Streetwise Professor

I haven’t written about climate controversies in quite a while.  Between Climategate, which discredited many prominent climate scientists, and impending economic catastrophe, which has made speculations about potential future catastrophes seem indulgent, concerns about global warming have been relegated to the back burner (no pun intended).  But the recent news about the CERN experiment testing the Svensmark hypothesis is worth comment.

Svensmark’s work is an attempt to explain the most inconvenient truth for AGM advocates: the strong correlation at all time scales between measures of solar activity and temperature.  Of course, correlation does not imply causation, but it is implausible that terrestrial conditions–including CO2–affect the sun.  It may be the case (though highly unlikely) that some other factor affects both the sun and our climate, but this undermines the importance of CO2 as a major climate driver.

The correlation is well known.  The mechanism is not.  AGM advocates have demonstrated that variations in the amount of energy reaching the earth from the sun are not sufficiently large to explain variations in earth temperature.  Fine.  That rules out one explanation of the correlation.  But it does not make the correlation disappear.  It is a fact that hangs there.

Years ago Svensmark hypothesized that variations in solar activity affected the amount of cosmic rays reaching the earth, and that cosmic rays affected cloud formation.  Variations in cloud cover driven by variations in cosmic radiation driven by variations in the sun, according to Svensmark, cause variations in temperatures and other climate variables on earth.

Svensmark has been dismissed by the climate science establishment.  This establishment has gone to great lengths to prevent testing of his hypothesis.  The multi-government funded, and very politically sensitive, CERN dragged its feet for years before grudgingly making resources available to test it.  The initial results, announced in late-August, do not reject the hypothesis, and are generally supportive of it.

If the establishment scientists were acting more like scientists than an establishment, they would have welcomed speedy and thorough testing of Svensmark’s conjecture.  If they were truly confident in the AGW explanation for climate change, they would have had nothing to fear from testing of an alternative explanation, and should have indeed wanted empirical evidence that would have allowed them to reject it.  This would have discredited “skeptics” and bolstered confidence in their preferred explanation.

But in acting like the Inquisition to Svensmark’s Gallileo, the establishment scientists betray deep insecurity about their explanation for climate variations–and no doubt their funding, which hinges crucially on the acceptance (not the correctness) of that explanation.  If the AGM hypothesis is indeed as strong as they insist, they would have nothing to fear from a rigorous test: yet fear is clearly evident in their continued efforts to squelch not just this research, but exploration of alternative hypotheses more generally.

This whole sordid tale reveals just how corrupting Official Science can be.  Big science funded by government becomes less like science and more like government: politicized, bureaucratic, and driven by vested interest and money rather than a strong desire to find the truth, the chips fall where they may.

The mechanism that Svensmark posited decades ago may be wrong.  Future tests may reject his hypothesis.  But absent surprising new empirical evidence, the Big Fact hangs there: there is a strong association between what happens on the surface of the sun and what happens on the surface of the earth.   That fact neither rises nor falls on Svensmark’s hypothesis to explain it.  The fact is antecedent to the explanation.  As long as that fact remains a fact, CO2-based explanations are tenuous, at best.

No existing climate model explains this correlation.  In real science, this should stand as a decisive rejection of those models, and the theoretical foundation on which they rest.  Until such models can explain this salient fact, little–if any–weight should be placed on the reliability of their predictions about relations between CO2 and climate variables.

The CERN CLOUD experiment has let some sun shine on the dark corners of climate science, and the view revealed is not a pretty one.  Much more sunshine is needed to purify the smelly orthodoxy that is establishment climate science.  Until that establishment can demonstrate a serious willingness to tackle a major empirical and theoretical challenge, it will have fully earned the oblivion to which it is currently headed, to the accompaniment of Al Gore’s lunatic ravings.

With the catastrophe at the Fukushima reactors in Japan has led to additional scrutiny of nuclear power plant construction projects around the world.  This is indeed prudent, but we should hope that the reviews are done soberly and carefully, rather than in a Chicken Little fashion.

For instance, the “no nukes of any kind anywhere” position advanced by people like Rep. Ed Markey from Massachusetts is a premature over-reaction.  “No boiling water nukes on seismically active coastlines vulnerable to tsunamis that could destroy emergency generators needed to operate cooling pumps” is sensible.  Just where between those extremes the line should be drawn depends on myriad factors, not least of which is the nature of new nuclear power technologies.  (Spare me the Chernobyl references: even Fukushima analogies are inapt when discussing more modern reactor designs.)

We should, in brief, keep in mind what Puddin’ Head Wilson said:

We should be careful to get out of an experience only the wisdom that is in it — and stop there — lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot stove-lid again, and that is well; but also she will never sit down on a cold one any more. [Emphasis added.]

In other words, when evaluating the future of nuclear power, we should not be like Wilson’s cat.

And another Twain phrase also comes to mind while following these events:

If you don’t read the newspaper, you are uninformed; if you do read the newspaper, you are misinformed.

