Petrol prices and Greenhouse

In this week’s column, I took a certain amount of pleasure in being ‘right wing’ (ie pro-market) about petrol and ‘left wing’ (ie pro-collectivism) on greenhouse.

It surprises me how many people get caught up in the greenhouse denialist agenda. It’s not that scientific consensus can’t be wrong, or even that strong currents of ‘political correctness’ can travel within scientific and professional communities. Australians who challenged the medical consensus about stomach ulcers just got the Nobel Prize after a huge and pretty unnecessary fight about a medical consensus that was wrong and apparently impervious.

I don’t pretend to know the science of greenhouse, so I’m sitting on the outside, and occasionally scrutinising claims for how reasonable they seem to me. How reasonably they’re expressed, how prepared they are to argue the strongest of their opponents’ cases, rather than the weakest and so on.

In my later years as an undergraduate doing history I learned to my surprise that one can come up with pretty good assessments of who is on the level in expert debates even knowing relatively little There are probably a few reputable scientists left amongst the denialists, I’ve not come across any that seem calm, lucid and convincing. But I’d be happy to give up a percent or two of my income to begin to get some insurance against climate change.

Anyway, here’s the column.
__________________________________________________________________________

How high can it go?

Petrol that is.

Instinctively unable to believe our luck, we’ve been predicting the imminent exhaustion of our resources since the industrial revolution first took hold.

When you’re predicting a long way out you won’t have much to say unless you understand the fundamental logic of the problem.

Thus over two centuries ago Thomas Malthus argued that population grew exponentially (2, 4, 8, 16) whereas food production grew arithmetically (2, 4, 6, 8). In 1865 another great economist William Stanley Jevons focused on the issue of non-renewability. “Some day our coal seams [may] be found emptied . . . Our fires and furnaces … suddenly extinguished, and cold and darkness … left to reign over a depopulated country.” Malthus and Jevons may turn out to be right, but not anytime soon.

Someone who’s already wrong is the shameless self-publicist Paul Ehrlich. In the late sixties he predicted global mass starvation within a decade. As one prediction after another was falsified, he segued unblushingly onto the next predicted catastrophe.

By then economists were becoming much more optimistic, again appealing to the underlying logic of the situation. Julian Simon who subsequently proved himself almost as simplemindedly optimistic as Ehrlich was alarmist showed how well markets handled resource depletion problems. Technical innovation reduces costs, improves quality, finds and harnesses new resources and/or economises on the resources that remain.

Responding to Ehrlich’s comment “If I were a gambler, I’d take even money that England will not exist in the year 2000″ Simon famously challenged Ehrlich to nominate a basket of five commodities that would rise in real price over the next decade. Every one fell!

Even so, oil is the first major global commodity showing signs of exhaustion. US Government geologists have production peaking somewhere between 2021 and 2112. Meanwhile China and India’s demand surges as they more than quadruple the number of rich people on earth!

So where will it all end? First the good news. Like Simon says, those old pals, capitalism and technology will handle resource scarcity admirably.

Oil prices could stay high for quite a while. (I guess you were hoping I wouldn’t say that). That would slow our economies as we adjusted to the new scarcity. But adjust we would by reducing demand and improving the viability of alternatives both fossil fuel and renewable. And the alternatives will keep getting cheaper.

So I’m with Simon on resource scarcity. But the thing that really scares me is about too many resources, not too few in our atmosphere that is. While there’s lots of uncertainty about how much effect we might be having, it’s looking increasingly like greenhouse gas emissions from mining and using fossil fuel burning are changing our climate. And that’s a problem that can’t be solved by market forces until there’s the political will to ‘internalise’ the cost of greenhouse gas emissions by taxing or otherwise limiting them.

You wouldn’t think we’d need to wait till we’re certain we’re stuffing up our planet, before we’d sacrifice a percent or two in economic growth that means waiting another quarter or so to reach any given increase in our income to buy some insurance against climate change.

