Joe Romm's cognitive dissonance on renewables, nuclear and shale gas

I used to be an avid reader of Joe Romm's "Climate Progress" blog. However, my enthusiasm has waned dramatically over the years due to his selective presentation of facts and data, stark intolerance for any opposing ideas and dogmatic stance on nuclear power. (On the plus side, his blog remains an excellent repository for climate news and he can be great fun when mocking the likes of Christopher Monckton.)

Probably the biggest problem that I have with Romm, however, is that he appears to suffer from acute cognitive dissonance. For example, the overriding theme of his blog is one of impending climate doom, yet he regularly proclaims that renewables are already at grid parity, getting cheaper by the second and ready for mass deployment. So, problem solved surely? Frustratingly, this is a recurrent theme on many green blogs, where Cassandra complexes are hard to square with wildly overstated -- or misleading at best -- claims about current renewable energy performance.

Such cognitive dissonance is again on display in one of Romm's recent posts, entitled "Major Study Projects No Major Long-Term Benefit From Shale Gas Revolution". The study in question is by Huntington et al, (2013) and contains projections from a broad suite of integrated climate models. In addition to GHG emissions, the researchers looked at the wider economic impacts of shale gas and their conclusions are rather more nuanced than Romm's excitable headline would suggest. In short, the final projections depend on a complex set of model assumptions and variable interactions. This is evident from the following paragraph that Romm actually cites from the study (emphasis his):

…this trend towards reducing emissions becomes less pronounced as natural gas begins to displace nuclear and renewable energy that would have been used otherwise in new power plants under reference case conditions. Another contributor to the modest emissions impact is the somewhat higher economic growth that stimulates more emissions. Reinforcing this trend is the greater fuel and power consumption resulting from lower natural gas and electricity prices.

Does anyone else see the irony here? Romm is lauding a study which questions the climate credentials of shale gas... and yet that largely depends on whether cheap gas displaces nuclear power -- a technology that he maligns at every opportunity.

More importantly, to say that shale gas confers no long-term climate benefits (in of itself) is extremely misleading. It all depends on whether it is complemented by a carbon price, as anyone interested in this debate (at least that I am aware of) readily acknowledges. You get a sense of this from the very figure that Joe Romm chooses to include in his blog post:

Comparison of low shale scenario (light blue), high shale scenario (dark blue), and a scenario depicting a reference case combined with a carbon price (green). This reference case is in between the low and high shale scenarios, while the carbon price starts at $25/tonne in 2013 and increases at 5% each year. Source: Huntington et al. (2013).

The dramatic reduction in emissions due to a carbon price is clearly evident. However, the above figure is still not really comparing apples with apples, since the carbon price is not adapted to the high shale scenario. (It is applied to a reference scenario that is somewhere in between the high and low shale cases.) Luckily, the data that would allow us to make the correct comparison is available here. I have therefore reconstructed the above graph, this time adding a new column that specifically combines the high shale scenario with a carbon price.

Based on Figure 13 of Huntington et al. (2013). The figure now includes a fourth column (purple) where a high shale scenario is combined with a carbon price.

This updated graph makes perfectly clear that the shale revolution can be fully compatible with deep long-term emission reductions, as long as it is complemented by a carbon price. To his credit, Romm does mention this briefly in the article and has also commented on the issue previously. Yet, by continuing to disparage shale gas and pretend that its supporters ignore the need for a carbon price, he simply serves to further polarise the climate debate.

THOUGHT FOR THE DAY: Adapting to the threat of climate change will require a broad suite of interventions. Nobody should claim that the proliferation of shale gas is a sufficient development for de-carbonising the global economy. However, together with a carbon price and other technological breakthroughs, it will likely form a very necessary component.

PS - It probably goes without saying that the economy also benefits from cheap and abundant shale. Huntington et al. state as much in their report (p. 7):

Higher shale resources reduce the costs of natural gas development and expand opportunities throughout the economy. Relative to its path in the low-shale case, [real GDP] is higher in all models that track the economy’s aggregate output. The cumulative aggregation of these GDP gains over all years is significant standing at $1.1 trillion (2010 dollars).

Showing this in graphical form is a little trickier, since some of the models actually take economic growth as an exogenous assumption, or don't extend all the way until 2050. Nonetheless, here is a graph showing a selection of models that compare changes in real GDP up until 2035.

Manufactured controversy and the "hockey stick": A football analogy

Even if you're only vaguely aware of the climate change debate, then you will probably have heard of the "hockey stick". You know, this bad boy:

Source: Mann et al. (1999).

This famous depiction of global temperatures going back into time has generated a lot of controversy. It doesn't seem to matter much to sceptics that the initial hockey stick(s) -- i.e. those produced by Mann, Bradley and Hughes (1998, 1999) -- have since been replicated by multiple studies using different lines of evidence and computational procedures. No, we are invariably told that the hockey stick is a fraud and has been debunked by the likes of Steve McIntyre and Ross McKitrick.