And that goes double for the internet.  (Present company excluded, of course.)

I am attending a The Greenhouse Gas Emission Trading Workshop at the International Energy Agency in Paris.  I feel like an alien, in more ways than one.  For one thing, I am not a global warming–excuse me, “climate disruption”–true believer, which makes me a minority here–a minority of one, probably.  Moreover, the anti-Americanism is palpable, and is all the worse because one of the most outspoken purveyors thereof is American.  (Chatham House rules preclude me from naming names.  But I am sorely tempted.) (I should also note that Canada and Australia were the subject of much criticism.  I guess we are all just hopeless colonials.)

The perfect illustration.  A Brit asked the American: “I understand American brains are wired differently, having two American daughters-in-law.  [I pity them.  And spare me the condescension, twit: wire this.]  Given that cap and trade is the most business-friendly way of reducing carbon emissions, how can you explain the opposition of the Republicans, the pro-business party, to cap & trade?”

Uhm, is your brain wired at all?  When it comes to cap AND trade, American opponents never even get to the trade part.  That is a detail that is overwhelmed by the cap part.  The political opposition in the US to cap and trade is all about the cap.  Period.  Opponents realize that capping carbon output will lead to higher energy prices.  They don’t believe that there is a corresponding benefit to justify this cost.  American opponents are hung up on the “reducing carbon emissions” part of the Brittwit’s question.

Amazing how silly a question one can ask when one assumes away the crucial issue.  This is just an indication of the prevailing mindset here: the belief that capping emissions is blindingly self-evident, so that it does not even dawn on the questioner that the cap part is what people object to.

You may criticize American opponents as benighted for their failure to recognize the peril of anthropogenic global warming–excuse me, climate disruption–but given that belief, opposition to cap and trade, cap without trade, or cap with trade on even days and not on odd days makes perfect sense.  It’s the cap, not the trade, and if you can’t see that you’re hopeless.  Anything with the cap in it is political poison.  [Apropos Monty Python: “Have you got anything without cap in it?”  With a chorus of “cap, lovely cap”  in the background.]

But the American’s response was even worse.  He attributed the failure of cap and trade in the Senate to the “Republicans’ desire to deny the new president of a political victory.”  [A few heads turned when I muttered, “you gotta be f*ckin’ kidding me” under my breath.]

It is hard to say which would be worse: the speaker believes this bilge, or he does not.  If he does not, he is just a liar and a political hack trying to score political points in a forum which is supposed to be a place for serious intellectual exchange.  If he does, he is utterly delusional.  As a practical matter, Obama himself put cap and trade behind health care and financial regulation on his list of priorities; this represented a rare moment of political lucidity, because cap and trade is deeply unpopular.  Moreover, if the Republicans were really intent on denying Obama a victory, they would have chosen health care.  But in point of fact, as the health care issue proved clearly, and as the financial “reform” legislation demonstrated further, the Republicans independently had no ability whatsoever to deny Obama a victory, given their shrunken numbers in both House and Senate.

No, cap and trade failed because (a) it was a stepchild in an already crowded and ambitious political family, and (b) anything that raises energy prices is broadly unpopular in straitened economic times.

Not that the true believers would have any interest in taking political advice from me, but I’ll offer up some.  If you want to achieve your goal, (a) get out of the echo chamber, and (b) take the opposition seriously and address its concerns head on, rather than writing it off to colonial stupidity, or mis-wired brains, or mean spirited political oppositionism, or whatever.  Condescension and ridicule may play well in the Circle of True Believers, but you know what?: (a) every adult in the US gets to vote on 2 November, (b) a lot of the true believers don’t get to vote at all, being furriners and such, and (c) it is just this elitist disdain that has set the stage for a political earthquake in a little over a month.

You know they won’t change.  I know they won’t change.  Which means that they are going to get what’s coming to them–good and hard (apologies to Mencken) in six weeks and a day.

This is, in a way, a woulda, coulda, shoulda post.  Back in July I was going to write about the Russian heatwave by referring to a book on climatology that (a) seemed to provide a cogent explanation of the process by which a brutal heat wave could be created, and (b) strenuously argued that this process had nothing to do with anthropogenic global warming.  But other stuff happened, the post didn’t get written–and now the National Oceanic and Atmospheric Administration (NOAA) has released a report validating this explanation of the heat wave.  Thus, I could have said I told you so.  But I didn’t.  So you can take me at my word that I indeed could have said so, or not, depending on your predisposition.

