Sherlock Holmes, I’m told, solved the case of “the missing
three-quarter.” Today, I’m going to try to emulate him. What is missing, this
time, is not a rugby player; it is a cost-benefit analysis for “net zero.” And
a lot more than three-quarters of it is missing.
This essay is a re-work and update of a detailed offering
from 2023, here: [[1]].
Externalities and social cost
First, I must introduce an economists’ word:
“externalities.” An externality occurs “when producing or consuming a good
causes an impact on third parties not directly related to the transaction.” The
impact might be negative (a cost), or more rarely positive (a benefit).
It is unreasonable that innocent parties should suffer
disbenefits from side-effects of others’ activities. At the least, once the
externalities are proven and quantified, those who benefit from the activities
ought to pay compensation to those negatively affected by them. If these effects
are sufficiently large compared to the benefits from the activities to those
who indulge in them, there is a case to be considered for restricting or even
banning them.
The effects are measured in terms of “social cost.” The
social cost of an externality is defined as the aggregate cost, to all those
affected, of that externality.
Cost-benefit analysis
Government, as I’ve said many times before, is supposed to
be a nett benefit to the governed. If not, we should get rid of it. So, if government
identifies a problem that it thinks may need fixing, then before taking any
action, it ought to check that the gains to the people from fixing the problem
will outweigh the costs the fix imposes on them.
Fortunately, we have a technique we can use to do this. It’s
called cost-benefit analysis. And in principle, it’s simple.
Social cost of the externality
You start out by understanding the problem. The first step
is to calculate the social cost of the externality, now and in the future. This
gives you an idea of what the costs resulting from the externality would be, if
you did nothing at all to control it in any way.
Costs of possible solutions
The second step is to look at possible solutions. Approaches
proposed generally divide into mitigation (taking pre-emptive action to
reduce the costs of the externality) or adaptation (only taking action
to resolve problems as and when they are apparent). It is also possible to have
solutions which are combinations of the two.
Each proposed solution will have its own profile of
reductions over time in costs resulting from the externality. It will also have
its own profile of costs, which must be incurred in order to mitigate, or to adapt
to the effects of, the externality.
Costs versus benefits
The third step is to analyze costs versus benefits. In
essence, to compare the costs of each solution – including doing nothing, which
has zero direct cost – with the benefits obtained through the reductions in
costs from the externality. You can then decide which is the best option.
Complexities
Of course, in practice, to do such a cost-benefit analysis
is very complicated. There will be uncertainties in the costs for the case
where no political action at all is taken over the matter. There will be a
range of possible combinations of mitigation and adaptation, all of which must
be taken into account. And there will be uncertainties in all their costs.
Uncertainty
Further, as any mathematician or businessman knows, if you
subtract one uncertain number from another uncertain number, particularly if
the two are close together, the uncertainty can easily become so large that no
objective cost-benefit decision can be made.
In this case, the true precautionary principle, “Look before
you leap,” ought to apply. You should not attempt any mitigation, but should simply
let the externality run its course. While being prepared to fix any problems
that may arise as they come up. Such an uncertainty, in effect, disqualifies
mitigation approaches as solutions to the externality, and means that
adaptation is the only sane approach.
After all, people benefit from the activity that causes the
externality. And those benefits must not be taken away from them if the
cost-benefit case against the activity is unclear. As in criminal law, people
should be assumed innocent, and not punished, until proven guilty.
The nub of the problem as I see it
In the claimed problem to which “net zero” has been put
forward as a solution, the externality is seen in terms of effects on the
climate of emissions of carbon dioxide (CO2) from human activities
such as energy generation, energy use, and transport. It is measured by the
“social cost of carbon” (SCC), a misnomer since it is really the social cost of
CO2 emissions. In the words of Nobel Prize winning economist
William Nordhaus, “This term represents the economic cost caused by an
additional ton of carbon dioxide emissions … or its equivalent.”
Now, I do not propose to look at the second and third steps
in cost-benefit analysis, which I described above. It is the first step, in
this case the calculation of the costs resulting from given amounts of CO2
emissions, independently of any climate policies, on which I focus. For in a
sane world, this calculation should have been done before any “solutions” were
even considered. And any “solution” more costly than what, according to the
SCC, would have been saved by eliminating the emissions, should have been
rejected.