But a truly global agreement, which is what we need, is hugely difficult politically. It’s not made any easier by the intransigent sanctimony of developing countries wagging their fingers at the rich countries “You created the problem, you fix it” and the soft-headed credulity of those who swallow such nonsense. (Imagine exempting the poor from water restrictions in a drought!).

Then there’s the well-funded greenhouse denialist think-tanks on the lookout for any evidence, argument or anecdote that might raise public doubts legitimate or otherwise about the growing strength of the scientific consensus. Mr Ehrlich’s ridiculous predictions furnish them with excellent examples of how irresponsibly some environmentalists have prosecuted their case. (Some friend to the environment he turned out to be.)

So lots of uncertainty remains. As ever, in the long run, our luck will turn on the underlying logic of the situation.

Some people think our climate has natural inbuilt stabilisers. As CO2 concentrations and temperatures rise, greater plant growth could absorb lots of our CO2 emissions, neutralising the problem.

But as well as benign, stabilising ‘negative feedback’ like thermostat or the supply and demand of resources I discussed above there’s also the destabilising kind of feedback.

That’s ‘positive feedback’ like a microphone that’s held too close to a speaker or a hyper-inflation spinning out of control. As warming melts polar ice-caps, their smaller size reflects progressively less of the sun’s warmth back into space and so contributes to further warming and things go from bad to worse. You get the picture.

Who knows which kind of effect will dominate? But in the long term, though the pain you’re feeling at the petrol bowser might feel like a problem, it’s actually part of the solution for our economy and very probably our planet.

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Cameron Riley
2022 years ago

Couple of issues, nearly one third of the price of petrol is government taxes. It is far cheaper than the pump would have us believe. The common rationale for having petrol taxes is to reduce consumption and create cleaner fuels, yet coal burning for stationary energy pollutes far more than transportation, and there are no taxes on coal. So there are some contradictions there.

That being said, we dont pay the full cost of petrol at the pump. There is pollution to take into account, plus the military costs of making the Middle East/Russia/etc stable, there are also political costs. It has come down to the fact that much of our oil consumption is dependent upon several failed states in the Middle East like Saudi Arabia and Iran.

The atmosphere is absorbing more carbon and other pollutants that we are pulling from the gound and liberating into the air by burning fossile fuels. The earth being a complex system will try to self-dampen against this effect for as long as it can before fluctuating wildly out of control.

There is an argument for a nation building project to create alternative energy technology, in both stationary and transportation applications. Oil is super-super cheap, despite the oil shocks of the 70s and 00s; despite the taxes that governments (especially Europe) leverage on it. These costs have not changed that the car burns fossil fuels.

It is going to have to be a disruptive technology that replaces it, and that will only be done through either government funding R&D, some new type of tax free research bond, or some new kind of venture stock trading mechanism.

The other alternative is to pay the try cost of petrol which includes many of the external networking costs like the military expeditions, and the carbon, sulfide contaminants, ozone in the atmosphere. I would prefer to bet on the innovation of the technologists though, the increasing cost of petrol hurts disposable income, and in a consumer based economy that is not good.

John Humphreys
John Humphreys
2022 years ago

lol — the simultaneous “we’re running out of coal” and “we’ve got too much coal to burn” arguments have amuzed me in the past so it’s good to see you picking a side and sticking with it. :)

You say that it might be worth paying a couple of percent of growth now for some insurance. But perhaps it would be better (if we continue the analogy) to self-insure. That is, save our couple of percent and use it to pay fix the disaster when/if it happens. Or use it to fix other bigger disasters/problems.

I think coal energy will slowly decline in importance under a free market. Especially if people take a more positive view of nuclear.

observa
observa
2022 years ago

For all the SUV haters heretofore, proof that markets work and will fix your problem http://finance.news.com.au/story/0,10166,16808902-31037,00.html

Cameron Riley
2022 years ago

Observa, SUVs in the US are subsidised through the tax system as commercial vehicles. This is why lawyers drive round in Hummer H2s, it is a commercial vehicle for their practice. it is doubtful whether they would be as popular as they are without that tax subsidy.

