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Are Climate Change Mitigation Policies a Form of Insurance?

Posted April 17, 2014 | folder icon Print this page

In a previous post, I walked through one of the take-away messages from the latest IPCC report: Using middle-of-the-pack projections, the likely damages from climate change are actually less than what reputable studies estimate as the costs of government action to curb carbon dioxide emissions, such as a carbon tax or cap-and-trade scheme. In other words, even stipulating the entire IPCC framework and numbers, one can make a strong case that “on average” the various proposals to tax and regulate emissions would be a cure worse than the disease: They would cost more in terms of forfeited economic growth than they would save in terms of reduced climate change damages. Far from being a slam-dunk case as it is often portrayed in the media, aggressive government action to slow emissions does not pass a standard cost/benefit test.

Precisely because advocates cannot justify their desired proposals on conventional grounds, they have shifted their rhetoric. Climate change mitigation policies are now routinely described as a form of “insurance,” which admittedly may end up costing more than they’re worth, but will give peace of mind by preventing truly catastrophic outcomes. In the present post I’ll explain the shortcomings of this analogy, and show that it doesn’t justify the aggressive policies that many advocate in spite of their collapsing case for alarmism.

Insurance in the Market

Before examining climate change, let’s first get our bearings on regular insurance. For example, suppose there are many houses in a certain neighborhood that each have a total value of $500,000. Every year, there is a 1 in 1,000 probability that a given house will burn down. Thus the “expected” loss from fire is $500 per house per year. If a company offered fire insurance policies that provided full indemnification, the “actuarially fair premium” would be $500.

However, in practice the insurance company would charge more than that, let’s say $600 (for a 20 percent markup). This margin is to cover overheard expenses as well as provide a return on capital to the investors who started the company. Yet even though there is a sense in which buying such a fire insurance policy is a “bad deal” from the consumer’s point of view—because it costs $600 per year to eliminate an “expected loss” of only $500 per year—economists can easily justify this outcome. Consumers are “risk averse,” and it is completely rational to pay a little bit more than the actuarially fair premium in order to have the peace of mind of not worrying about a catastrophic loss from fire.

“Insurance” in the Context of Climate Change Policy

Such is the way economists handle everyday examples of insurance. Many economists want to apply this logic to the climate change policy debate. For example, Chris Field described the recently released IPCC Working Group II report (for which he was a co-chair) as one of managing risks:

The [IPCC Fifth Assessment Working Group II] report itself is scientifically bold.  It frames managing climate change as a challenge in managing risks…

[One theme of the report] is the importance of considering the full range of possible outcomes, including not only high-probability outcomes.  It also considers outcomes with much lower probabilities but much, much larger consequences.  [Bold added.]

Field’s emphasis on paying attention to very low-probability events that carry large consequences should underscore the analogy with conventional insurance. (After all, your house probably won’t burn down, but if it does, it will be catastrophic.) In a recent debate on climate change issues, when discussing the uncertainty surrounding the climate system’s sensitivity to increased carbon dioxide concentrations, MIT’s Kerry Emanuel argued:

To say it’s between 2.5 and 9 degrees for a doubling or more of CO2, Fahrenheit, it’s to confess that we don’t know…[If it’s the] near end [of that range], it doesn’t morph, it’s 2.5 degrees—we don’t have to worry very much, I would argue. And I don’t think many of my colleagues would suggest we do. If it’s in the middle range, there will be problems. Probably we’ll adapt to them. If it’s up at the higher end, that could be catastrophic. And the question for me is: Do we do nothing to avoid, even a small risk of catastrophe for our grandchildren? [Bold added.]

As Emanuel’s remarks indicate, the current argument for government action to curb greenhouse gas emissions isn’t to fret about the likely damages, but instead to focus on theoretically possible scenarios that would be catastrophic. This shows the connection to the layperson’s understanding of insurance. (Later in the debate, Emanuel went on to explicitly liken his support for climate change mitigation policies as a form of insurance.)

Notice that with this approach, the deck is now stacked heavily in favor of interventionist policies, because the critic no longer can merely point out the cost of such actions and the unlikelihood of the risks they are allegedly addressing. As Emanuel admits in the quotation above, for the low to medium ranges of impacts, climate change won’t be a big deal; our grandchildren will adapt with little difficulty. Nonetheless, Emanuel still thinks it is perfectly reasonable to take steps just in case the really bad outcomes occur. This rhetorical framing may resonate with many people because—to repeat—people in real life take out insurance policies against such things all the time (risk of a heart attack, house burning down, severe car accident, etc.).

Yet even though the rhetorical framing sounds plausible, it’s actually quite misleading. There are many crucial respects in which government efforts to artificially curb greenhouse gas emissions are nothing like private insurance.

Problems With the Climate Change Insurance Analogy

First of all, the type of insurance people like doesn’t have to be foisted upon them: they buy, say, homeowner’s fire insurance because the benefits of coverage are worth the price of the premium. In contrast, when it comes to forcing people to buy insurance—such as what is happening under the Affordable Care Act (aka “ObamaCare”)—then millions of people are extremely unhappy. Indeed, the Supreme Court had to declare that the “individual mandate” is really just a tax, because the federal government isn’t allowed to force people to buy insurance that they don’t want. On this ground, then, it’s hard to justify climate change policy as insurance, since it forces everybody to buy it even if they don’t agree the benefits outweigh the costs.

Another problem with the insurance analogy is that the catastrophic risks from climate change are all theoretical. In contrast, we have solid data on houses burning down, car crashes, and heart attacks. Insurance actuaries can pore over those numbers and come up with reasonable estimates for the likelihood of various events, for given pools of people. There is nothing at all like this in the climate policy debate. If the 21st century unfolds in the same way as the 20th century did, then we will experience modest warming and a mixture of mild benefits and mild harms from the change. There would be no case for aggressive government action at all. It is only by using computer models in which the temperature deviates from historical trends that the alarmist camp can build its case.

