Saturday, January 2, 2010

Proxy Problem Of Carbon Based Pricing And Global Warming

Below is a comment I posted about the proxy problem on Core Economics, "Why we need a carbon price, again" by Joshua Gans in response to his post about the Financial Times article, "Lights on – or off? Low-carbon living is anything but easy..." by Tim Harford.
Tim Harford's conclusion does not follow from his obvious truths.

When the public sector and governments are measuring and monitoring a wanted positive social result, such as a reduction in global harm and warming, there is always a proxy problem. The government always selects some indirect, intermediate and prior effect to control.

The ultimate and desirable goal is to prevent substantial harm to the planet and its inhabitants. Right now, our focus is on global warming, but of course, there are many other ways to harm the planet and to increase global warming. Currently, we know some of the other ways to cause extensive planetary damage and global warming, but we have yet to discover or notice the many other things we do that cause harm.

The best market approach to global warming would be some current indicator that measures the intended result and measures or modifies all future temperature increasing output of the planet's inhabitants and companies. Something akin to the market price of a company's shares that measure in current value all the future earnings output of a company. Minimizing the value of an indicator that measures the summation of future global temperature increases would maximize the reduction in global warming.

As history shows, when a public policy focuses on an intermediate casual effect, in this case carbon output, behavioral changes occur in the measured effects, but often do not achieve the intended results. Changes in the output of complex systems are never easy to predict when behavioral and input changes occur.

As I mentioned, our goals are to protect the planet and inhabitants. If we reduce carbon output and global warming, but harm life on the planet, we have both succeeded and failed. For example, many processes to reduce global warming use intermediate products that rely on heavy metals and rare earth materials, which can be harmful to the planet's inhabitants. Gases, other than carbon-based gases, which we are not limiting, may also increase long-term global warming. A proxy measure, such as carbon output, will create behavioral changes, but may not necessarily result in greater benefit to the planet's inhabitants. We could be finding ourselves running from one fire to another, until we reach a point without any feasible solution.

For example, right now, the earth absorbs a certain amount of the sun's energy and that energy heats the earth and its atmosphere. Suppose that in response to a reduction in the use of carbon fuels through price increase to carbon, it is more economical to use solar energy absorbing materials, such as darker colored materials. A slight change in the overall reflectivity and absorption of the sun's energy on the earth could undo all the benefit achieved through carbon and greenhouse gas reductions. Similarly, an increase in use of lesser solar energy absorbing materials could accelerate the next ice age. A change to solar energy absorbing materials exposed to the sun would occur gradually, without notice, intent or consciousness of its global warming/cooling effect.

Simply reducing a proxy, which is an intermediate effect, will achieve the results measured by the proxy, but it may not prevent the crisis. In the end, the proxy reduction may not achieve the desired overall benefit of decreasing global warming.

There is much more uncertainty about the effects of using carbon based pricing than often discussed. The results could be environmentally positive or negative and decrease or increase global warming. Results from complex system changes are never exactly as one predicts or envisions.

There is more uncertainty to Harford's conclusion, "a broad-based, credible carbon price will be the foundation of any successful policy on climate change" then he and many other carbon based pricing economists realize.

1 comment :

  1. Very true. I have often stated that the ecosystem is complex and that it is a logical fallacy to claim that CO2 reductions alone will protect the world from climate change. Congrats for putting together this piece!