The air quality in Washington DC is so bad that they are near to losing federal road funding. Then again, I have two V8s (sports cars), but they dont do many miles over a year, and get 30mpg anyway.

observa
observa
2022 years ago

To the extent that tax breaks ameliorate the overall running costs of vehicles that higher fuel prices produce, naturally this has had an impact on vehicle choice. Rising fuel prices are having an impact on these inherited choices though. Personally I have a preference for total reliance on resource taxing, with no exemptions whatsoever. It’s then up to any user to decide how big and how thirsty their use of personal transport resources should be under such a regime and I have absolute faith the market would respond to that resultant demand. Taxing labour via income tax and payroll taxes has naturally caused an inherited substitution effect towards fossil fuel intensive capital. The $64000 question is- How much?

Ken Miles
2022 years ago

“I think coal energy will slowly decline in importance under a free market. Especially if people take a more positive view of nuclear.”

I would expect it to be the opposite. In the absence of pollution taxes/other regulation, coal absolutely destroys nuclear on a cost per energy basis.

There was a recent MIT study on nuclear power (can’t remember the citation off the top of my head) which found that there would need to be a very substantial carbon tax before nuclear became comparable in price to coal.

Of course, a substantial carbon tax is my solution to reducing the effects of global warming.

observa
observa
2022 years ago

Even if you don’t accept GW, you still have to face the increasing health costs of burning fossil fuels as well as their increasing costs of exhaustion. Cheap oil won’t easily be replaced by the dream of shale oil
http://www.econbrowser.com/archives/2005/09/the_question_ab.html Even more health problems.

Our immediate hike in petrol costs is explained here
http://think-3.blogspot.com/2005/05/wsj-oil-industrys-refining-squeeze.html

Ken Parish
Ken Parish
2022 years ago

The MIT study I think Ken Miles is referring to can be found at http://web.mit.edu/nuclearpower/ (full text available in PDF format). On the front page of the site is the following passage:

“There is no question that the up-front costs associated with making nuclear power competitive, are higher than those associated with fossil fuels,” said Dr. Moniz. “But as our study shows, there are many ways to mitigate these costs and, over time, the societal and environmental price of carbon emissions could dramatically improve the competitiveness of nuclear power.”

Ken Miles
2022 years ago

That’s the one. Thanks Ken.

From the study, it would take a carbon tax of about $100/tC to make nuclear comparable to coal. With these levels of carbon taxes, wind and geosquestration would be very attractive.

Some technological improvements could significantly reduce the price of nuclear, however, I suspect that these improvements are a bit unrealistic (such as “Reduce cost of capital to be equivalent to coal and gas”).

I’d suggest whacking on a carbon tax, and if the nuclear engineers can pull it off, full power to them.

observa
observa
2022 years ago

“Of course, a substantial carbon tax is my solution to reducing the effects of global warming.”

There’s a lot more to it than that Ken. From physics we know the amount of work(W) done to turn our natural environment to our own ends, depends on the force(F) overcome which is largely gravity but also frictional resistance multiplied by the distance(S) and divided by the time(T) taken. Being somewhat lazy, greedy bastards we want the fossil fuels to move larger and larger chunks of the environment pronto, over given distances. There are 2 problems here- disappearing environment and faster disappearing fossil fuels. We need to tax both in order to increase physical human output, and at the same time make all resource use more precious. The quality cf quantity tradeoff that Pirsig hankers after in Zen and the Art of Motorcycle Maintenance.

Such a Rawlsian Third Way shift to a new constitutional marketplace(via its agreed taxing regime)would indeed see some tectonic shifts in resource use and its distribution. The physically fit and strong would inherit the maximum share of the more precious resources. The physical doers, movers and shapers rather than the counters, measurers, redistributors and philosophers would inevitably earn the greater share of the earth’s riches. The latter group are naturally going to baulk at that and want to retain their accustomed share. Will they want to sweat for their supper like the former or whine for it do you think? That would be the true test of many of these armchair green socialists at present.

