(Partly) Right for the Wrong Reasons

Some time has passed since I commented (i.e., criticised) on Bjørn Lomborg’s writings for the last time. His most recent activity (an article on Project Syndicate) is, however, inviting for another round of critique. Actually, there is not much newness to be found in this piece by Lomborg. But because it kind of summarises his views, it may be worth a brief investigation.

In The Smartest Ways to Save the World Lomborg presents results of the latest project of his Copenhagen Consensus Center. The pattern is not new: Lomborg invited some 50 economists to make a cost-benefit analysis of about 40 “world-saving” projects – ranging from fighting AIDS to tackling climate change. These analyses were then presented to a panel of 5 acknowledged economists (including Thomas Schelling, Robert Mundell, Finn Kydland and Vernon Smith, Economics “Nobel Prize” laureates in 2005, 1999, 2004 and 2002, respectively) who were asked to judge, given an imaginary budget of $75 billion over four years, which of the projects they would recommend for implementation.

Among the projects the panel found to deliver most (in monetary terms) per dollar of input there were: the fight against malnutrition (mainly micronutrient provision), support for the Global Fund‘s Affordable Medicines Facility-malaria’s fight against malaria, deworming of school children, investment in R&D of HIV/AIDS vaccines, provision of vaccines against Hepatitis B and low-cost drugs for acute heart attacks to those living in poor countries, and investments into agriculture-related R&D. Traditionally (for Lomborg), tackling climate change was found to be less “profitable”:

When it comes to climate change, the experts [none of them dealing professionally with climate economics – ZG] recommend spending a small amount – roughly $1 billion – to investigate the feasibility of cooling the planet through geo-engineering options.

Apparently, the panel believed investments in early-warning systems for natural disasters to be much more important/worth undertaking than tackling one of their causes (and a major factor in their likely becoming worse in future).

There are at least three general problems with Lomborg’s project results. First, they seemingly blindly rely on cost-benefit analysis. Secondly, they do not at all address structural causes underlying the challenges analysed. And thirdly, the Copenhagen Consensus Center appears to be unable to learn from its previous mistakes regarding climate change.

My first criticism regards the unqualified adoption of cost-benefit analysis (CBA) in ranking the “world-saving” projects. Lomborg is probably right in pointing out that we have only limited resources worldwide (his $75 billion would mean an increase of about 12% above current global ODA level) and that we have to balance the alternatives. However, this does not mean (as Lomborg & Co. obviously suggest) that we can easily judge all these projects and weigh them against each other in some objective way, implicating in this case monetary CBA. In fact, most of the goals in hand cannot be easily quantified, not to mention the possibility to do this in an “objective” way. Such valuations (of ecosystem services, human lives etc.) always involve value judgements and are not uncontroversial. For example, in evaluating the worth of a saved human life, the economists who worked for the Copenhagen Consensus Center apparently applied the human capital approach, as can be seen in this quotation:

Studies show that, decades down the line, these children [provided with micronutrients – ZG] would be more productive, make more money, have fewer kids, and begin a virtuous circle of dramatic development.

However, this method is all but controversial and highly criticised by many economists. It is just one example of the many problematic valuations that had to be made for Lomborg’s project. They are per definitionem arbitrary (since such things as human lives or ecosystem services do not have market prices – their “prices” must be indirectly imputed) and this fact should be borne in mind when one contemplates claims similar to Lomborg’s. (For those interested in the issue I highly recommend the book Priceless: On Knowing the Price of Everything and the Value of Nothing by Frank Ackerman and Lisa Heinzerling who provide a fairly comprehensive account of the problems in applying CBA to environmental and health questions.)