But my contention is that the UK government has not
published any objective calculations of these costs for the UK. Indeed, it
has gone out of its way to prevent any such calculations being made! And thus, no
proper cost-benefit analysis for “net zero” has ever been done.
Integrated Assessment Models
The tools used in estimating the “social cost of carbon” are
called Integrated Assessment Models (IAMs). IAMs, in effect, take the outputs
of a climate model, then estimate the economic consequences, and from those
they calculate values for the SCC over time.
An overview of IAMs is here: [[2]].
It separates them into two classes. Cost-benefit IAMs, that “fully integrate a
stylised socio-economic model with a reduced-form climate model to
simultaneously account for the costs of mitigation and the damages of global
warming.” And process-based IAMs, which focus on (harrumph) “the analysis of
transformation processes depending on a broad set of activities that induce
emissions as side effects.”
I shall consider
only the first class of IAMs, as only they can do cost-benefit analysis. They
were also the only IAMs available at the time these calculations ought to have
been done.
DICE, FUND and PAGE
Three cost-benefit IAMs were available in 2006, when
Nicholas Stern conducted his review. These are DICE, FUND and PAGE. As far as I
know, they are the only cost-benefit IAMs still used today.
Historically, DICE was the first of the three. Its genesis
goes back at least to the 1980s, and its developer was William Nordhaus. FUND
comes from Richard Tol of the University of Sussex and his colleague David
Anthoff. And PAGE is the model produced by Chris Hope of the Judge Business
School in Cambridge.
In general, FUND seems to produce the most optimistic
results, because it includes positive side-effects of CO2, such as
on plant growth. PAGE is the most pessimistic, because it tries to make
allowance for unknown “tipping points.” And DICE is in the middle.
Some issues with IAMs
In an earlier essay at [[3]], I
noted the lack of testing of the predictions of climate models against
real-world data. IAMs seem to have the same problem, in spades. Particularly
given that they either include climate models, or work off their outputs.
Moreover, of the three, DICE and PAGE calculate damage using
a “damage function” which is essentially arbitrary. FUND’s damage calculations
are based on empirical figures from studies done in the 1990s; but even these
may only be valid within a narrow temperature range.
Some history
I shall now dive into the sorry history of the missing
cost-benefit analysis.
The Stern Review
In 2006, economist Nicholas Stern and his team published the
Stern Review. This was an (apparent) attempt to provide a cost-benefit analysis
for policy action or inaction on reducing CO2 emissions. It did, at
least, use the SCC approach. But of the IAMs Stern had available to him, he
chose the one, PAGE, which gave by far the most pessimistic estimate of the
social cost of CO2 emissions.
On top of this, Stern made other assumptions, such as a low
discount rate, that resulted in a grossly exaggerated estimate of the costs of
not taking any action. That Stern had to fiddle the figures in order to create
anything like a cost-benefit case for action, ought to have been a big red flag
for all involved. But it was ignored. With hindsight, it is obvious that PM
Tony Blair didn’t want Stern to do an honest, objective cost-benefit analysis.
What Blair wanted was something he could use to “justify” an alarmist call to
action.
Besides, Stern was – and is – not exactly a neutral in the
climate alarmism debate. Today, Stern is a professor at the Grantham Institute
of the London School of Economics: [[4]].
Funded by Jeremy Grantham, billionaire crusader against climate change. Stern’s
latest book is entitled: “The growth story of the 21st century: the economics
and opportunity of climate action.” “Opportunity,” for Stern, seems to mean denial
of opportunity to ordinary people.
The Climate Change Act 2008
Next, to the 2008 UK climate change bill. They did make a
token attempt at a cost benefit analysis. The numbers were based on the Stern
review. Not only were these numbers dubious for reasons outlined above, but
they had a huge range of uncertainty too.
I actually downloaded and read the 200 or so pages of
supporting data. If I recall right, there was a factor of 7 uncertainty in the
costs, and a factor of 12 uncertainty in the “benefits,” of taking action to
reduce CO2 emissions in order to mitigate climate change. If we
could believe the figures in the first place!
