In sum, the economics profession calls for a calm, considered but, above all, slow response to climate change.  This is in stark contrast to the position of many climate scientists; for example, the sentiment expressed in the following statement by the climate scientist Lonnie Thompson:

Why then are climatologists speaking out about the dangers of global warming? The answer is that virtually all of us are now convinced that global warming poses a clear and present danger to civilization.

Since the scientific and the economics communities inhabit completely different academic silos, it is rare to find any intelligent discussion that analyses this dichotomy of opinion. Economists cite scholarly articles published in the leading economics journals, and scientists cite scholarly articles in the leading scientific journals. The one exception is perhaps the Intergovernmental Panel on Climate Change’s periodic assessment reviews, which has provided a communal market place of ideas for a variety of disciplines to meet. However, the last report was published in 2007 and was based on an information set available a few years even earlier. Therefore, many economists are not very well placed to tap into the rising alarm of climate scientists as new data comes in and reports get published.

If I were a climate scientist trying to install a sense of urgency among economists, how would plan my avenue of attack?

First of all, we can go back to the Nordhaus model and try to find where the greatest uncertainties lie. Nordhaus, himself, is well aware of the limitation of his approach as the following passage indicates:

In the present context, we have a complex system that is imperfectly understood in the sense that we are unsure how the system will evolve in the future. The uncertainty is based on incomplete knowledge about external variables and the system itself.

Amplifying this caveat, Nordhaus goes on to pinpoint eight critical uncertainties that are highly influential on the model outcomes and policy recommendations:

1. Growth rate of total factor productivity (broadly technological progress)
2. Rate of decarbonisation
3. Population growth
4. Cost of backstop technology (fossil fuel replacement)
5. Damage-output coefficient
6. Atmospheric retention fraction of carbon dioxide
7. Temperature sensitivity coefficient
8. Total availability of fossil fuels

But but before looking at Nordhaus’ damage function, I must defend myself from the accusation that I have set up a straw man through emphasising a model in my last post that is already six years old. However, we can see from a more recent Nordhaus paper (here) that his updated damage function still only produces a very limited hit to GDP:

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Understanding the market and nonmarket impacts of climate change continues to be the thorniest issue in climate-change economics. The RICE-2010 model provides a revised set of damage estimates based on a recent review of the literature (20, 21). Damages are a function of temperature, SLR, and CO2 concen- trations and are region-specific. To give an idea of the estimated damages in the uncontrolled (baseline) case, those damages in 2095 are $12 trillion, or 2.8% of global output, for a global temperature increase of 3.4 °C above 1900 levels.

It is worth following up Nordhaus reference in the quote above, as it takes us to Richard Tol’s literature review entilted “The Economic Effects of Climate Change” (here). And the summary Table 1 I have highlighted here:

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The table summarises a range of academic papers, which overall show a relatively well-behaved warming of around 2 to 3 degrees Celsius and relatively limited GDP impacts. What will happen, however, if we stray into the territory of 3 degree Celsius plus levels of warming?

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If we follow the internal logic of the Nordhaus economic model, we can get a sense of CO2 concentrations. For Nordhaus, the baseline scenario is the ‘do nothing’ one for which atmospheric CO2 concentration reaches 800 parts per million (ppm) by century end. Further, in the ‘optimal’ policy scenario CO2 concentrations still reach a high 600 ppm (current level is 395 ppm and pre-industrial level was round 280 ppm) before peaking out—the kind of level that makes NASA’s James Hansen fear for the lives of our grandchildren (see for example here).

Yet Nordhaus, and the majority of the profession, seem relatively sanguine about a 600 ppm plus CO2 outcome. True, climate damage (measured as a percentage of global output) is seen as reacting in a non-linear manner with respect to forecast mean temperature rise, but the steepness of the curve (degree of convexity) is deemed to be relatively low. This chart from Nordhaus’ book  ’A Question of Balance’ shows only two extra percentage points of GDP lost output if global mean temperature rises from four to five degrees Celcius—in other words, a temperature level that would witness a mass panic among the scientific community is regarded as almost a side show for many in the economics profession. Just read the papers presented at the ’4 Degrees and Beyond Conference’ held at Oxford University in 2009 (here) to get a sense over whether such limited GDP impacts could be true.

Such questioning of the science, however, doesn’t particularly bother me: a contrarian mindset is a prerequisite for a successful career managing money so the multitude of climate skeptics within the industry should not be a surprise. What does frustrate me, though, is that many of those who argue so vehemently that climate change is a product of statist scientists trying to secure government funding don’t feel the need to acquaint themselves with the basic tenets of what they are arguing against (and yes I have had the painful experience of reading through the standard skeptic offerings from Ian Plimer‘s ‘Heaven and Earth’, to Nigel Lawson’s ‘An Appeal to Reason‘, to Bjorn Lomborg’s ‘Cool It‘ and many more).

When engaging with many skeptics, it is like arguing with someone over the merits of a novel when my opponent has only read the reviews in a newspaper and not the original text.

So what would I recommend every skeptic read? If they only have an hour or two to spare, then it would have to be the Summary for Policy Makers of the Intergovernmental Panel on Climate Change (especially as the IPCC has become the Great Satan in the skeptic’s cosmology – given the generally unassuming and non-ideological nature of most climate scientists this must be one of the greatest calumnies in history). A weekend? Well perhaps David Archer and Stefan Rahmstorf’s ‘The Climate Crisis‘.

But this post is not an attempt to jump into the quicksand of the climate skeptic literature. In their brilliant book ‘Merchants of Doubt‘, Naomi Oreskes and Erik Conway show that nothing is quite what it seems within the skeptic meme, and the excellent site Skeptical Science  plays Whac a Mole with the generally recycled skeptic ideas.

Actually, what I want to do is turn the tables a little and ask what natural scientists (or for that matter the general public) should aim to read if they want to acquaint themselves with the thinking behind climate change economics. The first stop must be the first chapter of William Nordhaus‘ ‘A Question of Balance: Weighing Options on Global Warming Policies’ entitled ‘Summary for the Concerned Citizen’. You don’t actually need to buy the book since it is available in pdf format on line here. Nordhaus, probably the foremost economist publishing on climate change issues today, is steeped in the neoclassical economics tradition and is a current co-author of the seminal undergraduate text ‘Economics’, first published by the eminent economist Paul Samuelson. Few in the profession of a certain age have not come across this particular book since starting their study of the discipline.

I think that a close reading of this chapter is important for non-economists interested in climate change since it encapsulates how economists think about a problem—and the limits to that way of thought. Moreover, Nordhaus is certainly not a skeptic. Indeed, a group of skepical scientists mistook him for one of their own in a recent Op-Ed for the Wall Street Journal entitled ‘No Need to Panic about Global Warming‘, prompting a dismissive riposte from Nordhaus himself (see here). Nordhaus is, however, a fervent believer in markets (while recognising their limits) and a strong advocate of the power of correct pricing. Politically, I guess he would be somewhere in the centre of the US spectrum, which would put him to the right of centre in the rest of the developed world.

Nordhaus sees the problem in these terms:

Any well-designed policy must balance the economic costs of actions today with their corresponding future economic and ecological benefits. How to balance costs and benefits is the central question addressed by this book.

The benefits in this case are the climate change damages avoided through a carbon emission mitigation strategy. The costs are those investments made in emissions reductions and future climate change adaption.

While admitting that the current state of knowledge with respect to economic damage sustained from climate change is ‘very meagre’, Nordhaus produces what I view to be an extraordinarily low figure from his model for his ‘baseline case’; that is, one where we do nothing:

Measured mean global surface temperature in 2005 increased by 0.7°C relative to 1900 levels and is projected in the DICE model to increase by 3.1°C in 2100 relative to 1900…..The climate change associated with these temperature changes are estimated to increase damages by almost 3 percent of  global output in 2100….

I should explain that DICE stands for Dynamic Integrated Model of Climate and the Economy. A concise summary of the DICE model is provided by Stephen Newbold of the US National Center for Environmental Economics here. The model incorporates economics, ecology and earth sciences and then uses optimisation techniques to predict different economic and environmental outcomes based through varying the underlying parameters of the model.

