In the long-term, do we need "defossilisation" as well as nuclear disarmament, in the interests of engineering lasting world peace?
Discussion about Stacy et al (2019) “The Levelized Cost of Electricity from Existing Generation Resources” report from IER/ACCCE
Eco-taxes (reproduced from my sister site, where the original was posted circa 2015)
Why it’s so important to be able to respectfully agree to disagree with each other, eg when discussing “capitalism”
How can you tell if someone is a genuine skeptic or a denier/delayist masquerading as a skeptic?
Summary of Peter Huber’s “Hard Green” book, from reading his chapter 1 (which appears to summarise the book)
Review of Michael Mann’s 2021 book “The New Climate War” and my own reflections on “when is it optimal to be talking about optimisation?”
Dr Lomborg’s rhetoric on climate change scepticism – helpful devil’s advocate, harmful distraction, or something in-between?
Open letter to Marc Girardot regarding effectiveness of lockdowns in combatting covid-19
UK Green Book discount rates for the value society places on environmental assets, goods and services
Response to Mark Carney’s 4th Reith Lecture 2020 - From Climate Crisis to Real Prosperity
I’ve just been listening to this fascinating Reith Lecture by Mark Carney on the BBC.
He quite correctly identified the main features of the Climate Crisis and some of the ways many people in the worlds of finance and economics are trying to solve this presenting problem, and even to go further to build a sustainable future beyond just stabilising the climate.
He is to be commended for such a salient and well-constructed series of talks, of which this one was the fourth and final one.
He seems to place a lot of confidence in the ability of market mechanisms, operating alongside government policies and regulatory legislation, to provide the shift in investment required to rebalance human activities and reflect changing citizen values on the planet and sustainability.
In my view, if I can be a "critical reviewer" for a moment, he gave only a partial response to the question by Tanya Steel (WWF) – about 42 minutes into the transmission – regarding the lack of valuations being placed on standing rainforests (as opposed to felled forests for land use change into agriculture). Although he mentioned Natural Capital, he expressed some concerns about using Natural Capital approaches to put a value on nature. His main concern, which has been expressed by others (including the famous environmentalist George Monbiot), is that putting a value on nature could make it easier (and more attractive) for businesses or individuals to make profits by exploiting those natural assets, in particular by converting them from capital assets into produced goods (eg cutting down trees to make wood and changing the land from forest use into more profitable agricultural use.
This is a well-worn concern about Natural Capital but it can be addressed. The key thing to realise is that, in most forests, the fact that they are not valued at all as a standing capital asset makes it much easier for them to be exploited for profit than if they had a standing forest value as a capital asset. This is because the cost of the raw material is currently essentially zero and no economic damage is recognised when the trees are felled. Placing a value on the standing forest as a capital asset (Natural Capital) would make it clear that felling the trees in an unsustainable way would be destroying value, by reducing the value of that capital asset without a larger compensating value creation from that activity. The main solution is to emphasise the necessary change of priority from a “flow” model of the economy (as typified by GDP) to a “stock” model, with managing national and global Balance Sheets being more important for a sustainable future than just managing the annual flows (equivalent to a profit and loss account).
Stock Flow Consistent (“SFC”) economic modelling has been around for several years, and it was a missed opportunity for Mark Carney not to mention this in his lecture. The SFC approach follows the premise that it is important to manage balance sheets as well as income and expenditure if you want your enterprise to have a long-term future. If that enterprise is an entire country (or the whole world) then we have for too long focussed almost entirely on the income and expenditure (eg GDP) and neglected the national and global balance sheets (incorporating Natural Capital). SFC modelling is, in fact, one of the most obvious things to explore as part of current moves to implement Natural Capital in National Balance Sheets (in National Systems of Accounts), and ultimately we should be maintaining and enhancing World Balance Sheets over time, including the whole of the Natural Capital of the Earth, as this is what the continued thriving of our species (and many others) depends on. For more about this concept, see WorldBalanceSheet.com
Passing through the Bottleneck
Steady State Economics might not be the best answer to current and future sustainability challenges. It might not even be sufficient as a solution, in its current form, as advocated by CASSE (The Centre for Advancement of Steady State Economics).
