Nigel Lawson: Rational Climate Economics
Paper presented at the Erice conference “The Role of Science in the Third Millennium” – Erice, 20 August 2012: Session ‘Climate and Climate Economics’
This is an economic session within a conference organized by the World Federation of Scientists.
So it is appropriate, perhaps, to begin by asking who, so far as climate change is concerned, have let us down more – the scientists or the economists.
In my judgment it is the scientists, not least because we expect so much more of them.
Science is so much greater than economics, and – as a result – the achievements of scientists have, over the years, benefited mankind so much more than the achievements of economists.
Those achievements have been based on one overarching principle: the application of reason, rather than authority, to our understanding of the natural world.
The long march from the middle ages to the enlightenment was the transition from relying on religion and the authority of the church to explain the natural world to relying on the application of reason and the open-minded study of empirical evidence.
That is what science is, or should be, about.
But in the case of climate science that is no longer the case.
There is now a new religion – the AGW religion, of which scientists are the new priesthood, preaching their dogma with precisely the same claim to authority as the mediaeval catholic church.
The truth is, as the best scientists recognise, that the greenhouse effect is a highly complex phenomenon, and the scale of the climate sensitivity of carbon is hugely uncertain.
Moreover, the greenhouse effect is only part of an even more complex and only partially understood overall climate system, and the notion that this can be reliably captured in a computer model is arrogant folly.
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But if we have been let down badly by the scientists, the economists are not free from blame, either.
The most culpable economist of all is surely Nicholas Stern, now Lord Stern, whose 700-page review of the economics of climate change purported to show that the cost of a crash programme to reduce carbon emissions would be far outweighed by the benefits of doing so.
Although the Stern review is now almost six years old, it remains the explicit basis on which my own country’s damaging climate and energy policies are officially justified, and Stern is taken seriously as an authority worldwide.
And although a number of economists – unlike the politicians, the media, and the environmentalists, few of whom had even read it – found fault with it when it was first published, few have stepped up to the plate since.
On 4 September, the Global Warming Policy Foundation, the think-tank I founded some three years ago, will be publishing the most comprehensive examination of the Stern Review to have appeared anywhere.
It shows the economic analysis of the Stern Review to be so shoddy as to border on the fraudulent, and wholly unfit to be used as a basis for important policy decisions.
I have time today to mention only a few of the defects the GWPF study exposes:
- it calculates the long-term benefits of decarbonisation by using an abnormal and ludicrously low discount rate, while assessing the costs of this policy by using a normal discount rate
- it compares the cost of limiting the extent of global warming with the benefit of eliminating warming altogether
- it assumes that there will be no behavioural adaptation that would reduce the adverse effects of a warmer planet, even using existing technological resources, let alone as a result of future technological development
- while it also assumes that future technological development will greatly reduce the cost of non-CO2-emitting energy
- in particular, it assumes the adoption of large-scale carbon capture and storage, a technology that does not at present exist and, which, on present evidence, if it ever were to exist, would be prohibitively costly
- it ramps up the alleged cost of warming on the basis of wholly unreliable non-peer-reviewed alarmist literature. A subsequent World Bank study, for example, has shown that Stern’s forecasts of damage to infrastructure from more powerful storms are up to 100 times too large
- it suggests that the losses from global warming (it wholly ignores, incidentally, any offsetting benefits from global warming) will be at least 5% of global GDP – and I quote – “each year now and forever”; concealing the fact that even on Stern’s own phoney figuring the cumulative costs of the crash programme he advocates would exceed the cumulative benefits for the next 100 years and more.
Uneasily aware – although not publicly admitting – some of these cumulatively fatal flaws, Stern and his team at the hugely well-funded Grantham Institute he now heads are increasingly falling back on the Weitzman thesis, the so-called ‘dismal theorem’ or ‘fat tail’ argument.
Harvard’s Martin Weitzman is, of course, a more distinguished economist than Stern.
He claims that Stern’s conclusion is right: it is merely his reasons for that conclusion that are wrong.
In sharp contrast to Stern, Weitzman maintains that cost-benefit analysis is inapplicable: the uncertainty is far too great.
What matters in his eyes is that we cannot rule out the possibility that, however small the risk, global warming will increase to the point where it threatens the very survival of humanity on this planet.
That being so, we must do whatever it takes, now, to prevent it. The cost of doing so is, essentially, irrelevant.
But it is immediately clear that this is absurd, for two compelling reasons.
First, as Peter Lilley, the author of the GWPF study, points out, this climate Armageddon can occur only if the climate sensitivity of carbon is very high indeed.