Now the DICE model adopts a discount rate to allow us to translate future damages (that 3% lost output in 2100) to a present value. The figure adopted is a relatively high 4%, which means that $1,000 worth of damage in 100 years is only the equivalent to $20 today. Why? Because we have a choice: we can reduce carbon emissions today (and so limit damage in the future) but by so doing we divert capital away from investments that would grow the economy. In his words:

Although $20 may seem like a very small amount, it reflects the observation that capital is productive. Put differently, the discount rate is high to reflect the fact that investments in reducing future climate damages to corn and trees should compete with investments in better seeds, improved equipment and other high yield investments.

Nordhaus then goes on to explain the key concept of the ‘social cost of carbon’. Currently, the emission of carbon results in future damage to society that are now born by the emitter (a so called externality in economic terms), and as of the book’s publication this was estimated to be $30 per ton of carbon.

The preferred method to deal with such a cost, according to Nordhaus, is to apply a carbon tax.

This is the price on carbon emissions that balances the incremental costs of reducing carbon emissions with the incremental benefits of reducing carbon emissions.

Further, the tax should be ramped up from a relatively small $27 per metric ton in 2005  to $90 by 2050 and $200 by 2100, in the process cutting carbon emissions by 25% by 2050 and 45% by 2100. The result? A total cost of emission abatement of $2 trillion which would secure a reduction of climate damage of $5 trillion (for a net gain of $3 trillion). To put this in context, global GDP was around $45 trillion in 2005. Note that under the DICE model, a more aggressive tax policy would result in a lower net gain since the reduction in climate damage sustained would be worth less than the present value of the lost economic output in the future.

The chapter then goes on to explain why a carbon tax is preferable to any other type of emission mitigation approach and what form the tax should take to be most effective. I leave these issues for interested readers to follow up by themselves.

Overall, the most counter-intuitive finding from the DICE model for a non-economist is the link between growth and high climate change outcomes:

High climate change outcomes, as measured by temperature change, are positively correlated with consumption. This lead to the paradoxical result that there is actually a negative risk premium on high climate change states.

This is basically ‘the get dirty and clean-up’ approach to economic development. It also echoes Lawrence Summer notorious leaked memo (see here) while he was Chief Economist of the World Bank suggesting that poor countries needed more pollution not less, because their growth return to pollution was so much higher than that for rich countries.

Nordhaus, being somewhat more diplomatic than Summers, gets his point across with a slightly more user–friendly parable:

A homey example might clarify this paradox. Assume that in the future low-economic-growth outcome, we are living in caves, while in the future high-economic-growth outcome we have four stately mansions. As a result of the global warming associated with the high-growth outcome, one of our four mansions burns down, while on the low-growth outcome our caves remain unscathed.

He then goes on to argue that we would be happy to accept the risk of the high-economic growth, major climate change outcome (indeed he postulates that there maybe a negative risk premium in this scenario), rather than accept the opportunity cost of a benign global warming outcome that consigns us to living in caves.

A non-economist might be shocked that the model’s preferred outcome (that is the welfare-maximising one) could consign large sections of the eco-system to the scrap heap with resulting mass species extinctions. The response to this would be that we price our own lives implicitly through our own actions anyway. Value of life studies suggest that we are willing to accept a marginally higher likelihood of death if compensated correctly. So if we are willing to do that with our own lives, why not the lives of other species?

Putting the moral philosophy question to one side, the more interesting question for me is why a leading natural scientist such as Lonnie Thompson could claim that  the majority of scientists working in the field “are now convinced that global warming poses a clear and present danger to civilization” (see his paper paper entitled ’Mitigate, Adapt or Suffer’ here ) , while one of the leading economists on climate change, William Nordhaus, is still talking in terms of global warming knocking off a few percentage points of GDP. This dichotomy of opinion is a topic I will return to soon.

Now, when I say ‘recognised’ that did not mean ‘accepted’. Rather, the IMF acknowledged in the World Economic Outlook that price alone had not brought forth sufficient supply or substitutability over a multi-year time frame, as had previously been predicted. Economists at the IMF, therefore, seemed to have decided to widen their intellectual net to bring in some fresh ideas.

In a recent paper (here), however, the IMF has gone a step further and actually started to incorporate aspects of Peak Oil methodology (what it calls the geological approach) into a new oil price forecasting model:

We discuss and reconcile two diametrically opposed views concerning the future of world oil production and prices. The geological view expects that physical constraints will dominate the future evolution of oil output and prices. It is supported by the fact that world oil production has plateaued since 2005 despite historically high prices, and that spare capacity has been near historic lows. The technological view of oil expects that higher oil prices must eventually have a decisive effect on oil output, by encouraging technological solutions. It is supported by the fact that high prices have, since 2003, led to upward revisions in production forecasts based on a purely geological view.

The abstract appears very even-handed in awarding merit badges to the two approaches, but if you read the body of the report I have to say that Peak Oilers have come out on top. In particular, the IMF points out that the forecasting fidelity of the major organisations making traditional oil price projections has been appalling. Here is the track record of the US government’s Energy Information Administration (EIA):

As an aside, note that the EIA is currently producing bullish forecasts for shale gas production in the US, and these have got even President Obama excited. The above chart alone should suggest a note of caution to all those espousing imminent energy independence for the US.

By way of contrast, the IMF highlighted the forecasts of prominent Peak Oiler   Colin Campbell to represent the ‘geological camp’. It sees this as a miss as well, but in my eyes a far less spectacular one than the EIA’s:

Putting the geological with technological approach together within their new model, the IMF comes up with this rather scary chart:

And the accompanying frank commentary in the conclusion:

Our empirical results vindicate this choice. Our model performs far better than competing models in predicting either oil production or oil prices out of sample, in a field where predictability has historically been low. Our empirical results also indicate that, if the model’s predictions continue to be as accurate as they have been over the last decade, the future will not be easy. While our model is not as pessimistic as the pure geological view, which typically holds that binding resource constraints will lead world oil production onto an inexorable downward trend in the very near future, our prediction of small further increases in world oil production comes at the expense of a near doubling, permanently, of real oil prices over the coming decade.

Finally, the IMF not only takes on board the implications of Peak Oil for the oil price, but also that a potential doubling of the oil price in the space of a decade takes the world economy into ‘unchartered territory’:

Our current model of the effect of such prices on GDP is based on historical data, and indicates perceptible but small and transitory output effects. But we suspect that there must be a pain barrier, a level of oil prices above which the effects on GDP becomes nonlinear, convex. We also suspect that the assumption that technology is independent of the availability of fossil fuels may be inappropriate, so that a lack of availability of oil may have aspects of a negative technology shock.

The fact that an institution as eminent as the IMF is now flagging the possibility of such stormy seas ahead is certainly refreshing. As yet, though, global political elites appear blissfully unaware that their economic growth projections could be so imperilled by such oil scarcity, and the mainstream financial media like the Financial Times and Wall Street Journal still give it short shrift in their pages.

As I mentioned in my previous post, the current debate between austerity and public spending appears sterile to the extent that neither option addresses the underlying long-term structural impediments to growth, Peak Oil among them. At some stage, politicians may have to tell their electorates that unlimited economic expansion is becoming unfeasible, and some other path to personal fulfilment is needed to replace the desire for rising individual consumption. Don’t hold your breath.

The ‘interesting time’ that we are witnessing in Europe is the unstitching of postwar political and economic institutions in the face of austerity. And actually it is not ‘austerity’ per se that is the problem in Europe, but rather a structural lack of growth. A libertarian would argue that this death of growth in Europe is the result of the continent’s over-regulation, excessive taxation and sclerotic labour markets. Unfortunately, this argument appears lacking since the downward trajectory in economic growth seems an OECD phenomenon; for example, while the US is no Italy, it currently appears incapable of growing enough to absorb the natural rate of increase in its labour force, and its GDP is expanding at a far slower rate than in previous decades.

True, global growth as measured by the IMF is still humming along at a handsome pace. If we ignore the 2009 credit crisis aberration, then GDP expansion has recently been above the post-War long term average and is projected to push up above 4% over the next few years (here). However, just as OECD growth appeared to be have been artificially propped by the accumulation of debt in the 2000s, it is an open question as to whether the developing market behemoths of China, India and Brazil have also been binging on mal-investment post the credit crisis to keep their economic miracles on track. As countries as diverse as the Soviet Union and Japan show, this particular type of industrial policy has a tendency to suddenly come up against a brick wall with the passage of time (read Michael Pettis on China for this sort of critique).