Part of the problem here is that the alleged catastrophic scenarios from climate change won’t occur until decades or even centuries into the future. So rather than likening government polices to taking out fire insurance on your house, a better analogy would be paying today for a fire insurance policy on your grandchild’s apartment on the moon colony of 2100. Nobody in his right mind would embark on such a path, even if a computer simulation showed that “locking in the rates” today would be much cheaper than deferring the decision so your grandkid had to deal with it.

The Unlikelihood of Climate Catastrophe

Above we’ve shown the weaknesses in framing government climate change mitigation policies as a form of insurance. But let’s stipulate the analogy, and look at just how overpriced this “insurance” would be.

For our purposes, we just need ballpark estimates of the type of damages that would occur in the “catastrophic” scenarios. Here’s a good example from the 2010 Economic Report of the President:

[W]hile the projected loss for the first 3˚C is 1.5 percent, the loss at 6˚C is five times higher. And the estimated loss associated with an increase of 9˚C is about 20 percent [of consumption’s share of GDP]…Overall, it is evident that policy based on the most likely outcomes may not adequately protect society because such estimates fail to reflect the harms at higher temperatures. [2010 Economic Report of the President, p. 242, bold added.]

As the bolded portion indicates, even back in 2010 the rhetoric was shifting to show that government action was needed, not so much to deal with what would probably happen, but rather to avoid the unlikely scenarios of what might happen.

So if the real danger zones kick in with warming of 6 degrees Celsius and higher, we have to ask how likely is such an outcome, and how soon might it occur? To answer that, let’s consult the following chart from the IPCC’s AR5 Working Group I report, which came out last fall:

2014.04.06 AR5 WG1

SOURCE: Figure 12-40, IPCC AR5, Working Group I

In the figure above, the IPCC has provided projections of the mean and “envelopes” of warming (in a 66% confidence interval depicted by the gray bands) for four Representative Concentration Pathways (RCPs). For three of them (which may include assumptions of strong government measures to reduce emissions), humanity never comes close to the danger levels of warming.

But for the sake of argument, let’s look at the most pessimistic scenario—RPC 8.5. Further, let’s look at the lower end of when we might reach 9 degrees Celsius warming, meaning where the left gray band first hits the 9˚C mark. Eyeballing the chart above, this happens around the year 2145. In other words, even if we just consider the worst-case emission and climate sensitivity scenario reported by the IPCC in its summary chart from its September 2013 update, the suite of IPCC computer models still only assigns a 17% probability that the earth will experience 9 degrees Celsius of warming before the year 2145.[1]

In light of the above, let’s pick round numbers and say that a very unlikely outcome—give it a probability of 1 in 500—involves 9˚C of warming by the year 2100.[2] This is the climate change analog of the house burning down. So, does it make sense to “buy fire insurance” against this extremely unlikely, but awful, outcome?

No, it doesn’t. Remember, the damage estimate for this amount of warming is around 20 percent of global consumption. (The White House report that gave this figure was relying on the IPCC’s AR4 literature, but we’re just giving a ballpark analysis here.) On the other hand, the latest IPCC Working Group III report estimates that aggressive government policies to limit climate change would cost 3.4 percent of consumption by the year 2050.

Now ask yourself: Suppose someone from an insurance company came to you in the year 2050 and said, “We’ve run computer models many thousands of times using all kinds of different assumptions. In the worst-case scenario, a very small fraction of the computer runs—about 1 in 500—has you losing 20% of your income in the year 2100. In order to insure you against this extremely unlikely outcome that will occur in half a century, we want to charge you 3.4% of your income this year.”[3]

Would you want to take that deal? Of course not. The premium is way too high in light of the very low probability and the relative modesty of the “catastrophe.” When someone’s house burns down, that’s a much bigger hit than 20% of annual income. And yet, the premiums for fire insurance are quite reasonable; they’re nowhere near 3.4% of income for most households. Moreover, the threat of your house burning down is immediate: It could happen tomorrow, not just fifty years from now. That’s why people have no problem buying fire insurance for their homes. Yet the situation and numbers aren’t anywhere close to analogous when it comes to climate change policies.


Recognizing that they can no longer make their case on the basis of down-the-middle projections, those favoring massive government intervention in the name of fighting climate change have resorted to focusing on very unlikely but devastating scenarios. In this context, they have likened their preferred government policies as a form of insurance.

However, this analogy fails for several reasons. First, insurance in the marketplace is voluntary; when the government forces people to buy it—as with ObamaCare—then there is indeed a public outcry. Second, actual insurance in the marketplace is based on extensive actuarial data; we have no such understanding with climate change, but instead the outcomes against which we are “insuring” live inside computer projections.

Finally, even taking the insurance analogy head-on, the numbers don’t work. Nobody would take out an insurance policy on the terms of likely payouts and expense of premium that climate change policy offers.

[1] If the gray band covers the temperature range with 66% confidence, that means the remaining probability of 34% is divided in half (i.e. 17%) and allocated to the left and right sides of the gray band.

[2] To be clear, there is no way to precisely derive such a figure from the IPCC’s graph. We are merely picking a ballpark figure (which is actually generous) based on the information that the graph does contain.

[3] Strictly speaking the climate change literature often deals with percentage reductions in consumption (not income), but it would sound odd for an insurance company to talk that way. The basic point is the same.

Robert Murphy

Another DOE Flop: Smith Electric Vehicles Closes Kansas Plant

Posted April 16, 2014 | folder icon Print this page

“You’re doing more than just building new vehicles. You are helping to fight our way through a vicious recession and you are building the economy of America’s future.” President Obama, 2010.

