The Carbon Calculation Problem, 7/28

Intuition about how to reduce emissions is unreliable

From a pointer in The Daily Scroll, here is a story I came across:

the idea behind fertilizer emissions reduction wasn’t to reduce fertilizer use, and her aim is to achieve goals through “research and innovation.” The federal government is aiming to reduce fertilizer emissions by 30 per cent by 2030.

This is the Trudeau Administration in Canada. The story describes pushback from the provincial government, on the grounds that the plan will raise food prices. And I would add, who knows what the indirect effect on carbon emissions might be?

There are two carbon calculation problems, and they are interdependent. One problem is to figure out the optimal amount of carbon emission reduction. That means making a judgment about how much harm carbon emissions cause (and this relies on unreliable models) and comparing this with the cost of the carbon-emission reduction measures. The other problem is to figure the optimal carbon-emission reduction measures, which will in turn help you to calculate the cost of those measures.

When someone makes a specific proposal, such as changing fertilizer use, I want to say: Show Your Work. That is, show the assumptions and calculations that you made in order to arrive at this proposal. Otherwise, it may not even be true that your proposal would reduce carbon emissions.

In the economy, central planners face a well-known calculation problem. Even when they are sure that the market is getting things wrong, they usually lack a way to measure the degree of correction needed.

To a first approximation, the best way to have a sustainable economy is to let the market work. In order to determine sustainability, markets perform a complex calculation problem. If a firm’s output sells for more than the cost of its inputs, then its production process is sustainable, and it remains in business. If it sells for less, it experiences losses, and it goes out of business. No public official has knowledge that can enable a regulator to outperform the price system.

But there are costs that the market does not count. One cost that is on the minds of most policymakers today is the cost of carbon emissions, which add to greenhouse gases and hence to global warming.

Markets can still help in addressing the carbon emissions calculation problem. Timothy Taylor writes,

The global movement toward carbon pricing is partial and halting, but real. Ian Parry, Simon Black, and Karlygash Zhunussova provide some useful background and analysis in “Carbon Taxes or Emissions Trading Systems? Instrument Choice and Design (July 21, 2022, IMF Staff Climate Note 2022/006).

Note that even if your solution is a carbon tax, you still need to Show Your Work. How could a carbon tax in the U.S. shift production elsewhere, perhaps leading to higher overall emissions? How high a tax could you enact without having the costs exceed the benefits?

As an aside, I should point out that animosity toward gasoline-fueled automobiles and “smokestack” industry long preceded the focus on global warming. Fifty years ago, one concern was air pollution. This was a fair concern, and I would say that the regulators who mandated filtering systems probably got it right. Certainly, the air in Los Angeles is cleaner because cars no longer spew as much pollution. And the air in Pittsburgh is cleaner because it no longer is a steel town.

Also fifty years ago, there was a concern that we would soon run out of fossil fuels. This motivated President Carter and Congress to create the Department of Energy, tasked with developing alternative energy sources in what Mr. Carter called a “moral equivalent of war.”

The global warming issue shifted the rationale for opposing gasoline and “smokestack” industries. The concern that fossil fuels were subject to scarcity was replaced by a worry that they are too abundant. When people arrive at the same policy recommendations but shift to the opposite rationale, it seems fair to doubt their objectivity.

Regardless of the rationale for hating fossil fuels, people have intuitively felt that all-electric vehicles, along with solar and wind power are cleaner. Consider this IGM Forum poll of leading economists, who are willing to support government provision of more charging stations for electric cars without doing anything like a Show Your Work calculation of whether this would, in the end, reduce carbon emissions. They go with simple intuition, but simple intuition is a poor guide for assessing complex processes.

The carbon-emission cost of driving electric cars, using electricity derived from solar and wind power, it not zero. You have to take into account the process of building the cars, including their batteries. You have to take into account the process of building the infrastructure to convert solar and wind energy to electricity, as well as the infrastructure to store it and transmit it long distances to where it is needed. Those charging stations have to be built as well.

The electric vehicles and the infrastructure needed to support them require metals that need to be mined and transported. Solar and wind infrastructure also requires metal mining, as well as construction materials. These mining, construction, and manufacturing activities will produce carbon emissions. These carbon costs will be incurred in the near term, and any carbon saving that takes place will happen later. Because delay matters, the near-term carbon emission cost could outweigh long-term benefits (if any).

I believe that it would be easier to get a Show Your Work response out of advocates for geo-engineering or nuclear power. The proposals based on intuition (Subsidize Electric Cars! Regulate Fertilizer!) deserve pushback until their proponents are willing and able to show their work.