We need an effective Public Service

At the NZ Economics Forum on Friday, Oliver Hartwich delivered a frank assessment of central agencies.

He asked why Treasury, the lead economic advisor to the government, is advertising senior economic analysis positions that require “good relationship skills” and “comfort working at pace” but not economics. He notes the Reserve Bank is giving senior appointments to people without relevant skills. Members of the Monetary Policy Committee must have no current or future research in monetary policy to avoid conflicts of interest. Oliver calls this ludicrous.

He asks what Treasury’s Living Standards Framework can do that cost-benefit analysis cannot. He calls the LSF a distraction. He wants rigour.

Oliver also calls out the Chair of the Productivity Commission for almost apologising for his organisation’s mission.

It is not a question of whether the next Global Financial Crisis will occur, says Oliver, but when. To get through the coming storms, our central economic agencies and core institutions must have the intellectual firepower and information they need to respond.

Perhaps this is why Italy and Greece are struggling

A recent report by David Law at the NZ Initiative has this astounding chart:

The bottom four countries are the four underperforming European PIGS. Little wonder Italy and Greece are in fiscal crisis territory when every $1 transferred to people on low incomes means sending $4 to people in the top 20% of incomes. I’m sure taxpayers in northern countries are thrilled to have seen their tax dollars going into the pockets of people who earn more than they do.

New Zealand comes out looking rather good. Remind me again what problem unemployment insurance is meant to solve?

I wish the EU all the best for its inevitable break up.

To Minister Shaw: Please explain

Yesterday, in the Herald ($), I challenged Climate Change Minister James Shaw to explain how his Emissions Reduction Plan lowers emissions.

In this post, I want to head off what he is going to say. His lines are, frankly, not right. So let’s get that on the table and go through the argument before he says it.

Shaw’s plan is vast. It covers every sector of the economy. The government could regulator, tax or subsidise anything or everything in the name of reducing emissions.

But Shaw’s plan is not going to reduce emissions.* The government has already placed a quantity cap, a sinking lid, on emissions with the ETS. Legislation passed in 2020. It is widely accepted that cap-and-trade schemes neutralise other emissions policies. If the cap determines total emissions, policies under the cap do not.

This neutralising effect of an emissions cap is called “the waterbed effect”.

Here is how a cap-and-trade scheme will neutralise an EV subsidy, for example:

Imagine an economy normally produces 100 tonnes of emissions. This year, the government decides to cap emissions at 80 tonnes. It issues 80 emissions permits and demands the surrender of one permit per tonne of CO2. Emissions fall to 80 tonnes.
Next year, the government issues another 80 permits and introduces a new EV subsidy. The subsidy successfully reduces transport emissions by five tonnes.
Total emissions remain at 80 tonnes. Why? Because there are still 80 emissions permits available. The five permits which transport no longer needs due to the subsidy will be used elsewhere. They will raise emissions (or postpone reductions) by exactly five tonnes somewhere else in the economy.

So, the EV subsidy reduces emissions from one sector. But overall emissions do not change. This is the waterbed effect.

Now, before I go any further, let me say that “The ETS Is Not Enough”™ is not an answer. That line is a mantra in Wellington. It is useless except for the fact it has fooled everybody who hears it.

Somehow, nobody has noticed “The ETS Is Not Enough”™ does not make any case for doing other policies if those policies are going to be neutralised by the cap.

Even if the ETS leaves you short of your emissions target (because it is Not Enough™), the waterbed effect is still in play.

So even if the “The ETS Is Not Enough,”™ complementary emissions policies don’t help. If they are neutralised by the cap, then those policies are going to leave you exactly as far short of your target as if you had not done them.

Every day, this advanced logic escapes hundreds of public servants who do nothing except think about climate change policy at your expense. You pay their salaries but I assure you they are not working for you.

Anyway, if Shaw’s Emissions Reduction Plan is to reduce emissions, it has to find a way around the waterbed effect.

Shaw has previously spoken about how to avoid the waterbed effect. His solution seems obvious: lower the cap as policies bring down emissions.

Here is Shaw speaking to Carbon News earlier this year:

[W]hat they’re talking about is something called the ‘waterbed effect’. If you cut emissions in one area and that takes things below the cap then it allows others to pollute more in the meantime.
But if you’re successfully lowering the cap every time then you minimise that effect because you’re saying, ‘Yes we’re taking emissions out here with the feebate and also with the ETS and then next time we set an emissions budget it will take account of the fact that emissions are lower.’
The way it works is you’ve got your 2050 target which is sort of long term. Then you’ve got your three five yearly budgets and each one is smaller than the one before. Every five years, at the start of each budget period, if circumstances dramatically change since you set the budget five years earlier, you can adjust at that time and say, ‘hey look things have moved far quicker or in unexpected ways we can adjust the budget to take account of that emissions budget.’