The problem with these debates is that they are necessarily technical and involve concepts that are very unfamiliar to most people. Whenever I tried to explain things to my friends and family, I could see their eyes glazing over as soon as I mentioned the words "principal component analysis". So here is a sports analogy that captures the essence of what critics like McIntyre and McKitrick got wrong.

Obligatory comment on the 2013 Nobelists

Seeing as it is very de jour to comment on this sort of thing in the econ blogosphere, here is a quick personal take:

I know that this year's laureates have raised eyebrows -- not least of all because people think that Fama and Shiller are at complete odds with one another. This doesn't strike me as especially correct. (Hansen is really the odd one out in this triumvirate, but we'll get to him in a second). For starters, and as pointed out many times over the last two days, Fama was one of the first people to publish results that ran counter to EMH predictions. Mark Thoma is exactly right in pointing out the EMH remains a really useful benchmark/framework for thinking about markets in an empirical sense. I've used it a fair bit when looking at energy and commodity markets for my own research and also when asked to to advise/comment on market trends. 

Shiller has played less of a formal role for me personally, though his housing index and his "dividend returns" data have been extremely handy tools in the blogosphere. The former is better known, but the latter is especially useful when, say, debating your average goldbug. (E.g. When dividends are taken into account, U.S. stocks have enjoyed inflation-adjusted returns of +/-1,000% since 1974. Gold, on the other hand, has yielded a rather more modest 130% over the same time period...)

The 2013 Nobelist who has had the most relevance for me, however, is Lars Peter Hansen. I suspect that this is true for many people working in economic research today, simply because the tools that he bequeathed us are so widely used in modern empirical work. Alex Tabarrok has one of the best "layman" explanations of GMM that I've seen here. Guan Yang has a more wonkish (but still accessible to anyone who is familiar with basic econometrics) exposition here.

Predictable Nobel Prizes in the Economic Sciences?

The subject line is taken from an email sent around my department by one of the finance profs. Here's the email itself:

A curiosity: In the very first edition of their textbook Financial Theory and Corporate Policy (Addison-Wesley, 1979), the authors Thomas E. Copeland and J. Fred Weston dedicated the book to 15 named “pioneers in the development of the modern theory of finance”. Out of these 15 pioneers, eight have since been awarded the Nobel Prize (viz. Debreu (‘81), Modigliani (‘85), Miller (‘90), Markowitz (‘90), Sharpe (‘90), Merton (‘97), Scholes (‘97), and Fama (‘13)), one was already a Nobel laureate (Arrow (‘72)), and three are dead and thus not eligible (Lintner, Black, Hirshleifer). So what about the chances of the three remaining finance pioneers Michael Jensen, Richard Roll, and Stephen Ross? By the way, this year’s laureates Hansen, Shiller, and Fama (a well as the previous laureates Engle, Lucas, Arrow, and Samuelson) are all among the twelve elected Fellows of the American Finance Association, recognized as having made a distinguished contribution to the field of finance.

So I guess it's even money on Jensen, Roll and Ross then...

PS - Here's the evidence.

Quote of the Day - Privacy

"At a moment of austerity and with a general sense that our state's ability to guarantee prosperity for its citizens is in retreat, that same state is about to make the biggest advance ever in its security powers. In public, the state is shrinking; in private, it is shrinking until it gets just small enough to fit into our phones, our computers, our cars, our fridges, our bedrooms, our thoughts and intentions."

- Taken from a long, but very worthwhile (and disconcerting) article by John Lanchester.

Why a functioning electricity grid is crucial to economic development

... in two graphs:

THOUGHT FOR THE DAY: Decentralised power is a nice ideal -- and in some cases is the best option -- but it remains a poor alternative to the grid for the moment.

PS - I've previously written about why the electricity grid is best viewed as a (regulated) natural monopoly here.

Links and happenings

Busy times for yours truly over the last two weeks. Here is a list of things that I've been doing, plus one or two items that I spotted on ye olde internet.

1) I moved apartments! More or less the same size as our old place, but more comfortable and modern. Here is a little photo taken from the (car-free) route that I cycle to school everyday. Not too shabby, eh?

2) I had the pleasure of acting as moderator for the inaugural TEDxBergen conference. (My school has actually been hosting TEDx events for a while, but they've now expanded to include the other educational institutions in the city.) The speakers were all very interesting, with two or three in particular being excellent. I believe the video(s) for the event will be made available shortly, so I'll link to them then.

3) I gave a lecture on shale gas (and fracking) to the master's class in Petroleum Economics this week. My slides are here!

