively little in new insights on how to achieve these global agreements on targets and mechanisms.

 

The actions recommended in the Commission’s report are in many ways familiar already, and echoed in other reports on the climate problem. This also is encouraging. Released at the recent UN Climate Conference in New York, Tackling the Challenge of Climate Change, a report commissioned by the Republic of Nauru as Chair of the Alliance of Small Island States, covers many of the same points including the need for a price on carbon, and firm goals for individual countries and business sectors. It takes a more proscriptive approach, advising nations on what they should do now, while covering much the same ground, in less detail, as the more substantive document from the Global Commission on the Economy and Climate.

How Do We Motivate the Changes That are Necessary?

I would like to believe that reasonable leaders of nations, gathering together to consider what to do to solve an existential problem, and having read and thought about Better Growth, Better Climate, would recognize the urgency and develop appropriate goals and mechanisms which they would then put in place in their home nations. I’d also like to believe that good people always have great lives while bad people always are punished, that bad things never happen without a moral reason, and that the universe is somehow a moral place. But I learned some time ago that my world is not like this, and there are not any fairies at the bottom of my garden either. Sometimes people act out of pure self-interest, even when they have risen to positions of leadership, and the decisions they make are not necessarily the best ones that could have been made.

 

Western economies are powered by the energy sector, which is substantially based on use of fossil fuels. Major investors, whether the likes of Bill Gates, Warren Buffet, or major pension funds usually have significant holdings in the energy sector or other large parts of our economy – rail, other transport, auto industry – and few individuals are so magnanimous that they will willingly take big financial losses in support of the common good. Managers of pension funds and corporations have a duty to the shareholders to seek the best possible returns on investment, so they do not willingly take losses either. But the changes to the global economy that are required demand a radical reduction in the use of GHG-emitting fuels and other processes, and it is difficult to see how everyone can transition across to a decarbonized economy without anyone taking big losses. The Boundary Dam power plant has just had its life extended 30 years, and even the dirtiest of non-CCS plants have similar lifetimes. Shutting any of them down early means that some investors lose money. This is precisely why every report, up to an including Better Growth, Better Climate, has recommended loophole-free carbon taxes as one of the essential tools to ‘encourage’ economic change. And this is also why carbon taxes have been difficult to establish, and, in Australia’s case, get repealed with the election of a climate change denying government.

 

There are signs that we are now entering a very difficult time indeed. A move of capital away from fossil fuels appears to be starting. (I say ‘appears to’ because this may just be a function of the relative uncertainty at the present time, during a globally weak post-recession economy.) The more expensive fossil fuel projects, notably Alberta’s tar sands ventures, are seeing a number of project suspensions and cancellations. There is a nascent movement to encourage divestment from fossil fuel ventures that is beginning to have effect, particularly among universities and left-leaning individuals. Even Mark Carney, now Governor of the Bank of England, has been quoted talking about a ‘carbon bubble’ that increases the risk of fossil fuel investments – all those ‘stranded assets’ that can never be burned if we want a livable planet. At such times, we can expect heightened efforts to protect the status quo, increased climate change denial, denigration of any who would speak in terms of the need to make substantive changes, all surrounded by a swill of greenwashing advertising and PR. I personally am getting increasingly sick of the stream of advertising showing ‘clean as the day they were born’ power plants, bathed in impossibly blue light (thanks, Photoshop), under impossibly blue skies brought into Canadian living rooms by a combination of CAPP (Canadian Association of Petroleum Producers) and our very own Harper government. Real power plants do not look like that.

 

My favorite ad of this type at present is the one, from CAPP, which features David Deacon, of STT Enviro Corp. You can watch it on YouTube. STT Enviro Corp used to be called Stanco Projects, but it changed its name recently in the belief that “it’s important that our name and brand reflect our customers’ needs and our corporate direction”. It has as its logo, ‘the nuts and bolts of green’. STT Enviro Corp is a manufacturing company based in southwestern Ontario since 1977 which specializes in the fabrication of industrial scale storage tanks and silos. Their website claims that over 35 years they have installed over 1000 such tanks.

 

Mr. Deacon is filmed outdoors with lots of trees and occasional views of a lake, with frequent cuts to the inside of their facility, a wonderfully clean space filled with happy, well-dressed workers all busy designing and building tanks. For what? To hold the contaminated by-products of Alberta tar sands operations. Mr. Deacon identifies the tar sands (he says ‘oil sands’) as a great engine for innovation within Canada, and that is the core message of the video. The tar sands are good for us because they promote innovation by companies developing suitable storage for the mess they are making out in Alberta.

 

Now I wish Mr. Deacon well. But let’s try and imagine a world without the tar sands, a world in which we might still need innovative, industrial-scale containment, but a world in which we are not dumping CO₂ into our atmosphere. I think that would be a better world than the one we have. Promoting a messy fossil fuel development program because it spurs innovation in containment for its toxic wastes! I’ve been told a good salesman can sell anything – this seems to push the envelope.

 

And so, back to the question – how do we motivate the changes that are necessary? I recently read Thomas Piketty’s Capital in the Twenty-first Century, and have now moved on to Naomi Klein’s This Changes Every Thing. I am not sure that such reading is good for my health, but I am glad these books were written.

 

Piketty’s book does not concern climate change. He is interested in the tendency for capital to become concentrated through time so that a smaller and smaller fraction of people come to own more and more of it. He convinced me that the rich really are getting richer, and that the global economy seems likely to slow down. He also convinced me that the only way we will get back to political systems that invest in the public good – medical care, employment insurance, retirement benefits, public transport, public education – is to have a sufficient fraction of the voters demanding it. That prepared me for Ms. Klein.

 

Naomi Klein’s new book is about our continuing failure to act to remedy climate change. I’ve not finished it yet, but she is reawakening in me all the leftist idealism I had in the 1960s. Her thesis is that the only way the world is going to get climate change remission to the extent that is necessary is if a strong grass-roots movement develops to demanding it. A good climate is an important element of the public good, and waiting for the powerful to magnanimously provide it seems just as unlikely as waiting for them to do any of the things average people in the street would like to see. The first step in building that strong grass-roots movement may be to articulate why it is appropriate, in a civilized society, to have society provide common benefits that improve the quality of life of all. This is something that we used to believe, back when governments built public transport systems, established agencies to manage wildlife, fisheries and environment, and funded post-secondary education. It requires a major attitude shift in some communities, such as many parts of the USA, and Scandinavian countries may well be able to show the rest of us the way.

Greenpeace activist near Big Ben – we may have to change our politics to save our climate.
Photo © GreenBlog

There is a tacit assumption in Klein’s writing that it is the developed, western countries that are going to spearhead the shift towards a carbon-free economy. Certainly, if they do not go along with the shift, it will get stalled. While the need for a grass-roots movement seems especially necessary in the west, it may be easier to generate in other cultures, and ultimately the de-carbonization has to be global. And I am unclear about just how radical this grassroots movement has to become (perhaps I’ll have a clearer idea once I finish the book). Still, we are all standing around at the beginning of what could become a magnificent journey. It’s time to head out down the road.