Shaw’s logic, as I understand it, is this: Ministers set the cap; Ministers can link the cap to complementary policies (EV subsidies, for example); complementary policies therefore lower emissions.

In the earlier example, emissions stayed at 80 tonnes after the EV subsidy had cut transport emissions. That is because there were still 80 emissions units in circulation. The intuitively obvious solution is to lower the emissions cap to 75 tonnes. Total emissions come down in line with the emissions benefits of the EV subsidy. Problem solved.

No. Problem not solved. That logic is not right.

Linking the cap to the policy does not make the policy lower emissions. It is the cap, not the policy, which lowers emissions. The policy is actually redundant. We explain why in our submission earlier this week on Shaw’s plan:

[Linking] the cap with complementary policies may imply the policies lowered emissions. However, this is an illusion. To see why consider this from the earlier example:

# If the government reduced the cap to 75 tonnes without the complementary policy, emissions would fall to 75 tonnes.
# If the government did the complementary policy but left the cap at 80 tonnes, emissions would remain at 80 tonnes.

The cap is doing all the work.
Accordingly, it is wrong to say that linking the cap to complementary policies means complementary policies reduce emissions. The connection is arbitrary. Ministers could link the cap to, say, cumulative rainfall, but nobody would suggest last week’s storm had lowered emissions. It is the cap, not the complementary policies, which lowers emissions. Complementary policies are still neutralised by the emissions cap. The waterbed effect is not avoided.

The cap is doing all the work. So long as the government has the option to reduce emissions simply by tightening the cap, other policies cannot cause emissions to come down (provided they are subject to the cap). The other policies are redundant.

The next obvious question is: what happens when the government does not have the option to simply tighten the cap? What if carbon prices rise to the point that voters or Parliament will not countenance any further tightening? Can complementary policies help further reduce emissions then?

This does open the door to complementary policies reducing emissions, but only by the smallest amount. Our submission walks through the weird permutations which are needed to get complementary policies to to cut emissions under an emissions cap. Short answer: we see no real way for complementary policies to cut more than a little extra emissions, at best.

If anything, complementary policies are more likely to raise emissions because of their lower economic efficiency and likely political inefficiency. The high cost of top-down emissions policies probably translates to a higher burn rate of political capital per tonne of emissions. That may seem like a fairly esoteric metric, but it matters in principle when the limiting factor on further reducing emissions is political feasibility.

Think about it this way: if the reason the ETS becomes politically constrained is because voters don’t like its cost of living effect, then how can policies which spend far more per tonne of abated emissions be any solution?

Complementary policies only have the opportunity to make any difference to emissions, up or down, if the ETS first becomes politically constrained.

It is hard to see any way the ETS is going to become politically constrained before 2050. New Zealand is already comfortably on track to achieve net zero emission in 2050 with existing policies. We include a list of reasons why in our submission. Nearly all of the evidence shows existing policies get us there.

I need to be clear about what “politically constrained” means. I mean it in the sense that a future government has no politically feasible way to net zero emissions.

Sure, the government could force the ETS price all the way to $500 if it stamps hard enough on trees and other removals technologies and rules out offshore mitigation entirely. That is what this government wants to do. And voters could well object to paying $500 per tonne of carbon.

But the ETS is not politically constrained if the government has the option to just stamp a bit less hard on trees or open the door slightly to offshore mitigation. Politically constrained is when the government cannot tighten the ETS any further, it cannot plant more trees, it cannot commission other removals technologies, and it cannot go offshore, and it is still short of net zero emissions.

Not going to happen. See the submission for why.

So, there is no question at all that right now we have legitimate, affordable, genuine pathways to net zero emissions, and we have options. We can plant a less trees and still get to net zero. We could plant no more trees and get to net zero. None.

Which means the government will always have the option to tighten the cap.

Which makes complementary policies under the cap redundant, including existing emissions policies.

Which means James Shaw’s vast plan is not going to reduce emissions. Not by one tonne.*

* For policies covered by the ETS cap, which is nearly everything except agriculture.

Why Reserve Bank independence matters

The case for Reserve Bank independence on monetary policy is obvious. If politicians have control of the money supply, they will use it to support their re-election.