Ken Miles
2022 years ago

Observa, work equals force times distance. You’ve got it mixed up with power which has a time component.

Ken Miles
2022 years ago

And onto the more substantive part of your comment, how about using the revenue raised from the carbon tax to increase the tax free threshold, so the poor can still partake in said resource consumption if they so desire. Whereas those who reduce their consumption can enjoy the extra income.

And also, I suspect that you’ve got your order mixed up with who gets what.

observa
observa
2022 years ago

Yeah you’re right. Been a while since school physics. It is our command of that power that is changing our environment so rapidly of course. We can restrain and harness that power any way we choose. We can carry on with our ‘science of muddling through’inherited power relationship regime of course. OTOH we may decide that choice is no longer relevant to our present circumstances and understanding and needs a radical overhaul. The one thing we have learnt through bitter experience is, it’s important to work through price(taxing) rather than quantity controls. Leftists still don’t get that bit.

Ken Parish
Ken Parish
2022 years ago

“With these levels of carbon taxes, wind and geosquestration would be very attractive.”

I haven’t looked at the economics of geosequestration of carbon from coal power emissions. But you might well be correct. As for wind (and for that matter solar and tidal power), it’s not suitable for baseload power because the wind doesn’t always blow (and the sun doesn’t always shine etc). That’s where nuclear power might have a place as a relatively short-term supplementary/baseload expedient, especially if costs can be mitigated (e.g. with use of pebble bed reactor technology currently being developed by the South Africans and Chinese).

However, an option which would be safer in non-proliferation and waste disposal terms (if probably at least equally expensive) would be to use excess energy generated from renewable sources (including wind, solar and tidal) to create liquid hydrogen fuel, which is then used to fuel generators at times when solar, wind and tidal power aren’t available. As (I think) Ken M suggested, a reasonably substantial carbon tax would help to ensure that the market solves the problem with reasonable efficiency.

Ken Miles
2022 years ago

Gas may be better than nuclear as a base-load supply, as it is much easier to change the rate of consumption at a gas plant throughout the day than in coal or nuclear. While it does produce CO2, it is probably the best fossil fuel. Plus some new gas power station designs produce flues gases which don’t require much processessing for geosequestration.

The costs of geosquestration vary enormously depending on the type and location of the plant. It can range from virtually free (a natural gas well with high CO2 content which is located near a suitable reservoir) to very a lot.

I’m not too convinced about the economics of hydrogen (but I’d love to be proved wrong). I suspect that a better energy storage device to pump water up a dam (this is currently done with hydroelectric when demand is low).

Ken Miles
2022 years ago

Ken, the IPCC has just released a document on geosequestration. Currently only the summary for policymakers is available, but it can be found here: http://www.ipcc.ch/activity/ccsspm.pdf

Paul Norton
Paul Norton
2022 years ago

Amory Lovins has prepared an incisive critique of the economics of nuclear energy, and the superiority of renewables and energy efficiency in terms of quick and cost-effective reductions in greenhouse emissions. The paper is at:

http://www.rmi.org/images/other/Energy/E05-08_NukePwrEcon.pdf

Another good critique of the nuclear option is by Ian Lowe at:

http://www.acfonline.org.au/news.asp?news_id=545

The combined thrust of the two articles (and others on the ACF and RMI sites) is that:

(a) nuclear power will take years, if not decades, longer to produce reductions in greenhouse gas emissions than will alternatives such as renewables, energy efficiency and conservation;

(b) in the short to medium term, taking the nuclear option will increase greenhouse gas emissions over and above what would otherwise occur, due to the energy requirements of building reactors, mining and transporting fuels, etc.;

(c) the nuclear option has a huge opportunity cost in terms of being far more expensive than other options per unit of emissions reductions – i.e. it will worsen emissions by diverting money from other options which would produce bigger cuts in emissions, much more quickly, per dollar spent.