Such numbers are useless for making any kind of objective
decisions. These estimates were not fit for purpose. Yet, the politicians went
ahead regardless.
To their credit, five brave Tory MPs had the gumption to
stand up for the people they were supposed to represent, and oppose the bill.
The rest of them, more than 450, voted to subject us to Soviet-style “five-year
carbon budgets,” as well as all manner of taxes, and caps on emissions of other
greenhouse gases too. They acted shamefully and recklessly in making costly
commitments, on behalf of the people they were supposed to represent, without
rigorous justification. They acted as traitors to our civilization.
The social cost of carbon (SCC)
At the beginning, the UK did use the SCC approach for
valuing the effects of CO2 emissions when considering policies.
There is a “carbon valuations” page here [[5]],
giving some history. The interesting parts are near the bottom, so in essence
you need to read the page backwards.
The shadow price of carbon (SPC)
The carbon valuations page also says: “Following the
publication of the ‘Stern review on the economics of climate change’, and work
commissioned by the Inter-departmental Group on the Social Cost of Carbon, the
methodological approach was changed to incorporate use of the shadow price of
carbon.” Compared with the SCC, the SPC “takes more account of uncertainty, and
is based on a stabilisation trajectory.”
Reviews by economists
This page [[6]]
links to the documentation on the change to using the SPC. One key difference,
as the page admits, is that the SPC can be set by government. Whereas
the SCC is calculated independently of any political policies or aspirations.
The page also links to reviews on that change by several economists.
One, Paul Ekins, said: “The issue is how to arrive at such a price in a way
that is both defensible and supports the Government’s climate change policy.”
So, the climate change policy required a pricing mechanism that wasn’t easily
defensible? That’s a bit of a revelation. And an extremely worrying one. Are
we, perhaps, looking at a case of fraud against UK taxpayers?
A further review was instituted in 2009. The original page about
that review is still available, here: [[7]].
I will quote the details from the bottom of that page.
“The old approach based on estimates of the social cost of
carbon should be replaced with a target-consistent approach, based on estimates
of the abatement costs that will need to be incurred to meet specific emissions
reduction targets. The change will have the effect of helping to ensure that
the policies the government develops are consistent with the emissions
reductions targets that the UK has adopted through carbon budgets, and also at
an EU and UN level.”
This was supported by a review from economist Paul Johnson:
“given a target, the consistent approach is to value carbon in such a way as to
ensure we hit the target.”
So, let’s get this straight. Instead of doing a proper
cost-benefit analysis, they changed the rules to make it look as if whatever
“targets” government decided to pick were going to be met. This was not
evidence-based policy. This was policy-based fiddling with the “evidence.”
Moreover, it made it impossible to do a proper, objective cost-benefit analysis
on “net zero.”
A cost-benefit analysis at last?
Fast forward to 2019, when the ideas of “net zero” and
“decarbonisation” raised their ugly heads to the general public. There was,
obviously, still resistance to going ahead without any kind of cost-benefit
justification. The Committee on Climate Change (CCC) was asked, at last, to do a
cost-benefit analysis for “net zero!” This was the result: [[8]].
You can note that the chairman of the group that produced
this report, Paul Ekins, was the economist who drove the decision to move away
from the use of the social cost of carbon. And that one of the eight members of
the CCC was an economist called Paul Johnson.
You can see in action the “MAC” approach which replaced use
of the SCC, and you can marvel at how obscure and counter-intuitive it seems.
You can also marvel at the lack of monetary numbers in the report for the costs
of climate change!
You can also see that “Even though the macroeconomic change
from ‘net zero’ is likely to be small, the required structural change to the UK
economy would be very great.” And “It is clear that getting to ‘net zero’ will
require transformative social and economic changes in practically every aspect
of society.” And all this was being put forward behind closed doors, without
ever once consulting us, the people whom government is supposed to be serving!
You may well conclude, as I did, that whatever this report
was, it was not an unbiased, quantitative cost-benefit analysis. It was a
recipe for tyranny and economic collapse.