But what is the case for Reserve Bank independence on financial regulation?*

The question arises because the Reserve Bank is looking at disclosure rules and possibly other regulations in response to climate change. The Bank can only consider these actions by maintaining climate change is a risk to financial stability. The Reserve Bank Act does not mention climate change but makes the Bank responsible for the stability of the financial system.

The Reserve Bank has not found any credible evidence that climate change threatens financial stability. Climate change is a big problem, to be sure, which demands a response. But its costs will be manageable and come with decades of warning. The idea that climate change is financial stability risk is absurd.

Accordingly, the Reserve Bank is outside its financial stability mandate by focusing on climate change. Its decision to target climate looks politically motivated.

John Cochrane explains why the combination of unlawful, politically-motivated actions by powerful financial regulators is toxic:

Of all the threats posed by a slowly warming climate, why is Ms. Yellen [the US Treasury Secretary] talking about financial stability? The answer is simple: Financial regulators are not supposed to implement each administration’s policies on non-financial matters. Financial regulators may only act if they think financial stability is at risk.
Why? Imagine that Trump returns. He declares, “Illegal immigration is an existential crisis. I can’t get Congress to do anything about it. Financial regulators: Tell banks to freeze the bank accounts of any customers who can’t prove legal status. Scour people’s accounts for payments to illegal employees. Freeze out any business that hires an illegal.” You would be shocked. The nation would be shocked. Ms. Yellen would be shocked. There is no financial risk here, we would all say. This is a vast abuse of power.

The Reserve Bank’s actions on climate change are not remotely in the same league of awfulness as this scenario. But it opens the door to that possibility in the future.

Climate risk to the financial system is a Big Lie. I don’t know how to put this politely. A little lie is a knowing untruth spouted by a devious individual. A Big Lie is a whopper, self-evidently false when parsed in standard English, passed around and around the bubbles of Davos, Glasgow, alphabet-soup financial agencies, philanthropies, and the narrative-endorsing media, until earnest do-gooders come to believe in its nonsense. Spouting it gains one the approval of the elite, and denying it quick expulsion and exclusion. A Big Lie justifies extraordinary grasps of political power.
…
Why repeat this Big Lie? Well, it’s obvious. Many people in our government and surrounding policy elites want to expand a particular kind of climate policy. That policy centers on stopping fossil-fuel development and use, before alternatives are available at scale, and subsidizing a particular kind of “green” projects. Windmills, solar panels, electric cars, rail, yes. Nuclear, carbon capture and storage — which would permit fossil-fuel burning — natural gas, hydrogen, geothermal, hydropower, innovation, zoning and land-use reform, adaptation, no.
…
Democratically elected legislatures and accountable administrations refuse to quickly implement this policy. Even the Biden administration, which on day one canceled the Keystone pipeline, quickly turned around to ask OPEC and the Russians to turn on the spigots when voters noticed gas prices rising.
…
What to do? Well, turn to financial regulation. What they can’t accomplish by accountable, democratic methods, they can accomplish by unleashing the awesome power of financial regulators to impose these policies, by denying funding to fossil-fuel companies and their customers, and freezing them out of the financial or payments system as we do to pot farmers, by demanding “disclosures.” The European Central Bank (ECB) is already printing money to buy “green” bonds, declaring them to be “undervalued.”
…
It is a particularly effective idea, because once thousands of pages of regulations are written, once the right people are appointed with all the protections of office, once the Twitter mob has silenced dissenters in the financial-regulatory community, once private businesses have gotten the message how to please regulators and hired hundreds of thousands of climate-disclosure compliance officers, the effort will be immune to the whims of pesky voters….
Most of all, it is blatantly illegal. In a democracy, independent agencies have broad but limited powers. Financial regulators are limited to financial risks. Securities regulators are supposed to enforce the “fiduciary rule” that asset managers must invest only on financial basis, not to please either the managers’ or politicians’ preferences. And there are great reasons for this limitation. If the Fed starts buying “green bonds,” the next Trump can force it to start buying “build the wall” bonds…

John Cochrane really is difficult to excerpt. Do read the whole thing.

In New Zealand, the order of events is slightly different. Climate change is more politically feasible here than in other countries, with the possible exception of agriculture. But it is the Governor driving the Bank’s focus on climate, rather than politicians forcing it onto the Bank. The end result is the same: an unelected body pushing a political agenda, compromising its independence, and opening the door to greater abuses in future. It is all fundamentally undemocratic.

Finally, a nice insight from Cochrane on the logic behind central banks’ focus on investment:

What they mean is not climate risk to the financial system, but the financial system’s risk to the climate, by financing the “wrong” investments. But they’re not allowed to regulate that. Hence the Big Lie: We looked for risks, and guess what, climate came out on top!