The U.S. Department of Energy (DOE) provided $30 million to Missouri-based Smith Electric Vehicles and President Obama used the spending as an opportunity to campaign in Missouri. Hindsight now shows that it was irresponsible for the Obama administration to give Smith Electric Vehicles $30 million dollars of American taxpayers’ money because the company is closing its U.S. operations due to a “tight cash flow situation.”[i] This is not the first electric vehicle company that DOE has funded from the 2009 Stimulus package that has gone down the tubes. Fisker Automotive, a Finnish electric car maker, was provided with a $529 million DOE loan, but was cut off at $193 million when it failed to reach milestones in delivering its Karma model, an electric vehicle with a showroom cost of over $100,000.

Smith Electric Vehicle Source:  

Smith Electric Vehicles

Smith Electric Vehicles is shuttering its Kansas City plant, but will continue to operate in Europe and Asia, where the company has additional production facilities. The DOE stimulus grant of $32 million was supposed to support the construction of 510 electric vehicles for municipal public transportation[ii]–plug-in delivery trucks, which currently are used by customers such as Frito-Lay, The Coca-Cola Company, Staples, Kansas City Power & Light Company, and the U.S. military. Using $29,150,672 in taxpayer funds, Smith Electric Vehicles had 439 vehicles in service at the end of 2013.

While the White House claimed that the project would create “more than 220 direct and indirect jobs,” the company had created the hourly equivalent of 70.35 jobs. Thus, DOE spent an average of over $414,000 for each job created. Last year, the company reported that it employed 131 people in the United States. Smith Electric Vehicles has been struggling for some time, reporting that it had annual losses in the millions after receiving DOE funds. In 2009, Smith Electric lost $17.5 million; in 2010, $30.3 million; in 2011, $52.5 million, and as of June 30, 2012, $27.3 million.[iii] The company intended to have an initial public offering in 2012 and to open an assembly plant in New York and in Chicago—but, those plans were scrapped.[iv]

Purchasers of these plug-in trucks can benefit from a number of different Federal subsidy programs to defer some of the cost, such as[v]:

  • The Alternative Fuel Infrastructure Tax Credit (up to 30 percent of the vehicle’s cost);
  • Qualified Plug-In Electric Drive Motor Vehicle Tax Credit (between $2,500 and $7,500 per truck);
  • EPA Diesel Emissions Reduction Act Grant (up to 25 percent of the total cost of a vehicle);
  • Clean Cities Grant (up to 50 percent total cost of the vehicle); and
  • Congestion, Mitigation and Air Quality Funds.

Further, the individual states also have their own subsidy and rebate programs that apply.

DOE’s Advanced Technology Vehicle Manufacturing Program

Recently, Energy Secretary Ernest Moniz announced his intention to restart the Department’s electric vehicle subsidy program, the Advanced Technology Vehicle Manufacturing (ATVM) program that has wasted millions of taxpayer dollars on a number of failed companies, including Smith Electric Vehicles. The program has about $16 billion in authorized funds that have not yet been disbursed. Funds from the program have previously been distributed to electric vehicle manufacturer Fisker Automotive and battery manufacturer A123 Systems, both of which went bankrupt after receiving the DOE funds.

However, Secretary Moniz believes that the electric vehicle market has improved since those failures. But, the financial troubles of Smith Electric Vehicles indicate just the opposite. The Government Accountability Office (GAO) recommended that the program be scrapped. GAO recommended that Congress rescind “all or part of the remaining credit subsidy appropriations to the [ATVM] loan program, unless the [DOE] can demonstrate sufficient demand for new ATVM loans and viable applications.”[vi]

Despite GAO’s report to the contrary, Congressional Democrats are offering legislation to continue subsidizing the electric vehicle market. For example, a bill introduced by Rep. Zoe Lofgren would authorize the Treasury Department to issue up to $50 billion in federal bonds to finance, among other projects, $2,500 government vouchers for Americans to purchase plug-in hybrid electric cars.[vii] This would be very beneficial to Tesla Motors, which is headquartered in her home town of Palo Alto, and whose purchasers already receive a $7,500 reduction in their tax obligation from the federal government.


It is now 2014 and President Obama’s 2009 Stimulus program is still plaguing the country. Although, it has clearly been demonstrated that numerous projects benefiting from it have failed or otherwise not met their goals[viii], Federal officials want to continue to support what the market is having trouble supporting with Federal and state government hand outs. Smith Electric Vehicles’ closing of its Kansas plant in hopes to retool production outside of the United States is evidence that the $414,000 per job Federal give away is not working.

[i] Free Beacon, Taxpayer-Backed Electric Car Company Closes U.S. Factory, April 9, 2014,

[iii] Kansas City Business Journal, Smith Electric Vehicles prices initial public offering at $76 million, September 7, 2012,

[iv] Kansas City Business, Smith Electric Vehicles has suspended production, April 4, 2014,

[v] Heartland, Bottomless Subsidies Needed to Keep DOE Electric Truck Project Alive, July 10, 2013,

[vi] General Accounting Office, Government Efficiency and Effectiveness, April 2014,

[vii] U.S. House of Representatives Press releases, Reps. Lofgren and Matsui Introduce Legislation to Increase Investment in Clean Energy Technologies, April 8, 2014,

The UK and U.S. Northeast Face a Pending Energy Shortage Nuclear

Posted April 15, 2014 | folder icon Print this page

The United Kingdom and the U.S. Northeast may have something in common going into next winter—a possible energy shortage. Both countries are closing existing power plants—coal-fired and nuclear—in favor of renewable and natural gas generating technologies. In the United States, the Independent System Operator in New England has warned that generating capacity is extremely tight with the future closure of the Vermont Yankee nuclear power plant and several coal-fired power plants in Massachusetts. Likewise, in the UK, 8,200 megawatts of coal-fired power plants have been shuttered, with an additional 13,000 megawatts at risk over the next 5 years. The UK’s energy regulator is worried that the amount of capacity over peak demand next year will be just 2 percent—a very scary low amount for those charged with keeping the lights on.