For me, however, the far more fascinating question is whether the critical key to growth—technology—is becoming impaired. There are a number of mechanisms through which this could be taking place. At its most extreme, we could be witnessing declining returns to technology. I touched upon this issue in my blog post here, but will repeat the relevant section as it appears to me so important for our century’s prospects:

Joseph Tainter looks at the empirical literature on investment returns to technology (including studies of his own) and shows that the the idea of an ever accelerating progress in technology is nothing more than a myth (see a presentation he gave here). His conclusions are:

• The productivity of of our system of innovation is declining, and has been for some time. (First noted in 1879.)
• To maintain an acceptable rate of innovation, we will need to allocate more and more resources (money, people) to research and development.
• Within a few years, we will be able to innovate at an acceptable rate only by taking resources from other major sectors—e.g., health care, defense, transportation, infrastructure. This cannot continue forever.

For economists, technology is the manna from heaven that supposedly never stops giving, and is the principal driver of productivity growth. If you take out productivity growth, then society as a whole suddenly loses its most powerful weapon to tackle such modern economic afflictions as an ageing society and debt (not to mention climate change).

To this, I will add a further two channels that could destroy our worship of the cargo cult of technology. First, the degree to which technology is just embodied energy. Access to cheap energy enables a range of technologies. If, for some reason, we hadn’t been blessed with a fossil fuel endowment laid down millions of years ago, it is questionable as to whether the industrial revolution would ever have taken off. Ayres and Warr have set out this argument in far more sophisticated terms: a brief introduction is given here. The corollary of this argument is that if cheap energy becomes unavailable then, in effect, you start to disinvent a range of technologies (for which the growth implications are horrendous).

Now it is possible that technology could provide a solution to this particular conundrum. For instance, the efficiency of solar is following a somewhat slow motion Moore’s Law, but an exponential growth curve nonetheless. And many advocates suggest that solar will reach energy generation parity with an increasing number of fossil fuels in the not too distant future. There are a lot of moving parts in this particular argument, since both solar panels themselves, and battery technology for storing energy, could both in turn face natural resource constraints. But technology could then provide more abundant substitutes to those elements in short supply—but then again it may not. No unequivocal answer to this particular question exists, but I remain skeptical of a Matt Ridley or Ray Kurzweil’s type of religious response that technology is a deity that we should have absolute faith in. The human experience of turbo-charged technological development is brief indeed—a mere two hundred or so years. Statisticians always warn about extrapolating trends outside of the data set that generates a relationship. Therefore, to this argument, all I can say is ‘we shall see’.

A further source of worry is the ability of technology to undermine the very same conditions that allows it to flourish in the first place. My starting point here could be Martin Ford’s book ‘The Lights in the Tunnel’ (the web page is here). Ford argues that technology, or rather automation, if making an ever-greater part of the workforce redundant. And this assault on jobs is by no means limited to blue collar workers, since huge swathes of knowledge workers from lawyers to radiologists are also ripe for replacement. The argument brings to mind Marxist predictions of the inevitable decline of capitalism as machinery replaces workers, thus wiping out sufficient demand to keep the system intact. Editorials in The Economist magazine would at this point immediately shout ‘Luddite Fallacy’—the efficiencies secured would spur demand for the replaced workers to be employed in alternative occupations (to be fair, The Economist actually published a very good piece on the perils of technology recently here). My response (quoting Deng Xiaoping) would be ‘Seek Truth from Facts’; in other words, technology isn’t generating replacement employment regardless of the political system. Don’t believe me? Just look at the numbers.

Overall, OECD countries are beset by unemployment at a time when technological development has never been higher. Information is effectively free through the internet and almost limitless computer power. Both personal and corporate tax rates are far lower than in the full employment 1960s. Union power in most countries is also at a historical low. I am sorry, but it is nonsense to argue that such red tape issues as health and safety regulations are preventing markets clearing, when the entrepreneurial environment is far more conducive to new company start-ups than 30 years ago. Britain did experience the Thatcher revolution, and now unemployment levels are flirting with those before her reforms took effect. Something is, therefore, going on around here.

In sum, we should remember that technology does not equal growth. Modern day Greeks have access to an unprecedented level of technological knowledge, yet the economy is in free fall. My fear here is that technological development requires a stable soft infrastructure but has the capacity to undermine that stability by funnelling its benefits to an ever narrower range of elites. If absolute income decline starts to encompass more than one quintile of the population in any one country then the post-War technology-supported free market capitalist consensus is in trouble. To this challenge, politicians from Barack Obama to Angela Merkel to Francois Hollande appear to have few answers (and in the sterile argument of austerity against spending they are looking in all the wrong places). Indeed, it won’t be pretty. Just look at Greece.

Unfortunately, this tunnel vision of the benefits of technology does, on many occasions, not correspond to the actual historical record. One technology I have in mind is Thomas Midgley Jr.’s creation of a compound known as chlorofluorocarbon (CFC-12), better know as Freon. CFCs are a classic Kurzweil type solution to a particular problem, in this case the need for a substitute for the highly poisonous gases used up until the 1930s for refrigeration. At the time of their creation and for many years later, CFCs were believed to be inert and totally harmless to human health. In reality, as the CFCs accumulated in the upper atmosphere, they led to the creation of the Antarctic ozone hole. The journalist and author Dianne Dumanoski in her book “The End of the Long Summer” described the ozone hole phenomenon as the most important single event of the 2oth century, even eclipsing Neil Armstrong’s first steps on the moon, since it symbolised “the arrival of a new and ominous epoch when human activity began to disrupt the essential but invisible planetary systems that sustain a dynamic, living Earth.” Even more telling, the environmental historian J.R. McNeill described Midgley himself as having “had more impact on the atmosphere than any other single organism in earth’s history.”

In the lower atmosphere, ozone (O3) is a noxious gas since humans are able to breath it in directly, but in the stratosphere, 10-50 kilometres above the earth’s surface, ozone has a positive role since it screens the earth from harmful ultraviolet rationation. Specifically, it cuts out around 100% of the highly energetic and harmful UVc ratiation, around 90% of slightly less energetic UVb and 50% of UVa. If ozone were not present in the high atmosphere, ultraviolet radiation would, in effect, sterlise the earth and life on land as we know it would cease to exist.

An uptodate overview of the current state of the ozone hole can be find at a site run by NASA here and a table of year values here.

If you look at the chart above, you see the unit of measurement is the Dobson, which is 100th of a millimetre of  pure ozone at zero degrees Celsius at the earth’s surface. Normally, a column of air will contain 300 Dobson units (3 millimetres) of pure ozone. By convention, when ozone is depleted below 220 Dobson units (2.2 millimetres) it is classed as an ozone ‘hole’ since no historical values below this level existed prior to 1979 (in other words, CFCs pushed ozone levels below the historical norm).

The atmospheric physicists Herman and Newman from NASA have an interesting  commentary on the Skin Cancer Foundation site (here) on what could have happened if the depletion of ozone had not been discovered and the Montreal Protocol of 1987 limiting CFC production had not come into effect.

What might have happened if we had done nothing about CFCs? In the 1970s, prior to discovery of the ozone problem, CFC production was increasing 7-10 percent per year. Using the same computer models that predict the future recovery, we estimated that CFC emissions would have increased by three percent per year after 1974. By 2060, the levels of stratospheric chlorine would have been 16 times above 1980 levels. Average global ozone levels would have decreased by two thirds. The UV index in the northern mid-latitudes would have increased to a value near 30 for midsummer noon conditions. The average mid-summer UV index value now is about 10 in these regions. Typically, it takes about 15 minutes for a fair-skinned person to develop perceptible sunburn in mid-summer. In this theoretical world (“world avoided”) it would have taken less than five minutes to develop a perceptible burn.

