What price little white carbon shadows of Heathrow expansion?

February 27, 2008 at 9:36 am | Posted in Adding capacity, Alice in Wonderland, Carbon emissions, Carbon pricing, Climate change, Defra, DfT, Economics, Environment, GHG emissions, Government guidance, Greenhouse gases, Heathrow, Heathrow airport, Heathrow expansion, Policies, Shadow prices, Social costs, Trading | 4 Comments

Thanks to Tim for sending this pièce de résistance on carbon pricing. The thoughtful article, Path of least resistance, was written by Paul Ekins and published two weeks ago in The Guardian. I deliberately held on to it until sundown. So “little white shadows sparkle and glisten, part of a system”* at the end of consultation on Department for Transport (DfT) proposals for ‘Adding capacity at Heathrow airport‘ …

It might help you to know that in January 2008, Defra published revised guidance to government on carbon pricing. The Department for Environment Food and Rural Affairs (Defra) tells us that the social cost of carbon has been superseded by the shadow price of carbon. This terminology cleverly enables the transformation of government considerations about carbon emissions. Instead of framing emissions as having human impact (social cost), we may now recognise carbon emissions as a mysterious market opportunity (shadow price). From Defra:

Climate change: valuing emissions
*Updated* guidance on the Shadow Price of Carbon

Defra has published full revised guidance on how to value greenhouse gas emissions in government appraisals. This is for use in all policy and project appraisals across government with significant effects on carbon emissions. The guidance adopts the concept of the Shadow Price of Carbon (SPC) as the basis for incorporating carbon emissions in cost-benefit analysis and impact assessments. This replaces all guidance referring to the Social Cost of Carbon (SCC). This is an update of the interim guidance published in August 2007. This guidance is accompanied by a main background paper on the new SPC:

Now the article by Paul Ekins, past head of the environment group at the Policy Studies Institute, and currently professor of energy and environment policy at King’s College London:

Path of least resistance

The government’s fallacious use of carbon pricing means that it can disguise its aviation expansion plans as alleviating climate change

Paul Ekins
The Guardian,
Wednesday February 13 2008

Probably the most important recommendation of the recent Stern review of the economics of climate change was that carbon must be priced if societies want to get climate change under control. But the key follow-up question is: what price to use?

My policy recommendation to governments has always been that the price should be high enough, when allied to other appropriate policies, to drive the behavioural change in consumption and stimulate the development and deployment of low-carbon technologies that are sufficient to prevent climate change getting really out of hand.

Russian roulette

That is widely interpreted as requiring the global average temperature rise to be limited to 2C, which in turn requires the atmospheric concentration of greenhouse gases such as carbon dioxide to stabilise in the range 450-550 parts per million. It is now 436ppm – up from about 280ppm in pre-industrial times – and is rising at about 2.5ppm a year. Keeping it below 550ppm will require global emissions to stabilise in the next 10 years and then to reduce, with countries such as the UK cutting their emissions by 60%-80% by 2050. Even that is playing Russian roulette with humanity’s future. We really ought to go aggressively for 450ppm, which would require global emissions to start falling almost immediately.

We do not know how high the carbon price would need to be to achieve 450-550ppm (or a 60%-80% reduction for the UK), except that it is much higher than at present. A prudent and responsible government would therefore put an indefinite escalating carbon tax on top of all existing energy taxes in order to get serious with the imperative of decarbonising the economy, and would simply rule out any large-scale increase in carbon-intensive infrastructure that will make emissions harder to reduce in future.

Unfortunately, the Department for Environment, Food and Rural Affairs (Defra) has decided to take an approach based on applying a “shadow price of carbon” (SPC), which, if the calculations for the consultation paper for the expansion of Heathrow airport – a carbon-intensive development if ever there was one – are anything to go by, will have exactly the opposite effect.

The SPC is based on estimates of the damage that climate change – and, therefore, the carbon emissions that cause it – will do. The scientific uncertainties around climate change mean that one recent scientific study estimated that the SPC could lie anywhere between £1 and £1,000 per tonne of carbon emitted today, but that even this was not a maximum (because of the possibility of absolutely catastrophic effects) and there was no way of arriving at a “best estimate”.

I have concluded that a number with these characteristics is of little policy usefulness, but Defra and Treasury economists continue with the heroic task of trying to fix on a single number. Their decision on this issue makes an enormous difference to the amount of carbon dioxide the UK will emit in the future.

