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.

Another reason to love natural gas

Natural gas does not just save us from burning coal. It saved us from nuclear. In the 1960s, nuclear power was seriously considered for this country until the discovery of the Maui gas field in Taranaki 1969:

In 1968, the national power plan first identified the likely need for nuclear power in New Zealand a decade or more ahead, since readily-developed hydro-electric sites had been utilized. Plans were made and a site at Oyster Point on the Kaipara harbour near Auckland was reserved for the first plant. Four 250 MWe reactors were envisaged, to supply 80% of Auckland’s needs by 1990. But then the Maui gas field was discovered, along with coal reserves near Huntly, and the project was abandoned by 1972.

In 1976, the Royal Commission on Nuclear Power Generation in New Zealand was set up to inquire further into the question. Its 1978 report said that there was no immediate need for New Zealand to embark upon a nuclear power program, but suggested that early in the 21st Century “a significant nuclear programme should be economically possible.”

Stuff reports the discovery of uranium on the West Coast in 1955 occurred when two drunk guys stopped to relieve themselves on the side of the road and decided to try out their new Geiger counter.

And this:

In the 1970s, Norman Kirk’s Labour government set up its own group of scientists to look into the matter. National turned it into an election issue by promising to fully investigate the possibility of nuclear power in its manifesto.

Imagine that, the two main political parties fighting for nuclear.

And good on them. Nuclear is a wonderful technology.

The iron law of electricity

My Insights #2 this week:

Events have rather overtaken last week’s blackout. The outage on the evening of 9 August left 35,000 households in the dark for up to two hours on the coldest night of the year.

This week we published a paper on the blackout by Carl Hansen, the former Chief Executive of the Electricity Authority from 2010 to 2018.

Hansen’s paper is full of insights. He steps through the blackout to identify the crucial moment which led to the outage. He explains how the electricity system deals with shortages. And he shows who is responsible for what, when outages occur.

Hansen’s main message is that officials at the Electricity Authority must be allowed to do their job and investigate the outage. The facts must be established before any response from the government.

The blackout was a stern reminder of electricity’s iron law: the lights must stay on.

This law is one reason why most government interventions in electricity end up doing the opposite of what was intended.

Take the offshore oil and gas exploration ban, for example. That might seem like a good way to reduce emissions, including from electricity generation. Until the next dry year, that is, when we find ourselves importing coal with twice the emissions per kilowatt of gas to keep the lights on.

Last week’s blackout was probably not the direct result of any government policy. But policies like 100% renewable electricity and the gas exploration ban will eventually lead to more blackouts.

In 2019, the government’s Interim Climate Change Committee estimated 100% renewables could produce 100 times more blackouts than business as usual. The policy will also raise power prices and effectively increase emissions.

The government responded to this devastating critique from its own experts the only way it could. It brought forward the start date for 100% renewables from 2035 to 2030.

Despite the blackout, New Zealand has a world-class electricity system. It is more green and more affordable than most other systems, and about as reliable.

Blackouts are shocking because they have become so rare, a remarkable feat for a system which requires supply and demand to balance every second of every day. In an isolated country which cannot import electricity from across the border to secure supply. In a system which is more than 80% renewable.

Our electricity system almost defies gravity, it is so good. Which makes last week’s blackout a momentary wobble on a magic carpet. Tread carefully, Minister.

You can read Carl Hansen’s paper here. You can also sign up for our weekly Insights newsletter here.

Numpties

Let’s Get Wellington Moving wants to spend $350 million to reduce emissions by 1,000 tonnes. That is a bad deal – for you, the environment, just about everyone except Let’s Get Wellington Moving, it seems. Here is part of the summary of a plan called “City Streets”:

Let’s pretend for a moment that the government had not capped emissions with the Emissions Trading Scheme last year. Let’s ignore the statutory cap on emissions.

At a discount rate of 6%, Treasury’s standard rate for public spending, $350 million has an annual cost of $21 million. Which means Let’s Get Wellington Moving is proposing to spend $21,000 per tonne of emissions avoided.

Spending that much on each tonne means the country goes bankrupt before we get to net zero. At $21,000 per tonne, net zero emissions costs 230% of GDP.