Luckily for humanity, the existence of the ozone hole was discovered at a relatively early stage. The British Antarctic Survey had been taking ozone measurements continuously since 1956, and in a seminal article published in the journal Nature in May 1985 three scientists working for the Survey announced that Antarctic ozone was in a steep decline and named CFCs as the likely culprit. Jonathan Shanklin, one of the original authors of the Nature paper, explains the background to the discovery here:

The Nature paper came as a shock to the scientific community because NASA had been monitoring ozone levels over the Antarctic with much more sophisticated measuring equipment since 1978; however, satellite data had failed to flag any unusual changes. The reason why this happened shows one limitation of technology: human error. In short, the computer program recording the data had been designed so as to throw out any extreme readings from the analysis on the presumption that they were anomalies. Subsequently, upon a thorough review of the data, NASA’s satellite was found to have accurately recorded the burgeoning ozone hole.

What would have happened if the rather quixotic data gathering exercise of the British had been terminated once satellite measurements had come on stream?  Undoubtedly, the ozone hole would eventually have spilled into South America, South Africa, Australia and New Zealand, and a mirror ozone hole would have developed over the Arctic. Of course, at some stage land-based Dobson spectrophotometers in more populous regions than Antarctica would have noted the change, the NASA satellite data analysis error would have been discovered and the Montreal Protocol would have been enacted (but a lot more later than 1987). Levels of skin cancer world wide would though have risen, especially in southern latitudes. Nonetheless, both the global economy and mankind would have survived with relatively limited harm.

There could, however, have been a far darker outcome. Paul Crutzen, who shared a Nobel Prize for Chemistry in 1995 for his work related to gases and the ozone layer, stressed  in his acceptance speech (page 214) that things could have been a lot worse if refrigerants had been designed around bromine and not chlorine:

This makes bromine on an atom to atom basis almost a hundred times more dangerous for ozone than chlorine. This brings up the nightmarish thought that if the chemical industry had developed organobromine compounds instead of the CFCs – or alternatively, if chlorine chemistry would have run more like that of bromine – then without any preparedness, we would have been faced with a catastrophic ozone hole everywhere and at all seasons during the 1970s, probably before the atmosphe-ric chemists had developed the necessary knowledge to identify the problem and the appropriate techniques for the necessary critical measurements. Noting that nobody had given any thought to the atmospheric consequences of the release of Cl or Br before 1974, I can only conclude that mankind has been extremely lucky, that Cl activation can only occur under very special circumstances. This shows that we should always be on our guard for the potential consequences of the release of new products into the environment.

In short, if luck had not been in our favour, humanity could have come close to collapse due to the technological wonder of CFC equivalents.

Against this background, we should note that the analysis of Kurzweil style techo-optimists fails to recognise that it is not only the benefits of technology but also the costs that can on occasions grow exponentially. And further, the cost curve may not be smooth: costs could jump from one state to another that is far worse. Humanity did get lucky with the ozone hole as Paul Crutzen states, but there is no logical reason to believe that this will always be the case. Technology can thus sometimes be a double-edged sword.

A lake owner wants to stay at home to tend to the lake’s fish and make certain that the lake itself will not become covered with lily pads, which are said to double their number every few days. Month after month, he patiently waits, yet only tiny patches of lily pads can be discerned, and they don’t seem to be expanding in any noticeable way. With the lily pads covering less than 1 percent of the lake, the owner figures that it’s safe to take a vacation and leaves with his family. When he returns a few weeks later, he’s shocked to discover that the entire lake has become covered with the pads, and his fish have perished. By doubling their number every few days, the last seven doublings were sufficient to extend the pads’ coverage to the entire lake. (Seven doublings extended their reach 128-fold.) This is the nature of exponential growth.

While ‘the water lily and the lake’ appears a strange choice of metaphor since if nothing else it highlights the importance of boundaries to growth, what Kurzweil was trying to communicate was how technology has barely begun to transform our lives.

By contrast, consider the 1972 report to the Club of Rome published under the title “The Limits to Growth.” Much maligned and mostly misrepresented, The Limits to Growth (LTG) was nothing more than a mathematical analysis of linear and exponential growth rates and ultimate constraints. According to the authors, the tyranny of exponential growth rates would eventually lead population and industrial production to explode, setting off a negative feedback in terms of burgeoning pollution and the eventual exhaustion of food and resources. The report never provided specific dates for the depletion of individual materials, although nine our of ten commentaries on the report claim it did (for a post I did on this particular urban legend, see here). Nonetheless, what the report did do was suggest that the idea of inevitable constant human progress was a dangerous myth.

Ugo Bardi, in his excellent retrospective called “The Limits to Growth Revisited“, summarises the forecast actually made by the LTG authors:

Forrester and the LTG team had worked independently of each other, but had arrived at the same shocking conclusion that can be summarised as: The world’s economy tends to stop its growth and collapse as the result of a combination of reduced resource availability, overpopulation, and pollution. This conclusion was a “robust” feature of the simulations; that is, it changed little when varying the initial assumptions.

Neither Forrester’s calculations nor the LTG ones were meant to determine when exactly the collapse was to start but, using the best available data, both studies indicated that the start of the economic decline could be expected within the first decades of the twenty-first century, that is about 30 to 40 years into the future. In the LTG study, this scenario was referred to as the “Base case” or the “Standard Run”.

Fast forward just over 30 years back to Ray Kurzweil’s “The Singularity Is Near”. Interestingly, and ironically, at the centre of Kurzweil’s work is again a study of linear and exponential growth rates. But there is one major difference: the LTG authors saw in the exponential curve the power to destroy, while Kurzweil sees in such a curve the power to liberate. For Kurzweil, technology is the key, and once it passes what he calls ‘the knee of the curve’, that is the point where growth explodes upward, humankind will even have the power to transcend its own physical bodies. Ultimately, machine intelligence will beget further machine intelligence (or a human-machine amalgam of the two) in a recursive loop of self-improvement termed the singularity—a sort of universal big bang explosion of knowledge.

In a further irony (where ironies abound) Kurzweil now suggests that the singularity will take place around 2045 (see here), at which time the LTG report very roughly predicts that global population will be going over the edge of a cliff (a couple of decades or so after the wheels have come off the global economy).

While Kurzweil’s work is known particularly for its focus on information technology, he applies his law of accelerating returns to just about every aspect of science. As such, geopolitics and the business cycle become almost trivial issues in his eyes. The following quotes are taken from a PBS interview with Kurzweil in February 2011 (see here).

My main thesis, which I call the law of accelerating returns, is not affected by the kind of things you are referring to. The exponential growth of computation is measured in many different ways continued through the entire 20th century, completely unaffected by the little things like World War I and II or the Great Depression. It was not affected at all by the recent economic downturn. This exponential growth of solar energy has continued through thick and thin.

Accordingly, the energy constraint disolves:

Today, solar is still more expensive than fossil fuels, and in most situations it still needs subsidies or special circumstances, but the costs are coming down rapidly — we are only a few years away from parity. And then it’s going to keep coming down, and people will be gravitating towards solar, even if they don’t care at all about the environment, because of the economics.

So right now it’s at half a percent of the world’s energy. People tend to dismiss technologies when they are half a percent of the solution. But doubling every two years means it’s only eight more doublings before it meets a hundred percent of the world’s energy needs. So that’s 16 years. We will increase our use of electricity during that period, so add another couple of doublings: In 20 years we’ll be meeting all of our energy needs with solar, based on this trend which has already been under way for 20 years.

People say we’re running out of energy. That’s only true if we stick with these old 19th century technologies. We are awash in energy from the sunlight.

And the material constraint crumbles:

However, the same technologies that are going to extend life and nudge up the biological population are also going to expand the resources. We just talked about energy, because we are running out of it, but actually we are awash in energy. We are awash in water — pun intended. Just most of it is dirty and polluted. And we know how to convert it, today, but it takes energy, which is why it’s expensive. Once energy is inexpensive, we can create water.

There is a whole set of new food technologies. We are going to go from this revolution that happened 10,000 years ago of horizontal agriculture to what’s called vertical agriculture, where we grow plants, fruits, vegetables and meat in computerized factories by artificial intelligence; hydroponic plants tended by intelligent robots to create fruits and vegetables, in-vitro cloned meats, basically just cloning the part of the animal that you want to eat, which is the muscled tissue. There is no reason to create a whole animal to get to the parts that we want to eat.