Anyways, during the height of the Russian heat wave, I immediately thought of the book “Global Warming: Myth or Reality?  The Erring Ways of Climatology” by the late Marcel Leroux, a well-known (and iconoclastic) French climatologist.  (I read the book in the fall of 2006.  I’ve mentioned it on the blog before.)  Leroux emphasized the decisive influence of “mobile polar highs”–high pressure cells originating at the poles, then moving towards the equator–in determining weather and climate.  With respect to heat waves in particular, Leroux argued that “anticyclonic agglutinations”–combinations of a sequence of MPHs–were to blame.  When an unusually strong series of MPHs combine, and then stall over a particular region, during periods of high insolation (i.e., the summer) that area will experience a heat wave.  Describing the infamous French heat wave of 2003, Leroux wrote:

In 2003, from June onwards, the meteorological situation was dominated . . . by th epresence of a vast area of high pressure. . . . The great stability brought about by the anticyclonic conditions–calm air, or very slight breezes, and the absence of upward air movements–encouraged the warming of air in the lower layers.  The conduction of heat, and infrared absorption, are in fact enhanced when pressures are high and the air cannot rise; the layers nearest to the ground become (for the same amount of solar energy received) relatively very much warmer.  The heating leads to a considerable diminution of relative humidity (i.e., the air becomes much drier).  . . . Now that the moisture content is absent, maximum insolation occurs, and the cumulative heating effect gradually assumes the proportions of a ‘heatwave’, especially in urban areas, which are less ‘ventilated’, and become warmer, drier, and more polluted (pp. 278-279).

When re-reading Leroux in July, that sounded to me exactly like what happened in central Russia, down to the last jot.

Recently NOAA, hardly a hotbed of climate change skepticism, has stated that the Russian heatwave fits the Leroux template exactly:

The extreme surface warmth over western Russia during July and early August is mostly a product of the strong and persistent blocking high. Surface temperatures have soared as a result of the combination of clear skies, sinking motion within the environment of the high pressure causing compressional heating of air, the lack of any temporary relief owing to the blocking of the typical cold fronts that cool the region intermittently in summer. Add to this scenario the cumulative effect of drought that began in early summer which has caused soils to dry and plants to desiccate to wilting point , thereby causing additional surface warming via land feedbacks as the blocking condition persisted. These are all well-known and studied physical processes that have accompanied summertime blocking and heat waves in the past.

Much of the intensity of the current heat wave, and also the pattern of surface temperature conditions across Eurasia during July 2010, can be recreated from the atmospheric blocking event itself. The diagnostic procedure involves standard methods applied to the historical record of analyzed 500 mb heights and surface temperatures during the prior period of 1900-2008. The method of statistical regression is used to understand how surface temperature changes during a typical blocking occurrence over Russia during July, and is a method that can be used to infer causal relationships.

The temperature pattern accompanying a “garden variety” block consists of a localized +1 to +2°C warming over western Russia, with somewhat weaker coolness toward the Urals. July 2010 was not a garden variety block, but was instead the most extreme block in the post-1900 period. While there is no analogue from which to draw an assessment of the expected impact on temperatures form such a block, one can nonetheless use the historical regression relation in order to infer the impact of this extreme July 2010 block. The process involves multiplying the regression pattern by the standardized departure of the height index observed for July 2010. The calculation offers a meaningful evaluation of the surface temperature response to the extent that the height-temperature relation is linear. The results indicate a surface warming in excess of +5°C is expected over western Russia in response to the July 2010 blocking high, accompanied by a downstream pattern of about -3°C coolness over the Urals and warmth of +2°C to +3*C over northern China, Mongolia, and northeastern Russia.

The comparison of the above reqression map with the observed temperature anomaly map for July 2010 clarifies the cause for this heat wave. The strong agreement between the July 2010 observed pattern of Eurasian surface temperatures and that pattern attributable to the impact of upper tropospheric blocking provides key evidence that the block is the immediate cause for the heat wave (and related temperature conditions over adjacent countries). Blocking events are typically of 1-2 week duration, and by contrast the 2010 situation is highly unusual in that blocking has existed over western Russia on virtually every day form the beginning of July until the middle of August. The cumulative impact of such prolonged blocking has led to the extreme nature of the surface impacts on temperature, soil conditions, and rainfall.

The near universal response to the Russian heat wave has been–I’m sure you’re surprised–to attribute it to global warming, or climate change, or whatever the nom de jour might be.  This continues even after NOAA weighed in, with drivel like this in the FT.

To attribute this to a secular global temperature rise, it would be necessary to show how such a rise would affect the likelihood and severity of such “blocking events” (anticyclonic agglutinations in Leroux’s terms).  Leroux said it could not be done, generally, and indeed was nonsensical: if a rise in temperatures (forced by GHGs) was the underlying mechanism, pressures should drop (p. 279) because, duh, hot air rises–unless the rise is blocked by a high pressure wave resulting from some other process.  (Other climate skeptics, notably Richard Lindzen, postulate that the rising hot air results in a negative feedback mechanism that substantially reduces the temperature increase resulting from a given increase in GHGs.)

