We Know Zero

Black ball

18. August 2022 · Write a comment · Categories: Cartoons, Climate Change

Imagine all of the fossil fuel energy available to the Earth and its inhabitants before our emissions from using that energy mean that we will have, on average, a climate 1.5^oC warmer than pre-industrial levels. Imagine it as a big black ball located, for convenience, in China, as we have exported many of the most carbon-intensive manufacturing processes we all need there, and that we are all sucking the energy we need from this black ball 24/7 until it is exhausted.

We are currently at 1.2^oC above pre-industrial levels on average and have seen the consequences this summer in the UK, and in the unprecedented number and size of wildfires still raging across Spain and Portugal in particular, to name a few of the events which have been made much more likely by climate breakdown.

The last estimate of the size of the ball came from the IPCC AR6 Report of 2021, which indicated that the remaining carbon budget to remain with a 50% chance of staying at or below 1.5°C of global warming is 580 billion tonnes CO₂ and about 420 billion tonnes CO₂ for a two-thirds chance of limiting warming to 1.5°C, all as at 2018. Annual global CO₂ emissions in 2019 were 36.7 billion tonnes, in 2020 they were 34.8 billion tonnes and in 2021 they rebounded to 36.4 billion tonnes. So that ball is shrinking very fast.

Why the obsession with 1.5°C? Well, it is what we and most other countries signed up to in Paris in 2015. 2°C was agreed to be a much worse outcome than 1.5°C – we can already see the results of current warming where 20% of the global population lives with 1.5°C warming in at least one season of the year, but a global average of 2°C compared to 1.5°C would increase the proportion of the population exposed to severe heatwaves at least once every 5 years from 14% to 37%. NASA have an article on this here.

Can we make the ball bigger, by removing some of the carbon dioxide? If you look at the pathways that the IPCC discuss, you will see that they are split between those where temperatures are stabilised at or below 1.5°C warming and those which go above but are then brought back down later in the century. In its most recent report published in April, the IPCC said the use of CO₂ removal is now “unavoidable”, if the world is to reach net-zero greenhouse gas emissions. Where the UK is in its programme of carbon removal is discussed here. However, to get it into perspective, global carbon removal to date is still in the experimental stage, and there are many problems remaining to be overcome with most of the proposed methods, so such efforts must be additional rather than in anyway an alternative to drastically cutting our emissions.

Back to the ball. If this represented all of the remaining water in the world (the scientific consensus at 3°C warming has Indian monsoon rains failing, the Himalayan glaciers supplying the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers decreasing by up to 90% and the Amazonian rain forest basin drying out completely), would you think about it differently? Would you continue washing your car every weekend, watering your lawn, and power-washing your drives and patios on the assumption that we would invent a new way of making water? Simon Brodkin has done a good bit in answer to this, which is both very funny and terrifyingly plausible.

Some Don’t Like It Hot

21. July 2022 · Write a comment · Categories: Climate Change, Regulation

Levels of body temperatures at which extreme hot and cold sensors are triggered – data source: An Immense World – Ed Yong

In January this year, the southern hemisphere experienced, in some cases, record-breaking heatwaves, with temperatures reaching 50.7° C in Western Australia. In the last few weeks, it has been the turn of the northern hemisphere.

In the UK this week, we recorded the highest day (40.3° C in Coningsby in Lincolnshire) and night (25.8° C in Kenley in Surrey) temperatures ever. What is clear is that climate change has already significantly changed the probabilities of extreme weather events occurring in the UK, meaning that our own past experiences of weather ranges and likelihoods are now out of date.

This is likely to have many consequences. This week our railways literally went into meltdown in places, with New Street operating an “exit only” policy for a period while no trains were running to or from the station at all. Overhead cables were damaged, requiring lengthy repair work and buckling rails led to widespread speed restrictions across the network. This is because the heat tolerances of our railway system were set in cooler times, meaning that most of the network can operate up to around 46° C. As track temperatures can be up to 20° hotter than air temperatures, this threshold was widely exceeded.

So, if our infrastructure has limits, what about life on the planet? Well yes, in animals these are controlled by proteins called TRP channels, which allow neurons to be stimulated at temperatures which would be immediately extremely harmful to the organisms concerned. A few of these are shown above. In humans, this is a body temperature of around 42° C (a healthy temperature is around 37° C and our bodies work hard to keep it there, but we starts to feel unwell from 37.8° C upwards and may become comatose at 42° C. We are likely to die or at least suffer serious brain damage at 43° C), but the hot and cold limits vary hugely between different species. So rapid changes in the temperature distributions means that habitable areas, which would need to be at temperatures well short of these limits, for a wide range of animals and plants will also be changing rapidly, requiring migration or extinction for many.

In humans, where we have more control over our environments, we will still need to adapt many of our practices, from how we construct our infrastructure, to how we use resources and spend our time. One obvious question that has come up this week is why we don’t have a maximum workplace temperature (currently we don’t have a minimum either, although we do have guidance around minimum temperatures). The House of Commons Library Briefing Note on this from 2010 can be found here.

In Germany, a maximum of 26°C is the norm but the guidelines state that, if the outside temperature is higher, a workplace temperature may in certain circumstances be higher than 26°C.

