Tuesday, 26 May 2015

Climate change: the Treasury 'quantifies the costs but ignores the key benefits of climate change policies and concludes that environmental policies damage the economy'

A year ago, a WWF and Friends of the Earth report by Frank Ackerman and Joseph Daniel, of Synapse Energy Economics looked at how the UK Treasury's modelling quantifies the costs but ignores the key benefits of climate change policies and is predisposed to always conclude that environmental policies damage the economy:
Harvard economist blasts UK Treasury climate modelling | Friends of the Earth
Why Treasury model is a flawed tool for valuing climate policies | Business | The Guardian
Treasury’s climate modelling ‘deeply flawed’ - Blue and Green Tomorrow

(Mis)understanding Climate Policy The role of economic modelling

Economic models often speak with an authoritative-sounding voice in policy debates, providing precise quantitative estimates of the impacts of our collective choices. It is important, therefore, to be clear about what is included, and what is omitted, in such a model and its projections. 

The HM Revenue and Customs (HMRC) CGE model, a “computable general equilibrium” (CGE) model, was developed for HMRC to use in analysing changes in tax policies. Recently it has been applied to climate policy, specifically producing a widely quoted headline number for the economic impacts of the fourth carbon budget. 

Climate policy raises some of the most important and complex issues in public life today. It involves ethical choices, international cooperation, development and deployment of new technologies, interaction with other environmental problems – and economic calculations and tradeoffs concerning costs. A model such as HMRC CGE cannot address this full range of vital concerns. 

A look inside the HMRC CGE model shows that it rests on numerous simplifying assumptions. Some of these assumptions deviate far from the facts of realworld economic life. Any model simplifies reality, but the simplifications and omissions in HMRC CGE have a clear effect on the results and strongly undermine its ability to guide policy: some of the major assumptions predispose the model to reporting that any environmental or social initiative is unrealistically expensive. 

• The model is not designed to calculate employment benefits of public policies. Instead, it assumes that everyone already has a job, implying there are no possible employment benefits for any policy. 

• The model is not designed to evaluate non-market health and environmental benefits. In effect, it quantifies only the policy costs, a one-sided measure that cannot determine whether a policy is worthwhile. It thereby assumes that health and environmental benefits do not have any economic value, and that GDP is the sole measure of wellbeing. 

• The model is not designed to understand interactions with the rest of the world. It assumes that international transactions are static, with no changes, imbalances, or negotiations ever involved. By focusing on a single national economy in isolation, HMRC CGE misses the all-important international dimension of the climate problem. Climate policy raises some of the most important and complex issues in public life today. 

In each of these areas, better approaches are available – and lead to different answers. 

• As long as there is significant unemployment, the job creation benefits of public policies can and should be calculated. Models that take this approach frequently find substantial employment benefits for active climate and environmental policies. 

• The health effects of fossil fuel combustion are too large to ignore. Values for these health effects, published in other studies, would imply that the benefits of emission reduction often outweigh the costs – echoing results found by leading American economists analysing U.S. data. 

• Climate policy is the ultimate international issue, and cannot be sensibly considered without its global context. On the one hand, solutions to this completely global problem will require international cooperation. On the other hand, early innovation and deployment of new technologies will create a first-mover advantage for countries that take the lead. 

Even a revised and improved economic model would be only one of many inputs into climate policy decisions. The obligation to address climate change transcends simple calculation – and the opportunity to build a sustainable, clean energy economy requires new and innovative approaches to modeling and analysis.

(Mis)understanding Climate PolicyThe role of economic modelling - FOTE

It seems that the 'modelling' is still  dominant in government thinking, as reported in today's Guardian:

Growth at all costs: climate change, fossil fuel subsidies and the Treasury

The UK oil and gas industry receives huge government subsidy, while support for renewable energy is cut. Is Treasury control of Whitehall fuelling a shortsighted economic agenda?

