03 March 2010

Bias in IPCC WGIII? A Guest Post by Richard Tol, Part I

Richard Tol is a research professor at ESRI in Ireland, one of the top 175 economists in the world and a contributor to the work of the Intergovernmental Panel on Climate Change (IPCC), where his work is widely cited. In this guest post, the first of a series, Richard takes a look at parts of the IPCC AR4 Working Group III, which has largely escaped scrutiny in recent months. He concludes:
Chapter 11 of AR4 WG3 suggests that climate policy could stimulate economic growth and would create jobs. These claims are supported by gray literature only, and they are biased.
Please have a look at Richard's full discussion below. If you have questions or criticisms of Richard's analysis please submit them in the comments, I am sure that Richard will be happy to engage.
A Look at IPCC AR4 WGIII: A Guest Post by Richard Tol
Introduction


The Fourth Assessment Report (AR4) of Working Group II (WG2) of the Intergovernmental Panel on Climate Change (IPCC) has been discussed extensively in recent months. A number of errors were discovered. Few documents are without fault. What is surprising, however, is that the IPCC has denied obvious mistakes; and that the errors all point towards alarmism about the impacts of climate change.

The WG3 report did not attract the same scrutiny. This could create the impression that WG3 wrote a sound report. That impression would be false. Just as WG2 appears to have systematically overstated the negative impacts of climate change, WG3 appears to have systematically understated the negative impacts of greenhouse gas emission reduction.

Part I: Climate policy could stimulate economic growth and create jobs

I will first focus on Chapter 11: Mitigation from a cross-sectoral perspective. This chapter assesses the economic costs of greenhouse gas emission reduction.

The first and second order draft of the chapter and the review comments can be found here:

The first order draft omits two crucial tables, both on the cost estimates of emission abatement. One of the key results of Chapter 11 therefore has not gone through the double review that is a hallmark of the IPCC procedures.

Section 11.4.4 has the following paragraph:
The Stern Review (2006), which was commissioned by the UK Treasury, also considers a range of modelling results. Drawing on estimates from two studies, it reports the costs of an emissions trajectory leading to stabilization at around 500–550ppm CO2-eq. One of the two studies (Anderson, 2006) calculates estimates of annual abatement costs (i.e. not the macro-economic costs) of 0.3% of GDP for 2015, 0.7% for 2025 and 1% for 2050 from an engineering analysis based on several underlying reports of future technology costs. His uncertainty analysis, exploring baseline uncertainties about technology costs and fuel prices, shows a 95% prediction range of costs from –0.5% to +4% of GDP for 2050. The other study is a meta-analysis by Barker et al. (2006a) and looks at the macro-economic costs in terms of GDP effects. The study aims to explain the different estimates of costs for given reductions in global CO2 in terms of the model characteristics and policy assumptions adopted in the studies. With favourable assumptions about international flexibility mechanisms, the responsiveness and cost of low-carbon technological change, and tax reform recycling revenues to reduce burdensome taxes, costs are lowered, and in some cases become negative (i.e. GDP is higher than baseline).
Three papers are referred to: Anderson, Barker, and Stern. None of the three was peer-reviewed. Anderson and Stern were omitted from the Second Order Draft. Barker et al. (2006) was referred in the Second Order Draft, as follows:
Research has continued to focus on differences in various cost estimates across models (Weyant, 2000; Weyant, 2001; Lasky, 2003; Weyant, 2003; Fischer and Morgenstern, 2005; Barker et al., 2006).
and
These prices and costs are largely determined by the approaches and assumptions adopted by the modellers, with GDP outcomes being strongly affected by assumptions about 35 technology costs and change processes (see 11.5 above), the use of revenues from permits and taxes (see 11.4 above), and capital stock and inertia (considered below) (Fischer and Morgenstern, 2006, Barker et al., 2006).
That is, in the Second Order Draft, Anderson (2006) was omitted; and the gray publication Barker et al. (2006) was used to support the peer-reviewed paper of Fischer and Morgenstern. In the published chapter, Anderson (2006) and Barker et al. (2006) are used to support the notion that “costs are lowered, and in some cases become negative”.