The fact that there has been no recorded global warming trend for the past 15 years or so, during which CO2 emissions have grown very rapidly indeed, thanks in large part to remarkable economic growth in China, suggests that the climate sensitivity of carbon is in fact less than is incorporated in the models on which, for example, the IPCC relies.
But we cannot entirely rule out the possibility that, over the past 15 years, purely temporary and short-term climate factors have offset and obscured the true underlying warming trend.
If so, however, these will by their very nature before long come to an end, and we shall very soon discover whether the climate sensitivity of carbon is in fact as high as Weitzman fears it might be, and will be able to act accordingly.
The second reason why the Weitzman thesis is absurd, is that there are a host of possible planetary emergencies, the principal subject matter of this conference.
We simply cannot spend unlimited resources on seeking to eliminate them all.
And common sense suggests that the menace of manmade global warming, so far from being, as Weitzman claims, in a league of its own, is probably the least of them.
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But there is another and even more fundamental reason why Stern’s decarbonisation prescription (whether based on his own phoney cost-benefit analysis or on Weitzman’s ‘dismal theorem’) is – or should be – a non-starter.
Unlike physics, economics is not a science; and the attempts by economists to pretend that it is renders them both ridiculous and of diminishing use to policy makers.
Economics is an important aspect of the study of human behaviour. And, unlike the case with science, which is concerned with the natural world, in considering human behaviour we have always to take also into account two non-economic dimensions: ethics and politics.
If I had to name one reason, more than any other, why I object to the policy prescription of the Stern review, which at the end of the day is only slightly more extreme than that of the IPCC and indeed the UN, of which the IPCC is an offshoot, is that it is profoundly immoral. For what it calls for is global decarbonisation.
And the reason why the world uses hydrocarbons for its energy needs is simply that they are far and away the cheapest source of energy available, and are likely to remain so, not for ever, but for a very long time to come.
Even if (and I rather doubt it) we in the western world feel that we are rich enough to move from relatively cheap energy to much more expensive energy, the notion that the developing world should unnecessarily impoverish its people by doing so is, I believe, profoundly immoral.
Particularly when, in their case, impoverishment means, for hundreds of millions of their people, destitution, malnutrition, preventable disease, and premature death.
All this, moreover, in the name of arguably benefiting distant future generations who, thanks to economic growth, will be many times better off than those who are asked to sacrifice their living standard, and that of their children, today.
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Happily, of course, this won’t happen.
The Stern/IPCC/UN prescription is not merely ethically unacceptable: it is also, partly for that very reason, politically unattainable.
Copenhagen and its successors have demonstrated that no global decarbonisation agreement will ever be delivered – and quite right, too.
The position of China is particularly salient in this context. According to the most recent projections made by the International Energy Agency, China alone will account for getting on for half the total growth in global energy demand by 2020.
And with its overwhelmingly coal-based economy, China has no intention whatever of taking the decarbonisation route, or of signing up to a global treaty requiring it to do so.
There are some credulous souls who affect to believe that China is in the process of switching over to renewable energy. It is true that – rightly or wrongly – it sees great export opportunities in selling wind turbines and solar panels to the West. And it is indeed striking that Chinese solar panel manufacturers, most of whom did not even exist 10 years ago, now satisfy a third of the world’s demand for solar panels.
Admittedly most of these Chinese manufacturers are now on the brink of bankruptcy, as Western demand has failed to match their expectations.
But what matters in this context is not Chinese exports to foolish foreigners, but how China plans to meet its own rapidly expanding energy needs.
And being an authoritarian regime it does indeed have a published plan.
This shows that it firmly intends to remain a carbon-based economy – which of course is why it is spending so much economic and political capital on securing coal, oil and gas resources in sub-Saharan Africa, where it has become the new imperial power, and oil resources in Latin America.
As for renewables, the plan indicates that, by 2020, wind-power will be supplying something under 1 1/2 per cent of China’s energy consumption.
Even this may be an overestimate. At the present time, almost half of China’s wind turbines are merely there to impress credulous foreigners.
Unconnected to the grid (this would cost too much) they are incapable of providing any electricity at all.
And solar? According to the plan, by 2020 this will meet – wait for it – less than 0.1 per cent of China’s total energy consumption.
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In short, climate economics – present company excepted – has been hijacked by a mixture of pseudo-scientific quasi-religion and political fantasy.
It is time to return to reason.
Rational climate economics means, quite simply, that, should there be global warming, for whatever reason, and of course there might well be, we will do, in the most cost-effective way that developing technology permits, what humankind has always done.
We will adapt.
In that way we will minimise the disbenefits of any warming that occurs, and pocket the benefits.
In the words of the poet, “That is all ye know on earth, and all ye need to know.”