The deforesting Chinese land

The Chinese are cutting down the trees.  Deforestation has always been the opportunity cost of economic growth.  The demand for wood are from economic activities such as furniture-exporting and agriculture.  I'm going to focus on the impact of agriculture, on how croplands increase local temperature.

He et al. (2015) talks about how deforestation change the potential energy budget in China, namely the Northeast part.  Deforestation and land use change cause more than 10% of GHG emission (theguardian).   Over the past 300 years, 9.2% of forested area in China has disappeared.  The major cause of this is the conversion to cropland.  

In the article they uses satellite observation to investigate the impact of climate of land use change.  This would have less variation from difference model structures and parameters and would generate more constant result compare to climate models.  The study focuses in Northeastern China which is a main agricultural region and accounts for 20% of China's total cultivated area.

              

The conversion from forest to cropland not necessarily will heat up the surface.  Land surface albedo will increase (as seen in the graph) and will affect the shortwave radiation budget.  Short vegetation such as crops have a brighter surface and negative shortwave radiative forcing*, and will lead to local cooling.
*radiative forcing refers to "change in net radiative flux caused by an imposing change such as increase in CO2 or change in albedo" (He et al, 2015).

However land surface temperature (LST) increases when we includes some other factors.  For example, larger latent heat fluxes together with evapotranspiration will reduce LST in forests.  The average nighttime LST between crops and forest can be up to -2.30K*, which leads to forest area daily average temperature are cooler than croplands.
*K is a unit for LST

This graph shows how China's temperature increases from 1873-2008, which shares a similar pattern with the global temperature.  How is the impact of climate change treating China?  By 2030, the growing capacity of China's crop will reduce by 10%, including rice, wheat and corn.  There will be reduction in water resources in the major rivers and will increase disease attack and associated propagation. (Qin et al, 2010)

China is trying to address the issue by engaging in a massive tree-planting program in the North.  It is going to cover 2,800 miles across the Northern part of China.  According to the State Forestry Administration China has planted 32 million acres of new forest since 2008 (Quartz).   Can the afforestation in the future compensation the deforestation in the past decades?

The economics of leadership: Has EU failed in leading the world to fight climate change

As the impact of COP21 is yet to be seen, with regards to previous agreements and actions, the ineffectiveness of how the World fights climate change is undeniable.  In this blog I am examining whether the Western countries namely the European Union, has failed to lead the rest of the World to effectively engage in climate change mitigation measures. 

The word leadership is defined as 'asymmetrical relationship of influence in which one actor guides or directs the behaviour of other towards a certain goal' (Underdal, 1994).  There are few types of leadership such as structural leadership and directional leadership.  With regards to climate change, other forms of leadership apart from directional leadership is not viable.  For example, structural leadership requires coercion yet political powers will not impose mitigation goals upon each other which narrows our focus on directional leadership.

Directional leadership works leaders lead followers through example.  According to Dannenber (2014), leading by words is much more ineffective in stimulating cooperation between leaders and followers when compare to leading by example.  With reference to climate change mitigation, it is the failure of Kyoto Protocol.  The world's greenhouse gases emission has increased by 58% than 1990 despite the target was to cut the emission by 5% (CBC).  

Guardian

What are the flaws?  The intention of Kyoto Protocol is good, for sure.  For bringing the world together in order to fight against climate change.  However under directional leadership, the leader will need to have sufficient sacrifice in order to motivate second-mover to make contribution (Gergor Schwerhoff, 2015).  From the above chart if convert to percentage, the EU has only managed to reduce emissions by roughly 1% while the developing world has contributed 7% increases in CO2 emission.  The data will only go worse when we exclude the effect of EU ETS, of which some countries such as Italy did not reduce its emission at all.  Moreover, as I mentioned in my last blog, much of the China's CO2 emission is generated during the production of goods exporting to the Western World.  The sacrifice from the leader is insignificant.  

European Environment Agencies (EEA)

The EEA may say they are on track on meeting the 20% reduction target set in 2007.  However, some scholars have been criticising EU's leadership.  Parker et al. (2012) claims according to the surveys at COP 14 and 15, 'large number of followers did not embrace the EU's negotiation goals'.  Backstrand and Elgstrom (2013) also claiming that the EU's action is not sufficiently ambitious, which could be seen from the low carbon price (opportunity cost) at the EU ETS and the slow decline in aggregate CO2 emission.