Section 11.8.2 reads as follows:
A number of studies point out that investments in greenhouse gas mitigation could have a greater impact on employment than investments in conventional technologies. The net impact on employment in Europe in the manufacturing and construction industries of a 1% annual improvement in energy efficiency has been shown to induce a positive effect on total employment (Jeeninga et al., 1999). The effect has been shown to be substantially positive, even after taking into account all direct and indirect macro-economic factors such as the reduced consumption of energy, impact on energy prices, reduced VAT, etc. (European Commission, 2003) The strongest effects are seen in the area of semi-skilled labour in the building trades, which also accounts for the strongest regional policy effects. Furthermore, the European Commission (2005) estimates that a 20% saving on present energy consumption in the European Union by 2020 has the potential to create, directly or indirectly, up to one million new jobs in Europe.

Meyer and Lutz (2002) use the COMPASS model to study the carbon taxes for the G7 countries. They find that recycling revenues via social security contributions increases employment by nearly 1% by 2010 in France and Germany, but much less in US and Japan. Bach et al. (2002), using the models PANTHA RHEI and LEAN, find that the modest ecological tax reform enacted in Germany in 1999–2003 increased employment by 0.1 to 0.6% by 2010. This is as much as 250,000 additional jobs. There is also a 2–2.5% reduction in CO2 emissions and a negligible effect on GDP. The labour intensity of renewable energy sources has been estimated to be approximately 10 times higher in Poland than that of traditional coal power (0.1–0.9 jobs/GWh compared to 0.01–0.1 jobs/GWh). Given this assumption, government targets for renewable energy would create 30,000 new jobs by 2010 (Jeeninga et al., 1999).

In a study of climate policies for California, Hanemann et al. (2006) report small increases in employment for a package of measures focusing on the tightening of regulations affecting emissions.
Six studies are cited to support the notion that emission reduction creates jobs. Only one of the six is peer-reviewed: Bach et al. (2002). That paper adds:
Another important assumption shaping the results relates to the way in which wage formation is modeled. In our core simulations we assume that the induced increase in employment does not trigger higher wage claims. If, instead, it is assumed that the trade unions react to employment growth by increasing their wage demands, this could significantly dampen economic growth and neutralize the positive employment effects.
That is, the positive impact of climate policy on employment is fragile.

This is indeed the conclusion of Patuelli, Nijkamp and Pels (2005, Ecological Economics, 55 (4), 564-583). Their meta-analysis was published before the AR4 deadline, but overlooked by the IPCC authors. They assess 94 estimates of the impact of ecological tax reform and find an average increase of employment of 0.64% but with a standard deviation of 1.33%. The 6 studies cited in Chapter 11 only have positive effects – Bach et al. after censoring – and are thus not representative of the literature.

Section 11.8.2 does not alert the reader to the fact that climate policy would only have a positive impact on employment if the revenues of a carbon tax or an auction of emission permits are used to reduce taxes on labour. There is no positive impact on employment if emission reduction is achieved by subsidies on renewables or if emission permits are given away for free – as is common.

Similarly, it is well-accepted in the literature that emission abatement would stimulate economic growth if policy reform is smart and well-designed. By the same token, a badly designed policy could greatly enhance the costs. Boehringer et al. (2009) estimate, for instance, that the EU 20/20/2020 package is more than twice as expensive as needed.

Chapter 11 of AR4 WG3 suggests that climate policy could stimulate economic growth and would create jobs. These claims are supported by gray literature only, and they are biased.

34 comments:

Sharon F. said...

The fact is we really don't know. It depends on what we assume about what we are going to do and how we are going to do it. We could debate the science forever, (economics) or we could just try something small and see how it goes.

Empiricism used to have a fundamental place in the scientific enterprise. With all the modeling, etc., it seems to have become displaced.

It seems to me that if we are talking about the "science" , that that is an argument for an experimental approach. Perhaps each state should try a different policy option and we check back in five years and evaluate costs and benefits. Then select the best option for national use.

bernie said...

It is many years since I worked in the area of economic models - but surely a sustainable increase in employment is dependent upon either the emergence of a new need or the replacement of an existing way of meeting a need with a more cost effective way of meeting that need. The introduction of green technologies that are less cost effective than existing technologies cannot possibly create sustainable economic growth. You would simply be increasing prices in one sector at the expense of demand in other sectors.