John Cochrane will deliver a public webinar for the New Zealand Initiative on Thursday 2 December at 11am. Sign up here.

Ian Harrison will deliver a public seminar on “Climate change and the risk to financial stability; Reality or overreaction?” next week on Friday 26 November at 11am Sign up here.

*To be clear, the independent application of financial regulation. Policy setting sits and should remain with the elected government.

Not about emissions

With its Emissions Reduction Plan released last week, the government is promising unprecedented control over every aspect of your life.

How you move. What you eat. Where you live. How you heat your home.

It is little short of a revolution. Between its emissions plan and next year’s Budget, which will also be about climate change, future governments of this country will have more to say about everything.

The problem is that existing policies already have this country firmly on track to deliver emissions targets.

In both its draft and final reports, the Climate Change Commission said current policies and a $50 carbon price will be enough to deliver net zero emissions in 2050. Its analysis did not show undue reliance on removals by exotic trees, although Ministers and officials have repeatedly made misleading statements about the Commission’s findings.

Today’s carbon price is $65. So we are ahead of schedule.

Which makes the government’s Emissions Reduction Plan redundant. We get to our targets without the Plan. Emissions will come down about as quickly with the plan as without.

New Zealand should get more credit for its progress on emissions. On a per-capita basis, greenhouse gases have been falling since 2006. They are down 22% overall, and down 34% if agriculture is excluded.

Net emissions of long-lived greenhouse gases – relevant for the net zero target – are down 25% per person.

And it is not pine trees that are doing all the work. More than 100% of the fall in net emissions is due to lower gross emissions.

So current policies are already doing the business demanded by environmentalists. There is no need to add thousands of dollars to the cost of vehicle imports, or any of the many other impositions being looked at, since we are already on track to deliver the stated goal.

There should be no question existing policies will deliver all of our emissions targets if they are given the chance. That is because, apart from methane, New Zealand has set net emissions targets. Both domestic law and international agreements recognise three pathways to lower net emissions: lower gross emissions; removals by trees and other carbon capture technologies; and offshore mitigation.

Removals and offshore mitigation are each affordable and scalable enough on their own to deliver net zero emissions in 2050.

But voters prefer reductions. Fine.

So the task for emissions policies is to assemble a mix of reductions, removals and offshore mitigation which

delivers emissions targets; and
reflects the premium voters are willing to pay for more reductions, less removals and less offshore mitigation.

The government is not thinking about climate change this way. In fact, it does not seem to be thinking about emissions at all. It has published an Emissions Reduction Plan which will bring down emissions by about the same amount as existing policies to achieve the same emissions targets.

What, then, is the point of an Emissions Reduction Plan if it does not reduce emissions?

Judging from its effects, the point is control. The plan will have two clear effects. Ministers will decide how and where emissions come down, not you. Second, you will pay more – ten times more, on the government’s own analysis – for the benefit of their judgment.

What a terrible deal. For the environment. And for your back pocket.

And all based on the twin lies that reducing emissions requires central control, and that the government’s Emissions Reduction Plan reduces emissions.

How do officials think about the costs of expropriation?

The government has introduced legislation which will allow the Minister of Health and the Director General to take over private companies doing COVID testing (further description is here). The likely target of this change is Rako, which has sought a commercial negotiation with the government for the last year. The amendment, which is before the Select Committee, will give the government the option of taking Rako’s property and unilaterally determine compensation.

So, what do officials see as the costs of de facto nationalisation of COVID testing?

Here is what the Ministry of Health has to say in its Fact Sheet 5: Regulating COVID-19 laboratory testing and managing testing supplies and capacity:

The proposed change will not have any direct impacts. Orders made under the new provision may impose obligations or restrictions on testing laboratories to ensure quality of testing, integration of test results with the public testing repository and regulation of testing consumables.
It is important to note that an Order to requisition supplies or redirect capacity to the public health response would only be made if there was significant COVID-19 resurgence where there is insufficient testing capacity in the public system.

Here is what the Regulatory Impact Statement says about costs:

There may be modest costs to the Crown in administering any regulatory regime should this be required. There may also be administrative and other costs for public/private laboratories depending on what is proposed. These costs would be assessed at the time any order is made.

The RIS essentially repeats that last sentence when it says, “A full cost assessment would be undertaken should a COVID-19 Public Health Order (Order) be proposed using the new provisions.”

As for benefits, the RIS says “[t]his proposal will ensure flexibility in the legislation to make orders to effectively manage laboratory testing (if required) to ensure appropriate regulation of quality control and minimum standards in relation to testing, integration of COVID-19 test results into the public health, management of the supply of testing consumables.”