Moreover, NOAA refuses to attribute the blocking events to a secular climate change process:

Despite this strong evidence for a warming planet, greenhouse gas forcing fails to explain the 2010 heat wave over western Russia. The natural process of atmospheric blocking, and the climate impacts induced by such blocking, are the principal cause for this heat wave. It is not known whether, or to what exent, greenhouse gas emissions may affect the frequency or intensity of blocking during summer. It is important to note that observations reveal no trend in a daily frequency of July blocking over the period since 1948, nor is there an appreciable trend in the absolute values of upper tropospheric summertime heights over western Russia for the period since 1900.

The indications are that the current blocking event is intrinsic to the natural variability of summer climate in this region, a region which has a climatological vulnerability to blocking and associated heat waves (e.g., 1960, 1972, 1988). A high index value for blocking days is not a necessary condition for high July surface temperature over western Russia—the warm summers of 1981, 1999, 2001, and 2002 did not experience an unusual number of blocking days.

It should also be noted that the warming was extremely localized, that the Southern Hemisphere actually experienced substantial cooling, and the pattern observed in 2010 was less “global” than the pattern during the comparable event in Russia during the summer of 1936.

The contrasting patterns in parts of the Northern and Southern Hemispheres suggests to me that one of the various periodicities in climate may be at work, but that’s just a wild guess on my part.

The temptation to use weather events to flog pet theories about climate is dishonest an annoying in the extreme–regardless of who does it, be they skeptics jumping up and down about a cold winter or alarmists howling about a hot summer.  The Jeremiah-esque ideologue and proselytizer James Hanson got the global warming hysteria ball rolling by saying that the US heatwave and drought of 1988 was a harbinger of doom–when it was most likely something quite similar to what happened in Russia this summer.  Their cause flagging politically, the alarmists are trying to do the same with the Russian heat wave.  It is not honest to do so–and it is not science.

It is possible that there are complex interactions and mechanisms by which temperature trends forced by GHGs can lead to increased frequencies and intensities of heatwaves and droughts.  But none have been described or tested.  The initial empirical evidence, per NOAA, that there appears to be no trend in the frequency of blocking events is inconsistent with this.  Moreover, as Leroux notes, atmospheric pressure and the frequency of MPHs both began to trend up well before GHGs did.  So what caused that pressure trend?  GHGs couldn’t have.

Thus, the Russian heatwave should be a reason to acknowledge that we do not fully understand–or even remotely understand–the drivers of temperature extremes in particular, or climate generally.  It should be a spur to inquiry and research, not an opportunity to advance predetermined agendas.

NOAA is to be commended for taking an objective approach to the subject.  Sadly, too few others–including far too many scientists–have not.  Rather than a centerpiece of a morality play about global warming, events like the Russian heat wave should be viewed as things that are anomalies (or at least, lacunae) in the received climate models.  Such anomalies/lacunae should lead to questioning the received models, and the posing and testing of others.  That’s how science should work.  Whether today’s politicized climate science will work that way is, sad to say, highly doubtful.

Back during the height of the Hadley CRU scandal, I suggested that an open access, networked, distributed model should be considered as an alternative to the current, journal-dominated, hierarchical, peer review system.  University of Alabama-Huntsville climatologist John Christy has suggested that this could serve as a replacement for the highly politicized, deeply compromised, hierarchical, IPCC process:

The IPCC selects lead authors from the pool of those nominated by individual governments. Over time, many governments nominated only authors who were aligned with stated policy. Indeed, the selections for the IPCC Fourth Assessment Report represented a disturbing homogeneity of thought regarding humans and climate.

However, voluminous printed reports, issued every six years by government-nominated authors, cannot accommodate the rapid and chaotic development of scientific information today. An idea we pitched a few years ago that is now worth reviving was to establish a living, ‘Wikipedia-IPCC’. Groups of four to eight lead authors, chosen by learned societies, would serve in rotating, overlapping three-year terms to manage sections organized by science and policy questions (similar to the Fourth Assessment Report). The authors would strike a balance between the free-for-all of true science and the need for summary statements.

It is definitely worth a try.  This is happening in an informal way in the blogosphere.  It should be incorporated into the IPCC process, sooner rather than later.

The FT has an interesting article about the difficulties and uncertainties facing cap & trade schemes, even in Europe where they’ve been implemented.  A good part of the article focuses on the loss of intellectual coherence in climate policy in Europe, as regulations and taxes are being mooted to reduce CO2 emissions.  Such command and control bolt-ons are inconsistent with the basic concept of cap & trade, which is that by determining a price of carbon the market will induce efficient responses to reduce emissions on all relevant dimensions:

And the more the carbon market shrinks in its ambitions, the more it faces a broader threat: that of losing touch with its original objective. Credits could continue being traded in the old way. But if the main thrust of carbon reduction is tackled by other means, the market could face questions about its social utility.

But to me, the most interesting part of the article relates to the arcane area of offsets:

Nibble, nibble. Then we come to the aforesaid vexed question of offsets.

That is the system whereby EU companies build projects in developing countries – which are not subject to carbon caps – and thereby earn the right to emit more back home. The premise is that each project emits less than the existing version – or less than some notional alternative, which is not the same thing.

