Global Warming: Economics/Policy

 
ACADEMIC PAPERS
NOTE: for papers on State-Contingent Emission Pricing (i.e. the temperature-indexed tax) see this page. 
CLIMATE SENSITIVITY, AGRICULTURAL PRODUCTIVITY AND THE SOCIAL COST OF CARBON IN FUND

I have published a new paper with Kevin Dayaratna and Pat Michaels on the Social Cost of Carbon taking account of updated evidence on aerial CO2 fertilization and Equilibrium Climate Sensitivity.


Suppose we take a standard model of the Social Cost of Carbon (same as the EPA uses) and the latest mainstream science literature estimates of climate sensitivity to greenhouse gases (based on IPCC forcing estimates) and the mainstream measurements of crop/grassland responses to rising CO2 levels (based on satellites and experimental measurements) and put them together. Do we get evidence of a climate crisis? No, the opposite. We get evidence that the marginal damages of CO2 emissions are basically zero through the mid-21st century. In other words even if you accept mainstream climate science it still doesn't justify costly policy measures. 
EMPIRICALLY-CONSTRAINED CLIMATE SENSITIVITY AND THE SOCIAL COST OF CARBON
I have completed a study with Kevin Dayaratna of the Heritage Foundation in Washington DC and David Kreutzer of the EPA, which recomputes standard Social Cost of Carbon (SCC) estimates using updated empirical estimates of the equilibrium climate sensitivity (ECS). We applied the 2015 Lewis and Curry ECS distribution to the widely-used DICE and FUND Integrated Assessment Models. Previously the developers of these models (and others) have relied on model-simulated distribution of ECS values, especially from a 2007 paper by Roe and Baker. The Roe-Baker distribution underpins the US government's current SCC values used for regulatory purposes. We critique this aspect of SCC computation, explaining why the Roe-Baker distribution is unsuitable. A major reason is that simulated ECS distributions have been superseded by a suite of empirically-estimated distributions. Using a recent, well-constrained empirical ECS distribution we find the estimated SCC drops substantially in both the DICE and FUND models, and in the latter there is a large probability it is no longer even positive.
A PRACTICAL GUIDE TO THE ECONOMICS OF CARBON PRICING
A lot of people are talking about carbon pricing these days, but few people seem to have studied the underlying economics in any depth. The design of market-based instruments is definitely an area where seemingly obscure technicalities have large practical implications. I was invited by the University of Calgary School of Public Policy to write a survey paper on the economics of carbon pricing and the resulting report has been published as In it I emphasize four key points. First, carbon pricing is meant to be used instead of, not on top of, traditional command-and-control regulation. Second, the carbon price needs to be deflated by the Marginal Cost of Public Funds, which varies quite a bit across provinces. Third, the presence of market uncertainty means that a carbon tax is a less costly option than cap and trade. Fourth, Integrated Assessment Models give a wide range of estimates of the social cost of carbon, but empirical evidence favours numbers on the low end. 
PIPELINE UNCERTAINTY AND THE MARKET VALUE OF CANADIAN ENERGY FIRMS
Elmira Aliakbari and I looked at the question of whether unanticipated events that have bearing on whether pipeline projects get approved affects the market value of Canadian oil and gas firms. The working paper version of our study is here:We used Event Study Analysis to look at a series of news announcements from 2011 to 2015. Somewhat surprisingly, we could find no evidence that the events had a significant impact on stock market returns in the energy sector. This means wither that the market fully anticipated each announcement, or that market participants fully expect the oil to get to market some other way, so the future earnings and profitability of the energy sector will not be affected. 
CLIMATIC VARIATIONS AND THE MARKET VALUE OF INSURANCE FIRMS
Bin Hu and I published a study looking at how climate variations, in particular indicators of extreme weather, have historically affected the share prices of major insurance firms. The insurance industry has raised the concern that climate change poses a financial risk due to higher payouts for weather-related disasters. However, if extreme weather is increasing, presumably that means they have an opportunity to sell more insurance products as well, which may increase profitability. In our paper:we examined historical data on a portfolio of insurance firms and estimate a three-factor model augmented with climate indicators. Short-run deviations in measures of climate extremes are associated with increased profitability for insurance firms. Overall we find that past climatic variations have not had a negative effect on the profitability of the insurance industry. 
​EMISSION PRICING: In 2007 I was asked to talk about emission pricing at a conference organized by Queen’s University. This powerpoint deck gives a quick overview and introduced the state-contingent pricing concept. For more on that topic see this page. 
  • McKitrick, Ross R. (2007) Emissions Pricing: Some Implementation Issues Invited presentation to Queen’s University Institute of Energy and Environmental Policy conference “The Future of Coal in Ontario.” Toronto, May 10 2007.
NORTH AMERICA vs EUROPE: In 2007 I gave a talk at Wilfrid Laurier University's Viessmann European Research Centre, comparing US and European approaches to climate change. My point was that while they have outlined different objectives, the constraints are so tight that the outcomes are pretty much the same.
MITIGATION VERSUS COMPENSATION: This little paper sets out an argument that if we are unable to tell, ex post, whether a given weather event was due to global warming or not, we are unlikely ever to be able to compute the marginal damages due to carbon dioxide emissions. As such, we are better off planning to compensate victims ex post rather than trying to mitigate damages ex ante. If I was smarter and less distracted I would develop it into a more formal revision to the Integrated Assessment Model approach, which assumes away all the uncertainty over attribution.
DOUBLE-DIVIDEND SIMULATIONS: This paper came out of my PhD thesis work, using a computable general equilibrium model to show that revenue-neutral carbon taxes can achieve some emission reductions at no net macroeconomic cost. It wouldn’t get us to the Kyoto target, but I do believe that a low carbon tax of up to about $20 per tonne, if fully recycled into payroll and income tax cuts, would not harm the economy. Of course it wouldn’t reduce emissions much either.
OTHER
THE ECONOMICS LITERATURE DOES NOT SUPPORT THE 1.5C TARGET