In Spain, Real Decreto 486 of 1997 lays down that, in places where sedentary work takes place, the temperature should be between 17 and 27°C. In places of light physical work, an acceptable temperature will be between 14 and 25°C, although there are some limitations and conditions around these requirements.

There are clearly complications around setting a maximum comfort level which would probably also need to account for humidity and activity, but the Health and Safety Executive have suggested 30° C in their guidance as a maximum acceptable temperature, less if the work is strenuous. They also suggest polling employees to see if a particular temperature is comfortable, making adjustments if more than 10% are uncomfortable in an air-conditioned office.

There are now renewed calls to introduce a maximum workplace temperature in law. And, as Lord Turner so eloquently put it on Sky News, this is at only 1.2°C warming. If all of the promises made at Glasgow are kept we may stay between 1.8°C and 2.5°C. However in the UK, the Climate Change Committee, the body set up specifically to monitor our compliance with our climate commitments, has already said that our current programmes will not deliver net zero. And Liz Truss, who may be Prime Minister in 6 weeks, has vowed to halt the only green levies we have so far been able to put into law.

In the meantime, it appears to be a great time to be a Melanophila, or fire-chasing, beetle.

Ant Music

12. July 2022 · Write a comment · Categories: Cartoons, Economics

*But how do they know where they’re going? Spikes! Stop eating them!*

I am currently reading a wonderful book – An Immense World by Ed Yong – which I am certain will feature in much of my writing over the next few months. Today I want to talk about what Ed’s book has to say about ants and, in particular, ant pheromones.

Pheromones override all of an ant’s other senses. An ant will walk itself to death if its pheromone trails are laid in a circle (“the army ant death spiral”). And if an ant happens to get covered with one of the pheromones that signal that it is dead, it will continue to be treated as if it is dead however much it protests.

Compared to ants, the current Conservative Party leadership candidates obviously bestride the world like colossi, but I think I have spotted a similarity in the contest so far. Public First have attempted to put all of the policy announcements by each of the candidates together on a single spreadsheet and what is noticeable is that there is only one row which has an entry for every candidate: tax and economic growth. More popular than immigration, Brexit & Europe or any of the other issues one would expect any Conservative leader to have an immediate policy on. And, with one exception (the architect of the current economic policy which has been going in a different direction, Rishi Sunak), they all seem to be proposing a variation on generating economic growth as a result of tax cuts. I will not comment further on whether this is a coherent policy, as that has been done very well here.

However it did occur to me that tax cuts might be doing the same job for Prime Ministerial hopefuls as pheromones do for ants, ie something which, once emitted, makes everything else about your policy positions irrelevant. The problem of course is, whereas the success of an ant colony depends very largely on the coordination of a huge number of individual insects to follow a path, recognise an individual (or more likely a member of a group), identify their own young, etc, the leadership race is supposed to be giving the candidates a chance to differentiate themselves from each other. Even allowing for the fact that many in the race have no expectations of making the last two, but are merely indicating their level of ambition in a way designed to be noticed by one of the two who do, it does seem as if they have already coalesced into two teams – Ready For Rishi and Not Remotely Ready For Rishi. And noone running appears to be obviously looking for a job from Rishi Sunak.

The dangers of making policy a reflex rather than a reflective activity, particularly with respect to the economy, are obvious. Because the pheromones act on all of the ants, including those emitting them, this doesn’t suggest an eventual winner who is likely to be able to change economic direction beyond usual Conservative Party instincts, whatever is actually going on in the economy. Ed Yong has already used the army ant death spiral as a metaphor for the United States’ response to the pandemic.

It should all become a lot clearer tonight when the ones who cannot get 20 MPs to support them will drop out. It would be great if one of them would make a break with Elgar and use Ant Music as their campaign song instead. Then we would all know where we stood.

What Stuart Kirk was not criticised for and what this tells us about financial markets

01. July 2022 · Write a comment · Categories: Climate Change, Economics, Regulation, Risk, Science Fiction

For those of you totally immersed in the daily to and fro of the finance industry, this post about Stuart Kirk will probably seem a little late in the day. For those of you who are not, let me explain briefly what I am talking about today!

Stuart Kirk was Global Head of Responsible Investments at HSBC Asset Management. On 19 May 2022 he gave a talk at the FT Live Moral Money Summit Europe conference with the provocative title of Why investors need not worry about climate risk. Stuart’s talk was a real crowd splitter. Many called for his dismissal (HSBC subsequently suspended him), others regarded his talk as a missed opportunity and full of things which were not true, while others have regarded his stance as speaking truth to power.

However what interests me most about all of the column inches devoted to the affair is what he has not been criticised for and what this tells us about financial markets.

What Stuart said was structured around the following 12 statements:

Unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings are ALWAYS wrong.
As the warnings became ever graver, the more asset prices INCREASED in value.
One of only three explanations can explain the impending end of the world and higher risk asset prices:
1. Climate risk is negligible.
2. Climate risk is already in the price.
3. All investors are wrong.
Even by the UN IPCC own numbers, climate change will have a negligible effect on the world economy – A (large) temperature rise of 3.6 degrees by 2100 means a loss of 2.6 per cent o global GDP. Let’s assume 5%.
Adaption is cheap and effective: climate related costs relative to GDP and mortality rates are down.
Perhaps the biggest error of thinking with climate risk is confusing volumes and values – Plenty of things happen between a volume disruption and a move in asset values.
Climate “winners” and losers” can create value. Climate “winners” and “losers” can destroy value.
The difference between volumes and value is regularly made clear in markets.
Even if climate risk isn’t negligible, it’s too far into the future to matter for most companies.
To make climate change appear like a significant threat, scaremongers are torturing their models.
It’s easy to show that climate change is an investment risk if you engineer a bond market collapse.
Climate change isn’t a long-run risk just like wars, energy crises, pandemics, financial crises and so on (with the graphs shown above to supposedly prove this point).

