Marching Against a Tail (and All Those Who Don’t Get Risk)

This Saturday 7th March, I will be joining the Time to Act Climate March, which seeks greater government action to prevent climate change. Why? Because of RISK! To remind everyone:

Risk jpeg

Something can be risky even if it has a low probability as long as the impact is high. Imagine a game of Russian roulette. You put a revolver against your head with one loaded chamber–and then you pull the trigger. Feeling lucky? I now offer you $1 million to play the game once. Remember, an ordinary revolver usually has six chambers, one of which is loaded. Do you take the bet? What about a pistol with 100 chambers? A thousand? With 1,000 chambers, the probability that you blow your brains out is 0.1%. Is that a good bet?

In statistics, that 0.1% likelihood outcome is firmly in the ‘tail’ of the probability distribution. When outcomes cluster around a central estimate, they may not have significant tails; others, have long or fat tails. This is important since generally the tail is where bad stuff happens. In my example above, something really horrible happens in the tail: death. As impacts go, that is pretty bad. So despite the low probability of an adverse outcome and the $1 million potential pay off, putting a 1,000 chamber pistol against your head with only one bullet is still a very risky bet.

So is frying the planet.

And this is why I think scientists like Judith Curry and Nic Lewis don’t really get risk. They argue that doubling atmospheric CO2 isn’t much to worry about because we may only warm a little. Yes, we may warm only a little; but then again we may not. Here is the climate sensitivity table from a recent paper by the two (click for larger image):

Curry and Lewis jpeg

ECS refers to equilibrium climate sensitivity and TCS to transient climate sensitivity. Simplistically, the former has a longer time horizon than the latter.

On the back of this paper, Curry was welcomed with open arms by the Wall Street Journal to do an op-ed (which you can find on Curry’s personal web site here) and feted by climate skeptic blogs across the world. In the op-ed, Curry takes an extract from the table:

Nicholas Lewis and I have just published a study in Climate Dynamics that shows the best estimate for transient climate response is 1.33 degrees Celsius with a likely range of 1.05-1.80 degrees Celsius. Using an observation-based energy-balance approach, our calculations used the same data for the effects on the Earth’s energy balance of changes in greenhouse gases, aerosols and other drivers of climate change given by the IPCC’s latest report.

And then goes on to make a policy recommendation:

This slower rate of warming—relative to climate model projections—means there is less urgency to phase out greenhouse gas emissions now, and more time to find ways to decarbonize the economy affordably. It also allows us the flexibility to revise our policies as further information becomes available.

Now ‘likely’ used in the WSJ op-ed means the 17-83% range. She has 17% of the outcomes in the good tail–warming below 1.05 degrees Celsius–and 17% in the bad tail–above 1.80 degrees Celsius. But from the table we also see that there for a 5-95% range, the outcome of a doubling of CO2 may be above 2 degrees Celsius of warming–2.5 degrees to be exact.

Some rough back of the envelope calculations. The pre-industrial revolution level of atmospheric CO2 was 280 parts per million (ppm). We are now at 400 ppm, so to double from pre-industrial concentrations, we would need to get to 560ppm. Co2 concentrations are also rising at around 2.25-2.50 ppm per annum. So if climate sensitivity to a doubling of CO2 were 3 degrees Celsius, we would get 2 degrees of global warming if CO2 concentrations reached around 450 ppm, which will be in about 20-30 years time. Two degrees of warming is considered (somewhat arbitrarily) to be the borderline for dangerous climate change).

Now Curry and Lewis see a non-negligible risk, that is 5%, that the sensitivity is 2.5 degrees. If right, the current rate of CO2 emissions would lock us into a 2-degree warmer world maybe 10 years later than the consensus, say in 2050. And then we come to the tail.

What is going on at the 1% level? We don’t get a number. But we are talking about a one-in-a-hundred chance–not particularly low given the stakes involved. I want to know about this tail risk. It is important. This is the chamber containing the one bullet. If you wouldn’t play Russian roulette at such odds, how about permanently damaging the planet at such odds?