And climate change will become a non-issue:

Even if those timelines were correct, there will be quite a transformation within 10 years and certainly within 15 or 20 years. The bulk of our energy will be coming from these renewable sources. So, I think we have plenty of time. I think we can make it to the point where these renewables are taking over. And I think there are reasons besides climate change to move away from fossil fuels — that whole oil spill, remember that, that’s not climate change, that’s just pollution. But I don’t see a disaster happening before we can get there because it is pretty soon at hand.

While Kurzweil’s pronouncements appear somewhat extreme, a watered down version of the transformational ability of technology lies at the heart of the global consensus on economic growth. Here is Michael Spence, the Nobel Prize Winner in Economics, talking about the energy constraint on growth in his newly published book “The Next Convergence”:

If you add all this up, with known sources of energy and their costs, and with the likelihood of technological innovation in response to rising energy costs, energy will become more expensive but not to a level that will materially diminish the growth potential of the global economy.

Whether it is an external exogenous gift, so-called manna from heaven, or an internal endogenous function of investment, technological progress is viewed as one of the few inputs not subject to the law of diminishing returns. If the techno-optimists are correct, then the transition network movement will appear foolish in a decade or two—like a millennial cult bitterly disappointed that the peak oil and climate change ‘end of days’ never came. If, however, technology accelerates and then peaks following the path of a logistic curve (or S-curve) then our entire economic growth model could suddenly become redundant. The winner of this particular debate will in effect be shaping the lives of my two children, so I intend to come back to the critical issue of technology in future posts.

In my mind, media coverage of climate change is probably determined by four factors: 1) the setting of new temperature records, 2) visible iconic climate events, 3) media coverage of scientific studies that contain pessimistic forecasts of future climate and 4) extreme weather.

As regards the record setting, the fact that we have had a relatively moderate period of warming over the last decade has certainly helped to blunt the perceived threat posed by climate change in the public eye. The step nature of the trend in global mean temperature rise suggests we get bursts of record setting spaced out by extended periods when not much happens. Two charts taken from Skeptical Science’s excellent escalator graphic highlight this pattern:

Glenn Tamblyn at Skeptical Science recently had an interesting post explaining the mechanism that produces the periodic plateaus in warming. Basically, periods of accelerated heat transfer from the upper to lower ocean causes surface warming to slow from time to time. The post also makes the important point that the oceans are where the main action takes place in terms of earth’s heat balance, leaving surface temperature as almost a residual in the grand scheme of things (not that this should be any comfort to us).

Referring to a paper by Meehl et al (2011), Tamblyn explains that during these plateaus, which the paper calls hiatus periods, the bottom of the ocean (defined as greater than 750 metres deep) is absorbing an above average amount of radiation than the top (less than 300 metres). The heat transfer highways are the down-wellings and up-wellings that connect surface and bottom currents. However, the periodicity between relatively active and quiet heat transfer periods means that a plateau, or hiatus, will only be a temporary state of affairs. Before long, global mean surface temperature increases will accelerate again. Nonetheless, the staircase nature of the temperature rise will allow climate skeptics to regularly claim that warming has stopped and therefore climate change science is wrong—for example, as in this op-ed piece in the Wall Street Journal.

Where I differ from Tamblyn, however, is in how this periodic pattern of surface heating influences climate change awareness among the public (and politicians). In Tamblyn’s eyes, the escalator pattern of warming has provided concerned scientists with few favours in terms of securing public and political support:

Personally I hope that the model results reported by Meehl are right and that this Hiatus ends soon. Only when we see more serious warming will the dam of Denial break. Humanity can alter our energy systems rapidly if we are sufficiently motivated. But that motivation is esentially an emergency war-time like mobilisation. We won’t do that if most people can treat AGW as a problem to worry about later. Mother Nature really hasn’t done us any favours in the last decade.

In my opinion, a smoother pattern of warming, with records falling almost every year (rather than in concentrated bursts) is just as likely to bring about boiling frog syndrome. In other words, individuals will adapt their expectations accordingly, and the novelty of record-breaking will gradually disappear. Ultimately, the subtlety of such accumulated change would build unaware until manifesting itself as a full-blown climate disaster.

So what are the prospects for imminent record-breaking that will shock us out of our stupor? Global warming has three main components: a long-term rising trends of around o.2 degrees Celsius per decade (but growing), a cyclical component that fluctuates with the El Nino Southern Oscillation (ENSO) and some weather noise on top. Simplistically, temperature records are generally smashed when we have a strong El Nino in operation but are pretty bullet proof when we have a La Nina in charge. Currently, we are in the process of exiting a La Nina phase (good coverage is available from NOAA here), but the residual effect of the departing La Nina on the first few months of the year will make it difficult for 2012 to rewrite the record books. A better bet is likely to be 2013.

A bit of a wild card here is the possibility of major recession in China—although again the timing appears more likely to be in 2013. The fact that China has been so dependent on fixed capital formation (roads, railways, airport, ports, power stations, factories, houses) to drive its near double-digit GDP growth rates for the last decade or so makes it uniquely vulnerable to a turndown of historic proportions. Now you would think that such a recession/deprecession would lead to a turn-down in CO2 emissions, which it true. However, it would also lead to a drastic reduction in sulphur aerosol emissions from the burning of coal. The average CO2 molecule will reside in the atmosphere for around 100 years, but an aerosol particle will stay up for, on average, a mere 10 days (a good introduction to aerosol science can be found at Real Climate here). This asymmetry means that should China’s economy screech to a holt we could get—counterintuitively—a noticeable jump in warming.

So if 2012 is unlikely to be the hottest year on record, how about some of those climate icons raising awareness instead? The climate icons generally relate to ice, either in the form of glaciers or the polar ice cap. For the United States, the disappearance of glaciers from Glacier National Park would certainly draw headlines, but we are probably at least a decade or so away from that depressing announcement (here). Likewise, Asian and European glaciers are in retreat almost everywhere, but total disappearance looks like an end of century phenomenon.

Arctic sea ice extent has become a very high profile icon, conjuring up images of the opening of the fabled northwest passage above Canada and the northern passage above Russia (and, for that matter, drowning polar bears). Indeed, we almost broke the 2007 record in 2011. For 2012, there is certainly a chance that the ice pack could shrink to its lowest extent ever in the modern era. The National
Snow and Ice Data Center shows us currently extent neck and neck with 2007. This is despite the fact that 2011/2012 saw no repeat of the arctic oscillation inversion that gave rise to Snowmageddon and Snowpocalpse over the previous two winters in the US and freezing conditions in northern Europe. So this winter, the cold air has generally stayed up north, but sea ice has still not recovered to the expected extent.

Given that the crunch months for sea ice extent records are in summer, it is too early to tell whether 2012 will see more open Arctic ocean than ever before. (For a great site on all things arctic ice, I recommend Neven Acropolis’ Arctic Sea Ice blog here.) Nonetheless, even if the record is broken, I am not sure if the public will really care that much. Indeed, the financial press appears to have more articles on the business opportunities for transportation and oil drilling provided by shrinking arctic ice rather than treating the retreat as a symptom of a sick planet.

The third source of media coverage is the hash-up of the scientific press release. Frequently, this involves taking an article from Nature or Science and stripping out all the scary bits and then repackaging them as a news story. The public appears to have become rather immune to this kind of reportage. On the one hand, it is always met with an instant riposte from the climate skeptic attack dogs (who shout ‘alarmist, alarmist’ again and again); on the other hand, a disquieting scenario a  few decades into the future appears to have little traction for someone worrying about healthcare coverage or the size of their pension. Of course, and as I have argued in this blog before, people are capable of looking beyond their own immediate near-term interests, especially if they have children, but this is hard to do when you have had no personal experience of the risk that you are called upon to respond to. Accordingly, for the greater part of the population the bitter taste of a negative climate event will make a far deeper impression than any knowledge imbued from journalistic renditions of worthy academic articles. Which brings us to extreme weather.

The hurricane is the totemic extreme weather event but tentative academic evidence suggest that the frequency of this phenomenon will if anything fall slightly as global warming progresses (although the intensity of the worse hurricanes may grow). Accordingly, while hurricane hits in quick succession on, say, Miami and Houston would certainly concentrate minds, such a course of events appears a very low probability outcome at present.

