Gernot Wagner's Blog, page 21

As long as the music is playing

Betting against the herd turned out to be the smarter strategy in 2008, at the height of the financial crisis. But being right about the housing bubble was not enough.

The first economists called the bubble in 2002. Putting your money on that bet in 2002, 2003, 2004, 2005, 2006, or 2007 would have cost you. Timing was everything.

Some long-term investors are betting that green technologies will fuel the future; yet for now, oil companies are making record profits.

Sea levels may be on the rise; yet for now, beachfront properties fetch exorbitant prices.

It's generally much more comforting to follow everyone else—potentially even into the abyss—than to leave the herd and run the risks of being picked off by a predator.

As long as the music is playing, you've got to get up and dance. Feel free to stop dancing when everyone else is going strong. But if you really want to make the planet notice, you've got to try to change the beat for everyone.

Chinese margin of error

China's declared goal is to generate 15 percent of its electricity by 2020 from non-fossil sources.

If China meets half of its target, it will command half of the world's market for wind and solar energy.

If China meets its entire target, it will still need to add more new coal generation capacity than the entire U.S. coal fleet.

The margin of error in projections for China's electricity demand for 2030 is larger than the entire generation capacity of the United States.

Limiting pollution from planes, the natural way

I was supposed to be slumped next to my wife and son on an 8-hour flight tonight en route to an 8-day vacation in Austria. Alas, Hurricane Irene made that impossible, shutting down JFK.

Irene wouldn't be reaching New York at its current strength, if ocean temperatures weren't 1 to 3 degrees Fahrenheit warmer today.

While U.S. airlines—with the sorry support of Washington—are fighting the EU over reining in global warming pollution from air travel, the planet has a funny way of making itself heard: Shut down the business altogether, no doubt costing airlines untold amounts more than the EU's important but still timid plan ever would.

Let's all pay the fair share of our pollution any flight inevitably causes, instead of being stuck paying the ultimate price: not flying at all.

Keep calm and carry on

Take a walk this morning in Manhattan, and you'll see the typical Saturday morning Manhattan scenes: dogs, strollers, joggers, Starbucks cups, and combinations of all of the above. You'll also spot the occasional pair of Hunter boots. It isn't raining yet, but someone somewhere suggested it might later on. Manhattanites know that rain means taking their utilitarian-looking but oh-so-stylish $150 boots out for a walk.

There's a good chance Hurricane Irene will hit New York tomorrow. Most projections have New York within the range of possible storm paths. Parts of Manhattan could be under water; some are being evacuated. Buses and subways will start shutting down at noon today, but that for now seems unduly harsh.

After all, it could yet all turn into a slightly more intense rain storm. Dave Matthews may want to cancel his outdoor concert, but otherwise Hunter boots and a good rain jacket would do.

The reason why we are even talking about a hurricane in New York, of course, is because warmer ocean temperatures manage to guide hurricanes ever farther north. But that's not the only link to a changing climate.

We may be staring right into the eye of the coming global warming storm, but other than the occasional hurricane and a few droughts, floods, and drowning polar bears here and there, things seem pretty calm now. Crank up the air conditioner when it's hot, bust out your Hunter boots when it rains. Otherwise, "keep calm and carry on."

The British, after all, did it during World War II—except that they didn't. The poster is much more popular now than it was in 1939. Very few of the originals ever went up.

The design that did go up during World War II looks very different: "Freedom is in peril. Defend it with all your might." Not even the best Scottish-made Hunter boots would do for that.

Loss aversion cuts both ways

We are reluctant to give up what we already have. Losses count much more heavily in the collective conscience than equal gains.

One group looks at the world and sees floods, droughts, bleaching corals, and drowning polar bears; the other sees a comfortable existence based on machines, capital, and cheap fossil fuels.

The first group will want serious and immediate climate policy; the second will want to hide behind its air conditioners.

The first group will want to do everything to protect the status quo; the second will want to do everything to protect the status quo.

The first group believes that a transition to a low-carbon economy will be a lot cheaper than suffering the consequences of a planetary-style physics experiment gone awry; the second doesn't care as long as it is making money either way.