It might, however, be a useful stepping stone to better solutions we can’t yet know about, let alone express in economic terms. Some of the work of Brian Czech, Director of CASSE, and other authors in “Best of the Daly News” (ie Czech, 2020) is examined further below and in my forthcoming book, due to be published in 2021. And SSE might be a whole lot better than the current way economies are managed (or left to markets) in most parts of the world today.
However, it's worth setting some wider context first, which will help to explain why this, and other new forms of economic thinking, are a necessary field of thought and practice to address our current predicament.
The Bottleneck humanity hopes to pass through
“The Precipice” by Toby Ord (ie Ord, 2020) resonates with my own perspectives on the long-term development of humanity and the risks it currently faces.
Ord points out that humanity is at a critical crossroads, where its power has outstripped its wisdom, resulting in several serious existential risks (including unsustainability of our impacts on nature, rogue AI (Artificial Intelligence), engineered biological agents and conflicts that might, potentially, involve nuclear weapons).
The finite planetary limits of the biosphere that supports us are like a bottle containing a model ship in the classic “ship in a bottle”. Our population and civilisation are like the ship. The human ecological footprint has been growing as we have developed (the ship has been growing in size and complexity inside the bottle). But we are realising that the finite bounds of the biosphere, and the damage caused by our overshooting sustainable thresholds, is reducing the size of the biosphere and its capacity to support us (the neck of the bottle has been narrowing, as a result of our actions) and the rate of that depletion in biospherical capacity is accelerating.
We want humanity to progress further, because our future potential is immense if we can more effectively harness the energy from the sun (the only input from outside the bottle) and if we can access materials from outside the earth system, for example by mining materials on the moon, from asteroids or find even more distant exploitable resources. After all, the universe outside the bottle is potentially infinite in materials, energy and evolutionary progress for living beings.
Our challenge is to pass through the neck of the bottle, and to pull what we can of the ship, through with us, without destroying the bottle that is humanity’s birthplace.
It becomes obvious there are two main options for doing this, which are not mutually exclusive.
Firstly, we can modify our impacts on the natural biosphere, to reduce (and eventually reverse) the rate of degradation of the biosphere’s capacity to support us (slow down, and then reverse, the rate at which the neck of the bottle is shrinking).
Secondly, we can alter our civilisation and the way it draws resources from the biosphere and uses them, for example adopting circular systems of material and energy flow, such as those advocated in circular economy, or even implementing something along the lines of a steady state economy, a GDP-growth-agnostic economy or something similar (remodel the ship so it will more easily pass through the neck).
If we can do these things, a bright future awaits and the innumerable future generations of humanity will thank us for our efforts.
If we fail, however, our failure will go down in history as the biggest failure of any known life reaching a state of advanced intelligence and civilisation.
We should use the sense of responsibility this imparts as a spur to action.
The bottleneck analogy is used also, extensively, in White and Hagens (2020) “The Bottlenecks of the 21st Century”.
I think Daniel Yergin's "The Commanding Heights" is an excellent and highly relevant book, published in 1998 but still highly relevant today. I find myself dipping into it again and again, as it tracks the ebb and flow of the balances (and imbalances) in many nations and globally between 'the market' and 'the state' or (occasionally) global governance mechanisms. Although he seems (mostly) to fall on the side of supporting market approaches, at the end of the book he hints at the possibility of a resurgence of 'the state' and its role as regulator of things like environmental protection and climate change where markets fail or generate damage and harm.
The following is from page 390:
“Yet if the market is seen to fail on either of those two grounds - results and restraint - if its benefits are regarded as exclusive rather than as inclusive, if it is seen to nurture the abuse of private power or the specter of raw greed, then surely there will be a backlash - a return to greater state intervention, management, and control. The state would again step forward to expand its role as protector of the citizenry against the power of private interests, whether exercised through monopoly, wanton behaviour, fraud and deception, or exploitation and direct harm."
Was Yergin hedging his bets, or expressing some real concerns and fears that markets, insufficiently fettered, would be likely to wreak havoc with the planetary biosphere and climate, throwing us well beyond sustainability thresholds and requiring increasingly drastic national and international government and governance actions?