Set aside the fact that officials who cannot secure MIQ or order vaccines on time obviously cannot deliver any of those benefits.

Focus on costs. Officials seem to operating with a cost model that threatening to take a company’s IP is costless, and costs crystalise only when property is actually taken.

I wonder what Rako’s investors and employees think about that view? In fact, I wonder what every owner of intellectual property in every sector thinks about the Ministry’s view.

Because the cost of taking companies’ property is not the administrative overhead, as officials suggest in the RIS.

The cost is all the investment in innovation that will not happen in the future.

Those costs are large, big enough to be measured in percentages of GDP. So it is laughable that officials could list administrative costs as the only real downside of their proposal.

Do officials at the Ministry of Health understand how investment in specific assets works? Do they understand that investment in intellectual property, and in all sunk assets, depends on the credibility of the government’s promise not to take the property once it is created? Do officials recognise that even threatening such opportunism in one sector could have wider ramifications about security of property elsewhere? That prospective investors in wind turbines or EV charging infrastructure won’t notice the government putting in place machinery to take the property of medical companies?

Could officials and the government be any more short-sighted?

Just when you thought it could not get any worse

Having banned saliva testing for more than a year, the government is now proposing to take it. As in, expropriate inventors and manufacturers of COVID testing products.

Newsroom ($) quotes the Chief Executive of Rako, Leon Grice:

There is other legislation where the Government can come in and expropriate or requisition private property – that’s the Public Works Act. But that has more protections, like a process to determine a market rate that the Government must pay…. They can just insist we give up our stock and our reagents and our premises that we need to do our work.

This is real. The government really is proposing to give the Minister of Health the right to “insist we give up our stock and our reagents and our premises that we need to do our work.” The COVID-19 Public Health Response Amendment Bill (No 2) 2021 says:

11 Orders that can be made under this Act
(1) The Minister or the Director-General may, in accordance with section 9 or 10 (as the case may be), make an order under this section for 1 or more of the following purposes:
…
(e) requiring the owner or any person in charge of a specified laboratory that undertakes COVID-19 testing to—
(i) deliver or use, in accordance with directions given under the order, specified quantities of COVID-19 testing consumables that the Minister considers necessary for the purposes of the public health response to COVID-19:
(ii) undertake COVID-19 testing solely for the purposes of the public health response to COVID-19 while subject to the order, whether or not the laboratory is contracted by the Crown for that purpose.

The bill says the Minister will be able to set quality control standards in labs, manage the supply of testing consumables, and set different rules for different classes of testing.

Presumably the government’s target is Rako.

The bill provides for compensation and appeal:

11A Compensation or payment relating to requisitions
(1) This section applies if an order is made under section 11(1)(e).
(2) The owner of a testing laboratory injuriously affected by the requisitioning of testing consumables is entitled to receive compensation from the Crown at the market rate for the consumables requisitioned.
(3) The owner of a testing laboratory required to undertake COVID-19 testing solely for the purposes of the public health response to COVID-19 is entitled to be paid by the Crown for its services at the market rate for those services.
(4) All questions and disputes relating to claims for compensation or payment under this section must be heard and determined by the District Court, whose decision is final.

However, the bill does not define “market rate” or say who decides it. If the answer is Ministry of Health officials – the purchaser – then clearly there is a problem.

As I understand it, Grice has been asking for a commercial negotiation for the best part of a year. How is expropriation even on the table?

Expropriation is likely even if the quoted provisions are never used. The government will have a commanding position in any commercial negotiation when in its back pocket it has the option to take the property of the counterparty and decide compensation.

It is… breathtaking that a government which is borrowing a billion dollars a week wants to nickel and dime the developer of the one thing we need more almost than anything else right now: a ~~rapid~~ fast, saliva-based PCR test for COVID. If Grice’s technology means ten fewer minutes of lockdown, pay him. Let him have his millions. Or make a deal with a competitor. Either way, it’s worth it. And not just for COVID-19. We want the Leon Grices of the world to turn up in the next pandemic, too.

But, no. This government is threatening to take the property of the one company which could do more than any other to get us out of lockdowns. I look forward to the government’s explanation for how that is in the public interest. The judgment seems astoundingly poor. This looks like world class bad faith from officials and ministers.

Another worrying aspect of the bill are the proposed changes for section 12. The government wants to remove the prohibition which says a COVID-19 order “may not apply only to a specific individual”. Changes in section 12 and elsewhere in the bill are clearly designed to enable the Minister and Director-General to issue orders to specific individuals.