There is scope for abuse here. And, some claim, there is growing protest among locals who might not be too keen on a pulp mill or dam at all, let alone one built with foreign capital. Hence the curious sight reported by one environmentalist of thousands of Thais last year waving placards reading “Stop selling carbon credits”.

Since offset-based credits account for only a fifth of the total, the simplest solution might be to abandon offsets altogether. But that would be resisted by EU industry, since the whole job of meeting carbon targets would thereby fall on EU plants. It would also be a further reduction in the scope of the scheme.

For those not familiar with offsets, these are basically projects that absorb greenhouse gases or lead to reduced production of said gases by substituting low emissions technologies for high emissions ones.  Planting a forest that absorbs CO2 is an example of an offset.  The party planting the forest would receive CO2 credits based on the amount of carbon absorbed by the forest which could be sold.  The income from the sale of the permits can be used to recoup the costs of creating the offset, and earning a return on the capital committed.

As the article notes, Europe relies on offsets for about 20 percent of its CO2 reductions; the US ACES bill passed by the house depends even more heavily on offsets.

I teach (along with colleagues Victor Flatt and Praveen Kumar) what is likely the first university course in carbon trading offered in the US (and perhaps globally).  While teaching the course, prepping for it, and listening to my colleagues and student preparations, I have become convinced that although there is a strong conceptual case to be made for offsets (if it is cheaper to capture carbon somehow rather than reduce carbon output on other margins), the practical difficulties make it highly problematic to rely heavily on them.

The practical objection relates to transactions costs, notably what is sometimes called the measurement branch of transactions cost economics.

Every transaction involves some measurement.  Measurement is costly, and like all costs, it is desirable to economize on these expenses.  Measurement costs can be so large as to make some transactions prohibitively expensive.  Economizing on measurement costs can also affect the nature of transactions.  (As a prosaic example, to prevent excessive, wasteful measurement, it may be economical to package several pieces of fruit in sealed packages, rather than allowing consumers to pick over individual pieces.)

In my lectures in the carbon trading class, I discuss how commodity measurement issues have posed challenges in commodity markets, and how market participants have developed mechanisms to address these challenges.  Based on this history, and and an understanding of the unique issues associated with carbon and especially carbon offsets, I conclude that measurement problems are likely to be extremely knotty in this context.

The root problem is that incentives to monitor quality differ between transactions for “bads” like carbon, and transactions for goods, like wheat or oil. In transactions for private goods, the buyer has an incentive to monitor the quality of the good provided by the seller.  Moreover, the parties to the transaction have an incentive to develop ways to balance the costs and benefits of improved measurement.

In contrast, in a market for pollution, almost by definition the “consumer” in the transaction has no incentive to monitor.  Since the effects of the bad are extremely diffuse, the willingness and ability of those “consuming” it to monitor it are minimal.  Indeed, this is  one of the sources of transaction cost that must be invoked to justify the public regulation of CO2 emissions in the first place (in lieu of private Coasean bargaining, or reliance on torts).

So third parties must do the monitoring.  But this is likely to be very burdensome, for a variety of reasons.  At any point in time, it is a non-trivial problem to monitor the amount of carbon absorbed by any offset project.  Think of the challenges of measuring the amount of carbon absorbed by a forestation offset project.

Moreover, offset projects are supposed to be permanent.  Think of the forest example again.  If the forest burns down, the carbon captured–which has resulted in the distribution of valuable CO2 permits to the developer–is released.  Conceptually, you could provide the appropriate incentives by requiring the developer to acquire and retire an amount of carbon emission permits equal to the amount of CO2 released by the fire.  But here we face a stock-flow problem: the developer may be on the hook for say, 50 years worth of permits.  The developer has every incentive to retain very little capital, and just declare bankruptcy in the event.  So, to give the appropriate incentives to trade-off the benefits and costs of risk of loss of permanence, it may be necessary to require the purchase of insurance; or bonding requirements; or capital requirements.  But how do you price the insurance?  How do you determine the bond or capital that gives the right incentive?  Offset projects differ in permanence loss risks; who measures that risk (which will vary by project and by the efforts of the operator of the offset to control the risk of release) and prices it so that developers have the incentive to create the right mix of offsets?

Presumably we will see the creation of offset rating agencies to address some of these issues.  In light of the financial crisis, enough said?

And here’s another thought apropos the financial crisis.  I predict that if offset projects are created, financial instruments will be created to distribute (“slice and dice”) the risks of loss of permanence, and the risks of underperformance.  Specifically, I predict the creation of CDOs–carbon derivative obligations–that will create offset tranches from portfolios of offset projects.  The lower rated tranches will bear the first risk of loss of performance, the mezzanine tranches the second risk of loss, and the AAA pieces will only fail to pay out completely if the offset portfolio’s performance is so poor that the less senior tranches are wiped out.