Robert Murphy and I have published a study for the Fraser Institute arguing that standard mainstream economic analysis does not endorse the 1.5C target. 


We don't conduct a cost-benefit analysis ourselves. And we point out that the IPCC SR1.5 likewise didn't do a cost-benefit analysis (they even admit as much early in the report). Instead we show that the economists who have done CBA's have found that the costs of trying to keep to a 1.5C warming target vastly exceed the benefits.  Nordhaus' analysis, for instance, shows that it would be better to do nothing at all than to try to get warming down to 1.5C. And he got a Nobel Prize. 

IMPACTS OF A $170/TONNE CARBON TAX ON THE CANADIAN ECONOMY

Elmira Aliakbari and I completed a study for the Fraser Institute modeling the effects of imposing a high carbon tax on the Canadian economy. The federal government has said it won't have any effect on GDP and most people will end up better off, but this is nonsense. 


We project a GDP decline of about 1.8% and a loss of 184000 jobs nationally [Updated]. And we show that these estimates are right in line with numbers computed for policies at the time of Kyoto. The underlying model I developed is a hybrid CGE/Input-Output model with considerable provincial and sectoral detail. I developed my first CGE model (as part of my Ph.D. dissertation) which I used to model carbon taxes back before most people had ever heard of them. The data availability and  computing power have improved a lot since then. Unfortunately what has not improved is government policy analysis: it's all but vanished. One of the themes in our report is the contrast between the extent of analysis and disclosure 20 years ago regarding the costs of implementing Kyoto versus the total absence today. Some of the modeling groups and capabilities are simply gone, but more generally the government has decided it doesn't want to know the answer. 
CLIMATE POLICY: WHEN EMOTION MEETS REALITY

I have done a few talks recently on the theme of why CO2 emissions, unlike other types of air pollution, have proven so hard to reduce. One such presentation was for the Irish Climate Science Forum and is available online:


My talk covers some of the main reasons why, after 30 years of concerted public policy effort, there has been so little achieved on climate policy, and why I think this will continue to be the case going forward. Governments do a disservice to the public when they keep promising more than they can deliver and when they try to rally support for climate policy by claiming not only will it not cost anything but will make us wealthier. Marcel Crok wrote an article about the presentation for Clintel here. 
IMPACT OF THE FEDERAL CARBON TAX ON THE COMPETITIVENESS OF CANADIAN INDUSTRIES
This paper uses an input-output model to examine propagation of a $50 per tonne carbon tax through Canadian industrial operating costs to identify those at most risk of losing competitiveness. We also explain why the OBPS compensation will  only partly mitigate the problem. Even firms that get a rebate will experience an increase in marginal costs. 