This is draconian legislation, yet it seems to be slipping under the radar. It deserves attention.

Here is the legislation: https://www.legislation.govt.nz/bill/government/2021/0068/latest/LMS552303.html

Here is where to make a submission, which closes next Monday, 11 October:

https://www.parliament.nz/en/pb/sc/make-a-submission/document/53SCHE_SCF_BILL_115898/covid-19-public-health-response-amendment-bill-no-2

Here is the Ministry of Health analysis and RIS: https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-response-planning/covid-19-public-health-response-amendment-bill-no-2-2021

Here are marked up changes to section 11: https://www.dropbox.com/scl/fi/vpqwry2bzd0v6fypz1hs4/11_diff.docx?dl=0&rlkey=armucq7yh1w4qejp8yy7ppf1c

And to section 12: https://www.dropbox.com/scl/fi/sidz80ck8yaalfx50d2ss/12_diff.docx?dl=0&rlkey=7mbivhxfbo5bayrkcvtj53phz

A climate policy framework

John Cochrane has written a long essay in National Review called ‘Climate Policy Should Pay More Attention to Climate Economics’ with a subtitle of ‘Without numbers, we will follow fashion.’

The article is beautifully written, hardly a single one of the 3,500 words is wasted. In arguing for economics in climate policy, Cochrane covers many of the major ideas for thinking about how to reduce emissions. The article is comprehensive enough to be a framework.

In this post, I attempt to distil the main ideas in Cochrane’s article.

To avoid doubt, Cochrane (and I) believe climate change is real and is a problem which justifies a policy response. He disputes none of the climate science. He takes the findings from science as given and thinks about the consequences for climate policies. He highlights the harmful mismatch between scientific findings and popular rhetoric on climate.

Most of the following text is directly from Cochrane, with or without quotes. I have put my favourite soundbites in italics:

Climate science and climate policy are different. Climate science concerns the relationship between greenhouse gas emissions and climate. Climate policy is about reducing greenhouse gas emissions. Attacking policy is not attacking the science. “You don’t have to argue with one line of the IPCC scientific reports to disagree with climate policy that doesn’t make economic sense.”

Climate change is not that expensive. “The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP. Even extreme assumptions about climate and lack of mitigation or adaptation strain to find a cost greater than 5 percent of GDP by the year 2100… Five percent of GDP is only two to three years of lost growth. Climate change means that in 2100, absent climate policy or much adaptation, we will live at what 2097 levels would be if climate change were to magically disappear. We will be only 380 percent better off [instead of 400%]. Or maybe only 950 percent better off [instead of 1,000%]… Northern Europe has per capita GDP about 40 percent lower than that of the U.S., eight times or more the potential damage of climate change. Europe is a nice place to live.”

The central uncomfortable fact is that the output of an advanced industrial economy like the U.S., moving headlong into services, is just not that sensitive to climate or weather. The worst heat waves, floods, and storms just do not move national GDP.

To be clear, a modest cost is no reason not to act on climate. But a modest cost places a modest cap on the benefits of emissions policies, so caution is necessary to avoid emissions policies doing more harm than good.

Growth risk is an order of magnitude larger than climate risk. “The cost of climate change to India is trivial compared with the benefits India could obtain by adopting economic institutions more like those of the U.S. — which themselves are far from perfect.”

If the question is, “What steps can we take, perhaps costly today, to improve GDP in the year 2100?” hurried decarbonization is not the answer. If the question is, “What steps can we take to improve the well-being of the world’s poor?” climate policy is not the answer, with many zeros before you get to the decimal point. Sturdy pro-growth policies, however unpopular to so many in today’s political class and incumbent businesses and labor organizations, are the answer.

GDP is imperfect, but if anything it understates the benefits of economic progress. “It leaves out a lot — the tremendous value of free or nearly free goods, the value of clean air and water, good health, long life, a free and egalitarian society, and so forth. But all of these things are better when GDP is better, and far worse where GDP is worse.”

If the question is how to blunt the economic impact of climate change, adaptation has to be a major part of the answer. There seems to be a great disdain for adaptation, clearing the brush, building dikes and dams, moving to higher land, installing air conditioners, moving or engineering crops and so forth. Spread over a hundred years, the costs of adaptation are not large. Perhaps climate-policy advocates dismiss talk of adaptation because, by reducing the damage that might be caused by greenhouse-gas emissions, it makes emissions less scary. Climate models are also short on adaptation and innovation, perhaps for the same reason.