The second point of my critique is that the policy proposals mentioned by Lomborg completely fail to address structural issues – especially in the context of hunger and malnutrition, but also health issues. Along with a “biophysical” or “natural” component, hunger and malnutrition have a common structural-political set of causes. These are manifold and range from agricultural subsidies especially in the EU and US; so-called land-grabbing activities facilitated by a lack of recognition of traditional property rights; food wastage in rich societies; agricultural land lost to biofuel production; to speculation in commodity markets. All of them have a profound impact on food supply across the world. While the approaches proposed by Lomborg’s Copenhagen Consensus 2012 are important, they won’t sustainably solve the problem if its structural causes won’t be addressed as well.

And, last but not least, there is the issue of climate change. I must admit that I have no idea what the informational basis is from which Lomborg’s experts panel is able to draw the startling conclusion that there is no hurry in addressing climate change. Almost all other commentators, from environmentalists to the IEA (sic!), agree that we are running fastly toward the brink of the abyss of catastrophic climate change. Both climate science and climate economics have provided multiple arguments in favour of heavy investments in climate protection – which should be started as soon as possible. Meanwhile, Lomborg’s experts dismiss the climate change issue as obviously not so important and limit their recommendations in this respect to a relatively small R&D programme in geo-engineering – exactly the “solution” to climate change that is the most controversial one. Not to mention the vastly negative influence of climate change on numerous other challenges from Lomborg’s list (agriculture and thus hunger; natural disasters; likely also malaria and other health issues…).

What can we conclude from the above discussion? Whereas Bjørn Lomborg’s project team has identified a number of humanity’s challenges that indeed belong to the most pressing ones, their analysis was more than problematic. First of all, the method used to assess the relative relevance of the various challenges (i.e., cost-benefit analysis) is critical and at least partly not suited for this kind of analysis. It shouldn’t therefore surprise anybody that while some of the conclusions drawn on that basis are right, others are not. Furthermore, in the field of hunger and malnutrition particularly, the participants of the Copenhagen Consensus project proposed only treatments to symptoms, without addressing the structural causes of the analysed problems. And, last but not least, there is the issue that will stick to Lomborg’s name for a long time to come – his treatment of climate change. Although more than once his mistakes in the analysis of this particular challenge and in the assessment of its likely consequences were pointed out, he apparently refuses to acknowledge them. The consequence of this blindness is that his projects one after another downplay the severity of perhaps the greatest challenge in humanity’s history, while claiming that they provide hints as to how save the world in a “smart way”.

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15 thoughts on “(Partly) Right for the Wrong Reasons

  1. Something about practical problems. In small part related to your essay.

    “London / Frankfurt – To reach its strict climate targets and fulfill Chancellor Angela Merkel’s nuclear exit plans, Germany needs to avoid coal and build a stack of gas power plants to secure clean energy supplies beyond 2020.

    Yet the challenge facing Merkel’s new environment minister Peter Altmaier, his predecessor fired this week following a disastrous state election defeat, is finding a way to make gas an attractive option while coal remains the more profitable way to produce electricity for Europe’s biggest economy.

    “At current prices, you create a future that is comprised of renewables and lignite (coal) power generation,” Klaus Schaefer, CEO of German gas company E.ON Ruhrgas, said at the Reuters Energy Summit in London this week. “Is that something we want,” he asked.

    Germany’s energy mix is undergoing sweeping changes, with massive growth in solar and wind, and a law on phasing out nuclear set to erase 12,696 megawatts (MW) of atomic power over the next decade.

    Germany needs to make up for that loss, some 15 to 20 percent of the country’s electricity needs, by importing more or building new power plants using gas or coal.

    Environmental considerations would make gas the clearcut choice over coal, as it pollutes far less.

    Germany aims to cut its greenhouse gas emissions by 40 percent from 1990 levels by 2020.

    But then there is the need to create power while making a profit, and on that front coal wins.

    Electricity from coal for sale in 2013 is more than 16 euros per megawatt-hour (MWh) more profitable than generating it from gas, according to Reuters data.

    Gas-fired power plants, in fact, lose money during baseload hours (24-hour supply), only turning a profit at the higher-priced hours of peak demand (0800-2000 local time).