Tietenberg (2018) provides similar conclusions:
“In summary, the record compiled by our economic and political institutions has been mixed. It seems clear that simple ideological prescriptions such as “leave it to the market” or “let the government handle it” simply do not bear up under a close scrutiny of the record. The relationship between the economic and political sectors has to be one of selective engagement, complemented in some areas by selective disengagement. Each problem has to be treated on a case-by-case basis. As we have seen in our examination of a variety of environmental and natural resource problems, the efficiency and sustainability criteria allow such distinctions to be drawn, and those distinctions can serve as a basis for policy reform …
Our examination of the evidence suggests that the notion that all of the world’s people are automatically benefited by economic growth is naïve. Economic growth has demonstrably benefited some citizens, but that outcome is certainly not inevitable for all people in all settings.”
The "commanding heights" of the economy (nationally and globally) continue to be a vital piece of context for the challenge of transitioning (or 'transcending') to sustainability, and our money systems play a key part in that.
Maintenance and reform of money systems are a legitimate role for the state.
These issues transcend party politics. Indeed, I think the vision of achieving global sustainability and social justice is often damaged when it becomes co-opted by political movements, as these often result in polarisation of debates, and unnecessary conflicts.
Critique of willingness-to-pay and willingness-to-receive methods for valuing natural capital
One valid criticism of economic valuation approaches is where they are based on willingness-to-pay (to acquire the asset not currently owned) or willingness-to-accept (to accept compensation for the loss of the asset currently owned). In many cases, and especially in relation to valuing nature, there is likely to be an element of hypothetical bias in people’s answers to surveys of their willingness-to-pay or willingness-to-accept preferences.
Hypothetical bias can enter the picture because the respondent is being confronted by a contrived, rather than an actual, set of choices. Since he or she will not actually have to pay the estimated value, and has potentially very little understanding of the significance of the hypothetical scenario underlying the question, the respondent may treat the survey casually, providing ill-considered answers.
A particular case of this is where the respondent is being asked about the value of a natural asset (eg natural capital comprising part of the global commons), when it is currently valued at zero and the respondent (via the global industrial supply chains) is currently not paying anything for the use (or abuse and exploitation) of that asset.
These sorts of valuation methods can also be undermined by the personal circumstances of the respondent. A respondent with very small amounts of financial resources (eg income) is likely to give much smaller willingness-to-pay answers than one with much larger financial resources.
Let me paint a hypothetical scenario to illustrate this. For those of you who have heard of the Biosphere 2 experiment in the 1990s, imagine a re-run of that 2-year experiment. For those unfamiliar with it, Biosphere 2 was a project where 7 volunteers lived inside a closed set of connecting bio-domes containing air, water, soil, plants etc with no inputs or outputs (wastes) allowed to enter or leave the domes, except for the sunlight falling on them and the energy ‘leakage’ out through the glass walls at night. Everything was recycled that possibly could be.
In the imaginary re-run, which I’ll call Biosphere 3, because of the strict limits on availability of such materials, suppose that each inhabitant had a daily budget of financial resource, and each of the main materials required for survival was made exclusive to each “consumer” (eg with breathable air provided via breathing apparatus and personal cylinders, and exhaled air collected in similar cylinders for recycling, water provided in personalised bottles, food in personalised containers) But suppose further that this was all provided as a public good for the first six months, on a strictly need-to-consume-for-survival basis. Suppose also that some inhabitants had financial resources very different from others – say, some had $100 per day while others had $100,000 per day.
In this scenario, what would willingness-to-pay or willingness-to-receive questioning and valuation methods reveal about the values of the various survival essentials? I would guess that the answers would be very different between participants with different financial resources, and they would also be very different with passage of time.
On day one, probably everyone would be willing to pay almost all, if not actually 100%, of their ‘budget’ for breathable air (even if they don’t actually have to pay for it), on the basis that none of them could survive the day without breathable air, whereas everyone could survive without water or food for one day. The trouble with that is that it gives a value for breathable air of $100 for some respondents, $100,000 for other respondents. As long as this doesn’t affect the actual amounts of air, water and food provided (because they are being provided as a public good, not as a market-traded exchange) there is no problem with continuing provision.