The 2020 Green Book change
The “Green Book” is a set of procedures, meant to guide cost-benefit
analyses carried out by the UK government. Here is an overview: [[9]].
The Green Book was first issued in 2003, and radically updated in 2013.
In 2020, there was an update to the Green Book, described
here: [[10]].
It says: “In March 2020, the Government announced a review of the approach, to
improve how the Green Book supports strategic priorities such as its ‘levelling
up’ agenda and the transition to net zero greenhouse gas emissions.” Further: “The
2020 review of the Green Book concluded that it failed to support the
Government’s objectives … because the process relied too heavily on
cost-benefit analysis.” And there was “insufficient weight given to whether the
proposed project addressed strategic policy priorities.”
This seems to imply that policies politicians deem to be
“strategic,” including “net zero,” are to be exempt from cost-benefit analysis!
No matter how damaging the effects of those policies will be on the people the
government is supposed to be serving. Let that sink in.
I’ll also point out that, while it was Gordon Brown and
Labour that abandoned the use of the social cost of carbon, this
amazingly dishonest turn-about was the work of Boris Johnson and the Tories.
And specifically of then-new chancellor Rishi Sunak. Both the main political
parties have been caught fiddling the books on this one.
What is the UK’s recent “shadow price of carbon?”
A 2022 independent report, [[11]],
revealed that the number the UK government then used to calculate the benefits
of reducing CO2 emissions by a tonne (£255.40) was more than five
times the sterling equivalent of the US government’s published SCC per tonne
(£48.54).
This means that the UK government’s estimated cost of CO2
emissions per tonne has gone up by a factor of more than 5 due to the
abandonment of the SCC approach. I call foul on that.
Where we are today
The costs of the “net zero” project are now recognized, by
more and more people, to be spiralling out of control. There are many people
who understand the energy supply side of the ledger. One I can recommend, if
you can tolerate numbers, is David Turver and his “Eigen Values” substack: [[12]].
Government is throwing plenty of misinformation at us there.
But fewer people have looked at the other side of the ledger
– at whether or not it actually makes any sense to be doing any this stuff at
all. That is the province of people like me. And I can tell you, without any
doubt, that if government had any concern at all for the people it is supposed
to serve, the “net zero” caboodle would never have been begun.
The political blob have been defrauding us for decades. It’s
time to fight back. And as campaign manager for my local branch of Reform UK, I’m
going to be doing everything I can in the run up to the May 7th local
elections.
To sum up
What happened with the Stern Review was bad enough.
Economists took it apart, yet it was still used to “justify” the Climate Change
Bill 2008.
The numbers submitted for the Climate Change Bill 2008 were
far worse than merely bad. Yet almost all MPs waved it through, against the
interests of the people they were supposed to “represent.”
It is even more troubling that in 2009, the UK government
chose to make it, in effect, impossible to do proper cost-benefit analysis on
anything involving CO2 emissions. Stern had failed to convince
people that the problem was big enough for draconian action. So, they made sure
no-one could try to show he was wrong.
Then in 2019, they issued a report about costs and
benefits of “net zero,” which was not a cost-benefit analysis. And in 2020,
they decided to exempt “strategic” projects such as “net zero” from any
requirement to analyze costs and benefits at all.
UK governments of all parties have, in my view, committed very serious fraud over the “net zero” issue against the people they are supposed to serve. And they have behaved, over decades, with extreme bad faith towards us. We do, indeed, have a crisis on our hands. But it is not a “climate crisis,” or anything like it. This is a crisis of legitimacy of government.
[[1]] https://libertarianism.uk/2023/04/15/climate-crisis-what-climate-crisis-part-five-the-case-of-the-missing-cost-benefit-analysis/
[[6]] https://www.gov.uk/government/publications/shadow-price-of-carbon-economic-appraisal-in-the-uk
[[7]] https://www.gov.uk/government/publications/carbon-valuation-in-uk-policy-appraisal-a-revised-approach
[[8]] https://www.theccc.org.uk/wp-content/uploads/2019/05/Advisory-Group-on-Costs-and-Benefits-of-Net-Zero.pdf
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