 A BP oil platform in the North Sea. The UK chancellor, George Osborne, announced new measures to encourage oil exploration in the last budget. Photograph: Andy Buchanan/AFP/Getty Images
There are no oil rigs visible from Aberdeen itself, but evidence of the foundations of Europe’s oil capital is easy to see: plaques for the head offices of major fossil fuel companies, helicopters ferrying workers to and from offshore platforms, designer shops for a city that has more millionaires than any other in the UK.
It is not far from the centre of the granite city to the poorer wards, though, where like so many places, people struggling to pay ever-increasing energy bills are still forced to live in cold, damp, poorly insulated homes. 
It seems incongruous then that in the last parliament the government gave the oil and gas industry billions of pounds in tax breaks and subsidies, while it spent barely £400m making buildings more energy efficient. Some argue it is particularly odd in light of the UK’s commitment to reducing carbon emissions by 80% by the middle of this century.
This pursuit of what some would see as growth at all costs is rooted in centuries of Treasury control of Whitehall, not just as a necessarily cautious finance ministry but the hub of economic strategy, too. Critics denounce its often secretive and some say arrogant culture, as well as its unabashed free-market, conservative, short-term growth agenda.
Some also suspect there is an ambivalence or even denial of climate change feeding down from the top that infuses the department’s attitude to measures that would tackle climate change. The Treasury has tried to water down carbon reduction targets, given the go ahead to new airports, announced a boom in road building, cut fuel duty, frozen – and is now cutting – support for renewable energy, and even blocked research into the impacts of climate change on the UK economy.
The Treasury stamp runs through government. When David Cameron walked back into No 10 Downing Street on 8 May he did not pass a plaque announcing the official residence of the prime minister, but his other title: first lord of the Treasury. His government sits on the Treasury benches in the House of Commons. These are not historical curiosities: they reveal much about where power lies in the British establishment.
The department has gradually accumulated more power since swallowing up the then separate Department of Economic Affairs in 1969 – which had been set up five years earlier by Harold Wilson to split finance and economic policy. The trend from annual to three-year budget planning has given the chancellor an even greater say in strategic decisions made by cabinet colleagues. And now the Treasury must approve spending over £100m – a lot of money to ordinary people but “in the weeds” for significant public policy, says one former mandarin, especially any measure that would have an impact on the energy revolution required to decarbonise the economy.
No one would question that the finance ministry has a duty to ensure public money is spent wisely. But critics have long accused the Treasury of using these powers to choke off ideas it does not like.
Across Whitehall, civil servants or ministers have only to suggest the Treasury will not like a policy to shut down discussion. And it is not just the inevitable instinct to say no to spending, but the barriers put up to debate: an ex-Treasury economist describes how civil servants two grades below the requested level would be sent into meetings to say no, to make futile any attempt to negotiate the refusal.
Even within the department, civil servants are seldom in a position to challenge what is going on. The Sharon White report on the Treasury [pdf] after the 2008 crisis found staff churn was the highest in Whitehall, employees were younger than any other department and too generalist. “It’s not a department that likes intellectual challenge,” reports a former insider. “It’s completely at odds with how it expresses itself: Osborne-Macpherson thought is all you can think.”
Some would argue that the Treasury, in favouring the fossil fuel industry, is just doing its job of maximising tax revenues. There is tangible public hunger to tax big corporations, and oil and gas companies do pay a lot of tax: their corporation tax made up nearly a 10th (£4.7bn) of the national total last year. As demands for public spending escalate, the Treasury cannot afford to choke off such an important source. This presumably is the thinking behind what are already £1.3bn of tax breaks and subsidies a year, and as forecasts show the wells of black gold in the North Sea are drying up fast the chancellor announced new exemptions of more than £200m a year in his March budget to encourage exploration.
What makes the Treasury obsession with reducing spending and raising tax so distorting, however, is not just that it has a pervasive influence across government, but there is no counter-weight. The UK is not unique in combining the finance and economics functions of government, but there are tensions: “No company has accountants running [their] forward investment strategy,” is how one former adviser put it.
This stress in the system is almost certainly exacerbated by the historical imbalance of the two roles: the Treasury has been balancing the books for centuries; it has been responsible for economics for a few decades. It is one way of explaining why – to the immense frustration of those making the case for low-carbon infrastructure – the green investment bank, set up in 2012 to fund environmentally friendly infrastructure, was forbidden from borrowing to lend, notably limiting its impact.