CANADA'S BIOFUELS POLICY BLUNDER
Doug Auld and I wrote a study for the MacDonald Laurier Institute on biofuels policy in Canada. The bottom line is that they fail basic cost-benefit tests, costing about $3 for every $1 in benefits (including emission reductions) at best. But it's difficult even to make the case that they reduce GHG emissions at all.


Associated with this paper we published an op-ed in the Post.

ENERGY ABUNDANCE AND ECONOMIC GROWTH
Along with PhD candidate Elmira Aliakbari, I published a report for the Fraser Institute on the relationship between energy and economic growth. It might seem obvious that energy is important for growth, but a surprising number of policymakers and activists (e.g.) seem to think that cutting energy consumption is an important end in itself. We review econometric evidence from around the world, supplementing it with some new results on Canadian data, that indicates a Granger causal connection between energy abundance and GDP growth. 
ASSESSING THE PROSPECTS FOR A BINDING, EFFECTIVE, GLOBAL CLIMATE TREATY
I was an invited speaker at the 2014 Global Business Forum in Banff, Alberta, September 18-19. I was asked to be on a panel discussing climate and energy policies. The format allowed me about 10 minutes to present my perspective on these issues to an audience of CEOs, business leaders, a few academics and other VIPs from Canada and around the world. I decided to eschew powerpoint and simply give a short speech, which is available here. 
THE HIGH PRICE OF LOW EMISSIONS: I wrote a report for the Ottawa-based MacDonald-Laurier Institute on the difficulties of reducing GHG's from motor vehicles in Canada.
The bottom line is that if a moderate carbon tax were introduced (i.e. at around $25/tonne) driving habits in Canada would not change much. If policymakers decide that's not good enough and try to force large changes in driving habits anyway, the result will be high costs that outweigh the benefits, including environmental benefits. So if transport-related policies are being considered, the prospect of GHG emission reductions should not be considered a trump card that overrides other cost-benefit considerations.  
WUWT-TV PRESENTATION: I appeared on Anthony Watts' 24-hour web telethon on November 15 2012, speaking on "Energy, Pollution Control and Economic Growth." The video is online here. There are a few sound glitches, Skype being what it is, but generally the transmission quality was decent. 
CANADA'S CLIMATE POLICY OPTIONS: In 2007 the Ottawa Economics Association invited me to address the question of Canada’s options on global warming policy, on the eve of the new Conservative government’s announcement. In this paper I explain why pricing instruments are preferred to quantity targets, and what the literature says about the approximate marginal damages due to CO2 emissions.
​THE KYOTO PROTOCOL: During the debate over whether Canada should ratify Kyoto, Randy Wigle and I published (through the CD Howe Institute) a critical review of the federal government’s work on implementation costs. A little later I was asked to discuss the government’s plans as they were reflected (or not) in the 2003 budget, for a conference at Queen’s University.
  • *McKitrick, Ross R. and Randall M. Wigle (October 2002). The Kyoto Protocol: Canada's Risky Rush to Judgment. The C.D. Howe Institute Commentary.
  • McKitrick, Ross R. (April 2003) "Budget '03 and the Kyoto Process." In The 2003 Federal Budget: Conflicting Tensions edited by Charles Beach and Thomas Wilson, John Deutsch Institute, Queen's University.
REGULATING CO2: In 2001 I wrote this paper for the Competitive Enterprise Institute (they paid me a thousand bucks) explaining why cap and trade and similar methods for controlling CO2 emissions are bad ideas. I will have a new report for CEI this year going into more detail in light of the proposals before the US Congress.