On current trends of global carbon emissions, atmospheric concentrations will reach 700ppm or more. The Stern review estimated that, at this level, the SPC is around $85 (£44) per tonne of CO2, or $312 per tonne of carbon. However, if the world were to stabilise atmospheric concentrations at 550ppm, climate change damage, and therefore the SPC, would be much less. Stern estimates this at $30 per tonne of CO2, or $110 per tonne of carbon – lower by almost a factor of three. This $110-$312 per tonne of carbon effectively defines the range of SPCs that policy makers can use.

In the consultation paper on the proposed addition of a third runway to Heathrow, the government uses the lower SPC, on the grounds that it is committed to a 550ppm stabilisation concentration and is legislating in the climate change bill for the UK to achieve carbon reduction targets that are appropriate to achieve this objective. In the economically most favourable option considered, the annual benefits of Heathrow expansion are calculated as £18.9bn, while the costs are £13.1bn – a net benefit of £5.8bn. The costs include £5bn for climate change damages, using the low value of SPC identified above. Heathrow expansion, and the huge rise in carbon emissions it will bring about (180m tonnes of CO2 from 2020-2080), is thereby judged to be economically beneficial and, no doubt, will be pushed through.

But it is a simple calculation to show that use of an SPC of $238 per tonne of carbon or more would have turned the economic benefit of Heathrow expansion into an economic cost. This $238 is still well below Stern’s estimate of the cost of the emissions trajectory the world is currently on, and even further below the levels of catastrophic damage from climate change that many scientists believe is distinctly possible.

The extraordinary thing about the use of the SPC to which the government now seems to be committed is that the assumption, against all the evidence, that the world – and the UK – is on a low emissions trajectory that will limit climate change damage both justifies and promotes high-carbon developments that will ensure that this trajectory will not be achieved.

Impossible beliefs

This is Alice-in-Wonderland economics. One can just imagine the White Queen, who taught herself to believe six impossible things before breakfast, saying: “We are on a low-carbon emissions trajectory because I say we are, and that means I can emit as much carbon as I like!”

This is a cake-having-and-eating strategy if ever there was one, intended to permit the government both to claim to be committed to climate change mitigation and to have all the aviation expansion it wants. When future generations, struggling with the multiple ills that climate change will bring about, look back on this sort of policy sophistry, they will realise just how comprehensively, and knowingly, this generation has sold them down the river.

· Paul Ekins, past head of the environment group at the Policy Studies Institute, is professor of energy and environment policy at King’s College London.

Alice grows in a peculiar way

“Curiouser and curiouser!” Cried Alice.

She was so much surprised, that for the moment she quite forgot how to speak good English.

P.S. * Quote is from the lyrics of White Shadows by Coldplay from X&Y 2005:

When I was a young boy I tried to listen
And I wanna feel like that,
Little white shadows blink and miss them
Part of a system, I am

If you ever feel like something’s missing
Things you’ll never understand,
Little white shadows sparkle and glisten,
Part of a system, a plan

All this noise I’m waking up
All this space I’m taking up
All this sound is breaking up

Ooh oh ooh

Maybe you’ll get what you wanted
Maybe you’ll stumble upon it
Everything you ever wanted
In a permanent state

Maybe you’ll know when you see it
Maybe if you say it you’ll mean it
And when you find it you’ll keep it
In a permanent state, a permanent state

When I was a young boy I tried to listen,
Don’t you wanna feel like that?
You’re part of the human race
All of the stars in the outer space,
Part of a system, a plan

All this noise I’m waking up
All this space I’m taking up
I cannot hear you’re breaking up

Woaaooh

Maybe you’ll get what you wanted
Maybe you’ll stumble upon it
Everything you ever wanted
In a permanent state

Maybe you’ll know when you see it
Maybe if you say it you’ll mean it
And when you find it you’ll keep it
In a permanent state, a permanent state

Swimmin’ on a sea of faces
The tide of the human races, oh
An answer now is what I need
I see it in the new sun rising and
See it break on your horizon, oh
Come on love, stay with me

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  1. I’ve only just come across the launch of “Making the right
    choices for our future -An economic framework for designing policies
    to reduce carbon emissions” jointly issued by DECC and DEFRA on 16th
    March.

    http://www.defra.gov.uk/environment/climatechange/research/economics/

    It seems to be trail-blazing for the announcement of carbon budgets
    later in the year (? with the Budget) and I have read hints that
    things like the shadow price of carbon may get a re-adjustment
    upwards.

    “CHAPTER 5: Applying the analysis: selecting the right mix of
    instruments
    In order to meet the carbon budgets set under the Climate Change Act,
    the UK will need to consider effective ways of delivering the required
    emissions reductions (see chart 3). The Government will announce the
    carbon budgets in spring 2009, taking into account advice from the
    Committee on Climate Change. Carbon budgets will set whole economy
    emission reduction targets, but emissions falling under the EU ETS
    will be determined by the UK share of the EU ETS cap.