Can you spot the pattern here? All of these statements are about the map that Stuart is standing in (think of Joey standing in his map to orientate himself in Friends). It is a complicated map of asset prices and charts and reports written by lots of other people standing in the map with Stuart, but it is still just a map. And the map is the territory as far as Stuart is concerned. If something does not appear in his map, it is not worth worrying about. And climate risk is struggling to make it into his map. In Stuart’s view, this is a problem for climate risk, and the people “torturing” their models to make climate risk appear significant and piling him up with regulatory reporting responsibilities are very annoying.

But of course this take is completely upside down. This is not a problem for climate risk. Rather climate risk is a problem for us and the fact that it does not appear in our models unless we torture them (which I am sure is true) means that we have the wrong models. Because the scientific consensus about the consequences of climate change on our current trajectory of between 3 and 4 degrees warming are (amongst others from Mark Lynas’ Six Degrees: Our Future on a Hotter Planet):

Africa […] split between the north which will see a recovery of rainfall and the south which becomes drier […] beyond human adaptation.
Indian monsoon rains will fail. The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers [will decrease] by up to 90%.
The Amazonian rain forest basin will dry out completely. In Brazil, Venezuela, Columbia, East Peru and Bolivia life will become increasingly difficult due to wild fires which will cause intense air pollution and searing heat. The smoke will blot out the sun. Drought will be permanent in the sub-tropics and Central America.
Australia will become the world’s driest nation.
In the US Gulf of Mexico high sea temperatures will drive 180+ mph winds. Houston will be vulnerable to flooding by 2045. Galveston will be inundated. Many plant species will become extinct as they will be unable to adapt to such a sudden change in climate.
The [IPCC] in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates.[and] food prices [will] soar. Population transfers will be bigger than anything ever seen in the history of mankind. [The feedback effects from the] Amazon rain forests dry[ing] out and wild fires develop[ing] [will lead] to those fires [releasing] more CO2, global warming [intensifying] as a result, vegetation and soil begin[ning] to release CO2 rather than absorb[ing] it, all of which could push the 3° scenario to a 4°-5.5° [one].

Much of the discussion about the talk was that Stuart was speaking out bravely and that HSBC had only suspended him to silence inconvenient truths, that he had been silenced by “extreme environmental ideology“. I have no idea about all of the reasons why HSBC suspended Stuart other than their official statements, but it seems clear to me that many people in the finance industry agree with what he said. This suggests to me an extreme ideology of its own of resolutely refusing to look out of the window.

In Kim Stanley Robinson’s excellent New York 2140, global sea levels have risen by 50 feet. Everyone lives in tower blocks connected by sky bridges which occasionally topple into the canals which were once streets. I used to think that money markets would not survive events like this, but Robinson posits what I believe is a more likely future scenario. The Intertidal Property Pricing Index is developed instead, carefully constructed to be reasonably stable despite the instability of the actual real estate being valued, and people bet on it. And soon everyone is fixated on what this index is saying daily rather than the buildings collapsing around them.

This is exactly what our finance sector will do of course, there will be money to be made out of such activities after all. And so expectations that they will, in any way, be a leader out of the climate emergency are, in my view, unrealistic.

We will however need the finance industry to facilitate aspects of how we transform our economies over the next 10 to 20 years. And this will involve much more of the regulation which annoys Stuart and others so much.

Fighting for meaning

24. July 2021 · Write a comment · Categories: Cartoons

I recently finished reading an excellent book about how to read Russian short stories: A Swim in a Pond in the Rain by George Saunders. Of course it is about much more than this, drawing on George’s 20 years of experiences of teaching a creative writing course at Syracuse University and his own writing experience (primarily a short story writer, he won the Booker Prize for his first novel in 2017: Lincoln in the Bardo. It has caused me to think more deeply about my teaching (I teach some mathematics, economics, professional skills and communication skills) as a result. The two pages where George talks about finding his literary “voice” are, for me, worth the price of the book on their own – I never really understood how critical this was and why noone I had read had talked about it in very clear terms before. I can also, at long last, see the point of literary criticism. This book is all about the fight for meaning, and a bare-knuckled fight it is at times.

I think finding your own voice can apply in any field, not just the creative ones. George describes realising that he did not belong on Hemingway Mountain and the process of finally accepting his own “Shit Hill” with huge power. But at least as a writer you know you are supposed to be finding your own distinct way of writing. I sometimes think that, in many professional careers, this is not widely encouraged.

However it is, in my view, massively important. Finding your voice in a professional career is about discovering what you are good at and what you are interested in and trying to bridge the gap between the two. It is about being prepared to learn from those around you, although not necessarily the thing they think they are trying to teach you. It is about being prepared to spend time, sometime considerable time, on mastering things which are important to you, even if they seem to have no importance to anyone else. In this way you will develop an independent professional career where you have something interesting to say in your chosen field.