Moreover, if we ignore this tail risk and feel “there is less urgency to phase out greenhouse gas emissions now”,  isn’t there the possibility that due to fossil fuel infrastructure lock-in, we commit ourselves to a more than doubling of atmospheric CO2?

It gets worse. What if their climate sensitivity numbers are wrong. Curry and Lewis use one particular approach to reach their figures, but there are others. Michael Mann sets out the alternative approaches and the resulting climate sensitivity numbers in a Scientific American article here (click for larger image). In general, they are nearly all higher than those of Curry and Lewis.

Solid Line of Evidence jpeg

Finally, going on a march would appear a quixotic act in the face of the wicked problem of climate change. But one can take a risk approach similar to that of extremely unlikely, but very harmful, events here as well. Like voting, demonstrating or lobbying may have only a very small chance of changing the probability of the final outcome. But the potential impact of altering an outcome–through in this case encouraging more aggressive Co2 emission mitigation–is monumental. This is reverse Russian roulette, where the chamber with the bullet becomes the benign outcome. And so I march.

Chart of the Day, 4 March 2015: Arctic Stories

Arctic sea ice extent is one of the most iconic indicators of climate change, but we usually give it most attention during the summer melt months. Nonetheless, I try to do a quick catch-up around the beginning of March, which marks peak extent. And this is what we see (Source: National Snow and Ice Data Center here; click for larger image):

Arctic Sea Ice Extent jpeg

Generally, winter ice is not a good predictor of summer ice extent, so I wouldn’t read too much into the fact that we are currently hitting new historical March lows in terms of what will happen this coming summer. That said, what we see in the above chart is still part of the general picture of new climate records being made across the board–especially in northern latitudes where warming is amplified.

The NSIDC is also hosting a series of stunning animated NASA satellite images that illustrate the changing nature of Arctic snow cover, vegetation and frozen ground as well as sea ice extent.  The frozen ground page has this inset chart showing the general thaw (click for larger image):

Nonfrozen Ground Anomalies jpeg

This, in turn, is increasing fears relating to methane release, although as I blogged about here, I still see this as a lesser risk than general CO2 emissions. The Global Carbon Project also has a good backgrounder on methane (here), including a methane budget showing sinks and sources (click for larger image):

Methane Graphic jpeg

At present, we have more to fear from ruminants, rice, landfills and fossil fuels, than from hydrates and thawing peat bogs.

Returning to sea ice, the ‘go to’ site is Neven’s “Arctic Sea Ice Blog” I’ll be checking in regularly to see if what we are seeing now with Arctic sea ice is just a blip or harbinger of another big melt season. Neven has also just highlighted a disturbing Ocean Geographic Magazine photo essay by Jenny Ross that is worth checking out. It’s a surreal and unnerving experience to witness the planet change dramatically before our eyes.

Chart of the Day, 3 March 2015: Summation of Secular Stagnation

For the second day, I am praising a short article by Business Insider, which in this case contains this gem of a graphic from Citi (click for larger image):

Secular Stagnation jpeg

From Citi’s commentary:

The most profound implications stem from demand-led secular stagnation. In particular, that the zero bound is a problem in delivering actual stimulus while bubbles may help deliver demand (and so may be part of the toolkit and landscape for long horizons) but their ultimate collapse further entrenches the core yield declines.

Which ties up with my chart from yesterday, highlighting the structural decline in interest rates. Business Insider describes the phenomenon this way:

In other words, secular stagnation puts forward the idea that interest rates at 0% might not be low enough to sufficiently stimulate an economy facing a demand shortage as stark as what some economists think we’ve been grappling with since the crisis.

Nonetheless, while Citi has produced a great infographic, there are a couple of glaring omissions–and both come on the supply side. First, they omit the hypothesis that technology-driven productivity growth is suffering from diminishing returns. This is the thesis of the growth economist Bob Gordon, which I have blogged about frequently, including here and here.