The model predictions and empirical evidence for the increased incidence and severity of draught look a lot more robust. Nonetheless, it is difficult to see what scale of drought would be required to reenergise a broad-based political movement to tackle climate change. Texas is witnessing one of its most severe droughts of the last 100 years, and the possibility exists that it will grow far worse in 2012 as the spring and summer months arrive despite some recent rain (see here for an update). However, successive La Nina’s have played a part in causing the drought, so making it difficult to disentangle the role of climate change. Further, few Texans these days are farmers; the majority are white collar office workers for whom air conditioning and easy access to water makes drought an alien concept in their everyday lives—and certainly nothing that would make them take to the political barricades.

So what would we need to stimulate a broad-based political movement that forces a reaction from the world’s political elites? Joe Romm, over at Climate Progress, once suggested that it would take multiple hits of what he termed climate Pearl Harbors to provide the catalyst. In a post titled “What are the near term climate Pearl Harbors?” he came up with the following list:

1. Arctic goes ice free before 2020. It would be a big, visible global shock.
2. Rapid warming over next decade, as recent Nature and Science article suggests is quite possible (posts here and here)
3. Continued (unexpected) surge in methane
4. A megadrought hitting the SW comparable to what has hit southern Australia.
5. More superstorms, like Katrina
6. A heatwave as bad as Europe’s 2003 one.
7. Something unpredicted but clearly linked to climate, like the bark beetle devastation.
8. Accelerated mass loss in Greenland and/or Antarctica, perhaps with another huge ice shelf breaking off, but in any case coupled with another measurable rise in the rate of sea level rise.
9. The Fifth Assessment Report (2012-2013) really spelling out what we face with no punches pulled.

I say multiple events because we need a critical mass understanding the climate is changing catastrophically. Multiple events will be needed to make the case that this is global and climate-related, as opposed to local and weather-related.

The pattern of ‘climate impact, response’ appears the only feasible one from a political perspective. The question then is whether it is economically practicable too. By the time the Pearl Harbors are coming thick and fast enough to produce the reaction, it is likely that atmospheric CO2 concentrations will be considerably higher than today. Given that the economics of actually removing CO2 from the atmosphere are appalling, then the only option available at that stage would be to slash emissions close to zero to make a difference. However, as noted by the IEA in my post here, the sunk costs and long lead times of energy infrastructure would make such a response an incredibly expensive thing to do. At the same time, the costs of adaption will be moving up their own exponential curve, particularly as sea level rise accelerates and climate in general departs from the Holocene norms of the last 12,000 years.

The question then is whether growth will be robust enough to take the strain of the dual requirements of drastic mitigation and accelerating adaption. Given a combination of diminishing returns to technology and burgeoning resource and energy restraints, I suspect that the potential global growth rate will already have been radically reduced by the time the climate change chickens come home to roost. In other words, all of this has the makings of a perfect storm: we will suffer a severe lack of capacity to act just as we realise we have no choice but to act.

Interestingly, the idea of the slowly boiled frog is an urban myth (see here): if the frog is able to escape the heated container, it will do so. Unfortunately for us, our container—earth— is all we have got.

Greece joined the EU in 1981 and the eurozone in 2001 (with the  drachma abolished in 2002). This chart of Greece’s GDP growth rates from eurostat shows  the sharp reverse in the country’s fortunes (note that the forecast rates for 2012 and 2013 currently look hopelessly optimistic). Moreover, latest data for 2011, suggest the final figure will come in at around minus 7%.

A piece in The Atlantic places Greece’s predicament in the context of other recent major country recessions. On current trends, Greece has the potential to surpass the Latvian and Argentinan recessions.

The article chooses to leave the Soviet collapse out of the equation on the following rationale:

Russia’s GDP fell a spectacular 44% in the 1990s, but the dissolution of the Soviet Union is categorically different from a recession within a single country, so some analysts exclude it.

However, if we look at all these case studies of hard times, life for most did go on and the government continued to function. But throughout history there have been far worse outcomes. Joseph Tainter, in a path-breaking book called “The Collapse of Complex Societies” (1988), set out some of the conditions for when a country goes beyond depression and reaches a state of collapse:

Collapse is a fundamentally sudden, pronounced loss of an established level of sociopolitical complexity.

Symptoms include a downward spiral in law and order, a breakdown of educational systems, an inability to execute large infrastructure projects particularly the efficient distribution of food and energy, and a steep reduction in urban population concentrations.

Tainter’s book is in many ways an archeological and anthropological grand tour of deceased civilisations from the well-known like the Maya to the more obscure such as the Harrapan of the Indus Valley. His key point is that societies grow more complex (which is initially termed civilisation) to solve problems, but in so doing incur costs; in short, greater complexity requires more energy and more organisational expertise. Eventually, diminishing returns set in until the society in question implodes under its own weight or due to some external shock from outside.

Following the financial collapse in 2008, Tainter has been much in vogue as a commentator on the vulnerability of our current civilisation to collapse. Indeed, he recently wrote a book with Tadeusz Patzek called “Drilling Down: The Gulf Oil Debacle and Our Energy Dilemma” that used the metaphor of the Deepwater Horizon disaster to show how our need to resort to every greater complexity to meet our energy needs was increasing risk within the system. The book is a somewhat messy read, as it jumps between detailed descriptions of what went wrong with the Deep Horizon rig and then more theoretical treatments of complexity. Nonetheless, it contains some disquieting chapters, particularly those that look at the diminishing returns to technology.

The idea that innovation and invention will lead to limitless technological growth is so central to how we view or society that no political leader ever dares question it. It also underpins the publication of all our economic institutions such as the IMF, World Bank and OECD. In Tainter’s words:

In the conventional economic perspective, resources are never scarce. They are just priced wrong. Subscribing to what has been called the Principle of Infinite Substitutability, conventional thinkers assume that, provided that markets are undistorted, innovators will respond to price signals and develop solutions to the problems of the day–whether those problems are shortages of energy or other resources, climate change, or merely a need for a competitive product.

Tainter goes on to look at the empirical literature on investment returns to technology (including studies of his own) and shows that the the idea of an ever accelerating progress in technology is nothing more than a myth (see a presentation he gave here). His conclusions are:

• The productivity of of our system of innovation is declining, and has been for some time. (First noted in 1879.)
• To maintain an acceptable rate of innovation, we will need to allocate more and more resources (money, people) to research and development.
• Within a few years, we will be able to innovate at an acceptable rate only by taking resources from other major sectors—e.g., health care, defense, transportation, infrastructure. This cannot continue forever.

For economists, technology is the manna from heaven that supposedly never stops giving, and is the principal driver of productivity growth. If you take out productivity growth, then society as a whole suddenly loses its most powerful weapon to tackle such modern economic afflictions as an ageing society and debt (not to mention climate change).

In short, if there are more retired as a percentage of the total population, then the only way we can maintain living standards is if those working become more productive. If technology doesn’t deliver the productivity, we just become poorer. Likewise, to pay down debt ultimately requires growth.

Of course, the heavily indebted could just default. But this brings us back to the problem of complexity. As a global society, we have grown interconnected in such a way that we cannot just disengage from each other financially overnight. Most of the advanced economies have become ever more serviced orientated. Only a small portion of the things we consume are made within nation state boundaries. If the debt edifice were to topple, then no seller of goods would continue to deliver them if they believed they couldn’t get paid. Reindustrialize? That will require access to raw materials and energy—both of whose costs continue to rise to due increasing scarcity that technology has not been able to offset. It would also take time.

I would also note that energy has its own particular dynamic. As explained in my post here, the IMF is at least acknowledging the existence of alternative approaches to the importance of energy in economic growth. Economists such as Ayres and Warr make the point that much technology is predicated on the existence of cheap energy; remove the energy and you in effect disinvent the technology.

Going back to Greece, an IMF paper back in 2009 (here) shows us Greece’s situation before the crisis really accelerated. First, Greece’s demographics are the worst in Europe:

Second, the country is relies on oil for over 50% of its total primary energy supply (tpes) and 99.7% is imported. The natural gas and coal is all imported as well. Furthermore, oil imports had been exploding going into the crisis (table from an IEA paper here).