Of course, we have an ETS, domestic transport is in the ETS cap, and the ETS cap is the law. As a result, LGWM will reduce emissions by exactly zero tonnes. You’re not helping your grandchildren by borrowing to pay for emissions policies that don’t cut emissions. You’re just saddling them with debt and making them poorer.

Notwithstanding the whole not cutting emissions thing, congratulations LGWM. You’re in the hall of fame:

Let’s Get Wellington Moving IBD, August 2021, $21,000/tonne

EECA Low emissions contestable fund, December 2020, $33,000/tonne

Auckland Harbour walkway and cycleway, June 2021, $7,800-$230,000/tonne

New competition for the Flat Earth Society

Supermarkets are easy, apparently. So easy, according to this article on Stuff, that you can set up and run a chain of them and at the same time “actively work towards other government goals across the environment, technology, business, and the labour market.”

What does that mean? The author helpfully explains (I am not making this up, somebody actually said this):

  • develop[ing] skills and technology in software, robotics, and distribution systems
  • developing 21st-century skills across the New Zealand workforce.
  • sustainable practices such as innovative packaging, bulk product refill stations
  • solar-powered warehouses could give consumers more reasons to use Kiwishop
  • prioritising local suppliers to reduce transportation costs
  • ensure better nutritional values for produce
  • incentives for food suppliers to use sustainable practices… utilising hybrid, organic, or te ao Māori farming methods
  • sustainable seafood manufacturing practices could be rewarded, further enabling the Government to achieve its related objectives.
  • better business practices, such as paying staff at least the living wage
  • strong work-based education programmes
  • leading to poverty alleviation, increased literacy, and a reduction in prisoner recidivism.

That’s right. The government’s new supermarket will help solve climate change and lower recidivism. All while remaining competitive with Foodstuffs and Progressive. It is just that easy to sell food.

Kiwishop is an opportunity to create a new ecosystem of food sourcing and sales with a smarter way of achieving economic, social, and environmental aims. In short, a much-needed disruptor in a market that has stunk for far too long.

The world is just one big free lunch. God help me.

The author concludes,

Kiwishop is a big idea, but so is KiwiSaver, Kiwibank, and Three Waters. We know how to do big in this small country.

What, no Kiwibuild or Kiwirail?

Venezuela has state supermarkets. Looks like their low, low prices deliver empty, empty shelves. Sorpresa!

Source: npr.org

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/

How Musk deals with complexity

Elon Musk has given a personal tour of SpaceX’s Starbase at Boca Chica in Texas to a Youtuber, Tim Dodd aka the Everyday Astronaut. You can see the first part of the interview here.

Musk’s interview is in his capacity as Chief Engineer at SpaceX. Musk is also the CEO of Tesla and a founder of Paypal, and currently the world’s third wealthiest person. The interview is fascinating throughout.

What I find most interesting is seeing how Musk handles massive complexity. As the Chief Engineer at SpaceX, part of his job is getting the left and right hands talking to each other across the processes that support the design and manufacturing of a rocket.

His interview reveals some elements of his strategy: a clear objective; a small number of metrics to guide decisions; awareness of how problems emerge in complex design and manufacturing; preserving the option to experiment (and fail) cheaply because some things are only discoverable through trial and error; solve the problems that need solving first.

I can’t help but think some of these strategies for dealing with complexity in scalable systems is relevant to public policy. Officials and ministers are not building rockets or cars. But they have to make sense of practically unlimited complexity. I don’t know what strategies officials use to manage the complexity they deal with. Whatever they are, few of those strategies seem to make it into public discourse.

Musk makes the interesting observation that because every Space Shuttle flight had people on board, failure was intolerable, experimentation was costly, and innovation essential stopped as a result. Keeping the doors open to experimentation which does not hurt anybody is important. That seems like a relevant idea for public policy.

Here are some of Musk’s insights from Part 1 of his interview with Dodd.

Objective

Become a multiplanetary species

Metrics

  • $/tonne of thrust: “What is hard is how do we make a Raptor [rocket engine] where the cost per tonne of thrust is under $1,000”
  • $/tonne to low Earth orbit: “The fundamental thing that needs to be fixed is the cost per tonne to orbit”
  • $/tonne delivered to Moon, Mars

Musk talks about thrust in tonnes, rather than the more correct measure Newtons, to make it easy to compare with the mass of the rocket the engines propel. He is happy to sacrifice correctness for clarity and simplicity.