More wealth, and now

Just a few weeks after coming to power in 2010, the new Tory chancellor stood, grim faced, outside No 11 Downing Street, on his way to the House of Commons for the coalition’s “emergency budget”. By tradition he held aloft the red box for the press cameras. But this was not the red box of modern chancellors, it was the more famous battered leather-bound and silk-lined (deeper red) red box first used by William Gladstone in 1860. Osborne had to negotiate hard with the reluctant National Archives to borrow the frail relic, and his insistence set the tone for the next five years. The 19th-century Liberal is a sort of father of the modern Treasury – not just through his extension of Treasury control, but his economic vision.
Beneath a portrait in his study of Gladstone – patrician, cold-eyed, with his distinctive downturned mouth – Osborne perhaps prepared a speech he gave in January this year on economic policy for the next parliament and beyond, declaring his goal “for Britain to become the most prosperous of any major economy by the 2030s, with that prosperity widely shared across our country”. To the extent that there is an economic agenda, that is it: growth. Few would advocate a contracting economy, but this is not a vision for long-term sustainable growth, it is simply a desire for more wealth, and now.
George Osborne with Disraeli's original budget box as he leaves 11 Downing Street for parliament in June 2010.
 George Osborne with Disraeli’s original budget box as he leaves 11 Downing Street for parliament in June 2010. Photograph: Peter Macdiarmid/Getty Images
In practice, when assessing competing projects, the Treasury’s Green Book rules give every impression that economic growth trumps all other considerations: “The economic case is the essential core of the business case”, it stipulates, before adding “it is important to ensure that the proposal has considered any relevant wider issues [including] environmental and sustainability”. In this atmosphere it is less surprising that in 2015 the Highways Agency, basically a conduit for Treasury spending on major roads, has just two environmental key performance indicators: biodiversity and noise. No mention of carbon emissions, despite road traffic accounting for a fifth of the UK’s output.
The Green Book says any policy decision must consider alternatives, including “do nothing”. But spending nothing does not deliver the quick-fix growth ministers want. Encouraging producers to use less packaging and consumers to waste less will not win a competition with building an expensive incinerator. Reducing energy used by buildings will not stand a chance against the jobs and investment of a multibillion pound nuclear power plant.
Delivering this growth is a strategy that (its critic) John Maynard Keynes called the “Treasury view”. The approach has evolved since Gladstone’s day, but the “Treasury view for our time”, described last year in a speech by the department’s permanent secretary and top civil servant Sir Nicholas Macpherson, is aggressively free-trade and free-market, pro-deregulation and competition. “Markets generally work,” declared Macpherson, advocating the state only intervene after things go wrong. Among his more controversial suggestions were the virtue of cheap food, and that “the lesson of the financial crisis is not that we had too much competition but that we did not have enough”.
Evidence of this philosophy is everywhere in the failure of environment policy, not just the past five years, but under the last government too. For years the Treasury has ignored repeated pleading for subsidies to encourage people to make homes more efficient, arguing the advantages are so obvious they will do so anyway (despite a decade of evidence that people don’t), based on the prevalent belief in efficient markets of rational individuals.
This short-term growth driven, free-market, rational framework then necessarily shapes the models that the Treasury has designed to assess spending decisions across government. But unconsciously or otherwise they appear to have produced some questionable assumptions fed into those models. The government’s own aviation commission has stopped using its official oil price forecasts, worrying they are too low and flatter future demand for air travel – an issue that must then exist for road transport and other policies too. The cross-party environment select committee has criticised the “discount” rate used to calculate the benefits of a policy years ahead, undervaluing those future advantages. Many other assumptions have to be made – the risk of “optimism bias”, or the value of time saved by cutting congestion.
In other cases things are simply not counted at all: while models put the cost of low-carbon policies in the negative column, there is no counting the benefits of avoided damage in the positive one.

Climate change ambivalence

The institutional bias of the Treasury is clearly strong. But it is striking that as the science of global warming has got more certain, the climate change warnings more dire, and the political promises more ambitious, there has been no evident attempt to challenge this culture, under Labour or Conservative chancellors.
The chancellors and mandarins have necessarily been preoccupied with urgent problems in the past seven years: collapsing banks, currencies and productivity. Critics also mumble that some senior figures are at best ambivalent about climate change, possibly unconvinced it is a threat.
But a third theory was (implicity) suggested by Osborne himself: that the Treasury remains unconvinced the UN-led process to agree international carbon cuts will work.
Early in his tenure the chancellor railed against the “burden” and “ridiculous cost” of green policies, from the UK and the European Union. “I don’t want us to be the only people out there in front of the rest of the world,” he said.

Growth at all costs: climate change, fossil fuel subsidies and the Treasury | Environment | The Guardian

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