The U.S. Northeast Power Struggle

Both nuclear power and coal-fired power plants are retiring prematurely in New England due to onerous regulations and competition from low cost natural gas-fired generating plants. The Vermont Yankee nuclear power plant (604 megawatts), which supplies 4 percent of New England’s power and three-fourths of Vermont’s electricity, is expected to retire at the end of this year concurrent with the end of its fuel cycle. Entergy, the plant’s owner, cites a number of financial factors for the retirement including increased costs to comply with new federal and regional regulations and competition from natural gas power plants. However, Vermont Yankee has been opposed by state political figures for some time, and many have cheered its closure after years of criticizing its operation.  Also, U.S. nuclear power plants are plagued with competition from negative power prices from wind energy due to the federal Production Tax Credit (PTC) that provides a 10-year subsidy for qualified wind units. Because Vermont Yankee is operated as a merchant generator, its costs cannot be recovered through regulated cost-of-service rates.[i]

New England expects more than 1,369 megawatts of coal-fired generating capacity to be retired between 2013 and 2016. Dominion Energy Resources is planning to retire the nearly 750-megawatt Salem Harbor coal- and petroleum-fired power plant in Massachusetts this year due to the Northeast states antagonism toward coal (i.e. the Regional Greenhouse Gas Initiative), the costs of compliance of new environmental regulations, and declining profits for coal-fired units in New England.[ii]  To keep operating its coal-fired power plants, the company would need to spend millions of dollars on environmental equipment to comply with EPA regulations. In southeastern Massachusetts, the Brayton Point power plant, the largest coal-fired power plant in New England, is expected to be shut down in 2017 due to EPA’s onerous regulations.

Reliability experts are noting that the New England grid is entering risky territory. It currently gets 52 percent of its electricity from natural gas. There is currently enough natural gas pipeline capacity during non-winter months to supply New England utilities. But, this past winter, the lack of pipeline infrastructure resulted in the need to rely on nuclear, coal, and petroleum to meet demand from the extreme cold weather. The spot price of natural gas was so high that it was less expensive to generate electricity from petroleum. At a recent hearing, Senator Lisa Murkowski noted, “… 89 percent of the coal electricity capacity that is due to go offline was utilized as that back-up to meet demand this winter.”[iii]

With the early retirements of nuclear and coal-fired power plants cutting back on supply diversity, the New England grid is becoming dangerously reliant on natural gas for its generating capacity. The Independent System Operator New England recommended against the closure of the 1500 megawatt Brayton Point facility because the plant is needed to ensure reliability.[iv]

NE Energy Infrastructure

Source: Energy Information Administration,

After the colder-than-average winter, natural gas stockpiles are low. According to the Energy Information Administration, on average over the past five years, natural gas stockpiles totaled 3.832 trillion cubic feet by the end of October going into the winter heating season. This past winter, natural gas inventories dropped by 2.92 trillion cubic feet between the end of October and March 21, making it the fastest pace of withdrawals for any U.S. heating season since 1995. The extreme cold weather pushed stockpiles to their lowest level in 11 years. That large withdrawal means that about 3 trillion cubic feet of natural gas will need to go into storage during the warm-weather months to cover expected winter demand. By the end of October, it is expected that stockpiles may increase to close to 3.5 trillion cubic feet, about 300 billion cubic feet less than the high achieved over the past 5 years, putting even more stress on having adequate supplies for next winter.[v]

The northeast already has the highest electricity prices in the country (outside of Alaska and Hawaii). Residential electricity rates are currently 45 percent higher in New England than the U.S. average. Phasing out these power plants prematurely will only increase electricity rates in New England.

The UK Power Struggle 

The United Kingdom’s electricity consumption is roughly 1/12th of that in the United States, but policies there are leading to growing concerns about energy price and availability. The United Kingdom may encounter power shortages next winter because electric utilities are shuttering coal-fired power plants to comply with Europe’s carbon-emissions rules and have stopped their investment in new generating capacity. Over the past 15 months, 8.2 gigawatts of coal-fired power plants were shuttered and 13 gigawatts are at risk of closing by 2019. According to the UK’s energy regulator, the amount of electricity available over peak demand may drop below 2 percent next year, the lowest level in Western Europe.[vi]

Beginning in January 2016, the European Union will require electric utilities to add further emission reduction equipment to plants or close them by either 2023 or when they have run for 17,500 hours.  Only one UK electricity producer has chosen to install the required technology since the equipment is expensive, costing over 100 million pounds ($167 million) per gigawatt of capacity.   Because the UK has built only one coal-fired power plant since the early 1970s, most of the existing coal-fired plants are expected to be shuttered.

According to data from the Office of Gas and Electricity Markets in London, the capacity margin–the amount of excess supply above peak demand–may drop below 2 percent in 2015. Under normal weather conditions, the margin could drop below 4 percent during the winter months from over 6 percent now, but lower than average temperatures increase electricity demand and would thereby lower the capacity margin further.

The United Kingdom was the first nation to introduce a carbon tax on fossil fuel combustion, which is in addition to the regional carbon trading system of the European Union. As a result, UK utilities are already paying the most among European countries for the right to emit carbon dioxide from burning fossil fuels. To ensure reliability and to remove uncertainty for utilities, the UK government froze the tax from 2016 through 2020 so that electric generator operators could make investment decisions regarding their coal-fired power plants.

