China and GDP

I’ve been a bit unwell this week so have been relaxing with not one, not two, but three detective novels – Chief Inspector Chen in the series by Qiu Xiaolong set in Shanghai. They’re hardly action packed but they have a lot about Chinese politics and also the fabric of everyday life, including food. Fascinating.

One of this week’s [amazon_link id=”1473616786″ target=”_blank” ]Don’t Cry, Tai Lake[/amazon_link] has a plot about environmental activism against industrial pollution. Whatever China’s GDP growth has been – much disputed – it has been fast enough to have exacted a serious environmental cost. Inspector Chen reports back to his Party patron: “I focused my research on issues of the environment. … Pollution is so widespread that it’s a problem all over China. To some extent, it’s affecting the core of China’s development with GDP-centred growth coming at the expense of the environment. It can’t carry on like this, Comrade Secretary Zhao. Our economy should have sustainable development.”

I’ve been working on a paper on the political economy of economic statistics, for a conference in 10 days. Many, many people would agree with Chief Inspector Chen, and not just about China, but it’s hard to move from GDP-centred to something else centred without a consensus about what the something else should be. Perhaps China could assist the political economy of such a transition given its need for a measure that can show increasing economic welfare without costing the earth.

[amazon_image id=”1473616786″ link=”true” target=”_blank” size=”medium” ]Don’t Cry, Tai Lake: Inspector Chen 7 (Inspector Chen Cao)[/amazon_image] [amazon_image id=”1473616808″ link=”true” target=”_blank” size=”medium” ]Enigma of China: Inspector Chen 8 (Inspector Chen Cao)[/amazon_image] [amazon_image id=”1473616824″ link=”true” target=”_blank” size=”medium” ]Shanghai Redemption: Inspector Chen 9 (Inspector Chen Cao)[/amazon_image]

Be afraid. Be very afraid.

[amazon_link id=”0262029189″ target=”_blank” ]Why Are We Waiting: the logic, urgency and promise of tackling climate change[/amazon_link] is Nick Stern’s second book on this subject, the first being [amazon_link id=”1847920373″ target=”_blank” ]A Blueprint for a Safer Planet[/amazon_link]. In the new book he aims to combine fear and hope – fear of the consequences of not taking big steps now, and hope that the need to change is an opportunity for new technologies and growth.

[amazon_image id=”0262029189″ link=”true” target=”_blank” size=”medium” ]Why are We Waiting?: The Logic, Urgency, and Promise of Tackling Climate Change (Lionel Robbins Lectures)[/amazon_image]

The first part of the book, “A Planet Between Peril and Prosperity,” sets out these two elements. Stern is at the gloomy end of the range of views about the likely rise in mean global temperatures and the consequent economic and social risks. Unless the world acts within a decade or two, the window for limiting the temperature rise to a manageable 2 degrees C will be closed, he says, before proceeding to dangle hope with a chapter about the potential for a “new energy-industrial revolution.”

The second part of the book is an interesting challenge to climate change sceptics (of course) but also to some of the economists who are less pessimistic. Stern challenges the application of economic methods that assess the costs and benefits at the margin – inappropriate he rightly argues when you are discussing big changes. He has a chapter discussing the flaws in the conventional ‘integrated assessment models’ used in the literature. Stern argues: “They have assumed strong underlying growth, plus only modest damages from big increases in temperature, plus very limited risk.” If you disagree as he does with all three assumptions, the consensus forecasts look Panglossian. A final chapter in this section assesses the debate about ethical assumptions and how these are captured in the modeling, a debate first triggered by the Stern Review. His critics argue that he makes an extreme assumption about the right discount rate to use to assess future costs and benefits; but he has not changed his view.

The third and final part is about political economy – why the negotiations are so hard, how to get fast-growing developing economies to sign up to urgent action, why is everything so slow? The book argues that this is the result of the analytical errors he sets right in part 2, and psychological barriers to change, and a communication deficit. But surely it’s much simpler? Nobody – person or country – has an individual incentive to bear the short term cost of change, while the costs of climate change are uncertain, 20 years into the future, and a collective problem. It will take an extraordinary politician to solve the global collective action problem in advance, rather than reacting to events. So the book concludes, “Why are we waiting?” I am not sure the market is waiting – there seems to be a lot of energy innovation under way. As for policy, surely we need individual nation state governments to do what they can through carbon taxes, or plastic bag taxes, or policies to ‘green’ power generation – and not wait for an all-encompassing international agreement?

This is not to say Nick Stern is wrong to be so concerned. The outcome he fears clearly has a non-zero probability even if you don’t agree with him. So I’m all for action. Anybody who is interested in the economics and political economy of climate change policy will want to read this book.

Not-so-green economics

I’ve been mulling over some statements in [amazon_link id=”0262028573″ target=”_blank” ]The Container Principle[/amazon_link] by Alexander Klose. He says logistics has become the “third largest sector of the economy”. That in Germany 10% of energy use is accounted for by data centres – and that there are more than 5 million worldwide, whose CO2 emissions (from their production and use) is approaching those of global air traffic.