The notion that an investment $ spent on conventional energy generation will somehow generate fewer jobs than an investment $ spent in green technology that produces less energy strikes me as bizarre. It is not sustainable in the open market.

Am I being too simplistic?

Richard Tol said...

-2-bernie
There are three effect going on.

First, there's the static effect that you describe. Proponents of the "green new deal" often present gross job creation while net job creation is what matters.

Second, there's the price effect. If the tax burden is shifted from labour to energy, production would become more labour intensive.

Third, there's the growth effect. If climate policy stimulates economic growth, more jobs are created.

So, it is perfectly possible to have a positive effect on employment through climate policy. But is by no means guaranteed, and in fact unlikely unless policy is smart.

Craig said...

If nuclear was embraced as "green," I think the argument would be many times stronger.

Sean said...

Do economists have any type of law or rule that is equivalent to conservation of energy in the physical sciences and engineering? I read what was written and the first thing that popped into my mind was a perpetual motion machine.

MIKE MCHENRY said...

...The labour intensity of renewable energy sources has been estimated to be approximately 10 times higher in Poland than that of traditional coal power...If they are talking wind or solar that can hardly be the case. In fact I would expect the reverse.Richard do you what "renewable energy" they are talking about?

MIKE MCHENRY said...

I think Bernie has got it right in my experience. From 1970 to 1980 I watched the average family sedan in the USA triple in price. Almost all driven by environmental regulation and energy cost. By 1980 there was even a term for it "sticker shock" This continued at slower pace in the 1980's. Meanwhile the number automotive sector jobs has decreased. Richard can you sight one significant case where environmentalism has increased jobs. On shifting the tax burden. If the cost of energy increases for industry they will look to cut cost elsewhere-labor.

Craig said...

Playing with the "green" label seems to be the key to success. Some of those chicken sh*t ideas all ready have momentum: http://www.stateline.org/live/details/story?contentId=464696

"... many states also include energy from burning agricultural residue or solid waste, known as biomass, or drawing energy from the earth’s heat, known as geothermal. Hawaii and Texas will count wave energy towards their standards. North Carolina includes energy generated from swine or poultry waste. Michigan and Pennsylvania go further, counting so-called “clean coal” technologies towards their standards."

Gerard Harbison said...

Isn't the experience of Spain with green jobs sufficient of a counter-example? Or do we have to learn the lesson twice?

Marlowe Johnson said...

Richard,

Given that you accuse WGIII of bias, I'm wondering if you'd care to respond to Frank Ackerman's suggestion that some of your work on the social cost of carbon is similarly biased in favour studies that give low estimates for the social cost of carbon:

http://www.sei-us.org/climate-and-energy/Ackerman_Sept2009Comments_on_EPA_GHG.pdf

Specifically:

"Tol‟s meta-analysis, sometimes described as the most comprehensive available study, is in fact a highly personal view of the economics literature. Tol includes 211 estimates of the SCC, of which more than half, 112 to be exact, come from Tol‟s own work.

Disproportionate numbers also come from a few other authors and models. Every version of William Nordhaus‟ DICE model is included, despite the fact that the newer versions were created to update and replace the older versions.

Tol has not published 112 separate studies of the SCC; rather, he has counted multiple scenarios and sensitivity analyses within his own studies as separate estimates. He has extended the same treatment to some but not all other economists. For example, the Stern Review, which included multiple scenarios and sensitivity analyses, is treated as only generating a single estimate of the SCC in Tol‟s meta-analysis. Thus the use of Tol‟s meta-analysis as a starting point is not a
neutral decision; it introduces biases in favor of the work of Tol and Nordhaus, and against the
Stern Review, among others."

Slightly off-topic, but is it correct to say Roger that your advocacy of a $5 carbon tax is based on Richard's similar preference?

Roger Pielke, Jr. said...

I hope that this discussion can keep two issues distinct ...

One is about the relationship of climate policy and jobs;

The other is the degree to which the IPCC accurately reflected the scientific literature on this topic.