This may sound very utopian to some, particularly those in the early years of a career where you may have little control over your workload or the structure of your working day. However that will not be the case for ever unless you choose it to be and, provided you do not lose the habits for finding your own voice in the meantime, the opportunities to do so will only grow.

What you may have gathered from this is that I see finding your voice, not as some quick process that takes place over a short period at the start of your career (at least not in the pursuits I have been involved in so far), but as a lifetime’s search. Mine didn’t really start until I was 40 and, health willing, will carry on for many years to come (I still have no real idea what my voice as a writer is yet).

Let’s all wish each other good luck on the quest!

Could climate change slash global GDP by 18%? It’s much worse than that

05. May 2021 · Write a comment · Categories: Actuarial, Climate Change, COVID-19, Economics, Prediction, Risk

Last week, the news from the Actuary magazine was that climate change could slash global GDP by 18%. This was based on a Swiss Re report, the economics of climate change, from which the analysis above is taken.

According to the report, “The current trajectory of temperature increases, assuming action with respect to climate change mitigation pledges, points to global warming of 2.0–2.6°C by mid-century.” It was unclear why they had decided to stop at 2050, when current commitments continue to push temperatures up until 2100. And the scenarios from the IPCC’s AR5 Synthesis Report (see below) show that the path we are currently on diverges far more considerably from the Paris agreements after 2050. Climate effects are very long-term and many of the impacts of a 2-3°C warming would be irreversible ones, ensuring continuing losses at similar or greater levels for decades to come, and that is before we even consider the much higher probabilities of feedback effects: from the melting of the permafrost, additional methane releases, loss of Amazonian carbon and the loss of the albedo reflectivity of Arctic ice. The Swiss Re report makes clear that is has not considered these.

You might notice that there is a separate column to the left, in a different colour, with the title “Well-below 2°C increases” and sub-title of “Paris target”. It is actually an agreement which 189 countries have signed up to, including the UK. As the Paris Agreement says (Article 2 Point 1):

This Agreement, in enhancing the implementation of the Convention, including its objective, aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by:
(a) Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature
increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

There has been some debate over whether the Agreement is aiming for 1.5°C warming with a 50% chance of staying below it, or for “well below” 1.5°C similar to the 2°C goal with a 66% chance of avoiding more than 1.5°C warming, but the modelling used for the next IPCC report has adopted the latter definition. Either way, I cannot see why Swiss Re has decided to put the Paris Agreement targets in a different column from what it calls the “likely range of temperature gains” as if those we have committed to are no longer feasible to aim at.

In saying this, I do not underestimate the massive challenge of keeping to the Paris target. As Mark Lynas says in Our Final Warning, at the end of 2018 over 1,000 GW of additional fossil-fuelled electrical power generation capacity was planned, permitted or already under construction around the world, equivalent to adding an additional 188 Gt CO2 into the atmosphere to the 658 Gt already baked in from existing infrastructure, which gives a total of 846 Gt of CO2 not including impacts from deforestation, agriculture and future land-use change. This compares to a future carbon budget as estimated at the end of 2018 by the IPCC (although estimates of this vary considerably) of 420 Gt of CO2 (or 1,170 Gt of CO2 for 2°C warming). So an extraordinary change of direction is required and we should be very cautious of getting anywhere near these limits when we do not know precisely where they are.

Which brings me onto the modelling of economic impacts. The first thing to say is that modelling in terms of impact on GDP, while guaranteed to get the attention of the financial community, is perhaps not the best way of communicating the devastation of runaway climate change.

In the summary of Mark Lynas’ excellent book Six Degrees: Our Future on A Hotter Planet , which summarised the scientific consensus already arrived at by 2007, the three degree increase for which damages are being estimated is expected to lead to Africa […] split between the north which will see a recovery of rainfall and the south which becomes drier […] beyond human adaptation. Indian monsoon rains will fail. The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers [will decrease] by up to 90%. The [IPCC] in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates.[and] food prices [will] soar. Population transfers will be bigger than anything ever seen in the history of mankind. [The feedback effects from the] Amazon rain forests dry[ing] out and wild fires develop[ing] [will lead] to those fires [releasing] more CO2, global warming [intensifying] as a result, vegetation and soil begin[ning] to release CO2 rather than absorb[ing] it, all of which could push the 3° scenario to a 4°-5.5° [one]. The recent update to this: Our Final Warning, describes “entering the three-degree world means we are now living in a hotter climate than any experienced on Earth throughout the entire history of our species”. These impacts, which are likely to pose existential risks for many, appear totally inconsistent with the economic loss modelling shown above.

In his 2020 paper, The appallingly bad neoclassical economics of climate change (apologies, Journal access required), Steve Keen says in the abstract:

Forecasts by economists of the economic damage from climate change have been notably sanguine, compared to warnings by scientists about damage to the biosphere. This is because economists made their own predictions of damages, using three spurious methods: assuming that about 90% of GDP
will be unaffected by climate change, because it happens indoors; using the relationship between temperature and GDP today as a proxy for the impact
of global warming over time; and using surveys that diluted extreme warnings from scientists with optimistic expectations from economists. Nordhaus has misrepresented the scientific literature to justify using a smooth function to describe the damage to GDP from climate change. Correcting for these errors makes it feasible that the economic damages from climate change are at least an order of magnitude worse than forecast by economists, and may be so great as to threaten the survival of human civilization.

