Analysis: The Economics of climate change and the Green New Deal

George Sharpe
George Sharpe, Merrion Oil and Gas investment manager

How much more would you be willing to pay for energy today to help reduce the effects of climate change on future generations? A recent Associated Press poll showed that only 28% of Americans would be willing to pay an additional $10 a month. According to economist William Nordhaus, that isn’t going to get it done.  

Nordhaus won the 2018 Nobel Peace Prize for modeling the economics of climate change. He put a future cost on dealing with the various levels of catastrophe that climate models forecast based on different emission levels and ultimate temperature forecasts.  He then put a cost on complying to meet those specific emission levels.  (No, it is not going to be free to the consumer, as is implied by the Green New Deal).  

In his paper, he presents three cases… 1) a “Do Nothing” (Base) scenario, where emissions continue at current levels, 2) a “Do Everything” (Stern) scenario, where emissions are taken to zero as quickly as possible, and 3) an “Optimum” (Opt) scenario, where the cost we pay today is commensurate with the “catastrophe costs” we avoid in the future. The results are shown below for forecast emissions and forecast temperature for the three scenarios.

Actual and projected  CO2 emissions in different scenarios.
Temperature change in different scenarios.

I am sure that one could pick apart his assumptions, whether it is Skeptics saying that the model predictions of catastrophe are overblown, or the Believers saying he is underestimating the future costs of those catastrophes. So let’s forget the specific numbers and make some high level observations.

1. Even the “Do Everything” scenario acknowledges the fact that emissions can’t go to zero immediately, but will take some time.  We will continue to need and use carbon energy during that transition.  

2. The “Do Everything” scenario still doesn’t meet the 2 degree increase in temperature target set by the Paris Climate Accord.  No matter what we do, it is going to get warmer, so we need to prepare for that.

3. The “Optimum” scenario is a balance between “Do Everything” and “Do Nothing”, and is arguably closer to the latter than the former. Future poor people living in low lying areas are at risk from rising sea levels. However, current poor people are at risk if the current cost of energy increases substantially. The Optimum scenario attempts to balance those conflicting needs.  

The recently proposed Green New Deal doesn’t really fit this economic model. It calls for 100 percent renewables within 10 years, going well beyond Nordhaus’ Do Everything scenario.  As attractive as Ocasio-Cortez’s nirvana may sound to the layperson, it is neither physically nor economically feasible.  Here are some of the reasons:

1. Driven by tax credits, the percent of US energy that comes from wind and solar are growing.  However, even with the incentives, it’s not growing fast enough. As the table below illustrates, at current growth rates it will still take hundreds of years for wind and solar to replace all carbon energy. While the growth rate is going to accelerate, the bottom line is that 10 years is an unrealistic pipe dream.

U.S. energy use by source.

2. Wind and solar are important and growing energy sources, but they are hardly ready to go it alone. They still require petroleum for their materials, construction, transportation, installation, and their backup generation.  They are NOT yet reliable and independent energy sources.

3. A 100% renewable scenario is going to require massive amounts of storage, which right now is lithium ion batteries. However, the current recoverable lithium reserves world-wide total only 13.5 million tons (USGS data). But with a Tesla battery requiring 26 pounds of Lithium, it would take 26 million tons of lithium to power the projected 2 billion cars on the road by 2035, more than double what is available.  And who knows how much lithium it would take to provide storage for the entire electrical grid.  Therefore, an all-renewable scenario is going to take some sort of storage technology that hasn’t even been invented yet.   

4. Consumers are not going to switch away from carbon energy until it makes economic sense for them to do so.  I know numerous “environmentally righteous” individuals who hate oil and gas, but still haven’t bought that Tesla because it’s too expensive, even with the tax credits.  Nordhaus advocates for a carbon tax on energy use to artificially provide the incentive to switch fuels.  Indeed, a carbon tax would lower our appetite for carbon energy and would help make renewables more competitive.  However, as indicated by the Associated Press poll and as demonstrated in France’s “yellow jacket” revolt, consumers (especially the poor) won’t like higher energy prices.  Nor will the economy. 

5. America is not in this battle alone. The 5.5 billion people in the world who don’t live in “developed” countries are all hoping to ultimately “develop”, which will take much more energy. They aren’t nearly as worried about climate change as they are worried about what they are going to have for breakfast. They want heat, sewers, and running water, and they will use the cheapest energy at hand to get it. The reality is, any carbon reductions we make in the U.S. are likely to be overwhelmed by increases in carbon energy in the developing world. That is not an excuse not to pursue those reductions, but it is a good reason to proceed with reason.  

World energy consumption

The bottom line is that confronting climate change without devastating the poor and destroying our economy will take a balanced approach. As climate activist Alex Trembath put it, “Climate change is not a national emergency that can be addressed in a knee jerk emergency resolution. Climate action is much more likely to be a long, sustained process, not a satisfying revolutionary one.”  

10 countries with the largest reductions and increases in CO2 emissions in 2017

Additionally, the Green New Deal pushes renewables as the ONLY answer to the problem. However, there are many other technologies (fuel cells, fusion, carbon sequestration, micro nuclear plants, etc.) that may ultimately provide superior solutions.   
In all probability, the final solution will be a combination of many technologies, including the use of clean burning natural gas. In the meantime, carbon energy will continue to be the workhorse that keeps our homes warm, the car running, and the lights on.  

Love it or hate it, we darn sure are still going to use it.