After all, failure to produce the anticipated/promised amount of carbon offset is almost exactly analogous to a default, which is just the failure to produce a promised cash flow.  It is therefore to be expected that the risks will be managed, sliced, and diced in very similar ways.

But permanence isn’t the only issue.  Offsets are also supposed to be “additional,” meaning that a particular offset project wouldn’t have been created even without the prospect of receiving valuable carbon credits.  For instance, if the ability to sell natural gas or power makes a project to capture methane viable even absent the inducement of carbon credits, providing such credits provides an excessive incentive to create such projects.

And just how does one measure additionality, exactly?  It requires a detailed understanding of the economics of a particular project.  (The issues here are very complex.  Think of a wind power project.  Wind power is erratic, and typically requires backup from fossil fuel units to maintain reliability.  It’s not trivial to model what the actual amount of fossil fuel consumption that is eliminated by a wind project.)   Moreover, and even more problematically, since these projects are durable, it requires an understanding of the but for equilibrium; what does the equilibrium long term supply curve for these projects look like in the absence of a subsidy (via the provision of credits)?; what alternative technologies are being displaced?  Any measurement of these quantities is highly, highly subjective, and built on layer after layer of assumptions.

These problems would be pretty daunting even if enforcers/measurers had good incentives, and were not subject to influence.  But how does one incentivize those making the evaluations?  How does one economize on influence costs, which are likely to be quite substantial?  Again, all of the problems with rating agencies that culminated during the financial crisis occur in spades here.  And when one considers that offsets are to be created internationally, corruption and enforcement problems may be particularly acute in some jurisdictions.

In other words, offsets sound great in theory, but are likely to be extremely expensive in reality, especially if they are introduced on large scale.  These expenses need to be taken into consideration when evaluating the costs and benefits of cap & trade generally, or of specific cap & trade plans.  Moreover, these costs may prove so prohibitive that it would be better to eschew offsets altogether, or sharply circumscribe their use.  But this will mean that the cost of carbon will be that much higher as the burden of adjustment to caps will be forced onto other margins subject to diminishing returns.

From my perusal of various sources, it doesn’t seem that the measurement issue has been adequately analyzed, or measurement costs adequately quantified.  As a result, it is likely that the costs of a cap & trade system will be far greater than have been estimated.  That is a sobering thought.

No, not me–although I am sure that a few of you would disagree.  No, I refer to Senator Maria Cantwell (D-WA) and her confreres, who clearly have some deep seated neuroses and phobias when it comes to anything involving derivatives and speculation.

Cantwell actually earns a twofer today.

First, she is the co-sponsor of a new cap & trade bill.  Although cap & trade isn’t dead, it is coughing up blood; even Obama has recognized that it has no chance of passing soon.  Along with Senator Collins (R, sorta-ME), Cantwell has introduced a bill that would institute a cap & trade regime.  It is, blessedly, much simpler than the grotesquely bloated, complicated, and convoluted ACES bill that passed the House in 2009; apparently Cantwell and Collins believe that ACES is doomed, and that a simpler bill may be the only hope.  Conservation of paper is, alas, its main redeeming feature.

It isn’t really a cap & trade bill.  It’s better described as cap, definitely, trade, not so much.  And the latter feature is what lays bare Cantwell’s phobias.  To read what she and Collins have proposed is to enter bizarro world.  They impose onerous restrictions on the trade of emissions rights and derivatives on them, apparently out of a belief that (a) speculation is evil, and (b) derivatives can only be used for speculation.

There are two completely non-sensical provisions in the bill that relate to trading emissions rights, and derivatives on them.

First, the bill permits only emitters to own certificates, and to purchase them at (an annual) auction.  This means, specifically, that financial institutions cannot buy or trade certificates.  Presumably, this is intended to bar the market to those malign speculators.  But its actual effects will be to make the market extremely illiquid, and to make it unnecessarily costly for those who have more permits than they need to trade them with people who have fewer than they need; financial institutions would be the natural market makers and liquidity suppliers, and baring their participation would starve the market of liquidity.  This will hamper the efficiency of the market, and make it costlier to achieve the emissions reductions imposed by the cap feature of the bill.  Moreover, it is likely that absent such a restriction, certificates could be used as collateral and facilitate end user financing, an alternative that would be precluded under the bill, making it more costly for emitters to finance their purchases of certificates.

Second, and even more bizarrely, the bill prohibits those very end users from trading any derivative contract on emissions.

Let me repeat: the bill prohibits those very end users from trading any derivative contract on emissions.

Huh?

Under a cap and trade scheme (and I mean scheme), end users are exposed to carbon price risk, and over very long time horizons.  They are natural hedgers who need derivatives to manage that risk exposure, but the Cantwell-Collins bill would preclude them from doing that.  The bill creates risk by pricing carbon, but at the same time denies those affected by this risk the ability to manage it.  That borders on cruel and unusual, and just makes it unnecessarily costly to achieve carbon reductions.  Pain with no gain.