Uncertain policy, uncertain outcomes

Bad policies are bad. Uncertain policies are worse.

Imagine you are in the business of putting up wind turbines. The cost of your turbines has been coming down dramatically for years, and is slated to do so for the foreseeable future.

You can almost compete with dirty coal and gas plants on price alone, but not quite. It would be much easier if coal and gas had to play the same game as you, alas no such luck. For the most part, the costs for the dirt they produce are socialized. So instead you rely on a production tax credit paid to anyone for the first ten years of a wind turbine's life. That's what's driving your business, except when it isn't.

The production tax credit was passed in 1992, but it was left to lapse at the end of 1999, 2001, and 2003.

The result? See for yourself:

Production tax credits are set to expire once again on December 31, 2012. The time to act is closing soon, if we don't want to have 2013 be 2000, 2002, or 2004 all over again.

Climate wars

First came science fiction—with brave new worlds, meteors, earthquakes, and rising sea levels causing mass exodus, war, and worse—and there was no reason to react because it was science fiction.

Then came fiction—with well-researched accounts of Climate Wars to come in the not-so-distant future—and there was no reason to react because it was still in the future.

Then came science—with Nature publishing an analysis that shows how climate changes were a factor in a fifth of all civil conflicts between 1950 and 2004—and now there is no place left to hide and deny a link between climate and human suffering to the point of flat-out war.

Annual Conflict Risk increases in countries connected to El Niño, not in those unconnected. (Source: Hsiang, S. M., Meng, K. C. & Cane, M. A. Nature 476, 438–441 (2011).)

What if it's all a big hoax?

This cartoon has been makings its rounds since Copenhagen. Sadly, it's as prescient as ever.

"3 to 0″ beats "10 to 3″

We hold dear a set a of beliefs that isn't all that rational in the traditional economic sense but still holds a lot of sway over our daily actions.

Dan Kahneman shared a Nobel Prize "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty." One such insight is that reducing the risk of a particular loss from 10 to 3% is perceived as not nearly so valuable as reducing it from 3 to 0%. Never mind that the risk reduction from 10 to 3 is more than twice as large.

Zero strikes a chord in more ways than one. Everyone craves certainty.

Sadly, "solving" global warming is out. All we can truly do at this point is hope to reduce the risk of the worst consequences. Scientists cannot, in good faith, provide reassurance that any foreseeable policy will avoid disaster with certainty.

There's no good answer other than to hope for enlightened leadership trying to bridge the gap. It should be a lot easier for one such enlightened leader to understand that "10 to 3″ does, in fact, beat "3 to 0″ than to try to convince the millions that their intuition and their craving for certainty is "wrong."

Fat tails thinking and non-thinking

Disasters are bad no matter how you look at them. And then there are disasters that boggle the minds of even those who are hardened in the art of disaster management.

They aren't just a bit worse than anything that came before, they are twice as bad.

They don't burn a few more acres than the last wildfire, they burn twice as many.

They don't just take the lives of a few more people than the last terrorist attack, they take the lives of twice as many.

 
Second Largest
Largest


Wildfires, 1988-99
Nevada (1999)
Yellowstone (1988)


Acres burned
288,200
1,585,000


Earthquakes
Pakistan (2005)
Sumatra (2005)


People killed
80,361
283,106


U.S. Terrorist Attacks
Oklahoma City (1995)
9/11 (2001)


People killed
168
2,974

 

That relationship seems to hold across the board, and the table isn't cherry-picking. The worst earthquake in history, in Shaanxi on January 23, 1556, claimed over 800,000 lives—much worse than Haiti, Pakistan, and Sumatra combined.

Disaster damages don't follow nice little bell-shaped distributions we all study in high school. The tails of the distributions are much wider than others, "fat" in statistical jargon.

What to do?

Well, politicians have the tendency to hope that something bad doesn't happen on their watch, and chances are that it won't. The problem for the rest of us is that often it's just a matter of time. The goal isn't to survive a four-year term. The goal is to survive. It isn't very comforting that an ever warming atmosphere will load the dice to make precisely these extreme events more likely.