This oil dependency has been a key component in the country’s expanding current account deficit (from the IMF report).

Overall, the 2009 IMF report was relatively upbeat, expecting the economy to weather the downturn slightly better than other European countries, while at the same time acknowledging some fragilities.

Greece is feeling the downturn with some delay. Moreover, even with the staff’s weaker outlook relative to the authorities, Greece’s growth decline from peak to trough would still be milder than for the euro-area as a whole.

By late 2011, we have a completely different interpretation of Greece’s economic stability (here) and a typical package of IMF reforms is advocated: privatisation, cutting of red tape and more transparency, removal of barriers to investment and exports, higher labour market flexibility and a reduction in government spending. No surprises here. Yet one wonders if the IMF’s inability to recognise the severity of Greece’s structural problems as the crisis got going bodes poorly for such transitional measure to solve such problems. This goes beyond a Keynesian critique—in other words, in a country lacking from a chronic lack of effective demand, why would one slash public spending and thus entrench the downturn—but also encompasses issues of emerging long-term structural impediments to growth.

We appear to have created an ever more complex global economy in the pursuit of growth. Unfortunately, due to diminishing returns to technology and a looming resource constraint, such growth is becoming harder to come by over increasing swathes of the world. The danger is that, as with Greece, when growth stalls, an economy can’t easily find a new stable equilibrium without first undergoing a rapid decent. Moreover, if the descent is too rapid it could have sufficient momentum to unpick existing sociopolitical arrangements as Joseph Tainter has documented in countless cases in the past.

Luckily, we have few modern examples of Tainter-type collapse among relatively advanced economies in modern times. The state certainly survived the Great Depression in the US, and even prospered. Likewise, neither Latvia nor Argentina saw complete social breakdown during their crunching recessions. For a time, it could be argued that the old Soviet Union become socially unstitched as documented by Dmitry Orlov, but it can’t really be classed as total collapse because it was so temporary in nature—lasting just a few years.

Nonetheless, individual nations appear to have accepted a Faustian pact of becoming ever more integrated into the global economy in exchange for higher livings standards and better growth. Their economies have become less resilient to shocks in the name of efficiency. Richard Parker, an expert on Greece, summed up that country’s conundrum in a recent article in the Financial Times:

A third of its economy depends on tourism and international shipping; neither is “controlled” by Greece. “Modernisation” of its internal economy means the spread of large firms in place of micro-enterprises, a structural shift complicated for a small economy searching for a niche between the hyper-efficient Germans and the low-cost Chinese.

These sectors boomed on the back of a sea of cheap credit in the mid 2000s. At the same time, EU transfers and Greek private- and public-sector borrowing led to a construction and real estate binge that provided the other leg of Greece’s growth miracle. The miracle can now be viewed as a mirage.

The problem is compounded by the fact that an advanced economy needs a very efficient soft infrastructure to function properly in the modern global economy: a transparent legal system, lack of red tape, absence of corruption, fair and efficiently enforced taxation system and so on. The 20% peak to trough and counting decline in Greek real GDP means the there are far fewer stake holders in Greek society who see such things benefitting themselves. Personal economic relations are reasserting themselves with a vengeance as the economy spirals downward as it is only family and friends who provide a real safety net—the government having relinquished this role.

It is possible that the IMF could be right with its prescriptions for Greece: the market could ultimately clear, and a new equilibrium be reached from which to build growth (and higher living standards) anew. However, just as the IMF did not really understand the structural problems facing the global economy back in 2007, it is possible it does not understand the structural impediments to recovery that remain. The ever-rising oil price, for example, makes the point at which the Greek economy is able to clear its own imbalances more and more difficult to achieve.

As a consequence, there is possibly a point at which a horrible negative feedback cycle sets in: the shrunken economy ceases to be able to support the sociopolitical infrastructure that the country needs to compete in the modern global economy. At that point, we have a Tainter-style collapse.

Energy, technology, productivity, specialisation within an increasingly complex global economy—none of these things are unique to Greece. So I would be none to blase if Greece does move toward collapse. It could easily be the canary in the coal mine showing the fragility of the global economy as a whole.

In February 1977, two weeks into his presidency, Carter told the American people in a fireside chat that “we must face the fact that the energy shortage is permanent”. In April 1977, in another address to the nation, Carter’s opening words were “Tonight I want to have an unpleasant talk with you”. Carter then went on to talk about the potential of the energy crisis to “overwhelm us” and that if the country didn’t act on energy “the alternative may be a national catastrophe”. Over 30 years later, to hear a politician deliver such an unrelenting stream of bad news appears almost shocking.

Fast forward a mere seven year, and the Carter gloom had the character of a long-forgotten bad dream. Ronald Reagan played against it constantly, most blatantly in his “It’s morning again in America” campaign.

I am not quite sure why Carter was quite so down beat about the US energy outlook. By 1977, it was already known that a series of new sources of petroleum were about to come on stream, most of which were in geopolitically stable areas. That year, the Alaskan Prudhoe Bay oil field commenced production, Mexican oil production was also on the cusp of passing 1 million barrels of oil per day, and North Sea oil production had just vaulted over the same mark.

And then again there was the question of markets and prices. In 1977, the US oil market was highly regulated such that oil price rises did not translate into gasolene price hikes—and thus a change in consumption habits. At its most extreme, demand was controlled by the queue. Carter, in fact, did eventually come to understand this: his moves toward deregulation set the scene for the Reagan free market revolution that followed. Even that bastion of Austrian economics the Ludwig von Mises Institute recognises a debt to Carter (see here).

Nonetheless, because Carter ‘cried Wolf’  for so long and so loudly (and so wrongly), energy conucopians have been citing his administration as proof of the absurdity of the idea of resource constraints ever since.

And so we come to Barack Obama. In his January 24 State of the Union Address (full text here) we see this passage on energy and natural gas:

But with only 2 percent of the world’s oil reserves, oil isn’t enough.  This country needs an all-out, all-of-the-above strategy that develops every available source of American energy.  (Applause.)  A strategy that’s cleaner, cheaper, and full of new jobs.

We have a supply of natural gas that can last America nearly 100 years.  (Applause.)  And my administration will take every possible action to safely develop this energy.  Experts believe this will support more than 600,000 jobs by the end of the decade.  And I’m requiring all companies that drill for gas on public lands to disclose the chemicals they use.  (Applause.)  Because America will develop this resource without putting the health and safety of our citizens at risk.

The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy.  (Applause.)  And by the way, it was public research dollars, over the course of 30 years, that helped develop the technologies to extract all this natural gas out of shale rock –- reminding us that government support is critical in helping businesses get new energy ideas off the ground.  (Applause.)

Nearly 100 years supply of natural gas? Well that is a large supply—but is it true? Let us start by studying how much natural gas the US is currently consuming. Again, the democratic information commons that is the internet allows us to go straight to the original data when evaluating a political pronouncement. For consumption, let us go to the US government’s Energy Information Agency data (for where else would Obama get his numbers), and more particularly their early release Annual Energy Outlook published in January 2012. In this report, we find that the US consumed 24.1 trillion cubic feet (tcf) of natural gas in 2010.

For reserves and resources, the most respected source of reliable data is the Potential Gas Committee, which publishes a benchmark biennial assessment of the US technically recoverable US natural gas endowment. The last report came out in April 2011, and a summary can be found here and power point presentation covering the report here. The suggested gas supply available is shown in the chart below:

Now if we take the bottom-line number of 2,170.3 tcf of future gas supply and divide by the current consumption of 24.1 tcf, we get around 90 years. It is not 100 years, but close enough in political terms to give us a nice, round talking point for the State of the Union Address.

Next let’s look at the different categories of future gas supply. We have 272.5 tcf of proved reserves according to the EIA. These are known gas reserves that can be exploited with existing technology at existing prices.  The EIA provides a somewhere dated breakdown (as of 31 Dec 2008) here. For me, the most interesting part of this EIA analysis is that shale gas was still a relatively minor part of proved reserves as of 2009. The next update on proved gas reserves is due from the EIA in April 2012, and it will be very interesting to see how the steep decline in natural gas prices, coupled with the advance of technology and investment in the space, has altered the situation.

