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Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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Monday, October 15, 2018

Incredibly high cost of carbon pollution

How do you measure the cost of carbon emissions?  The cost isn't borne by those who do the emitting, but by the whole of society.  This is called an "externality": someone benefits because the cost of creating their income is forced upon others.  A good example is where a chemical factory dumps toxic pollution into the air.  The factory's owners gain, but individuals who live near the factory have worse health or even die.  This is a clear example of what's called "market failure".  One way to reduce this failure is for society to charge polluters.  This "internalises" the cost of their pollution so that it is taken into account in the cost of production.

 From Dana Nuccitelli at The Guardian:

The social cost of carbon is a measure of the economic damages caused (via climate change) by each ton of carbon pollution that we produce today.  It’s difficult to estimate because of physical, economic, and ethical uncertainties.  For example, it’s difficult to predict exactly when various climate tipping points will be triggered, how much their damages will cost, and there’s also a question about how much we value the welfare of future generations (which is incorporated in the choice of ‘discount rate’).

In 2013, the Obama administration set the federal social cost of carbon estimate at $37 per ton of carbon dioxide (up from the previous estimate of $22).  That was a conservative estimate – in recent years, research has pegged the value closer to $200 because recent research has shown that global warming slows economic growth, which makes it quite expensive.  A majority of economists in a 2015 survey believed the federal estimate was too low, but Republicans have recently been trying to dramatically lower it anyway.

A new study led by UC San Diego’s Katharine Ricke published in Nature Climate Change found that not only is the global social cost of carbon dramatically higher than the federal estimate – probably between $177 and $805 per ton, most likely $417 – but that the cost to America is around $50 per ton.  That’s the second-highest in the world behind India’s $90, and is also higher than the current federal estimate for the global social cost of carbon.

That’s a remarkable conclusion worth repeating.  Ricke’s team found that the cost of carbon pollution to just the United States is probably higher than its government’s current estimate of costs to the entire world.  And the actual global cost is more than 10 times higher than the federal estimate.  And yet Republican politicians think that estimate should be much lower.
[Read the full article here]

13 degrees C /54 degrees F is the optimal temperature for human economic productivity.  Economies in countries with lower average temperatures like Canada and Russia would benefit from additional warming, but it would slow economic growth for nations closer to the equator with hotter temperatures. (Source: The Guardian)

In other words, for entirely selfish reasons, the US should have a carbon tax of $50/tonne of CO2.  Even with a carbon tax of just $20 per tonne. emissions would decline sharply.  For example, at current costs of wind and solar, with a $20 carbon tax, coal power stations would be so uneconomic they would quickly be closed down.  At $50 the USA would decarbonise their economy within 15 or 20 years.  Of course, to prevent major economic disruption,  we wouldn't introduce the carbon tax at $50 per tonne, but at, say $20, stepping it up each year by $5.  And we would tax imports from countries which didn't have a carbon tax, using relative per capita emissions or emissions relative to GDP as the benchmark.  As we have seen, it is entirely possible to have a price on carbon and also to have economic growth.

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