One of the argument in Schwerhoff's paper is genuine sacrifice has to be seen by the followers given by the leaders.  Especially when motivating second-movers to contribute in climate change mitigation, of which he regarded as a public good which can be easily being free-ride.  More investment in energy efficient and renewable energy are needed for the rest of the World (followers) to make significant follow-up contribution.

 

When clean air no longer is a free good: The economics of air pollution

The cause of heavy smog in Beijing is similar to the great smog in London in 1952:  Immense consumption of coal.  In the winter of 1952, they heavy burning of coal in the Londoners' home, together with the anticyclone which prevent the smoke rose into the atmosphere, caused the great smog in 1952.  Similarly, Beijing has been suffering from smog in recently years.  The heavy reliant of China's economy on steel means huge amount of coal has to burnt in order to produce steel.  Burning coal release air pollutants named PM 2.5 (particulates smaller than 2.5 micrometer) into the atmosphere.


How much more coal is China burning in 2010 than UK's 1952 record?

According to UK's Department of Energy & Climate Change, the coal consumption in 1952 is 225 million tonnes, which have already caused the great smog.  Meanwhile in China, solely in 2010 the total amount of coal burnt is 3.2 billion tonnes.  This is 13 times of the 1952 UK's level.

Consequently, air pollution is severe in China.  It is best shown in its capital city, Beijing.  Beijing issued its most severe air pollution warming in December 2015.  The level of PM 2.5 in the air is 20 times more than the World Health Organization suggested level.

Tealeafnation

The pie chart above shows where does the air pollutants came from.  Beijing has the worst air pollution compared to other more industrialised cities is because of the huge rise in car ownership (approximately 5 millions vehicles, Yahoo), which accounts for 22% of the PM 2.5.  Direct coal pollution itself contributes 16.7%, while the "pollution from districts around Beijing", for example Hebei province, involves high amount of coal burning from steel production and coal-fired power plants (11% of world's production of steel;  95% of public heating from coal; Fortune), the effect of coal pollution is huge.

As a result of air pollution and smog, clean air has changed from free, public goods into luxury goods.

twitter

Affluent Chinese starting to buy bottle of fresh air from Banff National Park in Canada for roughly £10/bottle and is 50 times more expensive than a bottle of mineral water.  The most interesting part is that the founder of the company, Vitality Air starts the company as a joke but ending up created a huge market of clean air.


What is the economic cost of smog?

1. According to the World Bank, disease and death caused by air pollution leads to annual losses of 3% of GDP in the 21st century
   
2. Lower life expectancy.  People in Northern China has 5 year less life expectancy than people in the South and caused 1.6 million people died prematurely annually. (theguardian)
   
3. Agricultural loss.  The paper written by Wei et al. (2014) indicates the relationship between air pollution and economic agricultural loss.  The economic growth of major Chinese cities rely on the burning of fossil fuels and emits pollutants such as PM10 and SO2.   While according to Cao (1989), high concentrations of SO2 for some Chinese cities and industrial areas in the 1980s reduce the growth and yield of local crops and vegetables by 5.25%.  Wei examined this statement using empirical data.  They have created an equation estimating agricultural economic loss including variables such as crop production under influence of SO2.  They concluded that solely in 2008 the loss due to SO2 are roughly 1425m USD$ (0.66% of agricultural value of China).  They also found significant positive correlation in regional agricultural loss and industrial emission.

To me, the causation of smog in Beijing is not solely the consequences of the Chinese over-polluting their homeland in exchange of economic development.  It is also the result of global economic development.  Many of the Western countries still enjoying economic growth is because they have outsourced the production process to the East, especially China, where labour cost is low.  Yes, the Chinese is polluting their atmosphere in order to produce goods for more GDP.  Yet how much of these will end up selling in Europe?  How many of the goods nowadays are made in China?  Can we exempt ourselves from the pollution in Beijing?

Carbon tax?

If carbon market is not doing its job, what about carbon taxes?

Rachel Notley on carbon taxes 

Despite the concerns of its impact on economic growth, carbon tax has recently regarded as one of the emerging climate change mitigation tool.