There follows a demolition of the methodologies employed by Nordhaus and others in this field. To be fair to the Swiss Re report, some of the criticisms in Keen’s paper appear to have been borne in mind when constructing their model, eg:

A shortcoming of our model build so far is that some economic impacts are linearly estimated: non-linearities are not adequately captured. We use multiplicative factors of 5 and 10 to simulate the increasing severity of outcomes from nonlinearities… Importantly, the framework does not consider
tipping points, events such as the partial disintegration of ice sheets, biosphere collapses or permafrost loss, that pose a threat of abrupt and irreversible climate change. This is because it is thought that tipping points will materialise well after our model horizon of mid-century only.

And as the Swiss Re report also acknowledges:

It is likely that the estimated impacts of GDP damages from climate change will rise as existing modelling develops to incorporate economic linkages in trade, migration and other channels, and to generalise the results to multiple countries.

And they are getting criticisms from the usual suspects of climate denial, eg Bjorn Lomberg on Twitter here, that even their attempts to date to quantify the uncertainties caused by non-linearity are a step too far.

And yet there remains a problem with these analyses in that they fail to capture existential risk. One of the things Steve Keen points out in his paper is the different attitude Nordhaus found towards estimating damages from climate change in natural scientists as opposed to economists. Natural scientists typically estimated the damage at 20-30 times higher than economists and some refused to cooperate with the exercise at all:

I must tell you that I marvel that economists are willing to make quantitative estimates of economic consequences of climate change where the only measures available are estimates of global surface average increases in temperature. As [one] who has spent his career worrying about the vagaries of the dynamics of the atmosphere, I marvel that they can translate a single global number, an extremely poor surrogate for a description of the climatic conditions, into quantitative estimates of impacts of global economic conditions.

But how do you calibrate what is clearly a complicated model that Swiss Re and Moody’s have constructed for this analysis? Obviously we all have a very recent GDP fall in our minds at the moment – here is a summary from the UK Commons Library of Economic Indicators as at 30 April 2021 (themselves sourced from OECDstat and Eurostat):

This shows an almost identical GDP fall of 10.5% year on year in Q2 2020 for the OECD as predicted in the event of a 3.2°C warming, although it has bounced back pretty quickly since. For a longer term view of the global data, Our World In Data have an Annual growth in GDP per capita graph which runs from 1961 to 2017 (see below).

One very large GDP fall which stands out in the data here is the 26.5% fall in China in 1961. This was towards the end of the China’s Great Famine, in which approximately 3 million people died of starvation over a 3 year period. This certainly qualifies as an existential event and Swiss Re’s modelling suggest something of similar proportions in Asia and Africa at 3.2°C warming.

The biggest danger in all of this is that rich countries will look at a 10.6% reduction in GDP (at 3.2°C warming) and think this liveable with and adaptable to for their populations. After all, Simon Wren Lewis calculates that the austerity policies between 2010 and 2018 in the UK reduced GDP by nearly half of this amount every year for at least the second half of this period, compared to where it would have been without these policies, with an estimated cumulative loss of 15.9% of GDP. An 18.1% overall world average loss, however, effectively means more than a 25% loss for the rest of the world outside the OECD, as the OECD accounts for around half of the world’s total GDP which, even if we did not allow for the acknowledged likelihood that these are underestimates, is still in the Chinese Famine category of disaster and neither liveable with nor adaptable to.

We are already seeing vaccine nationalism carve up the world between rich and poor countries, with up until last month only 0.3% of the vaccines administered around the world having gone to people in low-income countries. This is likely to reduce the ability of poorer countries to be represented properly at this year’s COP26 when it frames a global response to the climate change which will affect them so disproportionately. And the losses if we do not act will be measured in far more frequent floods and sea level rise, extreme storms and heatwaves, crop failures, water and food shortages and mass migration on a scale we have never seen before, not GDP.

Could climate change slash global GDP by 18%? It’s much worse than that.

Hope-over-Experience is a comfortable place to live in…for now

26. April 2021 · Write a comment · Categories: Climate Change, COVID-19, Economics, Prediction, Risk

There is a particular variety of We Know Zero graphs that look like this one – showing an experience of a steady increase in something (usually bad, but not always) up until now, followed by a projection of that thing falling in the future. My wife Marsha suggested I call them Hope-over-Experience graphs, which seems to suit them very well.

Such diagrams are often very comforting for those who want to maintain the status quo. Let’s look at three such curves in particular (the excellent Doughnut Economics by Kate Raworth has alerted me to the first two of these).

The Kuznets Curve

There is a considerable body of evidence, most notably from Kate Pickett and Richard Wilkinson, that inequality impacts most health and social problems adversely, to the detriment of all socio-economic groups, but what is to be done about it? Enter our first Hope-over-Experience graph. In this case the x-axis is actually income per capita, but to the extent that this is something expected to increase with time I don’t think this matters too much. The y-axis is inequality. It was originally proposed by Simon Kuznets (the inventor of GDP) in his 1955 paper Economic Growth and Income Inequality (my apologies, but you will need journal access to read this) based on data from England, Germany and the United States from 1875 onwards, and the belief that economic growth will automatically deal with inequality has been a powerful influence on economic policy at the World Bank and elsewhere since.

