Shellenberger & Nordhaus echo flawed economic assumptions
I just finished reading Shellenberger & Nordhaus’ latest, and while I realize I am a bit late to the party, I think they say some fascinating things — perhaps not for the reasons they intended.
S&N manage to succinctly distill an awful lot of the ideas that are core not only to policy debates on carbon, but to policy discussions of any major change to the economy. Understanding these biases is critical to understanding why S&N write what they write, but also why they are so deeply wrong.
I recently joked to an economist friend that economics is the only discipline where you can get fired if you admit you are unable to predict the future. The comment has too much truth in it to be particularly funny, though. We not only have heaps of economic models out there (on the basis of which we make massive policy decisions), but we also have heaps of evidence that the predictive efficacy of the models is awful. From Laffer curves to future costs of SO2 tradable credits, the world is awash in economic predictions that were proven grossly wrong — yet we keep making decisions based on the same set of core assumptions.
The irony in this is that the way to get a Nobel Prize in Economics seems to be to prove that classical economic theory is flawed (see Tversky, Solow, etc.). Yet we keep using it, on the basis, so far as I can tell, that we might as well until something better comes along.
I should make it clear that I’m not hostile to economics. It does a great job at providing a narrative to make sense of historical events — just a lousy job predicting future events. In Consilience, E.O. Wilson differentiated between the sciences and the pseudosciences by noting that only the former are verifiably predictive. By this definition, economics is a pseudoscience. Arguably, so is much of medicine, and this is fine so long as the discipline is honest enough to acknowledge its limitations. My beef with economics is that it keeps on dogmatically asserting the accuracy of its crystal ball in spite of all available evidence to the contrary.
So why does this matter to Shellenberger & Nordhaus? Four reasons:
(1) They implicitly presume that all futures are known and testable.
This is implicit throughout their work, when they assert what prices will have to be to lower carbon and what technologies will participate. But since when are all futures known? Indeed, much of the most interesting work going on in economics right now focuses on the psychological and sociological drivers behind individual action. (Softer than econometric modeling, to be sure, but vastly more accurate — witness Tversky and the behavioral economics crowd.) Consider this gem from Jeffrey Luke:
Individuals have a natural tendency to choose from an impoverished option bag. Cognitive research in problem solving shows that individuals usually generate only about 30 percent of the total number of potential options on simple problems, and that, on average, individuals miss about 70 percent to 80 percent of the potential high-quality alternatives.
This is both insightful and obvious. Next time you go out to dinner, try to imagine what choices you’ll have on the menu and what you’re going to pick. Compare that to what your choices actually are and what you actually eat and you’ll get to Luke’s 70% failure rate. Now expand this to the much larger question of what technologies and approaches society will select in response to a carbon price signal, and it becomes obvious how deeply flawed any prediction based on that impoverished option bag is likely to be.
(2) They claim expertise they lack.
They write that “technically, there simply do not exist the low cost, low carbon technologies that could be quickly brought to scale to replace carbon intensive energy sources.” How the heck do they know this? How does anyone know this? Again, we’ve got that impoverished option bag. Here’s a great example: I am willing to bet that we could find a virtually identical quote in the late ’60s / early ’70s from some economist who concluded that Rachel Carson and her crazy hippie followers were delusional. (Perhaps someone can find one?) And here’s a great statistic: If the U.S. still had the same energy intensity (Btus of primary fuel per dollar of GDP) that we had in 1970, we would presently use three times as much primary energy as we actually use today. (Thanks to the folks at ACEEE for this great calculation.) This makes energy efficiency by far the most significant source of new “load” over the past three decades. I challenge you to name any economist this side of Amory Lovins who predicted anything close to that potential. Outside of Skip Laitner at ACEEE, who is seriously talking about our “strategic energy efficiency reserve” as a resource moving forward? No one — and yet we are making policy decisions as if these options don’t exist.
(3) They provide an opening for my latest favorite joke.
It seems to be implicit in much of their writing that carbon capture and storage is going to have to play a major role in a carbon-constrained world, and since CCS is really expensive, that means carbon control will be really expensive. This is as logically bizarre as it is ubiquitous, and yet (outside of Gristmill, at least) we keep having this same tedious conversation. Sing with me folks: “just because something is expensive doesn’t make it good!”
Okay, so here’s my joke. I was recently at an energy conference in Houston, having that exact same conversation with a guy who had a small consulting business to help companies hedge energy price volatility. He was also helping them hedge carbon, which he figured was eventually going to have to be priced at $100/ton, since below that point, CCS didn’t pencil out. Try as I might to convince him that his logic was flawed, he kept clinging to the number. So finally I cut him off and said, “Look: if you paid me a million bucks, I might have sex with a goat. But that wouldn’t make it a good use of a million bucks.” Needless to say, that killed the conversation, but we all laughed. My own blue humor notwithstanding, it is exactly the same with the CCS nonsense. Get over it.
(4) They assume that carbon control is incompatible with economic growth.
As I’ve said many times, this is totally, grossly flawed, for the simple reason that it assumes that energy markets are economically optimal. They aren’t even close … ergo, we can get massive carbon savings concomitant with drastic reductions in energy cost. The electric sector is half as efficient as it was in 1910, thanks to our goofy regulatory model, so we could slash its emissions and costs in half (and this is the single biggest source of both in the economy) just by deploying 100-year-old technology. Efficient, my butt. Here’s another source. The Arizona Climate Change Advisory Group is serious about climate change, and they’ve got a much less impoverished option bag. They looked at all the technologies out there to control carbon and found that meeting their commitments would an average cost of negative $12.74 a ton. Oh, and it will create 285,000 jobs in the state as new businesses rise to deploy all those low carbon, revenue-generating technologies. The example is far from atypical. As Ken Colburn of Symbiotic Strategies has pointed out, the states that are actually doing something about climate change right now are consistently finding that carbon reduction (done right) has a net negative cost, and the total NPV worldwide in present dollars is in the neighborhood of $1 trillion. This completely changes the game. If China doesn’t want to participate, fine — we’ll just take our manufacturing jobs back as our energy costs fall. The economic benefits serve only to double the imperative to act — but first we have to get beyond those impoverished option bags telling us that the costs of action are too high. To be perfectly blunt: Shut up.
One last point. I do accept S&N’s core existential question. When they write, “will green groups transform themselves into institutions motivated by a vision of prosperity and possibility? Or will the remain grounded in the the politics of pollution and limits?” I agree it is a good question. The environmental movement has for too long had a knee-jerk reaction to economic growth, to its great detriment. But I’m not sure it matters. Dow and BP have both made public statements indicating that setting internal goals to reduce carbon created hundreds of millions of dollars of shareholder value. Our company is doing the same. If the green groups get on board and give their imprimatur to those efforts, so much the better — but the economic incentive is going to keep that train rolling forward regardless.