This post is primarily focused on the latter question.

Roger Pielke, Jr. said...

-10-Marlowe

"... but is it correct to say Roger that your advocacy of a $5 carbon tax is based on Richard's similar preference?"

No, not at all. I think that it is safe our (Tol/Pielke) views on carbon taxes are based on completely independent judgments based on very different reasoning, though we arrive at similar conclusions.

Harrywr2 said...

Mr Tol,

I would like to know where the IPCC numbers for coal come from.

http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch4-ens4-3.html#4-3-1

The BP Statistical Energy Review lists a 122 year Global Supply at current consumption. Yet the IPCC numbers show a greater then 800 year supply at current consumption.

A recent USGS study concluded that US 'recoverable' coal was substantially over stated and US 'economically recoverable' coal was even more greatly overstated.
http://pubs.usgs.gov/of/2008/1202/

It seems to me any economic analysis that starts from the standpoint that coal will not become a constrained resource will be diverge greatly from reality.

The global price for coal tripled between 2000 and 2010. This rate of price inflation indicates a 'constrained resource'.

Geckko said...

As an economist, this is one area of popular debate that drives me mad. It is not confined to the economics of cliamte policy.

None of these policies "create" or "destroy". The change the way we allocate and transform resources (means the economy moves to employ the same number of people doing different things of different value) and change the distribution of income and wealth by central arbitrary intervention (i.e. produces winners and losers).

The debate is about whether the artifiically tranformed economy - an economy that transforms and allocates resources according to centrally dictated rules (e.g. electricity MUST NOT be generated by fossil fuels) - is less productive and hence has a reduced standard of living.

It is not a controversial stance to say that the answer is almost certainly yes, we will employ as many people, but we will be less productive in aggregate and hence poorer.

bernie said...

Roger:
I think Richard has proved his point that the IPCC did a poor job summarizing the literature and identifying the uncertainties and gaps in our current level of understanding.

Mike:
I agree with you that an example would be informative to say the least.

Geckko:
In a confused way I think I was trying to say the same thing. This type of meddling arbitrarily adjusts prices and ergo must be less efficient - ceteris paribus!

Marlowe Johnson said...

Roger,

I suspect many of your readers, myself included, would be interested in hearing more about your reasoning behind the $5/tCO2e, but I understand it's OT here so maybe later?

Roger Pielke, Jr. said...

-15-Marlowe

Yes, I will ... very soon you will get much more than you probably want on that topic;-)

A said...

The argument that the green economy will create jobs is a red herring. Economically, the real question is whether the green economy improve our standard of living (i.e. GDP per capita). I most certainly will not. This is analogous to arguing that we could build more wealth if we mandated the use of hand tools over power tools for housing construction. This is nonsense. The sum total of man-hours needed to build a house would increase, even when considering indirect man-hours (manufacturing, power production). How can one argue that less efficiency and lower productivity will increase our standard of living? It's simply wrong.

I also hear this "jobs" reasoning with regard to green energy. The energy business is much like the taxi business in that supply must be dispatched to meet demand in real time. If cab companies were mandated to deploy wind and solar powered taxis, would we really be better off? No. When the wind wasn't blowing and sun wasn't shining then the good old fashioned gas cab would have to be dispatched. Instead of having to purchase and maintain one fleet of taxis, there would instead be three with the corresponding cost increases. What's so green about that? How would these new "jobs" be better for the economy? It's all fuddle duddle.

Marlowe Johnson said...

A,

I suspect you'd find quite a lot of people who would object to your assertion that the concept of standard of living can be meaninfully represented by such a coarse metric as GDP per capita.

The rest of your post neglects to consider the damages that are avoided from climate change, which makes the rest of what you say fuddle duddle, so to speak...

Harrywr2 said...

Gerard Harbison said... 9

"Isn't the experience of Spain with green jobs sufficient of a counter-example? Or do we have to learn the lesson twice?"

Spain heavily subsidizes its coal industry. Coal production can be quite labor intensive once one gets down to mining 3-6" seams with a pick and a shovel.