However, more recent data has shown the patterns suggested by this limited original data set are no longer correct, if indeed they ever were. Thomas Piketty and Emmanuel Saez, in their 2001 paper Income Inequality in the United States 1913-1998, state:

In particular, the evidence presented in this paper, together with the evidence on France by Piketty (2001a, 2001b) and the U.K. by Atkinson (2001),
strongly suggest that there was no such thing as a “spontaneous”, Kuznets-like decline of inequality in developed countries during the first half of the 20th
century. The inequality decline was to a large extent accidental (depression, inflation, wars) and amplified by political factors (progressive taxation). This does not mean that the current rise of inequality will not be followed by a mechanical downturn during the first few decades of the 21st century: this is simply saying that such a mechanical downturn apparently never occurred in the past.

Their data suggests a curve which looks like this instead:

The Environmental Kuznets Curve

This was first proposed by Gene Grossman and Alan Krueger in 1994 in their working paper Economic Growth and the Environment, which suggested that there was an eventual inverse relationship between pollution and income per capita, with a turning point mooted at around $8,000. Most of their graphs are not quite as U-shaped as the Kuznets Curve, but this nonetheless has come to be known as the Environmental Kuznets Curve.

However, in 2016, the international industrial ecology research community and United Nations Environment agreed on a comprehensive data set for global material extraction and trade covering 40 years of global economic activity and natural resource use, which led to several papers including the UNEP Global Material Flows and Resource Productivity: A Report of the International Resource Panel (again apologies but journal access needed). Their graph of material extraction instead looked like this:

The Human Development Index (HDI) is the geometric average of 3 indices: Gross National Income, Health and Education. An optimum score of 1 is achieved where life expectancy is 85 or more years, adult literacy is 100%, school enrolment is 100% and the Gross National Income is US$40 000 or more per person per year in purchasing power parity. So again, this is not very supportive of a reduction in material footprint with increased wealth.

Which brings us to the third graph, often cited as an argument for why one of the most obvious ways to reduce inequality rather than just focusing on average income per capita, ie make taxation more progressive, is pointless.

The Laffer Curve

The story of the Laffer Curve, dating from the 1970s, is recounted by Arthur Laffer himself here. It plots tax rates against tax revenues to indicate that there is a tax rate beyond which tax revenues actually reduce. As he says:

The Laffer Curve itself does not say whether a tax cut will raise or lower revenues. Revenue responses to a tax rate change will depend upon the tax system in place, the time period being considered, the ease of movement into underground activities, the level of tax rates already in place, the prevalence of legal and accounting-driven tax loopholes, and the proclivities of the productive factors. If the existing tax rate is too high…then a tax-rate cut would result in increased tax revenues. The economic effect of the tax cut would outweigh the arithmetic effect of the tax cut.

However, returning to Piketty, this time in the 2011 paper, Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities by Piketty, Saez and Stefanie Stantcheva, the evidence underpinning this curve is again highly questionable. As they point out in the abstract (bold type added by me):

This paper presents a model of optimal labor income taxation where top incomes respond to marginal tax rates through three channels: (1) standard labor supply, (2) tax avoidance, (3) compensation bargaining…The macro-evidence from 18 OECD countries shows that there is a strong negative correlation between top tax rates and top 1% income shares since 1960, implying that the overall elasticity is large. However, top income share increases have not translated into higher economic growth. US CEO pay evidence shows that pay for luck is quantitatively more important when top tax rates are low. International CEO pay evidence shows that CEO pay is strongly negatively correlated with top tax rates even controlling for firm characteristics and performance, and this correlation is stronger in firms with poor governance. All those results suggest that bargaining effects play a role in the link between top incomes and top tax rates implying that optimal top tax rates could be higher than commonly assumed.

There are a number of charts which could be used from this paper, but I have chosen the plot of economic growth against changes in top marginal tax rate to illustrate most clearly the problems with the Laffer Curve idea:

This graph should show an inverse relationship if the Laffer Curve were true.

Why do I feel the need to debunk these simple so-called economic laws which are nothing of the sort? Because you will always prioritise economic growth over everything else if you believe that:

Growth will fix inequality;
Growth will fix pollution;
Trying to fix inequality through the tax system is counter-productive.

And these beliefs will then also have policy implications when faced with a different sort of curve.

This was an explainer from Grant Sanderson at 3Blue1Brown about COVID-19 from March 2020 setting out quite simply how it was likely to spread, and how different case numbers in different countries (eg between Italy and the UK) were as likely to be due to being at different time points since the start of the pandemic as reflecting the relative success of their containment policies. We now know the UK Government locked down too late, at least partly because they prioritised economic growth over containment policies in the first few weeks:

Those attitudes changed and we have had an incredibly successful vaccine rollout in the UK, but this has been at the expense of any idea of international cooperation in vaccine supply. Wealthy countries such as the UK have bought enough vaccinations to cover our populations almost three times over, while Covax, the global vaccine procurement scheme, only aims to vaccinate 20% of the populations of recipient countries this year.