I believe a comparable critique, in terms of both time factors and opportunity costs, can be made of the Howard Government’s expenditure of hundreds of millions of dollars on trying to make geosequestration a goer whilst starving renewables and conservation programs of funds.

Ken Parish
Ken Parish
2022 years ago

Paul

Thanks for the references to the articles by Lovins and Lowe. I’ll read them with interest. How do they deal with the fact that renewables (by which I assume you mean solar, wind and tidal power) cannot by themselves produce baseload power? It’s that inability which leads many people to at least keep an open mind about nuclear power (while being wary about proliferation and waste disposal issues) and to think that spending money on developing geosequestration for coal and gas is a good idea. Of course, that shouldn’t be to the detriment of funding development of renewable energy sources (as it is with the Howard government).

However, people who condemn both nuclear and geosequestration out of hand, but without dealing constructively with the baseload power issue, provide readers with a strong clue that they are just tunnel-visioned ideological zealots whose work should be taken with a heavy pinch of salt. I’ll be interested to see whether either Lovins or Lowe deal with it.

Nicholas Gruen
2022 years ago

Too right Ken.

I was about to respond to Paul that I woudln’t bother reading either report because they’re going to be about as disinterested as a working paper from the Lavoisier society.

Life’s too short.

Styx
Styx
2022 years ago

Blog followers seem to have worked out that we need nuclear for baseload generation and stiff carbon taxes on the rest. Meanwhile conservative governments who keep getting re-elected say we need neither.

Jacques Chester
Jacques Chester
2022 years ago

I had a great post, then clicked the wrong button. Alas.

In short:

1. To compare coal dollar to dollar with nuclear, a fairer assessment is to require coal costings to include absolutely zero emissions with nuclear industry-grade radiation controls. Coal ash would qualify as low-level waste if generated at a nuclear site.

2. To calculate the cost of future nuclear generation schemes, prices should be based on current designs and not previous building programs. Old reactors were essentially one-of-a-kinds with little standardisation. Every reactor needed separate certification. Nowadays there are several designs which are certified, standardised, modular and scalable. They could be built for a lot less than the old reactor types.

3. Nicholas, if you are prepared to allow the market to answer a reducing supply in oil, why can’t the market respond to climate change? There’ll be money in responding to any changes wrought and entrepreneurs will appear to serve that need.

4. Further to which, I imagine insurance companies will be running the numbers on what to do about global warming. They may wish to invest in nanotechnology (where, the futurists predict, the building material is atmospheric carbon dioxide; timeframe 20-50 years) or the “Benford Scheme” (large fresnel lense at L1 point, described here: http://www.kuro5hin.org/story/2005/4/7/41932/19363).

Nicholas Gruen
2022 years ago

Jacques – I do want the market to solve the problem of greenhouse. A political superstructure allows the market to solve resource problems – by setting up property rights in goods. Political superstructures need to do the same with the goods of carbon abatement and sequestration.

Ken Miles
2022 years ago

Jacques, some points (in no particular order) on your points:

* Nanotechnology is a joke. It’s a keyword used by chemists to obtain funding. If you want to see the upper limits of nanotechnology, have a look at a biochemistry textbook. However, should the impossible happen, and we do end up with a future where nanobots utilise CO2, then it would be easy to add it to the atmosphere then.

* Do you have any links on future nuclear power plant designs? The MIT study which I referred to above was examining future use of nuclear power, and included a number of professors of nuclear engineering among its authors. The costs which it gives don’t look encouraging for nuclear power in a world without a tax on carbon.

Jacques Chester
Jacques Chester
2022 years ago

Nicholas;

While carbon trading appeals to my fondness for market ideals, I think Rothbard’s point that treating pollution as trespass would prevent it far more ffectively than any other method. A trade in credits will quickly be expanded to trading in other pollutants, I imagine, quite possibly with a bit of rent seeking. Everyone wins: the politicians get to natter about helping the environment and free markets, polluters get to carry on doing their bit with a bit of a fee. The only losers are private property owners downstream who are completely cut out of the picture.