    Boosting energy efficiency

    Steps to help gas close ground on coal include boosting the efficiency of gas plants, tax breaks, as well as putting a price on carbon to help steer utilities and manufacturers toward greener energy use.

    Yet to date, these steps combined have shown little promise.

    The core problem for gas-fired power is that even the newest plants, which offer 60 percent energy efficiency, cannot compete against standard coal-fired plants currently operating at 35 percent.

    According to Reuters research, an ageing coal plant would still be more than four times more profitable than a new gas power plant.

    An exemption from a fuel tax of 5.50 euros per MWh is offered for gas plants with an efficiency over 57.5 percent, yet even this does not tip the scales in favor of gas.

    Siemens, a leading gas turbine maker, says it now guarantees an efficiency rate of 60 percent for new gas power plants in Germany and can achieve up to 61 percent.

    That’s up from an industry norm of about 50 percent.

    “Any additional percentage point increase (above 60 percent) in gas-fired power generation would be a dramatic milestone,” E.ON’s Schaefer said.

    Siemens sees the physical limit at around 70 percent.

    Including the tax break, gas power plants would have to reach an efficiency rate of 65 percent to compete with existing coal plants, according to Reuters research.

    While Siemens says it plans to reach this rate in the long-term, the problem is that new coal-fired power plants (which are still dirtier than gas) can reach an efficiency of 45 percent, maintaining coal’s competitive advantage.

    Carbon market

    Another stumbling block for gas has been the failure of the carbon market to spur a move to greener energy and away from sources such as coal.

    Under the European emissions trading scheme, large polluters must buy carbon emissions certificates for each ton of CO2 equivalent they emit, a system that favors clean gas over coal.

    But carbon prices are currently below 7 euros a metric ton, while Reuters research shows that prices would have to top 35 euros in order to make German gas-fired power generation more attractive than coal.

    “We need more long-term investment (in power plants), but at 6 to 8 euros for a metric ton of CO2 there is no price signal (to invest in cleaner technology),” the European Commission’s Energy Commissioner Guenther Oettinger told the Reuters summit.

    Solar another challenge

    Generous renewable energy subsidies have led to a boost in wind and solar power generation in Germany, but this only means even more competition for the gas sector.

    German solar capacity will exceed 25 gigawatt (GW) in 2012, the equivalent of 25 nuclear power plants at full capacity.

    Although solar generation rarely reaches maximum output, the capacity is enough to shave several euros per MWh off peak demand prices, eroding profits that gas power plants rely on.

    One solution would be to raise wholesale power prices to increase power plant profit margins.

    But Germany’s power demand outlook for the next few years is flat as efficiency gains offset economic growth.

    Germany’s price outlook is pegged at around 0.5 percent growth a year, according to analysts at Point Carbon.

    One potential game changer between now and 2020 would be if gas prices tumble, helping the case for building new plants.

    The U.S. gas market in recent years, powered by a jump in shale output, demonstrates how quickly prices can fall, a factor which has made gas plants there highly attractive.

    And there is potential for price falls in Europe, too, as some analysts expect a flood of convention gas to come to European markets in the next decade, including from Azerbaijan, Iraq, Cyprus, Israel, and perhaps even Iran.

    In the meantime, if new gas power plants can’t be built to compete with coal in Germany, then the country must fill its looming capacity gap by other means.

    In addition to more offshore wind power along its North and Baltic Sea coasts, Germany could increase its interconnector capacity with neighbors Austria, Belgium, Czech Republic, Denmark, France, Luxembourg, Netherlands, Poland and Switzerland.

    This would give Germany access to vast hydro capacity, but also mean importing more electricity from the one energy source it is trying to escape – nuclear power.”

    Regards

  2. Thank you. Indeed, in Germany we have sort of a problem regarding the future power generation. As often with politics, many energy-sector policies have been half-baked only, and sometimes even contradictory.

    As recently written, I have turned to be sceptical whether we can really tackle climate change without nuclear power. Viewed in this light, German government’s decision to phase it out may be problematic – even though I still think that in Germany this is not that big a problem, especially when compared with France or Japan.