Second, biophysical constraints are nowhere to be seen. Biophysical constraints come in a variety of forms from the very concrete, like resource depletion, to the more complex like biodiversity loss and the spending of carbon budgets. I will put the latter to one side as it is not at all clear that they are a significant cause of the current phase of secular stagnation (although they most certainly will be causing secular stagnation, or even worse, as the century progresses).

Resource constraints do, however, provide a smoking gun for the Great Recession since all manner of energy and raw material prices were spiking before the credit crisis hit.

But doesn’t the current slump in oil, copper and iron prices remove raw materials from the secular argument? Only if the slump in prices continues and economic growth is restored. This would allow us to disentangle the supply and demand side. In short, low current prices could be a reflection of anaemic demand, which fits into the top half of the Citi chart above.

Alternatively, what we could be seeing is a ratcheting up in raw material prices over an extended period of time. Natural resource depletion leads to higher prices, which in turn leads to a spur to innovation (think fracking). However, prices do not return to their former, inflation-adjusted levels. Depletion then continues to the point that it overwhelms the current technology gains, leading to another jump in prices. This then prompts new innovation, but again only sufficient to cause a temporary retreat in prices not a permanent lowering.

So the ratchet does have short downward phases, but these are purely punctuation marks within the long-term upward trend. Is this what we are seeing? We just don’t know, but this hypothesis is consistent with the pattern of prices since the 1990s.

Going back to the central concern, secular stagnation is a wider threat to our socio-political systems, which are entirely premised on economic growth. Our democratic institutions are founded on a two hundred year phase of rising living standards based on cheap energy and  technological innovation. If living standards stop rising and innovation slows, then a lot of other things will change as well.

Chart of the Day, 2 March 2015: One Chart before You Vote

Business Insider has come up with the novel ideal of asking a cast of business, financial and academic economists to each  propose one chart that they recommend every member of the UK electorate look at before they vote.

Whilst this is UK specific, the issues raised transcend parochial UK concerns and encompass global challenges like growth, productivity and inequality. I highly recommend that you flick through the 21 selected charts, which can be found here.

So what would my chart be? It would have to be this one:

Big 3 Interest Rates jpeg

The stunning structural decline in interest rates across the UK, US and Germany is not just a reflection of inflation but low growth itself. The market is telling us that it cannot find anywhere to put its money in order to secure a real, that is inflation-adjusted, return. If there are no investments to be had yielding above inflation returns at the right risk,  there will be limited (or no) real growth in future. Message to UK government (and everyone else): start planning around this fact.

Furthermore, if the market cannot find a private-sector home to invest its money, then the government should provide an alternative. This is a golden opportunity to embark on a massive green infrastructure roll-out and tackle climate change, security and social justice issues all in one go. Projects should include renewables, energy efficiency, new low energy urban housing and public transport systems.

A demand for government-backed green bonds obviously exists (as why else would people be prepared to buy government bonds at a zero real return) and inflation expectations are self-evidently from the chart non-existent.

The green infrastructure would also distribute demand across the UK economy, reduce inequality, lower regional unemployment, increase energy security and provide investors with long-term relatively predictable returns.

A policy of turbocharged austerity in the next parliament with interest rates so low is absolutely bonkers.Rock-bottom interest rates are an opportunity–and this opportunity should be used.




Chart of the Day, 1 March 2015: US Crude Oil Production for December 2014

Yesterday, I noted that US natural gas production has yet to reflect the recent prices declines. Today, I am reporting basically the same story for crude oil.

The US government agency the Energy Information Administration (EIA) reports monthly crude oil production with a 2 month lag; December production was published on 27 February. December saw oil production averaging 9.2 million barrels per day, a rise of 17.4% year on year. The two following charts are taken from the EIA’s weekly oil report here (click for larger images).

US Crude Oil Production  jpeg

The chart of futures prices below shows the 50% decline between the summer of 2014 and the beginning of 2015.

US Crude Oil Futures Prices jpeg

As discussed in my post at the beginning of February, it will take another six to 12 months before futures hedges roll off and rapid shale field depletion rates mean that additional capital investment is required in order to sustain production levels. Such investment will only be forthcoming if the new oil price environment is countered by further technology driven cost savings.