Miami might be six feet underwater in 2100, but Amsterdam has been six feet underwater for centuries. They built dikes. By hand. Amsterdam is a very nice place, not a poster for dystopian end of civilization. Buildings decay and need to be rebuilt every 50 years or so. Just start building in drier places.

We need rigour in climate policy. “For a small donation, pictures of cuddly animals might do. For trillion-dollar costs and regulations, they do not. To justify such costs, we need some dollar value on specific environmental damage of climate change. Yes, the numbers are uncertain. But those numbers are the only sensible framework to discuss spending trillions of dollars on climate now.”

Cost-benefit analysis matters for making the best use of limited resources. “Naming costs and benefits is particularly useful to analyze whether some of those trillions are not better spent on other environmental issues. For example, species extinction is a real problem. We are in the middle of a mass extinction. But the elephants will die from lack of land and poaching long before they get too hot or dry. For a trillion dollars, how much land could we buy and turn over to complete wilderness? How many more species would we save that way, rather than spending similar amounts of money on high-speed trains and hurrying the adoption of electric cars? The oceans are in trouble. For a trillion dollars, how much over-fishing, chemical pollution, plastic garbage, or noise could we fix? Economics is about choice, and about budget constraints.”

Even though we don’t really know the economic or environmental cost of carbon, cost–benefit analysis is vital so that we do whatever we do efficiently. Avoid doing incredibly expensive things that save little carbon, and don’t ignore unfashionable things that might save a lot of carbon at lesser cost.

Without numbers, we will follow fashion. Today it’s windmills, solar panels, and electric cars. Yesterday it was high-speed trains. The day before it was corn ethanol and switchgrass. Actually addressing climate change in a sensible and effective way is likely to involve unfashionable technologies, and new technologies without political backers. A focus on cost–benefit, carbon per dollar, is vital to allow different technologies to compete, and new technologies to emerge. The alternative — and current predilection — is for different technologies to compete for political favor, a mechanism we all know well, along with its disastrous results, especially regarding innovation and cost reduction.

[MB: This is an important point. One of the costs of an ad hoc winner picking approach on climate is lower innovation. Subsidising EVs, for example, must reduce incentives for R&D in politically-disfavoured rival technologies, including technologies we do not yet know about.]

The policy prescription is simple: price + carbon dividend + R&D. “From an economic perspective, the ideal policy combines a carbon tax, whose revenues reduce other marginal tax rates, with strong support for basic R&D.”

Thus, if the question is how to reduce carbon as much as possible while damaging the economy as little as possible, an evenly applied carbon tax — even to the coal emissions used to create solar panels and car batteries — is the answer, in place of regulation and subsidies.

A carbon tax bakes in cost–benefit analysis, and otherwise incalculable carbon-reduction pledges. Just buy the cheapest option and you’re doing your bit.

Maybe rather than buying a Tesla, you should move closer to work — or carpool. Maybe cutting out one international trip does more than buying the Tesla. Maybe zoning and permitting reform will allow building houses so people don’t commute in the first place. Is it easier to decarbonize transport, home heating, cement, steel, or agriculture? Only by setting a price can we know the answers, and incent the millions of little daily decisions that go in to reducing carbon emissions efficiently.

A weak consumer response to a carbon tax argues for a carbon tax. “A carbon tax is a win-win. Many climate advocates disparage the carbon tax, on the view that people will not reduce energy consumption and carbon emissions when the price goes up. If so, great! A bankrupt government can raise a lot of money, and reduce other heavily damaging taxes. If people drastically reduce carbon emissions to avoid a small tax, the government doesn’t earn much money. Great! We save the planet at low cost.”

Carbon policy is full of economic fallacies. Mother Earth does not care if solar panels are made in the U.S. or China. She just wants them to be cheap. “Millions of green jobs” are a cost, not a benefit. Financial regulators are now taking on climate change, justifying this dramatic expansion beyond their legal authority by endlessly repeating a fantasy that “climate risk” imperils the financial system in the near future.

There is nothing in the science that justifies uniting “climate” with a left-wing political agenda. Yet even the IPCC mixes climate change with “sustainable development, poverty eradication and reducing inequalities.” Mixing anti-capitalist politics with climate change makes those skeptical of the rest of the agenda wonder about the objectivity of climate science, and whether the planet really is in such danger.

There is nothing in climate science to justify apocalyptic rhetoric. If the question is, “What threatens the collapse of civilization,” war, nuclear war, civil war, pandemic, crop pandemic, and social and political disintegration are far higher on the list. No healthy society fell apart over a slow and predictable change that came over a hundred years. There is nothing in climate science to say life on earth is threatened.