Another area of uncertainty for UK utilities is how a proposed market for providing backup electricity will work. According to the Department for Energy and Climate Change, electricity producers will be able to bid in an auction to take place this December to provide backup power for 2018. The program, called a capacity market, is expected to ensure sufficient capacity and security of supply. The Department estimates that the UK power industry needs around 110 billion pounds ($184 billion) of investment over the next 10 years.

According to Deutsche Bank AG, UK power prices, which are one of the highest in Western Europe, are expected to increase by 39 percent in the next five years. The UK generates 12 percent of its electricity from renewable energy today, and plans to get 15 percent from renewables by the end of the decade. UK electricity consumers will pay an additional 120 pounds a year (about $200) to fund the move toward greener power generation on top of their current average electricity bill of 1,420 pounds ($2,376).


The UK and the U.S. Northeast have something in common in their quest for lower greenhouse gas emissions—a possible energy shortage and unreliability of their electricity grid–expected as soon as this coming winter. Shuttering coal-fired power plants in favor of renewable energy and natural gas-fired technology due to government policies and regulations has been the major cause of the concern. Further, government regulations and policies are also closing nuclear units in the United States bringing diversity of supply issues to the forefront. Electric grid operators in both areas are worrying that generating capacity next winter may be too little to meet demand, particularly if frigid weather should hit.

Senator Joe Manchin stated at a recent Senate hearing, “Keep in mind that coal will provide about 30% of our power for at least the next three decades. As you are doing that, think about the fact that nearly 20 percent of the coal fleet is being retired. Add the fact that EPA’s proposed New Source Performance Standard rule will effectively ban the construction of any new coal plants, and you see that our reliability crisis is getting much worse.”

[ii] Dominion News, Dominion Sets Schedule to Close Salem Harbor Station, May 11, 2011,

[iv] Forbes, More Coal Plant Retirements in New England? Perhaps Not So Fast, January 6, 2014,

[v] Bloomberg, Record Natural Gas Need Keeps Bulls Betting on Advances: Energy, March 31, 2014,

[vi] Bloomberg, Green Rules Shutting Power Plants Threaten U.K. Shortage: Energy, March 19, 2014,


New IPCC Report Unwittingly Shows Weakness of Alarmist Camp

Posted April 3, 2014 | folder icon Print this page

On March 31 the Intergovernmental Panel on Climate Change (IPCC) released the tentative draft of its Fifth Assessment Report (AR5) for Working Group II, which studies the impacts of climate change under various possible scenarios, including actions by governments. (In contrast, the report from Working Group I—which was released in the fall of 2013—studied the physical science underlying projections of climate change.) Although the top brass at the IPCC and their accomplices in the media will do their best to hide it, the fact is that the new report shows just how optimistic we should be about the future.

The lengthy IPCC reports themselves are behemoths that only masochists and true nerds would attempt to parse (as the reader will see below). Consequently we will trickle out the major “news you can use” in a series of digestible posts over the next few weeks. In this first post, we will concentrate on the takeaway numbers on the impact of climate change, according to the IPCC. These should be a cause of relief, not alarm. We will also explain why a leading climate expert, Richard Tol, asked that his name be removed from the final “Summary for Policymakers.” The case for alarm over climate change is collapsing, and even the IPCC’s own reports—if not their dialog with the public—are reflecting it.

Summary for Policymakers—Written By Orwell?

We can quickly summarize the big-picture economic takeaway from the latest report by walking through a key paragraph, which is taken from page 19 of the Summary for Policymakers accompanying the recent release:

Global economic impacts from climate change are difficult to estimate. Economic impact estimates completed over the past 20 years vary in their coverage of subsets of economic sectors and depend on a large number of assumptions, many of which are disputable, and many estimates do not account for catastrophic changes, tipping points, and many other factors.

With these recognized limitations, the incomplete estimates of global annual economic losses for additional temperature increases of ~2°C are between 0.2 and 2.0% of income (±1 standard deviation around the mean) (medium evidence, medium agreement). Losses are more likely than not to be greater, rather than smaller, than this range (limited evidence, high agreement).

Additionally, there are large differences between and within countries. Losses accelerate with greater warming (limited evidence, high agreement), but few quantitative estimates have been completed for additional warming around 3°C or above. Estimates of the incremental economic impact of emitting carbon dioxide lie between a few dollars and several hundreds of dollars per tonne of carbon (robust evidence, medium agreement). Estimates vary strongly with the assumed damage function and discount rate. [Bold and italics in original, footnotes removed.]

Before delving into the technical details, it is a useful exercise to try simply reading the above block quotation a few times, slowly. The Orwellian nature of the IPCC reports—especially the Summaries for Policymakers—should eventually make the reader shudder. For example, notice that in the four places above where the writers document the nature of the evidence and the degree of confidence in a particular statement, the two cases of “high agreement” are the ones with “limited evidence,” whereas the statement with “medium evidence” and even the statement enjoying “robust evidence” only receive “medium agreement.”  That by itself is odd, but look more closely and see that the statements receiving “high agreement” bolster the alarmist side, whereas the two only garnering “medium agreement” contain reasons for optimism. This is yet another beautiful example of what the critics of the IPCC have been alleging all along: They go into this procedure with a preconceived agenda of what they want the political output to be, and then interpret the evidence however they need to, in order to suggest that result.

We should also highlight a sentence from the third paragraph above that should tell you just how “unsettled” this policy debate truly is: “Estimates of the incremental economic impact of emitting carbon dioxide lie between a few dollars and several hundreds of dollars per tonne of carbon.” Here they are referring to the “social cost of carbon,” and are admitting that the official, peer-reviewed estimates are all over the map, differing by a factor of hundreds. As we have repeatedly stressed, such quicksand is hardly the foundation upon which to build federal efforts to regulate and tax carbon dioxide.

What Type of Danger Should We Expect from Climate Change?