On fuel mix, the bias is in favour of oxygen over methane because oxygen is cheaper and more dense, which reduces cost per tonne.

Process

Musk has a five step process for managing complex processes.

1. Make your requirements less dumb. “It is particularly dangerous if a smart person gave you the requirements. Because you might not question them enough.”

2. Try very hard to delete the part or process. If you are not adding things back in 10% of the time you are not deleting enough. The bias is to keep things just in case. You can make that argument for almost anything.

3. Simplify or optimise. This is the third step not the first because a common error of a smart engineer is to optimise a thing that should not exist.

4. Accelerate cycle time. But only after the first three steps. Otherwise you are just “digging your own grave faster.”

5. Automate.

“I have personally made the mistake of going backwards on all five steps. Multiple times.” Musk tells an interesting story of fibreglass mats in manufacturing Tesla cars.

“Any requirement or constraint must come with a name not a department.” Otherwise some person years ago could randomly come up with a requirement that today nobody supports. The requirement will persist if it is not owned.

Other points

“All designs are wrong, it’s just a matter of how wrong.”

“Everyone is wrong some of the time.”

If you look at the various reasons for Starship’s landing failures, none of those reasons were on prior risk lists.

Musk has more than one optimisation metric, but he treats them in a sequence. “Fundamentally, the optimisation is for cost per tonne to orbit, and ultimately cost per tonne to the surface of Mars.”

A common problem in production is too much testing. The production line will be tested at each stage to identify where problems are occurring. Once the problem is diagnosed, it is common for testing to not be removed.

Production processes (manufacturing rocket parts at scale) requires 10-100 times more effort than the technology. “Manufacturing is underrated. Design is overrated.” So rocket science is the easy bit. Mind blowing.

Boosters and ships (the drone ships boosters land on) are easier to build than the launch pad. The pad includes the mechanism for catching returning first stages. The pad is going to catch them from the air.

Kiwi Olympics

My article in this week’s Insights newsletter. It is a #3, the third item in the newsletter which is always an attempt at humour. You can sign up to our weekly newsletter here.

Dear International Olympic Committee,

Please find attached our bid to host the 2036 Olympics Games in Wellington.

We noticed that at US$25 billion, Tokyo Olympics are the most expensive Games ever. That is a lot of sheep meat, as they say.

So forget unity and aspiration. The theme of the 2036 Olympic Games in Wellington will be fiscal responsibility.

Needless to say, our economic advisers are very excited about this theme. They have calculated that a fiscally responsible Games in 2036 will be “extremely efficient,” which means “wildly popular.”

Here is how we will cut costs.

First, we will run the 100 metres dash over 80 metres. To compensate, we will either make the track uphill or athletes will do the last bit twice. They won’t mind.

Instead of gold, silver and bronze medals, the medals will be tin, aluminium and tin with manure. We will make the ribbon out of number 8 wire because cliches are very cheap.

We think Tokyo was onto something by not letting anybody apart from athletes into the venues. We will save even more money by not having venues. We will broadcast everything via web cams. Spectators can watch on Youtube. Think of the emissions!

We also propose to remove two rings from the Olympics logo to save money on signage.

And no Games village. The athletes will be billeted.

As for mottos for the 2036 Games, we have some ideas. They include “Cheap as chips” and “Sweet as.” But we are leaning towards “Chur!” mainly because it has the fewest letters.

We are not going to lie to you. Hosting the Olympics in Wellington has risks.

For example, we cannot be sure the pool will have water or that you will be able to see the bottom. And let’s just say the water might have… obstacles. Does the term “Code Brown” mean anything to you?

The boat races will start in Wellington harbour. We just don’t know where they will finish. Depending on the wind, it could be Auckland, Christchurch or Chile.

Martial arts and shooting competitors will have dedicated facility thanks to a generous offer from the friendly team at the Mongrel Mob.

To commemorate the Wellington Olympics, the entire city will be declared heritage after the Games. Whichever parts were not already heritage, that is.

Finally, we promise to start the 2036 Games on time. Unless MIQ is still a thing in 2036 in which case all bets are off.

Yours etc.