This is very short-sighted if we think there might be an international issue even more threatening to life than COVID-19 which can only be combatted by unprecedented levels of international cooperation. And of course this is exactly what we have in the form of the climate emergency and our final graph (from the National Oceanic and Atmospheric Administration (NOAA) in the US showing the relentless rise in the level of carbon dioxide in the atmosphere as global emissions continue to increase:

Living in Hope-over-Experience may be very comfortable for some people for a limited time, but if it stops us engaging with the more implacable curves of the world we actually live in then none of us will be safe.

Now and Venn

28. March 2021 · Write a comment · Categories: Climate Change, Economics

Diagram 1

We are currently behaving like this is the world we live in – because if you are a finance person it is. The Dasgupta Report on the Economics of Biodiversity does nothing substantive to challenge this, despite a foreword from David Attenborough admitting “We are totally dependent upon the natural world”, other than putting a bigger number on the Sustainability portion (Natural Capital). John Kay mentioned in his talk, as part of the Dr Patrick Poon Presidential Speaker series on Finance in the Public Interest for the Institute and Faculty of Actuaries, the habit of actuaries in particular of often “attaching meaningless numbers to data”. There would seem to be great potential for doing precisely this in putting a number on Natural Capital.

But it is worse than that. As the September 2020 InfluenceMap report on sustainability finance policy engagement makes clear, most financial institutions (bottom-right quadrant, in blue, below) have shown caution and, despite having made some high-level supportive comments, have tended not to engage in a detailed or intensive manner. A small number of financial institutions (top-right quadrant, blue) have been actively engaged in promoting sustainable finance policy. A few financial institutions (centre-left of the diagram, blue) appear to be more cautious about sustainable finance policy.

This chart plots the results of InfluenceMap’s analysis for the financial institutions and industry associations included in the analysis. Engagement Intensity refers to how actively the entity is engaging, while Organization Score measures the degree of support/opposition to policy.

Diagram 2

In the meantime, the IFRS Foundation is proposing to set up a Sustainability Standards Board with its own reporting standards. This is what Richard Murphy (who got me thinking about this in Venn diagram terms originally) is rightly complaining about as it would lead to this:

His sustainability cost accounting idea offers a plausible alternative approach in my view. As the introduction says:

…accounting has to change because we need a clear, audited, enforced and unambiguous indicator of the process of change that business must go through to support continued human life on this planet. Sustainable cost accounting can do that by indicating who can, and cannot, use capital to best effect in this changed environment. That is precisely why it is needed, however uncomfortable the consequences might be.

What is actually needed therefore is clearly an approach rooted in this:

Diagram 3

This is the long term position most working in sustainability would, I believe, like to see. However there are differences of opinion in how to get there.

Kate Raworth argues that you may need to talk within Diagram 1 to start with in order to engage the finance professionals, which of course includes the central bankers and treasury official who might limit the speed at which we could move to Diagram 3. Others disagree, saying once you start talking to finance professionals in their own language, you are condemned to a solution in Diagram 1.

What seem clear to me is that, if our arguments are between Diagram 1 and Diagram 3, perhaps we can dispense with Diagram 2.

A success made of failures

13. March 2021 · Write a comment · Categories: Climate Change, Economics, Prediction, Regulation, Risk, Science Fiction

Source: Wikimedia Commons: Shattered right-hand side mirror on a 5-series BMW in Durham, North Carolina by Ildar Sagdejev. Cropped by Nick Foster

It starts in 2025 with a description of a horrific heatwave in India which will stay with me for a very long time. As well it should as, in the book, it kills 20 million people. In response, India send thousands of aircraft up to 60,000 feet to spray aerosol particulates of sulphur dioxide into the stratosphere, in defiance of the international conventions banning such activities, to deflect some of the solar radiation with the aim of reducing the probability of future heatwaves for a period. By how much or for how long or with what other consequences is unknown.

As we build up to COP26 in Glasgow in November this year, in the book we start with the results of COP29 in Bogota, where the organisation which would come to be known as The Ministry for the Future (and the title of the book by Kim Stanley Robinson) was set up “to advocate for the world’s future generations of citizens, whose rights, as defined in the Universal Declaration of Human Rights, are as valid as our own. This new Subsidiary Body is furthermore charged with defending all living creatures present and future who cannot speak for themselves, by promoting their legal standing and physical protection.”

The Indian crisis happens a few months later. The new head of this body, Mary Murphy, is briefly held captive by, Frank, one of the survivors of the heatwave in her own flat in Zurich (the book also feels like a love letter to Zurich) and challenged to do more:

It’s not enough. Your efforts aren’t slowing the damage fast enough. They aren’t creating fixes fast enough. You can see that, because everyone can see it. Things don’t change, we’re still on track for a mass extinction event, we’re in the extinctions already. That’s what I mean by not enough. So why don’t you do something more?

This has a profound impact on Mary, who keeps in touch with Frank and his troubled suffering life throughout the book. It also leans her towards effectively endorsing the involvement of her No 2 in “black” operations to ensure certain people are “scared away from burning carbon”.

Indeed the book is suffused with eco-terrorism. Technological progress has partly displaced the state monopoly of violence, with drone technology in particular meaning that no aircraft or ship or surface navy is safe from a well-enough organised group by the end of the book. People stop flying when aircraft start being shot down regularly, and those that still do fly use carbon-negative airships, where solar panels generate more power than the ships use. Davos attendees get taken hostage and given a compulsory seminar at one point. Tax havens become obsolete when all money becomes digital and tracked.

