Climate change is a highly contentious issue. Well, not entirely. The distance between climate “skeptics” and climate “believers” can be measured only in percentages of estimated probabilities. From the way the issue is typically framed in the media, one would think that battle lines are drawn and forces are lined up in adamant opposition. But that’s not the way it really is – or should be.
Scientists are skeptics by nature. Those who contributed to the Fifth Assessment Report – the latest in a series of assessments of scientific research on climate change prepared by the United Nations-established Intergovernmental Panel on Climate Change (IPCC) – are no exception. Numerous discussions and disagreements lay behind the production of the so-called consensus report. The end result projects temperature changes by the end of the century ranging from virtually no change to an increase of 10⁰F.
Nevertheless, the climate-change threat is real, even if it is only a matter of probabilities. What action we should take, and how action should be brought about, are knotty problems. Harvard Business School’s Business and Environment Initiative (BEI) says they can be attacked with a business approach.
Two separate climate change debates
There are two separate climate-change debates. At the root of this division is the difference between scientists and advocates.
Several years ago, I attended an excellent talk by MIT professor Susan Solomon, an atmospheric chemist and prominent contributor to the third and fourth IPCC Assessment Reports. She gave a 15-minute talk showing why she believed it was highly likely that climate change was occurring and that it was anthropogenic (caused by human activities). Her talk was, in my opinion, far more effective than Al Gore’s film An Inconvenient Truth.
The audience – inclined to be sympathetic – was overwhelmed by the power of the presentation. Afterwards, an attendee asked Solomon the inevitable question: Why don’t you devote your prodigious persuasive powers to climate-change advocacy?
Solomon just shook her head quietly. She would not become an advocate; advocacy was not for scientists.
The problem with advocacy is that it does not deal in uncertainties and probabilities, as climate-change science does. It attempts to influence public opinion through media that have little time or patience for turgid scientific distinctions. Hence, it gravitates toward ardently asserted certainties, not tentativeness and nuance. And though two advocate-scientists may express certainties that are only a few percentage-point differences of probabilities apart, they will seem strongly at odds.
Thus the debate hurtles down the slippery slope toward polarization, in a sound-bite-media intermediated information economy.
Biases and probabilities
Senior editor Carmen Nobel of Harvard Business School’sHBS Working Knowledge, writing in Forbes, says that a few years ago, Professor Joseph B. Lassiter of the BEI program “traveled to San Francisco, Houston and New York to hold discussions with Harvard alumni on the topic of business and the environment. Each time, he surveyed the audience about the touchy subject of climate change and how society should react to it.”
The responses were startlingly different. In Northern California, 80% thought climate change was largely man-made and urgent action was needed, while 20% thought it was a random fluctuation warranting no urgent action.
In Houston, the responses were exactly reversed. Nobel quotes Richard Vietor, another professor in the BEI program, as saying “The issue has become totally intertwined with political ideology. There are many people who believe the government is doing too much, and that the government interferes with economic growth if it enacts and implements policies around climate change; therefore, they choose not to believe in climate change.”
People who take such a position are usually referred to as “climate deniers,” not “skeptics,” since their stands do not really derive from scientific skepticism. They do not contribute to the scientific debate, but their views have the unfortunate effect of making some scientists more extreme and less willing to voice uncertainty.
In a median-probability scenario, the wealthy world may muddle through. In a related article by Nobel in HBSWorking Knowledge Lassiter says, “they'll put another few meters onto the seawalls of the Amsterdams, Londons and New Yorks of the world, and things will appear to be perfectly OK.” But islands and large parts of the developing world may be in serious trouble – so it becomes a question of global ethics.
In the extreme, low-but-non-negligible-probability case, consequences become severely catastrophic. As one example, Arctic warming could cause increased release from the permafrost of the powerful greenhouse gas methane, launching a warming spiral with unforeseeable results.
Enter the business approach
The potential for unknown but globally disastrous outcomes, even if low-probability, plus the higher-probability outcome of causing increasing hardship for the developing world, argue for action to reduce the probabilities.
In the current atmosphere of regression toward the extremes, Harvard’s BEI is a welcome entrant into the dialogue. According to Nobel, “Faculty members of Harvard Business School’s Business and Environment Initiative (BEI) aim to shift the debate to a practical conversation about business assessment.”
Nobel quotes BEI faculty co-chair Forest L. Reinhardt: “It’s striking that anyone frames this question in terms of ‘belief,’ saying things like, ‘I don’t believe in climate change,’” says Reinhardt. “I don’t think this ought to be treated as a religious question. I think it’s better seen as a classic managerial question about decision-making under uncertainty.”
Lassiter believes that it’s time “to give markets … a try at doing something that is both environmentally meaningful and economically sustainable.”
Well that’s fine to say, but it requires defining what “markets” means. Markets are created by regulatory boundaries – that is, specifications and enforcements of property rights and contractual obligations, both to the agreeing parties and to the state.
In Lassiter’s view, those boundaries need to be reshaped. He says, “I think each energy source – oil, natural gas, wind, nuclear, solar, etc. – should have a market price based not only on its production costs, but also, in part, on its unique public costs reflected by revenue-neutral taxes: a carbon emissions tax, a security-of-supply tax, a catastrophe insurance tax and even a local emissions abatement tax.”