The Potential Gas Committee also provides a figure of 1.739.2 tcf for traditional gas resources (and please note that ‘traditional’  includes shale gas under their definition). Note the word ‘resource’  not  ’reserve’. Resources (unlike EIA’s proved reserves) include gas that is a) as yet undiscovered, b) uneconomic to extract at present prices and c) cannot be extracted using current technology.

In addition, the PGC breaks down total resources to those that are probable, possible and speculative. Using these number, we can roughly see that we have 10 years current consumption of EIA proved reserves, 20 years of PGC probable, 30 years of possible, 20 years of speculative and 7 years of coal bed methane. So what are the PGC’s definitions for probable, possible, and speculative? The methodology behind these definitions is highly complex but a description can be found here. The key point is that as we move from proven, to probable, to possible to speculative the likelihood that the gas will actually reach the market diminishes.

Art Berman, a vocal critique of what he terms the shale bubble, emphasises that a large percentage of the PGC resources will never get reclassed as reserves. In his words:

Much of this total resource is in accumulations too small to be produced at any price, is inaccessible to drilling, or is too deep to recover economically.

Berman suggests that only half of the ‘probable’  resources will likely get upgraded to reserves, or around 275 tcf. Add this to the EIA’s 273 tcf and we have about 23 years worth of current consumption. A good summary of Berman’s view can be found here and a podcast here (start at 3:30). While that may be rather too pessimistic, the idea that all resources are equal appears hopelessly optimistic.

We most also remember that the president wasn’t content to keep natural gas consumption constant; he also said the following:

The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy.

Let’s just deconstruct this statement for a second. To ‘power trucks and factories that are cleaner’  requires natural gas to take market share from oil (since we currently aren’t powering trucks with either electricity or gas in any meaningful quantities at the current time), and to take market share from coal (since cleaner factories must mean factories powered by electricity generated from gas not coal). And if  ’we don’t have to choose between our environment and our economy’  then I presume Obama believes the economy will grow, in which case gas consumption will rise regardless of whether it takes any energy market share from coal or oil. So the 100 years of supply makes no sense whatsoever if we premise it on a level of gas consumption that gives us cleaner factories and trucks (and all at a cheaper price).

In conclusion, my feeling is that President Obama’s spinning of irrational optimism presents a far greater danger than Carter’s morose pessimism. It may be politically impossible to sell the possibility of an energy crisis to the American people any more, but that does not mean the pipe dream of an endless stream of natural gas should be sold instead. I also think it is a politically naive strategy.

Like climate change, resource scarcity is not an ideology. If you wish, you may persuade someone that abortion is unethical, and little information will emerge to prove this view right or wrong. By contrast, if you tell the nation that a resource scarcity doesn’t exist, in due course the market will pass its own judgement through price (and ultimately availability). If that happens, even the most soaring of rhetoric will provide you with no place to hide.

Interestingly, there is not that much difference between the aggregate energy numbers produced by the major organisations that predict energy supply and demand into the future (IEA, EIA, OPEC, BP and Exxon Mobile). I think that this is because they generally start with a GDP growth (and energy intensity) assumption and then work backwards to produce supply and demand forecasts. (The question of whether growth drives energy or energy drives growth is a topic for another post.)

Another thing to note is that BP uses million tonnes of oil equivalent (mtoe) as its unit of comparison (and occasionally billion toe) rather than quadrillion British thermal units (Btu) which the EIA uses (and which I referred to in my previous post). To convert from quadrillion Btu to mtoe you can roughly multiply by 24 (a good energy unit of measure comparison table can be found here). Given that BP is using mtoe, I will stay with that unit of measure for the rest of this post.

Looking at the chart above, it is obvious that changes in the energy mix are only taking place at the margin: 2030 does not look a whole lot different from 2010 percentage share-wise. Natural gas has gained share from 23.7% to 26.1%, and oil is down from 32.2% to 27.2%. But critically, the real action is taking place within each energy category. While oil’s share of total energy is down, in absolute terms oil production has increased by 15.3%. Natural gas production, meanwhile, has grown by 50.2% and coal by 22.6%.

In the previous post, I mentioned how some observers believe shale gas would help solve energy scarcity, security and environmental problems. Accordingly, to the BP numbers, however, scarcity will only be solved if every category of energy production is able to grow. Only in this way will total growth in energy consumption of 1.6% per annum between now and 2030 be achieved.

Turning to security, BP sees greater reliance on Middle Eastern oil supplies rather than less as the left-hand chart below shows.

Unconventional gas supply is seen jumping in the United States, and North America is seen becoming a net LNG exporter by 2030 (see chart below). However, the quantities involved appear to be almost a rounding error compared with overall global gas consumption. Dieter Helm, the energy academic and government policy maker, envisages US shale gas production as being a game changer from a security perspective, but this is nowhere to be seen.

For Europe and China, natural gas imports will pose a security risk equivalent to that for oil as these countries will become increasingly dependent on overseas (in reality Russian and the Middle Eastern) supplies by 2030. Unconventional gas production, including shale gas, is seen rising outside of the US but the amounts involved are almost an order of magnitude less than for conventional gas.

Finally, for shale gas in particular, or natural gas in general, a major contribution to the reduction of carbon emissions can only be made if gas displaces coal in the production of electricity. Unfortunately, BP’s numbers just don’t see this happening. Total global coal production is up 22.6% by 2030. Not surprisingly therefore, CO2 emissions continue to grow. We are not even close to the International Energy Agency’s required trajectory to keep atmospheric C02 concentration below 450 parts per million (a guideline threshold for dangerous climate change).

Of course, the BP predictions are just one view, and it could be argued that they are backward looking and don’t take account of the most recent developments in unconventional gas production. The problem with this argument is that it fails to recognise the supertanker nature of world energy production: in other words, it takes decades to steer the energy mix from one configuration to another.

To highlight this conundrum it is worth looking at another scenario analysis, the IEA’s special report entitled “Are We Entering a Golden Age of Gas?” published in 2011. At over 100 pages long, it is exhaustive in nature and covers every aspect of the production and consumption of natural gas, which somehow is never referred to by the promoters of shale. The premise of the report is one under which everything that could go right with gas in the energy mix does go right.

The Golden Age of Gas Scenario (GAS Scenario) takes the WEO-2010 New Policies Scenario as its starting point, and adopts new assumptions that have the effect of building a more positive future outlook for natural gas to 2035. These new assumptions include a more ambitious policy for gas use in China, lower growth of nuclear power, greater production of unconventional gas and lower gas prices.

Unlike in BP’s scenario, the IEA’s Golden Age of Gas scenario see natural gas overtake coal to become the second largest source of energy but still just behind oil—but we are seeing changes in the order of one or two percent. As the charts below show, the major volume increases are coming from conventional gas sources despite the fact that we see huge increases in unconventional gas production in the US and China.

Unfortunately, it is an inconvenient truth that coal is a lot cheaper than gas in many key countries such as China, and a transformational change will only take place through a regulatory response. Furthermore, the idea promoted by Dieter Helm and other observers that oil and gas are fungible (close substitutes) is just not true.

Oil and gas have different attributes in terms of energy density, storability and transportability (as do coal, nuclear, hydro, wind and solar). To make gas vaguely fungible will require vast infrastructure investment and a decades long cycle of replacement iof our current oil-orientated transport stock.

Nevertheless, let us say, for the sake of argument, that technological progress coupled with massive infrastructure investment solves the fungibility issue and allows gas to substitute for oil. This would, in turn, mean we would need a lot more shale gas if it is to significantly reduce oil’s share of total global energy demand. Indeed, we would need to see a monumental ramp up beyond anything projected to date. To reduce oil’s share by an additional one percentage point by 2030, say from 27% to 26%, would require 170 mtoe of replacement energy beyond that currently projected. The BP outlook currently sees North American shale gas providing around 550 mtoe by 2030 (up from about 150 mtoe now). So to get just one percentage less oil in the world energy mix, we would need to see nearly another 30% more US and Canadian shale gas production in 2030.

Against this background, the conclusion can only be that shale is important at the margin, but it is not a game changer. As such, the global economy will remain highly vulnerable to scarcity, security and environmental shocks for the foreseeable future, and anyone who discounts such risks through a religious belief in salvation from shale is just not on top of the numbers.