But note the bill doesn’t ban derivatives outright, so Cantwell and Collins are apparently perfectly willing to contemplate a carbon casino where only speculators can play (though not in the certificates themselves).  But the speculators will not be allowed to provide valuable risk bearing services to hedgers.  No, it doesn’t make sense to me either.

Seldom have I seen anything so inane coming out of Congress, and that is saying something.

Separately, Cantwell came out with a call for increased regulation of commodity derivatives generally:

The US commodities market should be freed from “reckless speculation” and abusive trading practices, a leading US senator has urged, as she attempts to stop the price of everyday items like petrol and food from being impacted by financial traders.

Senator Maria Cantwell, who is separately trying to revive the Glass-Steagall reforms of the 1930s which would prevent retail and investment banks from operating under the same roof, yesterday called for increased regulation of the commodities and derivatives market.

The Democrat politician is attempting to push regulation of the commodities markets – a hot topic in the summer of 2008 when oil prices topped $140 a barrel – back to the top of the political agenda.

She is calling for stronger powers for the Commodities Futures Trading Commission (CFTC), including the potential to police the unregulated over-the-counter derivatives market, which has worth $25 trillion at the end of June 2009.

And how, pray tell, does the Senator support her case?  By calling on the vaunted expertise of megatool Michael Masters:

Backed by hedge fund manager Michael Masters, of Masters Capital Management, she called for the proposed reforms to take their place alongside wider financial regulatory reforms currently being discussed by the US Congress.

Mr Masters believes that there is a strong correlation between the credit crisis and volatile commodity costs, which have seen a rise not only in oil prices but in basic food staples in recent years.

Correlation, causation.  Whatever.

Masters and I participated in a workshop on oil markets sponsored by the Energy Information Agency back in November.   I can state categorically that he doesn’t understand the economic function of derivative markets, or of the functions that financial intermediaries play in these markets.  He says things like (I quote from memory, but this is almost verbatim) “financial markets are for allocating resources over time, but commodity markets are to get goods from producers to consumers.”  Well, yeah, but commodity markets are also crucially about allocating resources over time, because the time patterns of consumption and production don’t necessary always match exactly.  In fact, they almost never do.  (Think about a seasonal commodity, like corn or natural gas.)

So even beyond risk shifting, you need futures and forward markets to encourage the efficient allocation of commodities over time; getting stuff from producers to consumers inevitably involves intertemporal trade.  What’s more, financial intermediaries are frequently the best able to perform the function of storing and financing commodities.  After all, what they do is facilitate intertemporal resource allocation, and commodity storage and financing is just a specific example of that.  But not in Mastersworld, evidently.

Talk about the blind leading the blind–or is it the phobic leading the phobic?  Maybe group therapy is available at a discount.

After Masters made this statement at the EIA workshop, I replied along the above lines.  Only less politely.  I started by saying something like: “I can’t believe you said that.  It’s one of the dumbest things I’ve ever heard.  Commodity markets are all about allocating resources over time.”  Always trying to win friends and influence people.

I doubt either of these measures is going anywhere.  Fortunately.  But they reveal a disturbing mindset that is all too common on Capitol Hill, and among the pilot fish that swim symbiotically with the senatorial sharks.

I was talking to some folks at a research/policy institute at another university about regulation of carbon derivatives trading who are attempting to educate Congress (or, more precisely, Congressional staff) on the matter.  They told me that there was a widespread belief on Capitol Hill that customized, OTC derivatives offer little or no social benefit, and that as a result, their use should be highly restricted, if not eliminated altogether. The view is that these instruments create systemic risks, but confer no corresponding benefit that cannot be offered by exchange traded products.

I disagree, for reasons I set out in a Brookings paper released last fall.  But I don’t want to focus on the details of that argument here.  Instead, I just want to flash back to a historical example that demonstrates that limiting the contracting choices of commodity market participants can have extremely perverse effects, and can in fact create systemic risks.

The legislation that restructured the California electricity markets, AB1890, precluded the state’s major utilities from entering into long term contracts for power.  Instead, in order to ensure the “success” of the spot market for power, the utilities were required to buy electricity from generators through an exchange–the Power Exchange (“PX”).  The bill also capped the price that utilities could charge their customers for power.

This legislation created a huge short position for the utilities.  They were exposed to increases in prices on the PX, and could not pass on these costs to customers.  Most importantly, the bill prevented the utilities from managing their price risk by engaging in long term forward contracting.

We all know what happened.  Power prices spiked, and two utilities still subject to the constraints (SoCal Edison and PG&E) suffered huge losses.  PG&E went bankrupt.

The problem would likely have been less severe had the utilities been given the ability to hedge.  Indeed, the absence of forward contracts may have exacerbated the price spikes, because these contracts would have precommitted the generators to supply power, whereas they arguably had an incentive to restrict output on the PX when conditions became tight.