This is standard environmental economics: The “externalities” of privately-imposed pollution and other societal burdens and obligations should be internalized through payment of a tax by the private parties that impose them.
This is theoretically sound but not always easily achievable – not only for political reasons, but for practical ones as well. How does one determine the public cost of carbon emissions? A debate has been roiling for years about what that cost should be. How about a catastrophe insurance tax? Such a tax should be imposed for nuclear energy, since it is generally governments that backstop utilities’ finances in case of a severe nuclear disaster – as the Japanese government did in the case of the 2011 Fukushima nuclear power plant disaster. But how should the cost of the insurance be determined? What are the probabilities of monetary levels of damage and how much coverage should be provided? These are questions with a range of answers as broad as the range of projections of global warming in the year 2100.
Nevertheless, it is better to think about what those costs and taxes should be, at least notionally, than to ignore the costs completely and leave them wholly externalized.
The global energy mix is the problem
The problem of anthropogenic climate change is the problem of energy. The energy sector accounts for more than 75% of emissions of greenhouse gases. (Greenhouse gases are gases that – all else being equal – are transparent to solar radiation but trap heat that re-radiates.)
Lassiter laments the fact that the world has allowed nuclear energy to become an “orphaned technology.” This reality could be perceived when I listened to Professor Solomon give her talk on climate change. Her talk had the effect of inciting the audience to discuss urgently needed solutions, including renewable energy (solar and wind) and energy efficiency – but there was not one word spoken about nuclear energy. And this was several years before Fukushima. (Actually, I brought the subject up – to a slightly uncomfortable reception – but only after it became clear that no one else would.)
Lassiter believes the long-term answer lies with nuclear energy, with shale gas hydraulic fracturing (fracking) as a shorter-term bridge. The problem of greenhouse gas emissions is no longer chiefly a U.S. or developed-world problem. It is chiefly a developing world problem – especially in China and India. Both these countries have an urgent need to develop economically to bring the bulk of their populations out of poverty. Widespread access to low-cost electricity is crucial to this process.
In both China and India, however, coal plants now produce electricity at the lowest cost. Coal is the worst greenhouse gas emitter of all energy sources – it produces almost twice the carbon dioxide emissions of a natural gas plant, for the same electricity generated. Emissions from the coal-fired power plants spreading rapidly across China and India will dwarf emissions from the developed world. To reduce emissions, it is necessary to find a lower-cost alternative to coal. (And as Lassiter said, to tax CO2 emissions, but that will raise the cost of electricity to the poor. Therefore, most carbon tax proposals include an electricity subsidy for the poor.)
Lassiter believes that renewable energy technologies are unlikely to beat coal on price. He does not believe that the currently approved “Gen III+” nuclear reactors can compete on price alone with coal plants in India and China either.
He does believe, however, that new nuclear technologies can do it, though massive investment will be needed to develop and test prototypes of these technologies. This sector has not been given the attention it deserves by investors. A very long-term investment outlook is required. Nevertheless, a number of candidates are in play – pursued by well-funded startup companies like Martingale, Inc., Transatomic Power and TerraPower. They will need cooperation from the U.S. government to identify and secure prototype test sites and to design appropriate regulations in coordination with the development of the technologies.
Surprisingly, Lassiter sees China’s accelerating efforts to clean up the polluted air of its cities as a CO2 emissions threat, not a boon, even though the efforts will entail the conversion of coal-fired power plants to gas-fired plants. The problem, he says, is that the plants will use syngas, which is produced by coal-to-gas conversion plants near the Inner Mongolia coal fields and piped to population centers. The process, he says, produces much higher end-to-end CO2 emissions than natural gas or liquefied natural gas.
The shale gas bridge
Lassiter believes that shale gas can be an important bridge to cheaper zero-carbon alternatives, since it produces about half the CO2 emissions of coal. He says that “shale gas production appears environmentally manageable, (including the risks from fugitive emissions, seismic threats, fracking water disposal, water supply contamination, etc.), as long as production takes place in a state or other legal jurisdiction with a history of sensible oil and gas production regulations and regulatory capacity in-place to enforce those regulations.” In other words, in a proper regulatory framework, the environmental impacts of shale gas fracking can be mitigated and made environmentally acceptable.
Lassiter’s are not certain – let alone instantaneous – solutions to what many see as an urgent problem needing to be dealt with immediately. And they do not give the attention to renewable energy that many – including whole nations, of great global importance, such as Germany – have given it. A vibrant dialogue in a business-oriented framework between advocates of that solution and those championed by Lassiter and others would be highly welcome.
Most importantly, we need to embrace a sober means of analyzing the potential consequences of the climate change problem, including their probabilities and paths to a solution. Viewing it as a problem of decision-making under uncertainty, similar to many problems confronted by business, could be a way to help coordinate the Babel of voices and opinions and seek a collaborative solution.
Michael Edesess, a mathematician and economist, is a visiting fellow with the Centre for Systems Informatics Engineering at City University of Hong Kong, a partner and chief investment officer of Denver-based Fair Advisors, and a project consultant at the Fung Global Institute. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri, and George Peacock, will be published by Berrett-Koehler in spring 2014.
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