Climate advocates have done themselves and the planet a great disservice by wrapping climate policy in increasingly shrill, apocalyptic, partisan, and unscientific rhetoric. “Global warming” became “climate change,” reflecting in part effects on rainfall or different geographies, but also inviting media commentary on every weather event to become a sermon. In the Green New Deal and comparable movements, it became “climate justice,” wrapping climate inexorably in a far-left-wing politics of anti-capitalism. The required vocabulary moved on to “climate crisis.” Still not enough: In April the (formerly) Scientific American proclaimed that, in coordination “with major news outlets worldwide,” it would start using the term “climate emergency.” Will “climate catastrophe” be next?

Finally, here is what I think is Cochrane’s most important point:

Actually doing something about the climate will require decades of consistent policy. That will not happen by today’s elites crying wolf and cramming regulations down the throats of a disdained and temporarily distracted electorate. [MB: That will also not happen by seat-of-the-pants ad hoc policies, nor will name-and-shame work. Consistent policy means a system – consistent, clear, enduring rules to lower emissions. The ETS is a fine example of a rules-based approach. Policies like 100% renewable electricity are not.]

Keep climate policy focused on the social cost of carbon

A new paper in the journal Climate Policy says “Keep climate policy focused on the social cost of carbon”. Its abstract:

In the context of climate change, the application of cost-benefit analysis to inform mitigation policies can help to achieve the best outcomes and avoid the worst: spending trillions of dollars but failing to get the job done.

The job, of course, is to cut emissions.

The costs of a climate policy are the abatement costs of reducing emissions of carbon dioxide (CO2) (or other greenhouse gases). The standard measure of the benefits of a climate policy is the social cost of carbon (SCC), which measures the avoided economic damages associated with a metric ton of CO2 emissions. Recently, however, there have been calls for an alternative approach to policy evaluation that ignores the benefits of avoided climate damages and instead focuses only on minimizing the compliance costs of a given, politically determined climate objective. We argue here that a shift from use of the SCC and cost-benefit analysis to an alternative approach for evaluating policy that focuses on costs alone would be misguided. Rather than advocate for alternative approaches, now is the time to support efforts to update the SCC and its application to official climate policy evaluation.[emphasis added]

I note the Climate Change Commission used neither the social cost of carbon, nor cost-benefit analysis, nor costs alone to inform each of its recommendations to the government in its final report.

Perhaps the authors of the Climate Policy paper could write a follow up piece called “At least do something, for goodness sake” and send a copy to the Commission.

Opening statement on the Natural and Built Environments bill

My opening remarks to the Environment Committee this morning on the Natural and Built Environments bill, which will replace the RMA:

Any planning system must allow trade-offs between competing outcomes.

Property rights confront owners with some but not all of these trade-offs.

The reforms should be based on understanding which trade-offs the planning system needs to solve, who is best placed to make decisions, and how.

This bill proposes the Minister for the Environment can decide everything using regulation.

This is not a credible approach. With the best will, the Minister cannot deliver a framework which makes sense of so much complexity. Decisions should be devolved to the lowest level, and with checks and balances, which regulation does not do.

The main goal of these reforms should be to improve housing affordability. The RMA has substantially contributed to the housing crisis. Quite simply, the new system must make it easier to build a house.

The key idea I want you consider is this. Cities protect the natural environment.

London, Tokyo and New York City are among the most environmentally friendly places on earth.

People living in those cities have smaller carbon and environmental footprints. They have higher prosperity and report higher wellbeing than other people.

This idea, that cities protect the environment, is important, because it means we can solve housing and protect the natural environment with a planning system that supports urban growth.

This bill proposes to apply rigorous bottom lines for the natural environment in urban areas. Paradoxically, this could harm the natural environment by stifling growth.

Planning cannot deliver urban growth if it does not protect urban amenity. Homeowners have the clout to stop any growth which threatens their standard of living. This bill must square the circle of supporting growth by protecting amenity.

So, three ideas to make sense of the complexity.

Cities protect the environment. This bill can support the Minister’s environmental goals if it embeds a presumption in favour of development.
Don’t put decisions in one place. Ask who is best placed to consider tradeoffs. And think about scope – what problems can only be solved by planning.
Finally, treat urban areas separately. Urban amenity is sufficiently distinct and important to justify its own treatment. Bundling urban and non-urban areas threatens to water down environmental bottom lines, and repeat the RMA’s mistake of stifling growth while failing to protect the natural environment.

This bill is not fit for purpose and should not go ahead in anything like its current form.

Thank you.

Link, from 50 minutes: https://fb.watch/7khkp_7mxS/