As we have seen in this latest report, the AR5 Working Group II Summary for Policymakers says that “estimates of global annual economic losses for additional temperature increases of ~2°C are between 0.2 and 2.0% of income.” So how long does the IPCC in this latest report think it will take for the earth to warm by an additional ~2°C (from this point forward) if policymakers don’t engage in any further actions that would impede greenhouse gas emissions?

With the old IPCC reports, this question would be easy to answer, because they specified various “emissions scenarios” (called SRES) and reported the associated ranges of temperature increases for each scenario. (For example, see Table SPM.3 here for the projections as of the Fourth Assessment Report issued back in 2007.) These SRES scenarios contained different assumptions about the rate of economic growth in the developing world, the improvements in solar power and car batteries that would allow humans to naturally move away from fossil fuels more rapidly during the 21st century, etc. Crucially, the SRES scenarios didn’t assume major new government interventions in the name of mitigating climate change, so it was easy to calculate what the latest IPCC projections were for “business as usual” or what critics would want to label “doing nothing about climate change.”

Unfortunately, the IPCC did not make their new report so easy to parse. They now don’t focus on emission scenarios, but instead they classify Representative Concentration Pathways, or RCPs. These do not itemize specific emission scenarios but instead talk about the “pathways” by which a particular concentration of atmospheric greenhouse gases could arise. For our purposes, this switch poses analytical problems because each RCP could include scenarios involving government mitigation policies. Therefore, it’s not as clearcut to say, “This is what the IPCC now says will happen, if governments don’t embark on any major new anti-carbon initiatives.”

Notwithstanding these difficulties, let’s go ahead and report what the latest IPCC numbers show, for the particular scenarios they chose to highlight. We turn to the Working Group I’s AR5 report, released last September. Table SPM.2 (page 23) shows the projected temperature increases under various Representative Concentration Pathways (RCPs):

2014.03.31 AR5 Weak Alarmist Table

To understand the impact of these temperature projections, remember that the Working Group II report (which was just released) has told us that for an additional 2°C of warming, the impacts of climate change will range between 0.2% and 2.0% of global income. The table above shows us that under three of the four scenarios that the IPCC chose to highlight, that amount of warming won’t likely happen until near the end of the century (i.e. the year 2100). In the most pessimistic scenario (presumably involving the fastest growth of emissions), that amount of warming still won’t occur until mid-century.

So to sum up: If we take the IPCC’s middle-of-the-road estimates, and rounding to ballpark figures, the AR5 reports tell us that in three of their four representative scenarios, the damages of climate change would be about 1% of income by 2090, while in the most pessimistic of the scenarios it would be about 1% of income by the year 2055. It’s true, we can’t cleanly say exactly what the outcome would be if governments followed “business as usual,” but nonetheless the middle-of-the-road projections are not alarming at all no matter which scenario we choose.

Costs Versus Benefits

But wait, there’s more. In the previous section we just looked at the ballpark damages from climate change, according to the latest IPCC report. These conceivably could be mitigated by government policies to stem greenhouse gas emissions. But these government measures—such as a carbon tax or cap-and-trade program—would themselves entail substantial costs. For these programs to make economic sense, their benefits (in the form of avoided climate change damage) would have to exceed their costs (in the form of slower conventional economic growth).

We will come back to this issue in future blog posts, but for right now, here’s one reference point: Back in 2009, Paul Krugman was stumping for aggressive government action to slow climate change. He reported with glee that an MIT study had estimated that stringent limits on US emissions would “only” reduce national income by 2% by the year 2050.

Now the reader should understand the hole into which the climate alarmists have dug themselves. They can’t have the IPCC running around telling people that the best projection of climate change damage will be “0.2% to 2.0%” of global income, either by mid-century (at worst) or possibly not until 2090, when they’ve spent a few years reassuring Americans that their preferred anti-carbon policies will cost 2% of income by 2050. Even using their own numbers, these policies clearly fail a standard cost/benefit test. (It obviously doesn’t make sense to spend $2,000 in the year 2050 to prevent a bad outcome that will probably cost you $1,000 in the year 2090, and the same logic applies to percentages of income.) The cost/benefit comparisons get much worse when you consider that even in their own computer simulations, the various carbon tax and cap-and-trade proposals will only reduce (not eliminate) the total damages from climate change; thus the economic costs of these policies must be compared to the potential benefits of avoiding only some fraction of the projected damages of climate change.

Richard Tol Takes His Name Off the Report

Thus far we have shown that the latest IPCC report undercuts the rationale for aggressive government policies to slow climate change; they don’t pass a standard cost/benefit test. This fact explains why the latest AR5 is shifting ground onto a discussion of the various “risks” involved in climate change; focusing on big-picture averages and “likely” outcomes isn’t going to cut it. For example, look how a co-chair on the Working Group II report, Chris Field, frames this new “boldness” in the IPCC approach:

The [IPCC Fifth Assessment Working Group II] report itself is scientifically bold.  It frames managing climate change as a challenge in managing risks, using this characterization as a starting point for two of the report’s core themes.

The first is the importance of considering the full range of possible outcomes, including not only high-probability outcomes.  It also considers outcomes with much lower probabilities but much, much larger consequences.  Second, characterizing climate change as a challenge in managing risks opens doors to a wide range of options for solutions.

Again, I ask the reader to go back and re-read the second paragraph above. Without perhaps realizing it, Field is openly admitting that the new and “bold” approach of the IPCC AR5 will shift emphasis away from “high-probability outcomes” and instead consider outcomes with “much lower probabilities,” and that this shift “opens doors to a wide range” of government interventions. How convenient. Needless to say, if the case for government “options for solutions” can be made on the basis of theoretically possible risks, then no critic will ever be able to refute the proposal.