Germany subsidizes portions of it's coal industry to the tune of $100/ton. Producing electricity from coal that has a true cost of $200/ton just isn't economically viable. Its nothing but a very expensive jobs program. I've seen numbers that the German coal subsidies worked out to be $94,000 per miner.

Obviously, Governments that heavily subsidize production of a product while simultaneously engaged in taxing consumption of that same product aren't thinking about 'economic efficiency'.

Richard Tol said...

-5-Sean
Economic growth is to a certain extent driven by new ideas. The accumulation of human ingenuity does not obey any laws of conservation.

-7-Mike, -9-Gerard, -14-Geckko, -18-A
It is very well possible to configure an economic model such that it generates higher employment as a result of climate policy. That is irrelevant. What matters is whether one can configure climate policy such that it generates higher employment in reality. (Lower unemployment is generally found to increase welfare.)

The problem is a subtle one. Applied economists are hired to do ex-ante policy evaluations (what would happen if?). That can only be done using a model. Funders of applied research are rarely interested in ex-post policy evaluations (what did happen?). Funders of fundamental research are not interested either, as it is all too applied and relevant.

So, the IPCC necessarily relies on a lot of idealised ex-ante research and little ex-post research.

For a recent ex-post study on this, see http://ideas.repec.org/p/esr/wpaper/wp329.htm

-10-Marlowe
Let's debate this elsewhere.

jgdes said...

You might just have doubled the number of people who have read WGIII.

I've always been bemused about the claim for green jobs, because if more people are employed to produce the same energy output then it can't be described as good economics. There's also the thorny issues of where these jobs will be (eg China?) and how long they'll last.

I think if the government money for renewable energies were found from cuts in the military budget or reductions in bureaucracy or stopping the subsidy of Wall Street bankers then it would be well worthwhile. How about interest free loans for insulation, geothermal heating and the like. Trying to compare the up and coming tech with established tech, all of which had a big leg up in the first place, just isn't fair. Price reductions come with mass production but that will only come from people actually buying green tech: The classic catch 22. I wonder if the government could start to practice what it preaches and buy green tech for their own offices - negotiating thereby a significant cut based on volume purchase.

Marlowe Johnson said...

Thanks for the link Richard. Very interesting paper, in particular the conclusion:

"We estimate the effect on the change in total factor productivity (a proxy for technological progress), on employment, on investment, and on the returns to capital (a proxy for accounting profits). The following results emerge. First, as one would expect, results vary dramatically between sectors, not just in the size of the
estimated effects but also in their signs. Second, total factor productivity accelerates
with higher carbon taxes. Although the effect is insignificant in large parts of the
economy, and negative in some sectors, the positive impact in a number of sectors
dominates. This finding supports the Porter Hypothesis. Regulation spurs innovation ..."

btw, the link you provided is missing an l at the end, as in html.

cheers,

Raven said...

It think it worth looking at the position of nanny or childcare worker. This job category is fairly unique because to be viable a nanny must make less that the wage of the parent continuing to work. If the nanny's wages rise too much one parent would quit their job rather than pay the nanny.

This has led to a situation where many Americans rely on illegals as a way to reduce labour costs.

I see the cost of energy like a nanny's wage. Increase the cost of energy then some economic activity will become unviable and people will be thrown out of work. Increase it a bit and the economy could adapt and still provide net gains in jobs. Increase it too much and the economy will be strangled.

That is why I think it is nonsense to claim that effective anti-CO2 regulations would be a net benefit until some currently unknown energy production technology is discovered.

UAN said...

-23-Marlowe Johnson

you stopped your ellipses too soon. The next few sentences go on:

Third, energy taxes reduce employment. There is a significant impact on employment in almost all sectors. The most important effect is a large shift in labour between sectors, but the overall effect is negative. While energy taxes create jobs, more jobs are destroyed.

Raven said...

Richard Tol,

I have a question about these economic models.

Do they take into account that policy induced price increases have a different effect than supply induced price increases because humans are also ingenious of finding ways around the rules?

If a model assumes that all types of energy price increases would have the same effect then I would say it can't be realistic.

carl said...

First of all, if the premise is going to be more non stop growth despite how much of a fallacy this is what essentially will happen is employment can be made to rise as jobs become far less energy dependent and revert back to much more manual labor. Cutting emissions means using less energy, well that has to be covered by more labor is response in order to have the same output.