[amazon_image id=”0262028573″ link=”true” target=”_blank” size=”medium” ]The Container Principle: How a Box Changes the Way We Think (Infrastructures)[/amazon_image]

A modest amount of rooting around online hasn’t enabled me to verify these rather eye-opening facts, if they’re correct. Does anybody know of sources for such figures? (This Scientific American article reports some signs of decoupling of CO2 emissions from growth in the aggregate; prior to 2000, the energy-intensity of GDP growth had apparently been declining.)


Shock tactics

[amazon_link id=”0691159475″ target=”_blank” ]Climate Shock: the economic consequences of a hotter planet [/amazon_link]by Gernot Wagner and Martin Weitzman is an impressive (and concise) book. It recognises that it’s a minority view that governments need to take significant steps now to reduce GHG emissions, as even people who are not climate change denialists would rather not have to bother with doing all that much about it. So the book aims to do two things: explain clearly the risks of the economic (and social) impacts if climate change is as bad as all the scientists expect; and persuade people that insurance against those risks is quite a good idea.

[amazon_image id=”0691159475″ link=”true” target=”_blank” size=”medium” ]Climate Shock: The Economic Consequences of a Hotter Planet[/amazon_image]

It’s actually a very sobering read. A one in ten chance of “catastrophic” sea level rise, anyone. And as the authors point out, “What we know is bad, what we don’t know is worse.” Having said that, the book tries to end on an upbeat note. We can make personal changes such as cycling more or recycling more. Better still, we have power as consumers and citizens to get businesses to do an environmental audit of their supply chains and start to de-carbonise them, and to get governments to take bolder decisions: yes, the price of energy will have to rise, to incentivise “green” technological innovation. Those of us who live in democracies will get what we deserve, so if you care, campaign and debate, the book says. It sums up the advised actions as : scream, cope and profit. Make sure businesses you buy from and politicians you might vote for know your views. Don’t build your house on a flood plain or by the ocean. And invest in businesses and innovations tackling the problem because it will prove financially beneficial.

Chapters in the book look at economic aspects of the problem of reducing emissions, including free riding, and co-ordination issues. It discuses financial aspects of changing energy technologies, and prospects of innovations such as geoengineering. Above all, the book explains the risks and the range of potential impacts associated with them. It gives very clear explanations of the economic issues – very useful for students as well as general readers.

The sense of urgency is palpable in the writing: “The debate around whether to act should be over. To some extent even the debate around how to act is over. … The ultimate goal is clear: for governments to set a mandatory price on carbon pollution. … Dare we say that anyone who pretends otherwise is wilfully blind?” There are those wilfully blind people around, of course. And hence the book goes on to what the clearer-minded people can do about insuring against the consequences of the risks posed by climate change. So now you know.

Living on the never never

I’ve been looking through an interesting book by UBS economist Paul Donovan and Julie Hudson, [amazon_link id=”1849714142″ target=”_blank” ]From Red to Green: How the financial credit crunch could bankrupt the environment[/amazon_link]. It starts with the simple point that people were relying on credit in two ways, using both financial and environmental resources for current rather than future consumption. In some cases the credit-financed consumer boom before the crisis accelerated the consumption of environmental resources, and in other cases had positive environmental benefits. More consumption clearly uses more of some materials and more energy; but has also encouraged investment in additional infrastructure (to use water more efficiently, for example) or innovation. In either case it’s important to note that the two are related, when thinking about what the crunch after the crisis implies for financial and environmental sustainability.

[amazon_image id=”1849714142″ link=”true” target=”_blank” size=”medium” ]From Red to Green?: How the Financial Credit Crunch Could Bankrupt the Environment[/amazon_image]

The bulk of the book looks in detail at different issues to explore the interactions between red and green credit. For example, a chapter on food discusses what actions could increase agricultural productivity while protecting biodiversity and soil quality, how the credit crunch is affecting the outlook, and also what changes in behaviour might be desirable . So declining real incomes could lead to reduced consumption of meat and less food waste, but these depend on changed consumer habits and changed practices in the food retailing business. On the other hand, there is less funding for R&D in agriculture and food production – unless the corporate sector concludes that it needs to do more to limit its exposure to supply chain risks like the horse meat scandal. Other chapters look at water, energy, infrastructure, housing, human health, and consumer goods.

The detail is all fascinating, and the book obviously covers a wide territory. It seems to offer a very practical and fruitful approach to turning the crisis to some longer term benefit by getting people to focus on specific actions to reduce the economy’s reliance on financial credit and at the same time economise on natural resource use and preserve natural assets. Ever since writing [amazon_link id=”B00GP1RV0U” target=”_blank” ]The Economics of Enough[/amazon_link] a few years ago I’ve been obsessed with the chronic short-termism of modern economies. So a book about what people can do right now to safeguard future living standards – written by a City economist too – was bound to appeal to me. Any investors who are genuinely interested in long-term returns rather than quarterly results will find it very interesting. However, although the advice in [amazon_link id=”1849714142″ target=”_blank” ]From Red to Green[/amazon_link] is practical and specific, it does highlight how much needs to be done by many people to lengthen the economic time horizon.