Mary’s interactions with central bankers are probably the closest this book ever comes to comedy. In the first, she tries to argue for a “carbon coin”, a digital currency which would be paid out to organisations and people who could prove they had removed carbon from the environment. This would be the incentive to work alongside the carbon taxes. The contemptuous response from the Federal Reserve and others at first is “not our purview”, however by the end they are on board with this and many of the other ideas developed along the way.

There are so many ideas in this book, far too many to cover them all here: some of them familiar to me from economics (carbon quantitative easing, Jevons’ Paradox, Modern Monetary Theory, Gini Coefficient – these each get a short chapter among many other ideas and interspersed with riddles) and others not so. The Indian techno fix is the first of many: some successful, like sucking out the meltwater under glaciers to slow them sliding into the ocean and others not so, like the billionaire wanting to refreeze the oceans. Russia dyes parts of the Arctic yellow to reflect more sunlight back. Huge areas of land are rewilded.

What strikes me most is that the arguments we tend to have here and now about which course to take (Freud’s phrase is quoted here in the book – “the narcissism of small differences”) seem largely moot in this one imagined near-future: all of them are tried there – it’s not techno-fixes or de-carbonisation of transport and heating, it’s both. It’s not carbon QE or re-wilding, it’s both. If something doesn’t work, it’s abandoned. By far the most important determinant of which of the IPCC future scenarios we end up on seems to be how quickly we start. Economists come in for particular ridicule there – whatever course of action is planned, they can find one group who thinks it will have one effect, one who think it will have the opposite effect and one which thinks it will make no difference at all. The difference is that the economists are no longer guiding policy there, but facilitating and post hoc rationalising it.

There is a wartime feel to the book throughout, with people doing what they feel needs to be done in desperate circumstances. The choices are all different levels of bad, but bad is almost incalculably better than worst. And the overall impression is of a world changing rapidly, with one of its herd animals belatedly getting into better balance with the others. Even at 560 odd pages the impressions are inevitably just that – one chapter is just a list of different organisations working on aspects of the climate emergency in different countries, described as about 1% of the total number active. It is like the shards of a smashed wing mirror picking out details from the vanishing world behind. I have never wanted to apply the word polymesmeric (which I first saw on the cover of Catch 22 by Joseph Heller) to a book as much as I have to this one.

The hoped-for outcome of all of this? In one conversation this is described as a “success made of failures” or a “cobbling-together from less-than-satisfactory parts”, which I think sums it up nicely.

And I definitely want to visit Zurich one day. Probably by airship.

Getting Serious About Miracles

17. January 2021 · Write a comment · Categories: Prediction, Regulation, Risk

There are many papers about model risk, and the dangers of blindly relying on algorithms or metrics without allowing for human judgement at any point in any subsequent analysis (in effect “baking in” whatever analysis was done at the time the computer model or algorithm was constructed as the final word), but these can often descend into the same level of technical impenetrability as the programmes they are attempting to critique.

I watched the film Sully: Miracle on the Hudson for the first time this week, on the anniversary of the landing on the Hudson. In the final scenes there is a hearing (spoiler alert!), where the evidence presented up until that point based on computer simulations, with and without pilots involved, was leading to the unanimous conclusion that Sully and Skiles could have turned back to La Guardia or Teterboro airports rather than landing on the Hudson River in January. However Sully had appealed to have the video recordings of the pilot simulations shown to the hearing, and these revealed the pilots responding to the catastrophic bird strikes which had taken out both engines (again something later confirmed when the actual engines were recovered, but which the simulations themselves did not accept because of the instrument readings on one of the engines from the aircraft) by calmly immediately setting course for La Guardia or Teterboro with no decision or response or recovery time needed at all. When a 35 second allowance for this was inserted into the simulations, the results were fatal crashes in both cases.

What struck me was how invisible this deficiency in the programming of the simulation would have been without a cockpit recording of the simulations. In many of the programmes we use to automate judgement-heavy processes, such as recruitment, many of the capital allocation decisions in financial institutions or even A-level grades, we do not have anything equivalent to a cockpit recording available to us. Perhaps we wait until either events prove us wrong (bad) or those on the receiving end of our automated decisions start to complain in sufficient numbers for us to reconsider (worse). What if quite a large proportion of the cost savings from automating these processes is in fact illusory as a result of our not putting enough time and attention into the original programming and/or not setting aside enough budget for maintaining it and challenging its decisions with parallel processes which do allow for human judgement? How much bigger is this problem going to become in the era of machine learning, where the programmes we are running are themselves several steps of abstraction away from those originally written by humans?

Our ability to programme machines to carry out billions of calculations in seconds would have been regarded as miraculous only a few decades ago and is still pretty astonishing to us now. We need to start thinking a lot more about how we can live alongside these ever more capable machines amicably over the long term. And it can’t be only programmers who get to see what the machines are doing – whatever the technical problems of allowing the equivalent of a cockpit recording to be made which can be understood by any of us, they need to be solved with as much urgency as the process automation itself. All of our decision-making processes need to be understandable and challengeable by the society in whose name they are carried out. It’s time to get serious now about our miracles.