When the carbon market has been manipulated by different stakeholders for personal interest and has failed to tackle the problem, carbon tax seems to be a more efficient tool.  Carbon tax, unlike carbon market, can have a direct impact on individuals.  Carbon tax will increase individuals' private cost so to match with the social cost of individuals' carbon emission.  For example, the cost of a person choose to drive to work rather than walk or using public transport will increase to reflect the real cost of his/her action.

The podcast is the premier of Alberta, Rachel Notley, explaining the Canadian province carbon tax scheme.  The tax of emission will be C$20 a tonne and will rise to C$30 a tonne in line with inflation.  The objective of imposing carbon tax is to 'provide incentive for people to change into a low-emission lifestyle', according to Notley.  She also mentioned in the long term, carbon tax will bring economic growth from the increase in green jobs.  While the statement is rather controversial as will discuss in later parts, there is an increasing numbers of countries and subnational governments imposing carbon tax.

Bloomberg

Indeed, carbon tax may not necessarily harm the economy and lower competitiveness.  All four countries from the graph has recorded an increase in GDP due to carbon tax.  One possible explanation could be a reduction in other form of tax which stimulates the economy.  For example in Canadian's province of British Columbia, thanks to the carbon tax revenue, BC has the lowest Canada's income tax and its GDP has kept pace with Canada's over the period.  Fuel consumption on the other hand, has reduced by 17.4% per capita. (Skeptical Science)

The scheme may success in some regions/countries, however there are quite a lot of uncertainties in economic aspect:

1. The cost of production of goods and services, especially in the electricity and transportation sector, which has large amount of CO2 emission, will increase and the cost will transfer to consumers.
2. The increase in price of goods will decrease the real wage of households.  Moreover, income inequality will increase because low-income household will suffer more with the increase of tax.  This is because low income-household has larger proportion of income spending on carbon-emission goods.  According to the US Congressional Budget Office, price hike for a 15% cut in emission will cost 3.5% of the low-income household after-tax income, compare to 2.7% and 1.9% for middle and high-income households. (Institute for Energy Research)
3. The difficulty in getting the correct tax level.  It is a basic economic problem.  Due to imperfect information, it is difficult to impose a economically-efficient tax.  The problem is more complicated if the tax is not regional but in a wider range.  This would require more information to figure out the equilibrium and there would be a risk of market failure, by over- or underestimating the tax level.

Both carbon tax and cap-and-trade is to price carbon and to raise the cost in consuming carbon to reduce carbon emission.  However, they are fundamentally different.  Cap-and-trade gives a certainty of the quantity of carbon emission as the total emission is capped, but the cost is uncertain.  This lead to the current problem of low price in the carbon market.  Carbon tax, on the other hand, provides certainty of the cost of carbon emission but with low control on total carbon emission.  Policies have pros and cons and will conflict interest of different parties.  Whether to use carbon tax or cap-and-trade or a hybrid of both may depend on one's economic structure and geographical location.  One thing for sure, carbon emission has to be reduced and we have to act now.

Source:
Government of Alberta
CBO
the Guardian

Why are carbon markets failing?

European Union Emission Trading System (EU ETS) is the most important and largest carbon market.  Its principle was from the 1997 Kyoto Protocol.  After 18 years, has the concept worked and played a significant role in combating carbon emission?

How the EU ETS works?  The regulator of the system sets a cap on the total emission EU sectors are allowed to emit and permits are distributed to polluters.  These permits are allowed to be traded between market participants.  Market participants here do not only refer to polluters (consumers) but also include suppliers, intermediaries, end users and regulator.  The EU ETS is an interactions between these participants and connects buyers of carbon credit with buyers.

The idea of carbon market is to reduce the demand by increasing the price of carbon emission and creates incentive in low-carbon technologies, why has it failed?

1.  Too much of carbon permits

Basic economic concept:  too much supply without sufficient demand, price falls.  During the first period of the trading system, too many permits were allocated by the regulator because countries had inaccurate emission data.  Whether this is resulted from countries protecting their industrial sector is not know, but asymmetric information in the market had created.  This form of market failure results from economic agents in the market do not have perfect information of the market and drives the price too high or too low.  The overcapacity is roughly around 2 billion tonnes which is around a year's emissions.  As a result, price fell by 75% from €20/tonne to €5/tonne in 2 years.  (carbon price is roughly €8.5 at the moment).  The intention to raise private cost of polluters to meet the social cost to eliminate the negative externalities is therefore not significant.