    However, I guess, there also has been too much emphasis on solar energy (whose potential in Germany is actually only limited). It appears that wind and maybe geothermal do make more sense here. And certainly energy efficiency incentives are needed. A part of the latter could be achieved (though only at EU level) through finally substantially lowering the cap within the ETS and thus raising the price for carbon. This would be, alas, very difficult due to lobbyism and possibly also social discontent (due to raising energy prices).

    For the moment, I don’t really see a way out.

  3. Just another “add on” to the problem. At the beginning of this year two professors of development and environment at one of our univerisities published a short arcticle where they called the “carbon trading machanism” another “Ponzi Scheme” to be avoided at all cost. I know some of the work of one of them and may suspect “ideological” motives, Nevertheless the prices have collapsed giving some validity to their claims.

    Regards,

  4. The fact that the price for carbon under the ETS collapses may have many reasons: unexpected rises in energy/carbon efficiency (i.e., too much allowances are on the market); expected recession (i.e., the actors anticipate a dicrease in the need for allowances); the approaching end of the 2nd Trading Period (i.e., everyone who thinks he’ll not need all his allowances is throwing them on the market, thus lowering the price) – I guess, this is the most important one -; political reasons (e.g., the €-crisis or the ongoing stalemate in climate talks, both possibly endangering the very existence of climate policy); increased activity in carbon offsetting (I don’t know whether this is actually the case)… Just to name a few. In general, I don’t think carbon trading by itself is a bad idea – quite the contrary -, but it has to be handled in a sensible manner, just as every policy does.

  5. “What’s wrong with pricing carbon emissions?”

    In general nothing, specifically if one takes it out of context. One may ask: what’s wrong with pricing air we breathe?. The professors mentioned in my previous post, while starting from the same “ideological point of departure” ( one of them is in fact very radical in his views ) have come to a completely different conclusion. So, who is right? At the moment I am reading an interesting book about India: pre colonial and colonial times. And right there, in the first chapter is an interesting thing about “financial mechanisms” which destroyed wealth of Bengal – at the time the claim had been made about beneficial effects and upliftment of the beckward peoples. So, there is nothing wrong with pricing and taxing until a real damage is done and cannot be undone.

    Regards,

  6. The “real damage” has already been done and the idea of carbon pricing (at best, through a cap’n’trade or related system) is to correct this damage. Of course, this is not a perfect instrument – none is. The question that should always be asked is: do we have better alternatives? In this case, I don’t think so. Command and control policies have many flaws (both in terms of effectivity and economic efficiency). Even a carbon tax is not as effective as a properly designed ETS. Business as usual is clearly not an option.

    You asked for a context. Here it is.

  7. “…do we have better alternatives? ”

    Possibly. When I was a child ( long time ago) word “recycling” was not used, possibly never considered to exist. However, we collected paper, bottles and any items which could be of use by somebody else. One would not dare to throw food into a waste bin. All those “good” things were collected ( in fact purchased in a way ) by a man coming to our suburb on a horse drawn cart. And so on……

    Regards,

  8. Recycling is not an alternative. Even if we would avoid most of the waste, I don’t think carbon emissions would fall enough. However, recycling is an important complementary strategy.

    You have to see, though, that in your time “recycling” was necessary – you could not afford not to do it. In the time since, much has changed. To get people to recycle, one needs additional incentives (education is important, but unlikely to suffice, alas) of one kind or another.

  9. “You have to see, though, that in your time “recycling” was necessary – you could not afford not to do it. In the time since, much has changed.”

    It was not necessary, it was a way of life which stays with the people of that generation, both from the West and the East. Yes, a lot has changed since but it does not mean we cannot learn from the past. The case of recycling is meant to be a small example illustrating importance of peoples awarness an seldf discipline. In my view, there is too much attached to the importance of “mechanical” means of influence, financial instruments are one of them.

    Regards,

    P.S.

    You say “you could not afford not to do it.”. What are the basis of your statement?