4) On a more prestigious note, two Nobel laureates recently gave lectures at my school. (i) As I pointed out on Twitter, Chris Sims is sounding an awful lot like an MMTer /Post-Keynesian lately. (ii) Finn Kydland makes a provocative claim that we are more resilient to energy price hikes today than we were in the past. His argument is that the adverse economic effects of the 1970s' oil shocks largely manifested themselves as inefficient tax rises due to the monetary and fiscal systems of the time. This in turn caused investment and employment to fall. I'm entirely not sure about this story -- the declining energy intensity of our economies would seem to play a bigger role -- but it's an interesting idea.

5) As predicted, some people are using the terrible events at the Westgate Shopping Mall in Nairobi to disparage "interventionist" foreign policy. I'm not saying that they don't have a point -- although, the ongoing anarchy in Somalia is certainly destabilising to the area and has negatively affected Kenya's economy. I'm saying that if blowback is the measure by which policy is to judged, then consistency dictates that one should make equally narrow arguments against (say) liberal immigration policy, subsidy revocation or economic austerity. What's sauce for the goose, is sauce for the gander after all.

6) To my American friends that have to suffer through the asinine politicking of the Republican party and the twilight-zone-thought-vacuum of Fox News, you have my sympathies.

China to reduce coal consumption?

I've tried to emphasise the importance of relative concepts many times on this blog. However, there are occasions when relative measures can also be more than a little misleading. Case in point: This article from Reuters, which describes how China plans to reduce its coal consumption to 65% of primary energy by 2017.

This policy prescription is primarily motivated by desire to improve the country's terrible air pollution. Of course, a reduction in coal will also bring climate benefits. (I have previously talked about the "co-benefits" of climate policy and local air pollution measures here.)

However, despite being a tentative step in a right direction, this is hardly a watershed moment. In fact, the US Energy Information Agency (EIA) was already forecasting a drop in Chinese coal consumption to 65% of total energy by 2017 (from 69% in 2012) in the reference scenario of its International Energy Outlook, which was published earlier this year.

More importantly, this relative decrease glosses over the fact that the absolute consumption of coal is forecast to increase by nearly 20% over the same period... Up from 79.2 quadrillion Btu in 2012 to an eye-watering 94.1 quad Btu in 2017!

Source: EIA data tool

THOUGHT FOR THE DAY: Be wary of anyone who tells you that China is leading the race in de-carbonising their economy, or winning the battle on renewables for that matter. There may be an element of truth in such statements, but the bigger picture is far more sobering.

How methane emissions could actually be good for the climate

This was the title of a post I wrote last week for the Recon Hub.

It may seem like I am merely trolling for viewer hits here. However, the logic behind this counter-intuitive statement is based on the political factors that shape people's opinion on climate change. (E.g. Rather depressingly, support for the theory of man-made climate change increases when the weather is hotter.)

The other important thing to realise is that methane is a much more powerful greenhouse gas than CO2 over the short-term. Yet, it's potency fades the further we look into the future, whereas CO2 remains in the atmosphere for millennia.

Here's the take-home:

Tying everything together, a move to natural gas might conceivably benefit the long-term climate in two ways. First, there is simply a direct elimination of carbon emissions due to the switching away from coal. This obviously presumes that fugitive methane leakages are not high enough to offset those gains. However, even that runs parallel to a second point which has been the focus of this post: Methane emissions in the present will drive up temperatures (but not over the long-term) in a way that likely encourages political action and hopefully helps to establish a coherent climate policy. 

To conclude, I’d rather see global temperatures follow a concave path over the coming decades, than a convex one. In less technical terms: Accepting an acceleration in near-term temperatures in order to secure the political will necessary to enact long-term climate policy, seems an acceptable trade-off from my perspective.

The more you read about ABCT... the more you read about ABCT

Chris responded last week to my previous post on the empirical (ir?)relevance of ABCT. I've been too busy to reply properly until now. (To be honest, I think that my original points remain intact.) I should also say that neither of us can afford to keep this dialogue going on for much longer. Still, here are some excerpts from his latest post, followed by my comments.

First, on the challenge of trying to distinguish between business processes that are fundamentally short-term in nature versus those of the longer-term:

My dad’s business, for instance, does multiple short-term contracting projects within long-term property development projects. In the normal production structure distribution his irrigation installations would be classified near the consumer level as it sits very close to final consumption, but he prices projects at the outset of long-term investment projects when the developer begins to plan and commence his project. My dad’s business therefore adjusts prices early in the business cycle at the same time that projects more remote of the consumer do, and will continue to price for projects throughout the period of the long-term project.