Ken,

I am reluctant to dismiss nanotechnology so completely as you seem to be. I’m not surprised that it’s been co-opted as a word to be massaged into grant applications: that’s because we’re at the “Wild Optimism” phase of the field. It’ll mature out and I expect that even if full molecular manufacturing remains impossible, we’ll get a lot of it.

I reject that biochemists have the last word on the realm of the very small. Current microprocessors do interesting things at comparable scales (and smaller) already.

As for reactors, Westinghouse have developed two designs called the AP600 and AP1000, the latter is a slightly modified variant of the former. Both designs are supposed to be recreated over and over: they are approved designs for series of plants, rather than a complete custom jobs for a single site.

http://www.ap600.westinghousenuclear.com/

I understand GE have something similar in the pipeline, and of course the Japanese and French aren’t standing still.

Nicholas Gruen
2022 years ago

Jacques,

I don’t follow your point. Are you agreeing with me. (In case I didn’t make myself clear, I’m arguing for carbon taxes (with equivalent $ per ton subsidies for abatement) or for carbon trading. Are you agreeing or disagreeing with that?

Jacques Chester
Jacques Chester
2022 years ago

To restate my points:

Carbon tax: no.
Pollution as trespass: yes.
Solution to consequences of global warming: Leave entirely to free market.

Nicholas Gruen
2022 years ago

Well thanks for the clarification Jacques, but it leaves me entirely in the dark.

I don’t know what ‘pollution as trespass’ means. I guess are carbon tax is predicated on the same notion – that it’s a ‘bad’ but that banning it is not economic.

Are we all supposed to sue all the emitters in the world?

Ken Parish
Ken Parish
2022 years ago

“Are we all supposed to sue all the emitters in the world? ”

That’s certainly the logical consequence of Rothbard’s argument. It might not be utterly implausible to the extent that class actions are permissible (the rules governing them in Australia are rather more restrictive than many parts of the US).

But the real problem with applying Rothbard’s suggestion to CO2 emissions is: how does an individual plaintiff or group of plaintiffs prove damage, and who caused that damage, and in what proportions? It’s one thing treating the emission of noxious smoke by a next door neighbour as an actionable trespass (presumably the situation Rothbard had in mind), but quite another to apply it to CO2 emissions generally. As Nicholas obliquely suggests, you could probably only succeed in such a trespass action by suing every single carbon emitter in the entire world, because the damaging effects of CO2 are cumulative and not referrable in a causative sense to any single emitter or group of emitters.

Moreover, a plaintiff would have to prove damage in the normal way. But global warming science simply isn’t advanced enough (and will probably never be advanced enough) to allow proof in advance of damage flowing from atmospheric accumulation of CO2 in a given location (where the plaintiff lives or carries on business). In many parts of the world, the effects of global warming will in fact be benign; some places will warm more than others; and science currently has no reliable way of predicting which regions will suffer net adverse consequences and which will benefit. It probably won’t be possible to know any of these things (at least to the standard of proof required ina court of law) until the damage has actually occurred, by which time it will be too late.

That’s why a carbon tax applied now is the only obvious effective way to stimulate the market into making adjustments before it’s too late. A right to sue in trespass for emitting carbon simply won’t and can’t achieve this. With due respect to Jacques, it’s a silly idea in this context (even for people who think Rothbard makes sense in other contexts).

Paul Norton
Paul Norton
2022 years ago

Further to Ken’s argument, it is not all CO2 emissions which are (indirectly) causing damage, just that quantity of global CO2 and CO2 equivalent emissions which is in excess of the assimilative capacity of the atmosphere, and creating the imbalance in the carbon cycle.

Thus the legal complication would not simply be that of suing every emitter in the world, but identifying which of the emitters were emitting the emissions which create the imbalance, and suing them!