  10. You say “you could not afford not to do it.”. What are the basis of your statement?

    You were living in communist Poland, furthermore you mention a horse cart, so I presupposed that you lived in a village. At that time, Polish villages were not quite the place of affluence. If I over-generalised, I appologise.

    it was a way of life which stays with the people of that generation, both from the West and the East.

    That is at least partly true, but the reason is (again, partly) that in those times people hadn’t yet realised how easy and time-saving it is to use one-way, throw-away items. The wave of this just began. So, you cannot ask people to go back to the past, because the preconditions are not as in the past. We became convenient over the times. Furthermore, this is a case of a social dilemma – you can urge people to behave more responsibly, but they don’t see why their own contribution should change anything. At a smaller scale it might function (through “monitoring” of the others to make sure that they commit to certain norms just as I do), but not at the scale of whole societies (this is not my theory but the result of years of research in the field of collective action, especially by Elinor Ostrom). Therefore the need for additional incentives.

  11. Yes, you have generalised and made assumptions. I am not offended as no offence has been made.
    Let me explain first:

    1. In those days a horse drawn cart was a popular sight in Poland, I may presume that in some poorer parts of the Western Europe as well.

    2. I am a “city boy” , and have never lived in a village. So combined with the above that horse drawn cart was in a city, one of the major urban conglomerations of Poland.

    3. We may assume poverty as a major motive of “recycling”, one cannot exclude that. Europe of to 50’s was not a place of “milk and honey”. While my grandparents were very wealthy people I do remember my grandmother saving and repairing things. As I see it, it was “in your genes”, one would not waste things, God forbid food for that matter. Most of our friends are not Polish, mostly of the same age as us. One of our friends is Dutch, her husband is an extremly wealthy person and, guess what, while being very generous to other people she is not wasteful ( I presume it has nothing to do with the communism), unlike her thirtysomething daughters. And let me tell you, those two young and bright women are not an exception.

    For the past 30 years ( or so) the world economy has operated on the basis of permanent expansion. To achieve that you need ever increasing and unrestricted consumption – and the consequences are showing now. As long as that “constant movement forward” is in place things seem to be fine. In fact it is a “musical chairs” situation i.e. the music at some stage stops there is always somebody without a chair to sit on. Just look at the consequences of the 2008 crash, they are still with us, look at the mess in Europe. So having fallen flat on our faces we still propose “financial instruments” as a way of changing the world. Let us be serious. What in fact is happening, is repackaging of the same product – now it is called “green” or “sustainable” economy. So we have deregulated the markets, fought for the “open skies”, installed “global economy” and now it is our intention to tax all those things and destroy them? European governments, in a state of panic are cutting expenditure, mostly social . Haven’t they seen it coming ? I would not believe that. So now new instruments are going to be introduced, a new source of revenue, new financial platforms under the banner of “green economy” and those will be managed by the same people within the same parameters as before. Are we serious here? My experience is that ordinary people obey laws because they believe it is the right thing to do for the wellbeing of all of us. Fear of the punishment is a marginal motivation – any tax is a form of punishment. However, if the state and its organs lose credibility people start ignoring the state and do their own thing, irrespective of the consequences. So if instead of providing a proper environment to institute changes penalties in form of taxes, levies and unexplained and unavoidable financial burdens are imposed on the society, I am not convinced about honesty of such moves ( forget about their effectiveness, as that aspect is always based on mostly untested and “rosy” data).

    Regards,

  12. 1. With regard to the recycling issue: apparently my second explanation – permanent expansion of consumption, as you put it – was closer to truth. People who feel affluent don’t save/recycle, especially if they are being told that consumption is not only good for them, but also for the economy.

    2. Carbon taxes etc.: you are mixing various issues. First of all, taxes are not “financial instruments”. The latter are the cause of the 2008 crisis. But the problem was that these instruments (mostly various kinds of derivatives, i.e., instruments building on other instruments that are packages of still other things…) had nothing to do with the real economy and were so complex that nobody really understood them.