Unlike Chris' initial post, where he was bemoaning the use of statistical indices, I regard this as a more interesting observation. Yes, it is true that firms with short-term production horizons will in some sense be dependent on the activity of (other) firms with longer-term production horizons. However, I still don't regard this as a decisive barrier to an empirical investigation into ABCT.[*] First note, however, that Chris' objection could be seen as theoretical critique of ABCT as much as an empirical one. For if his remarks hold true, then it is extremely difficult even in principle to distinguish the way in which, say, products closer to the end consumer are made less attractive by a fall in interest rates. The mechanics of the classic (naive?) Hayekian triangle begin to unravel, since the underlying distortions -- the switch into capital goods at the expense of consumption goods during an initial period of credit expansion -- may not even occur in a qualitative sense. Indeed, if processes all along the chain of production benefit from credit expansion then we are closer to a theory of economic growth than of business cycles.

Nevertheless, what really matters in this case is the change in relative prices. If you buy the insights provided by ABCT, then it seems extremely implausible that conditions inherently favourable to long-term production processes could benefit short-term processes to a near (or even greater) extent, merely through the creation of auxiliary demand. This is particularly true if the economy is operating at anywhere near full capacity, as is typically emphasised as the starting point for their analysis by Hayek and Mises... i.e. Any increase in capital goods production must increasingly come at the expense of consumer goods.[**] The focus of Lester and Wolff (2013) was the changing nature of such relative prices. It therefore seems a perfectly valid approach from my perspective and, moreover, the failure of the data to conform to the theory's broad predictions, or show signs of economic/statistical significance, is indeed cause for scepticism of ABCT's relevance. A final point on this matter is that L&W trace the evolution of these relative prices over time, which further accounts for the dynamic shifts between sequential processes in the economy.

Chris also made a few other remarks that I thought were worthy of comment, so here are some brief(ish) observations on other parts of his post:

Of course we have only have had around 5/6 business cycles since 1972 that to my mind can’t produce any statistically significant results either.

Okay, and how many monetary policy interventions have we had in that time? Again, I would think that this reflects rather poorly on a theory that places central bank interventions at the (inevitable) heart of all swings in the business cycle.

ABCT does not claim to be a theory that can explain all observed economic phenomena,which is what Grant thinks it claims to do.

Strawman. I have been very clear -- directly following the paper by L&W -- that this was entirely a question of how relevant ABCT is for explaining observed business cycles in the macroeconomy. Nothing more, nothing less. (Although, one wonders about the usefulness of a theory on business cycles if it seemingly fails to achieve that primary goal.)

On the subject of cycles, here is a beautiful example of circularity:

Let me emphasize that the relevance of the Austrian theory can only increase the more one engages and learns about[...] Austrian theory.

I love this sentence and have re-worked the title of my post in its honour.

On theory versus data:

So to Grant’s point, it is more than just a tendency of Austrians to dismiss empirical ‘evidence’ that runs counter to ABCT and related concepts, because their theories are not built on empirical data but on rigorous logical deduction.

Firstly, I challenge anyone to show me that ABCT follows solely and directly from the action axiom alone. The list of subsidiary axioms and assumptions becomes enormous once we reach the full scope of the theory. This idea of an immaculately conceived business cycle theory, of pure logical cogency and free of any auxiliary pillars is, to be frank, so fanciful that not even the most zealous praxeologist could believe it. More importantly, the "choice" between theory and empirics is a false dichotomy. The above paragraph betrays a misunderstanding of how theory in mainstream economics (or elsewhere) is developed and exactly why it is mutually reinforcing to empirical observation. All economic theory is essentially deductive in nature. You start with some primary axioms or propositions and work through to the implications and consequences. Yet, how do we arbitrate between competing theories or measure their importance? Well, the same way that we do for any scientific field; we test them using data from the real world. Rejection of empirical scrutiny, validation and testing means that we are no longer debating economics or any kind of science for that matter. We are now in the realm of religion.

Chris ends his post in decidedly Churchillian mode:

But Grant should know, in our professions as economists and in the practice of economic forecasting, we are continuously, nay, every week, refining and enhancing our forecasting methods and theories based on what’s available and recent experience. Economic theory and economic forecasting are, of course, very different things.

Typing up that final paragraph must have been difficult whilst holding a bowler hat over his breast and staring defiantly into the distance. Just kidding, bud. I agree with the sentiments here. I ask only that theory shape our forecasting efforts and that we avail ourselves of the opportunity to reconsider these theories when the facts do not match the predictions.

___
[*] As a technical point, there is also some confusion about data classification in the above paragraph. The PPI stage-of-process data is classified by commodities, not firms. Chris' dad's business -- hi Len! -- could therefore have goods classified in various stage-of-process categories, depending on where and who the end consumer was.

[**] This is analogous to an argument made by Tyler Cowen on the co-movement of investment and consumption over the business cycle. See pp. 8-9 of Daniel Kuehn's paper on the Hayekian version of ABCT, which I also mentioned in my previous post.