This shift in rhetoric also sheds light on what happened with Richard Tol, who is a global expert on climate change economics and a lead author on IPCC reports. Tol made a splash recently when he took his name off of the Summary for Policymakers associated with the AR5 Working Group II report. As this Daily Mail story reports:

Professor Tol, the lead co-ordinating author of the report’s chapter on economics [i.e. the Working Group II report that just came out—RPM], was involved in drafting the summary for policymakers – the key document that goes to governments and scientists.

But he has now asked for his name to be removed from the document. He said: ‘The message in the first draft was that through adaptation and clever development these were manageable risks, but it did require we get our act together.

‘This has completely disappeared from the draft now, which is all about the impacts of climate change and the four horsemen of the apocalypse. This is a missed opportunity.’


The latest IPCC report on the impacts of climate change—and various possible government policies to address it—is a huge issue that we will cover in several future posts. But for now, the big-picture takeaway is that the case for alarmism is collapsing. According to the IPCC’s own numbers, the likely damages from climate change through the end of the century are entirely manageable, and moreover are lower than reputable estimates of the costs of mitigation strategies. Regardless of how the media try to spin things, the case for “wait for now, and re-evaluate in a few years” keeps getting stronger. The teams in charge of writing the Summary for Policymakers have to bend over backwards to undercut these quite optimistic results that, in a sane world, would be the headline grabbers.

The case for taking drastic government actions, and thereby imposing very real and immediate costs on the economy, gets weaker and weaker, as even the “official” reports can’t help but admit to those who know how to read them. In order to offset this inconvenient truth, the latest IPCC Working Group II report discusses patterns in extreme weather events that might happen, even though the IPCC Working Group I report from last fall itself says they haven’t happened yet and we have no reason to expect them. But don’t expect the major media to pick up on such nuances.

Robert Murphy

Is the U.S. Falling Behind in the Nuclear Energy Race? Nuclear

Posted March 31, 2014 | folder icon Print this page

The United States is being left behind in the global quest for nuclear energy. While the United States has retired 4 nuclear reactors recently, plans to decommission several others, and is building only a few new reactors supported by DOE loan guarantees, the world is building lots of reactors, mostly with Russian technology. According to the Energy Information Administration, total world nuclear capacity is expected to double from an estimated 358 gigawatts in 2013 to 717 gigawatts in 2040. China and India each are expected to increase their nuclear generation by about a factor of 20 over the next 25 years.[i]  And, Russia has taken the lead in a $500 billion export market in nuclear technology.[ii]

The U.S. Nuclear Program

According to the Energy Information Administration, the United States now has 100 nuclear reactors, down from 104 nuclear reactors in January 2013. These reactors and several others are being decommissioned because of difficulties getting license extensions from the Nuclear Regulatory Commission and from competition from low cost natural gas. For example, two units at the San Onofre Nuclear Generating Station in California are being shut down due to delays in getting approval to restart them from the Nuclear Regulatory Commission. And, in the fourth quarter of 2014, Vermont Yankee is expected to be retired because it cannot compete as a merchant plant against low cost natural gas, making the Northeast very dependent on natural gas for electricity generation. For more information on these units, click here.

Further, the Nuclear Regulatory Commission has instituted new safety measures at existing U.S. nuclear plants due to the Fukushima accident costing billions of dollars. For example, Exelon, a company that operates 17 of the 100 commercial power reactors in the United States, expects to spend $400 million to $500 million in post-Fukushima upgrades.[iii]

Due to loan guarantees from the U.S. Department of Energy, 4 new reactors are expected to be constructed at two plants:  Vogtle, units 3 and 4 in Georgia, and Virgil C. Summer, units 2 and 3 in South Carolina. The four reactors are expected to be completed in 2017 and 2018. It is very expensive to build nuclear reactors in the United States. For example, Vogtle Units 3 and 4 represent a $14 billion capital investment. They are expected to require about 5,000 on-site construction jobs and 800 permanent jobs.

According to a report by the Center for Strategic and International Studies (CSIS):[iv]

“America’s nuclear energy industry is in decline. Low natural gas prices, financing hurdles, failure to find a permanent repository for high-level nuclear waste, reactions to the Fukushima accident in Japan, and other factors are hastening the day when existing U.S. reactors become uneconomic, while making it increasingly difficult to build new ones. Two generations after the United States took this wholly new and highly sophisticated technology from laboratory experiment to successful commercialization, our nation is in danger of losing an industry of unique strategic importance and unique promise for addressing the environmental and energy security demands of the future.”

Russia’s Nuclear Outreach

Russia has transferred nuclear technology to many countries, including Hungary, Venezuela, Turkey and Iran.  According to the World Nuclear Association, Moscow is building 37 percent of the new atomic facilities currently under construction worldwide and is expected to almost double its own nuclear generation by 2020. For example, Russia is building two new nuclear reactors in Hungary and may lend as much as 10 billion Euros ($13.7 billion) to finance the project. If the deal goes through, Russia will finance 80 percent of two 1,200 megawatt units on a 30-year loan at below-market rates.[v]

Russia has found that many countries need nuclear power but do not have the funds to pay for it or the expertise to build it. By helping these countries finance the purchase of nuclear technology, Russia is opening the door to sales of its nuclear technology and providing the construction and the training of employees.

World Nuclear Reactors

Source: CNBC,

The Future Global Nuclear Market

According to the U.S. Department of Commerce, the international nuclear market will grow to $740 billion over the next decade. It estimates that every $1 billion in exports supports at least 5,000 domestic manufacturing jobs. According to the Nuclear Energy Institute, there are 71 new nuclear plants under construction worldwide and an additional 160 in licensing and advanced planning stages.