My sense is that new investment projects won’t hit their required hurdle rates and so won’t go through. If so, production will first plateau and then fall. As always, we have to let the data speak on this one.

Chart of the Day, 28 February 2015: US Natural Gas Production for December 2014

The US government agency The Energy Information Administration reports  gas production figures with a two month lag. So yesterday we saw the natural gas production numbers for December 2014 (here). So far, the tend is still upwards–indeed, production has actually been accelerating (click for larger image).

US Dry Gas Production Dec 14 jpeg

December 2014 dry gas production was up 11.6% year on year, and the 12-month moving average was 5.6% higher year on year, the highest growth since November 2012. Any particular individual month reflects the impact of weather events, but the strength of production over recent months is still noteworthy. Of course, natural gas prices have shown far more resilience than oil prices over the last 6 months. Indeed, up until December, prices were little changed from mid-summer (click for larger image).

Henry Hub Natural Gas Spot Price jpeg

However, over the last two months, we have seen a step change downward in Henry Hub prices to around US$3 per million British thermal unit (Btu), a 25% decline from the US$4 seen for much of 2013/14 (apart from a cold winter spike). Source: EIA here.

At this stage, I will restate my definition of a “shale revolution”. To me, you can attach the moniker “revolution” if we see higher production at a lower price. We now have a lower price. Will we continue to see rising production? Watch this space.

Climate Change Pledge: Credit, Where Credit Is Due

In my last post (here), I was somewhat rude about Prime Minister David Cameron. Or rather I was rather rude about the vacuous drivel he spouted about competitiveness. But credit where credit is due. Of the three party leaders who signed a pledge in mid-February to combat climate change regardless of the outcome of the May election, it was Cameron who had the most political capital on the line.

First, here is the pledge (credit also to The Green Alliance, who brokered it) and for the whole one page document see here (click for larger image).

Climate Change Pledge jpeg

The Climate Coalition‘s “Show the Love Campaign” also helped created sufficient momentum to secure the joint pledge. (The Climate Coalition brings together 100 organisations whose interests relate to climate change; for membership, see here.) Indeed, the full pledge document was actually badged with the “For the love of” logo:

for the love of jpeg

Overall, the press coverage has been positive. Even the generally climate skeptic friendly Daily Mail gave the announcement a positive spin (here). And The Financial Times highlights the courage that Cameron has shown:

The deal is likely to infuriate numerous Tory rightwingers, such as Owen Paterson, the former environment secretary, who believes that climate change has been “consistently and widely exaggerated” in scientific forecasts.

Mr Paterson has argued that the UK should scrap the Climate Change Act, which binds the country to cutting greenhouse gas emissions.

Others who have urged Mr Cameron to tone down the green rhetoric include Lord Lawson, the former chancellor, who has criticised the UN Intergovernmental Panel on Climate Change, seeing it as “alarmist”.

The Carbon Brief also suspends cynicism and takes on board the positive aspects of the pledge.

The UK probably hasn’t witnessed a similar show of cross-party political unity on climate change since parliament voted to pass the UK Climate Change Act in 2008, with the support of all the main party leaders and only five votes against.

The joint pledge is, therefore, domestically significant for what it rules out, rather than what it rules in, because it reduces the chance that the next government could weaken the UK’s stance on climate change.

And they also highlight what to me is the most important part of the pledge: that climate change does not have to be a wedge issue. You can be passionate about countering climate change regardless of which part of the political spectrum you occupy.

In broader political terms, the cross-party UK climate pledge is already being used as an example to others. In Australia, a Nobel laureate says his country’s political leaders should follow the UK lead. In the US, the Washington Post compares UK leaders’ unity to Republican and Democrat disagreement over climate.

So three cheers for the pledgers, and special kudos to Cameron. But I’m greedy, and I hope that whoever wins the next election will kick it up a notch and be even more aggressive over countering climate change. Here’s hoping.