Time to get real about emissions

It is nice to see others point out the consequences of an emissions cap. Thomas Lumley gets the logic of an ETS:

We’ve got a cap (more or less). One of the non-intuitive aspects of having a cap rather than a fixed price is that parallel efforts to reduce carbon emission don’t work the way you’d expect them to. If I replace my gas stove with an electric one, my kitchen will emit less carbon (modulo the impacts of making the new equipment).  If everyone did it, everyone’s kitchen would emit less carbon (again, ignoring the impacts of making the new equipment).  What would happen to NZ’s total carbon emissions? Nothing. We have a cap.  Less of the cap would go on carbon coupons for burning natural gas; more of it would be available for cars or trucks or coal-fired power stations.  The impact of our kitchen-renovation decisions would be cheaper emissions rights for other polluters, not lower emissions.

Well said, Thomas.

A commenter on Thomas’s post has some fairly standard objections to the argument:

First, the ETS was thoroughly undermined by the previous govt because the carbon price did not rise and companies were able to use dodgy offsets from overseas. If such a thorough undermining of a supposedly brilliant and effective self-regulating system could happen once, then it could happen again (with another change of govt).

This is solved by not opening the window to fraudulent credits. Or a commitment to make good on any credits which turn out to be fraudulent. Or both. That future governments might act in bad faith on emissions is an argument for the transparency of the sort an ETS provides.

Second, how high would the price of carbon have to go to shift people’s behaviour? And at that point is there the chance that you might get a general popular revolt that would undermine the political will to make the system to work as it should.

Good question. The Climate Change Commission says $50/tonne (p91). Basil Sharp et. al. say $85/tonne. In 2018, Concept Consulting, Motu and Public Policy Research said $76-$127/tonne. NZIER estimated far higher costs, also in 2018. None of this apart from NZIER looks scary with 29 years until the net zero deadline in 2050.

Anyway, non-ETS policies are far worse on a cost per tonne basis. Almost everybody acknowledges this. Cap and trade cuts at least cost. If your objection to the ETS is cost, you should be even more worried about other policies. As the joke goes, you do not have to outrun the bear to survive, you only have to outrun your colleague.

Officials have argued that the lack of transparency of non-ETS emissions policies buys enough cover to justify their higher costs. Except we have already had a public revolt mainly (though not entirely) against non-ETS emissions policies. I’d have thought is obvious that policies which add thousands of dollars to the cost of an imported car are going to be easy to spot. In any case, non-transparency is a non-argument for policies which have to work in the long run. Voters are going to it figure out eventually, and one might question the democratic merits of trickery.

Thirdly, there is the danger that emitters, rather than reducing emissions, basically rely on offsets. So, that will be great for increasing forestation, but it still might not change behaviour and reduce emissions

Which is just shifting the goal posts from emissions – you know, the thing that causes climate change – to changing behaviour and disrupting lives per se, which does not cause climate change. A tonne of emissions removed has exactly the same climate change benefit as a tonne reduced. From a climate change perspective, any distinction between reductions and removals is arbitrary. We should just do whatever combination of reductions and removals best helps the climate.

But try explaining to most environmentalists the idea that there is an emissions penalty that goes with arbitrarily insisting on reductions over removals, or domestic over offshore, or EVs over pretty much every other scalable way to avoid emissions. I cannot recall ever seeing an environmentalist say they are concerned we might lose 95% of the emissions benefits of a policy by insisting each tonne has to come from EVs and nothing else. The attitude seems to be who cares if we could have cut 20 times more emissions for the same cost?

I do. And when the rubber meets the road, so will voters. Time to get real.

Submission on the Natural and Built Environments bill

I wrote the submission by the New Zealand Initiative on the exposure draft of the government’s Natural and Built Environments bill, or “NBA.” This is the first of three bills that will replace the Resource Management Act. We do not have undiluted praise for the bill. I will post more on it soon.

For now, here is our conclusion:

The proposed arbitrary and potentially all-encompassing powers to be conferred on executive government are draconian, unconstitutional and utterly unjustified as a response to any identified problem to do with land use. The NBA proposes to give the current and future Ministers for the Environment the power to regulate everything – every aspect of how we live, work and play. The Natural and Built Environments Bill is unconscionable in a democracy

Read the submission here.