The Center for Strategic and International Studies (CSIS) sees boosting the U.S. nuclear export sector “a national security imperative,” particularly given the encroachment of Russia, and also China and India. According to the CSIS, “U.S. firms are currently at a competitive disadvantage in global markets, due to restrictive and otherwise unsupportive export policies.” The United States provides nuclear expertise via a “123 Agreement” to 21 countries but lacks accords with key demand hubs in Asia and the Middle East where nuclear power is expected to increase the most and where Russia is providing technology and financing. The rules of the agreement also need updating given the current marketplace for nuclear power.

Added to this, of course, is the expertise gained by those who are actually building new nuclear reactors.  In much the same way that China is beating the United States at building new coal plants by constructing them, Russia can also be expected to excel in this technology by building on the information gained in constructing the many plants they have been pursuing worldwide.  Practice makes perfect, in most endeavors.


Russia views nuclear as an excellent export product and is using it as part of its plan to establish itself as a geopolitical economic power while the United States is left at the sidelines, in large part due to opposition to nuclear power. The U.S. nuclear sector has fallen into an advanced state of decline due to federal policies and actions taken by the Nuclear Regulatory Commission. Safety and cost concerns and competition from natural gas in generating electricity have resulted in a downturn in the U.S. nuclear industry, which most other countries are not following. Even the Japanese government has plans to return the nation to nuclear power just 3 years after the Fukushima nuclear accident.[vi]  According to the CSIS, “Without a strong commercial presence in new nuclear markets, America’s ability to influence nonproliferation policies and nuclear safety behaviors worldwide is bound to diminish.”

[ii] CNBC, The real Front in the US-Russia ‘Cold War’? Nuclear Power, March 23, 2014,

[iii] New York Times, After Fukushima, Utilities Prepare for Worst, March 9, 2014,

[iv] Center for Strategic and International Studies, Restoring U.S. Leadership in Nuclear Energy, June 2013,

[v] Bloomberg Business Week, Russia May Lend $14 Billion to Hungary to Build Nuclear Reactors, January 14, 2014,

[vi] New York Times, Warily Leading Japan’s Nuclear Reawakening, March 20, 2014,


Bad News for Carbon Tax Fans

Posted March 28, 2014 | folder icon Print this page

Last summer, in advance of Australia’s monumental September 7 elections that served as a repudiation of Australia’s carbon tax, IER published a key study by Dr. Alex Robson on the history and impact of the tax. Robson’s critique of Australia’s carbon tax was particularly relevant for the US policy debate, because he showed none of the promised benefits of a carbon (such as a more efficient tax and regulatory code, or “policy certainty”) actually happened in Australia. We are very pleased to report that a version of Robson’s study has now been through the academic peer-review process, and has been published in the February 2014 issue of Economic Affairs.

When the study first came out, there was a predictable backlash from those pushing for a U.S. carbon tax. After all, it was embarrassing to see that none of their hypotheticals about the wonders of a carbon tax actually came true in the real-world experiment in Australia. But what could the critics do? The author of the IER study, Alex Robson, was an obvious expert, a PhD economist teaching at an Australian university who had published technical articles on the interaction of climate policy and public finance.

In this context, there wasn’t much the critics could do, but they gave it their best. They did things like point out that just because Australia’s unemployment went up hand-in-hand with the new carbon tax, didn’t prove the carbon tax had anything to do with it. (However, in addition to showing a chart with the obvious correlation between the carbon tax and rising unemployment, Robson also provided several anecdotes of business owners who specifically laid off workers because of the carbon tax).

At the time, we walked through the ridiculous objections (some made by critics who complained about the IER study to a reporter but wished to remain anonymous); you can read our full response here. Yet one of the objections is worth revisiting. In September 5, 2013 E&E News article by Evan Lehmann, titled, “Energy group launches political attacks on carbon tax supporters,” here’s how one critic hit back at us and our Australia study:

Ray Kopp, an economist who directs the Center for Climate and Electricity Policy at Resources for the Future, said that the conclusions in IER’s report “simply do not align with the bulk of analyses” on carbon taxes.

“Not to speak disparagingly of IER, but they are not going to get their stuff in the peer-reviewed literature,” he added.

Well, sorry to say Dr. Kopp, but yes, Dr. Robson “got his stuff” in the peer-reviewed literature. Snarkiness aside, it should surprise no one who carefully read the Australia study that (a version of it) was published in a peer-reviewed outlet. Robson is quite meticulous in laying out the standard textbook arguments about a carbon tax, and then simply investigating what actually happened in practice in Australia. Fortunately, some peer-reviewed journals are interested in seeing whether the confident predictions of academics like Kopp turn out to be true.

In closing the present post, let’s review two of my favorite graphs from the Australia study.

Australia: Spike in Electricity Prices and Rising Unemployment

In the year after Australia’s carbon tax was introduced, household electricity prices rose 15%, including the biggest quarterly increase on record. Currently 19% of the typical household’s electricity bill is due to Australia’s carbon tax and other “green” programs such as a renewable energy mandate. The following chart from Robson’s study illustrates this increase:

Australia Carbon Tax 1

The job market had previously been stable, but after Australia’s carbon tax the number of unemployed began rising rapidly. Robson’s chart shows the gory details:

Australia Carbon Tax 2


Last summer, IER published Dr. Alex Robson’s hard-hitting analysis of Australia’s actual experience with a carbon tax. This study was quite inconvenient for those in the US pushing for an American carbon tax, because none of their promises panned out in Australia. At the time, one of the lame objections to the study was that it wasn’t peer-reviewed. Well, now that a version of Robson’s study has been published in a peer-reviewed journal, that objection falls away, just like the others.

The U.S. policy debate needs to start acknowledging the dismal reality of the actual effects of a carbon tax. They’re not pretty. It’s not surprising that Australia’s September elections brought new Prime Minister Tony Abbott to power on his campaign of “axing the tax”—even though elements of the Australia government don’t like the message the voters sent.

Robert Murphy