    Establishing a carbon price is key to identifying mitigation potential
    across the economy that is both efficient and cost effective to
    achieve – especially in sectors not covered by EU ETS. For sectors
    covered by EU ETS, the relevant carbon price is the EU ETS allowance
    price. The shadow price of carbon establishes the relevant carbon
    price for non-EU ETS sectors.”

    and

    ” The new guidance will replace the current approach of the Shadow
    Price of Carbon, which is based on the incremental damages associated
    with emissions. The new approach moves from a damage-cost based
    approach towards one that is based explicitly on abatement costs. The
    effect of using this guidance in impact assessments is to raise the
    net present value of policy and investment options with low carbon
    impacts relative to those with larger carbon impacts (for carbon
    abatement policies, it will raise the net present value of policies
    with larger carbon savings relative to those with lower carbon
    savings), and thereby enable policy-makers to identify the most
    efficient options for securing abatement, or for avoiding policies
    which increase emissions at net cost to society. Incorporating the
    guidance into appraisals should ensure that options and projects are
    ranked in a way which gives due weight to carbon they emit or abate,
    allowing emissions reductions to be made where they are cheapest.”

    Maybe this will redress the complaints of Paul Ekins on the old DEFRA shadow price of carbon:

    This is Alice-in-Wonderland economics. One can just imagine the White
    Queen, who taught herself to believe six impossible things before
    breakfast, saying: “We are on a low-carbon emissions trajectory
    because I say we are, and that means I can emit as much carbon as I
    like!”

    http://www.guardian.co.uk/environment/2008/feb/13/carbonemissions.tra

    which in turn caused Jonathan Porritt to write

    Given where we are today, in policy terms, the chances of stabilising
    at 550ppm are literally zero. So, following the good old adage of
    “garbage-in, garbage-out”, that wholly unrealistic assumption results
    in a wholly unrealistic shadow price, which (surprise, surprise)
    promptly resulted in a wholly unrealistic (and indeed appallingly
    irresponsible) Cost Benefit Analysis which has concluded that a third
    runway at Heathrow will be “sustainable” as well as economically
    viable! Oh please!!

    If Defra’s economists can’t do better than that, who is going to
    constrain DfT’s runway-building mania? Something of an own goal I
    would say.

    http://www.jonathonporritt.com/pages/2008/02/alice_in_wonderland.html

    I must work out what the shadow price has to rise to to wipe out the
    net economic benefit of the third runway…..

  2. Stuck on the bottom of today’s launch page of the UK Low Carbon
    Transition
    Plan at

    http://www.decc.gov.uk/en/content/cms/publications/lc_trans_plan/lc_trans_plan.aspx

    is the economics geeks “Carbon Valuation” paper headlined with:

    “The approach to carbon valuation in Government has undergone a major
    review, concluded in July 2009. The new approach moves away from a
    valuation based on the damages associated with climate change impacts,
    instead using as its basis the cost of mitigating emissions. ”

    I wish I could understand it – but attached is a peer review from Paul
    Ekins (mentioned in the post above) and he duly mentions the third
    runway economic evaluation. (SPC is the shadow price of carbon used
    for the cost benefit analysis in the Expanding Capacity consultation
    work):

    <<>>>>> >>> >>>

    It would be worth getting someone to redo the sums with the new
    figures. I suspect the answer will change…………

  3. Sorry it looks as if I managed to delete the relevant quote from Paul Ekins. Trying again :

    The second reason is that use of SPC may have been expected to
    reinforce, rather than compensate for, the dual excess of optimism
    referred to in the previous section. This is because an assumption of
    a strong global agreement, leading to a low atmospheric CO2 emissions
    and concentrations, would justify the choice of a relatively low SPC,
    which would justify in turn relatively high-carbon policy decisions
    and investments, which would undermine the chances of achieving the
    low emissions that were part of the initial assumption. This
    phenomenon was well illustrated in the CBA reported in the Impact
    Assessment related to the decision on the third runway at Heathrow.
    Use of a SPC far lower than that related to BAU emissions, predicated
    on an assumption that a strong global agreement would reduce emissions
    and concentration increases far below their current trends, made a
    huge carbon-intensive, long-term infrastructure investment appear
    economically viable, when the generalisation of similar carbon-
    intensive investments across the world would make the assumed low
    emissions and concentrations quite unachievable

  4. Economic case for Heathrow third runway flawed, figures show

    http://www.guardian.co.uk/environment/2009/sep/17/heathrow-third-runway-costs

    The Lib Dems have put the new DECC carbon figures into the Heathrow climate cost sums and found that it doesn’t make sense……..


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