Problem here is that the mere fact of cutting emissions and therefore energy usage also means an end to economic growth as we know it and also wipes out things like our entire banking system which are predicated on nonstop growth and unlimited energy. Energy isn't money per se but they are inherently tied together. Money is basically a representation of time and labor plus energy. Cutting energy usage means a semi permanent deflationary depression that would take decades to get out of until things equalize.

Obviously this gets very complicated very quickly but there are cases where nations have had to go thru this process. See Cuba for example. The bottom line is always the same, standard of living drops. It doesn't have to drop to the point of abject poverty though either, but what most Americans take for granted would cease to exist.

The trick here is to encourage the most efficient and non polluting methods while discouraging the others. This by itself presents big problems. Many think nuke power is an answer, it isn't. The external costs both monetary and environmental make it a non starter, it is already subsidized by the govt by necessity. In an energy and resource constrained environment nuclear has literally no chance to happen. Too many other ways to doing things work far better.

It all comes down to leverage and we need to use the methods that provide to most bang for the buck so to speak both economically and environmentally.

Sharon F. said...

jgdes-
You said:
"I wonder if the government could start to practice what it preaches and buy green tech for their own offices - negotiating thereby a significant cut based on volume purchase."


The US Feds have an extensive program of green purchasing... here's probably more than you would want to know..
http://www.fedcenter.gov/programs/buygreen/

Marlowe Johnson said...

UAN,

I highlighted that particular portion of the conclusion because I thought it might be of interest to Roger given that 'innovation' is one of the topic areas that I'm sure he's interested in.

As I'm sure Richard would agree, whether or not a climate policy results in a net cost depends very much upon a series of assumptions that are fundamentally normative in nature (e.g. risk tolerance, concern for future generations, etc).

p.s. Roger, just discovered that Ulrich Beck is coming over to BI. Hope he decides to enter the blogosphere. "World Risk Society" should be required reading :)

UAN said...

Marlowe,

thanks for the clarification.

Geckko said...

21 - Richard

We don't "configure economic models" to allow for full employment.

We allow the labour market to adjust and are mindful of any potential labour market failures (Keynesian recession anyone?).

A well functioning labour market will allow for full employment. Believing you can "configure an economy" which sounds dangerously like cnetral planning doesn't stack up too well against the literature or real world stylised facts.

markbahner said...

"The debate is about whether the artificially transformed economy - an economy that transforms and allocates resources according to centrally dictated rules (e.g. electricity MUST NOT be generated by fossil fuels) - is less productive and hence has a reduced standard of living."

I don't agree that's what the debate is about. Dictated rules are only one of many potential actions being considered. Others include (but are not limited to):

1) A tax on carbon, with revenues

2) Cap and trade on carbon,

3) More federal spending on new energy forms and energy conservation measures.

markbahner said...

Oops. In item #1, I was going to describe some of the directions towards which the tax revenues might go (e.g., replacing other taxation forms, such as income taxes; or spent on alternate energy).

So even possibility #1 could involve many separate possibilities.

Jim Clarke said...

If we really think that forcing nations to convert to green energy will produce a net economic benefit, than why don't we force farmers to produce food without heavy equipment. Employment in the farming industry would skyrocket as farmers employed tens of thousands of agricultural workers. Of course, food would become much more expensive and the quality of the food would decrease, possibly leading to much more food related illness. But at least employment would be up, right?

Of course not! As people everywhere paid more of their disposable income to eat, they would have much less to spend on everything else. Jobs would be lost in every sector outside of agriculture!

The idea that you can make a commodity that everyone requires (food, energy) more expensive and less reliable and get a positive economic outcome is simply stupid.

Can you imagine Ford Motor Company announcing that they are going to make their cars a lot more expensive and a lot less reliable in order to bolster their sagging bottom line? They would immediately be labeled insane. Yet, when the IPCC says we want to make energy a lot more expensive and a lot less reliable so we can produce a net positive economic outcome, people nod and agree. It is still insane.

Seriously folks, if this is really a way to make the economy better, why doesn't the government force every business to be less efficient?

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