The situation would get more complicated some days later, because after some days without water, survival would become a matter of securing water as well as air, and after an important threshold of deprival, no amount of air (or money) would compensate for lack of water, without which death would follow. Therefore, everyone would be prepared to pay something for some water, even if all the rest of their budget would be allocated to breathable air in their willingness-to-pay answers. So, perhaps their willingness-to-pay valuations would represent 90% of their “budget” for air and 10% for water each day, in order to survive until the next day. Some time after that point, edible food would have to be part of their answers, to avoid theoretical death, on the basis that no amount of money, air and water can stop someone dying if they don’t have food. So perhaps their valuations of willingness-to-pay would represent 90% of the budget allocated to air, 7% to water and 3% to food each day, in order to survive to the next day. And so on. Perhaps this situation and the associated willingness-to-pay values would reach some form of stable equilibrium after, say, six months.
It can easily be seen that the “values” of each of the necessities, as measured by willingness-to-pay, would vary considerably between participants, and would vary considerably over time during those first six months.
Now consider the scenario that the actual costs of providing all those necessities each and every day in Biosphere 3 was a lot higher than any of the personal financial resources of the ‘poorest’ of the individual participants, but not beyond the financial resources of the ‘richest’ participants. Assume, for example, that the cost of breathable air was $50,000 per day per person, water was $30,000 and food was $10,000.
Further, assume that the “provider” after the first six months changed, and was then a computer or Artificial Intelligence operating on market exchange principles (a complete contrast from providing essentials as a public good), and was unwilling (or unable) to compromise and incur a ‘loss’ on provision (eg the provider was not going to accept a lower price than the actual cost of provision). It will be clear that this is a very different state of affairs compared with the first six months of public good service provision.
The willingness-to-pay answers for the poorest participants under this new model for ‘traded’ provision would now be, in fact, an irrelevant and gross under-estimate of the value of the provision, for any answers they give, even if they answer 100% of their personal budget (ie $100 per day) as the willingness-to-pay value for any one of the essentials. They simply won’t survive day one, because they don’t have sufficient financial resources to pay for the true cost of the provision of the essentials for life. Their survival during the first six months was dependant on the provider subsidising the true ‘cost of living’ (ie incurring the cost of the public goods themselves and not passing them on to the consumer).
At least some of the “richer” participants might well survive the new regime for provision, but even though some of them might be able to cover the average actual costs of provision, they might not all survive the whole 2 years.
For example, if there is a bidding war, and if the Artificial Intelligence has profit maximisation as its aim, its optimum market strategy might be to use its monopoly power to manipulate prices to extract the maximum revenue, even if this means only very few participants surviving to the very end of the 2 years.
This might seem a very extreme scenario, contrived in order to challenge the validity and accuracy of willingness-to-pay or willingness-to-receive valuation methods. However, if you consider for a moment the overall insights derived from Kenneth Boulding’s “Spaceship Earth” conceptual writings, it doesn’t take a huge leap of the imagination to see how the whole of the Earth can be thought of as a larger version of Biosphere 3. In fact, the reason the 1990’s dome experiment was called Biosphere 2 was because it’s designers considered the Earth to be “Biosphere 1”.
So, Biosphere 1 (the current Earth we live on) has some similarities with Biosphere 3. The Earth is a finite, closed system, except for the sunlight falling on it (and the solar energy escaping through the atmosphere into space). The main differences between the Earth (Biosphere 1) and my hypothetical, imaginary Biosphere 3 are matters of scale, the key ones being the overall size of the Earth and its biological and chemical systems, and the size of the global human population.
With this perspective in mind, my “Biosphere 3” thought experiment can be seen to challenge the willingness-to-pay and willingness-to-receive valuation methods used in Biosphere 1 (the Earth we live in).
The Biosphere 3 scenario highlights the downsides of a marginalist approach to valuation. Willingness-to-pay and willingness-to-receive approaches are difficult to apply without the respondents falling into a marginalist perspective. That is, they are very likely (even if subconsciously) to consider a price or value in a way that is heavily influenced by their current circumstances and by the existing state (and prices / values) of the objects in the existing systems of supply (whether market-based or public goods provision). Many of these existing prices / values are effectively zero or heavily subsidised in current global supply chains, so this is likely to give a very strong bias towards very low valuations resulting from these methods of valuation.
The Planetary CFO - working towards a sustainable World Balance Sheet.