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economist

2.  Intention of participant

"If global warming is inevitable, why don't we invest in businesses that will profit as the planet gets hotter".  The problem of failing to correct the market failure as mentioned is that firms simply switch to (or maintain) high carbon emission production.  As Bloomberg reported , big energy companies are putting their efforts in increased extraction of fossil fuels rather than renewable energy as will yield more profit. (theguardian)

The inefficiency of the market is also examined by Crossland, J (2013).  Crossland mentioned in the paper that the main participant can earn profit simply using the historical price information.  If a market is not efficient it will open door for investor in the market to earn abnormal profit.  The trading system has violated the principle of efficient market because price is predictable.  A market is efficient if price don't exhibit predictability.  Carbon price followed a certain patterns within a year because it is heavily influenced by weather factors.

The focus of reducing carbon emission seem to be shifted away.

3. A single price

Certain sectors (power sector with 64% of permits) and countries have more influenced in the market.  This will create some kind of monopoly power within these agents in the market.  Because carbon price is homogenized, agents with significant market power may result in misuse of market power such as price formation.  One solution is to include the factors of carbon intensity or output based goals into the settings of carbon price.  Those sector with higher market share tend to produce largest amount of carbon emission.  The potential price differential for these sectors will force them to reduce more emission (rather than buying cheap permits from the market) and will also stop them from abusing market power.(Carbonpulse)

Energy mix without nuclear?

The combined earthquake/tsunami which triggered the dramatic events at Fukushima Daiichi nuclear complex on March 11, 2011 has raised the concern on safety issues of nuclear power plant.  Nuclear power will not result in direct CO2 emission and is therefore, according to Nuclear Energy Agency "Red Book", worldwide nuclear power capacity is expected to increase up to 110% by 2035.  

What would happen if nuclear power policies is more restrictive thus this alternative option of fossil fuel emission is less available for climate change mitigation policies?  What are the cost to the global economy?  How do we fill the energy gap under carbon budget?  

Bauer. N et al. (2012) is my main reference in this post.  In the 22nd round of the Stanford Energy Modelling Forum, nuclear power generation is expected to increase 34%-180% by 2035.  However with the safety concern of nuclear power plant, the future of nuclear power is uncertain.  

Fig.1 

Bauer compares the economic impact and energy mix differences under two scenarios.  The baseline scenarios is nuclear renaissance without the imposition of carbon budget and to compare it with when carbon budget is imposed.  In the reference case (w/o carbon budget with old power plants refurbishment), global nuclear power generation remains the same until 2050, however the majority will be shifted towards OECD and Asian countries.  If under carbon budget and nuclear power production phase-out scenario, the decrease in use of fossil fuels would be, compare to 2020: coal by 40% and gas by 18%.  The net shortfall is compensated by low carbon technology (including nuclear power) and renewable energy 

The impact of nuclear renaissance is very small in short term until 2035 when nuclear starts to play a more significant role in the energy mix.  Renewable energy such as wind deployment is unlikely to fill the energy gap as the increase in production of these sources significantly increase the already high cost.

How costly is nuclear renaissance?  Bauer claimed that the larger the strength of climate polices the more costly the nuclear phase-out would be.  This is due to the fact that the energy gap can not be filled by cheaper alternatives i.e. fossil fuels.  Without carbon budget, the cost phase-out scenario (old power plant refurbish) is as low as 0.0006% of global real GDP differences (base: 2010).  However full exit with carbon budget could be as much as 0.75%.

Therefore, the impact of restrictive nuclear power policies is actually not significant, as nuclear power is only moderately important in carbon emission policies.  The impact will kick in in the medium term but combination of alternative energy sources could well compensate the gap.

However some people hold a different view, claiming that nuclear power is essential in the energy mix, at least for their countries, or perhaps for their interest.  

#Eskom CEO Brian Molefe

"There is an urgent to build more nuclear plants in South Arica" 

"We don't think it is possible to have an energy mix without nuclear" 

#James Hansen, former NASA scientist and professor at Columbia University.

"We do not have a prayer of winning this fight without it (nuclear)” 

Even 8fact is supporting Stern.

Source: twitter