    Furthermore, in the case of carbon tax, there is the argument (though it is not unproblematic) that while introducing carbon tax (taxing things that we consider bad) we would be able to lower “distortionary” taxes (those that influence things we want more of, particularly income taxes).

    Then, a carbon tax is not punishment. It is not thought as a part of the Panopticon (I don’t really understand how it should). The idea is much more simple. A firm that uses a “dirty” technology sells its product and achieves some price P, while facing costs of the technology equaling C. The whole idea of a carbon tax is to make some technologies (those that we don’t want, because their application has dangerous environmental consequences – i.e., carbon emissions) more expensive, increasing the C by some amount of T. One could tackle the problem using a command-and-control policy (“thou shalt not…”), but this leads to both ineffectivity (since you only limit the emissions of each site, but cannot directly influence their total) and inefficiency (since some firms may be very easily able to lower their emissions, others not – some kind of trading would help to achieve the same level of total reductions while minimising negative welfare effects). A carbon tax is better (particularly in terms of efficiency), but still not perfect in these terms. A cap and trade scheme is both relatively efficient (since trading is possible) and effective (since the total level of emmissions is predefined before allowances are issued).

    I ask again: have you better ideas? Recycling is a great thing, but here also you need incentives (in Germany this is working quite well – e.g., in the construction sector, some 80% of the material from deconstructed sites is reused) – otherwise people would already have done it. They haven’t.

  13. 1. “People who feel affluent don’t save/recycle, especially if they are being told that consumption is not only good for them, but also for the economy.”

    Well it is like blaming poor people for being poor. Affluent people used to recycle then, why not now?

    2. “First of all, taxes are not “financial instruments”. ”

    This my simplified term when refering to financial matters. Strictly speaking you are right.

    3 “had nothing to do with the real economy and were so complex that nobody really understood them.”

    ????!!!!*#@***!!

    4. “Furthermore, in the case of carbon tax, there is the argument (though it is not unproblematic) that while introducing carbon tax (taxing things that we consider bad) we would be able to lower “distortionary” taxes (those that influence things we want more of, particularly income taxes).”

    In view of 3 above, how is it possible to be so sure? Where is the guarantee that in the years to come we will not hear an excuse “they had nothing to do with the real economy and were so complex that nobody really understood them.”

    5. “a carbon tax is not punishment”

    It is . Your words:”taxing things that we consider bad”.

    6. ” have you better ideas?”

    I have never claimed I have. But it is my firm believe one should look at the root of the matter i.e. in our case expansionist economic model where permanent growth/expansion has as it s consequence an increasing consumption. One does not produce electrical energy for the sake of it, one does not extract crude oil, coal and other minerals just for fun. Then there is the issue how societies are being treated and engaged in the process of change. If the financial incentives/penalties are the only or main means we may forget about any success.

    Regards,

  14. Affluent people used to recycle then, why not now?

    Don’t ask me, ask them. The fact is that they don’t (I believe that the reason is cultural).

    ????!!!!*#@***!!

    ?

    Where is the guarantee that in the years to come we will not hear an excuse “they had nothing to do with the real economy and were so complex that nobody really understood them.”

    First: even if you were right (and you are not), sometimes we have to take some risks. In the case of carbon emissions we should.

    We knew from the beginning that financial derivatives are dangerous. But most of those using them didn’t want to believe. Furthermore, they are clearly delinked from any real values (it’s just virtual money) – you won’t claim that a carbon tax is, will you? Furthermore, a carbon tax is not complex. If we would realise that it is bad for some reasons, it is easy to abolish it. As I already pointed out: you are mixing very different issues.

    It is .

    It is not a punishment in the sense you suggested. Even if we consider it to be one, it does not have any meaning, since its effectivity is completely indifferent to this interpretation. A tax does not have effects on behaviour because it is or is not punitive.

    If the financial incentives/penalties are the only or main means we may forget about any success.

    Who said that they are?

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