Moral of the story: limiting the ability of firms to manage risks can impose substantial dangers of financial distress on those companies.  Indeed, if they limitations are systemic (as they were in California), they create the risk of a systemic problem.

Now, the analogy should not be stretched too far.  In its infinite, tofu-fueled wisdom, California chose to favor one type of exchange trading (spot auctions on the PX) for different reasons than Congress in its infinite God-knows-what-fueled-wisdom is contemplating favoring exchange trading of carbon (and other) derivatives.  Moreover, the restrictions in California were particularly draconian, especially when combined with the retail price caps.

Nonetheless, the tale should be a cautionary one.  Firms use derivatives contracts to pass risks to others who bear them at a lower cost.  If you constrain their ability to do so, they will wear more risk than they would otherwise.  This raises the likelihood that they will suffer crippling financial losses.  The more draconian the restrictions, and the wider the scope of their application, the greater the likelihood, severity, and extent of these losses.

That is, by avoiding one risk, you create others.  Rational policy requires a prudent trade-off between these various risks.  But fixated as they are on the risk (largely chimerical, IMHO) of OTC markets, most policy makers in DC are blind to the risks they are effectively choosing.  Their ability to weigh these tradeoffs is, moreover, extremely limited due to a fundamental lack of information.  Carbon trading regulation in particular will have systemic effects: it will impact every producer and consumer of energy.  How could Congress possibly have the knowledge to evaluate the risks that they are forcing on such a vast and diverse group of companies when they restrict their ability to choose the instruments that they can use to manage that risk?  Short answer: they can’t.

I would hope that the California experience would at least make policy makers aware of the possibility that restrictions on the contracting choices available to market participants creates risks.  So far, however, the debate appears to have taken no recognition of this very real possibility.  Keeping their eyes fixed on the skies to reduce the risk of being hit by a falling object, they face the very real risk of stepping into an open manhole.

Finally coming out of the pretty intense cold that had temps in Houston down into the low-20s.  I am perfectly willing to stipulate that one cold month doesn’t say too much about the correctness of the AGW hypothesis–and I would hope (probably in vain) that those flogging that hypothesis would do the same.

The NYT felt sufficiently concerned that some out there might conclude that the cold weather refuted AGW, so it ran a piece to explain that it did no such thing:

What’s going on? Global cooling?

Nope. A mass of high pressure is sitting over Greenland like a rock in a river, deflecting the cold air of the jet stream farther to the south than usual.

This situation is caused by Arctic oscillation, in which opposing atmospheric pressure patterns at the top of the planet occasionally shift back and forth, affecting weather across much of the Northern Hemisphere.

What’s notable this year is that the pattern of high pressure over the Arctic is more pronounced than at any time since 1950.

. . . .

No one is quite sure what drives these flip-flops in air pressure.

“I tend to think of it as a random thing,” said John M. Wallace, who is a professor of atmospheric sciences at the University of Washington. “I don’t think we understand any reasons why it goes one way one year and the other way another year.”

What does seem clear is that these oscillations have nothing to do with global warming, or, for that matter, global cooling. For one, they’re not new. And this winter’s cold has not been global. Santa, by North Pole standards, has been experiencing a balmy winter.

Well, according to one climatologist, and AGW skeptic, the late Marcel Leroux, (a) this certainly doesn’t have anything to do with AGW, because it doesn’t exist, and (b) the phenomenon of varying intensity and frequency of polar high pressure events actually explains variations in temperature (temporally and spatially) far better than the AGW hypothesis.  Thus, if Leroux is correct, the current cold weather could actually provide evidence against CO2 driven climate change.

Leroux set out his ideas in a book: Global Warming: Myth or Reality: The Erring Ways of Climatology.  He focused on just the kind of phenomenon described in the NYT piece, what he dubbed “Mobile Polar Highs” (MPH).  Interestingly, these MPHs cause exactly the effect described in the NYT article: cold temperatures at medium latitudes, and warm temperature at the pole experiencing winter.  A summary of the idea can be found here.

Leroux argued that the intensity of MPHs oscillates between rapid and slow modes on a decadal scale, and that this oscillation can explain (autocorrelated) variations in temperatures, as well as glaciation and deglaciation, fluctuations in sea ice and sea level, and other climate-related phenomena.

The book doesn’t provide a very extensive or convincing explanation as to what causes the shift between rapid and slow modes, but it is provocative, and does raise some serious empirical issues that the CO2-driven models don’t handle well.  It certainly provides considerable evidence of cyclical behavior of that would necessarily complicate any effort to isolate any CO2-driven temperature trend, especially in a relatively short time series of data.

The next several years could provide some evidence relating to Leroux’s hypothesis.  He argues that the MPH cycle has been in slow mode since the late-1970s.  If the current winter is the harbinger of a return to the rapid mode, the next several winters will be cold as well.

Moral of the story: the cold weather currently being experienced in much of the northern hemisphere could indeed be germane to the debate over AGW.

Note that Leroux was not an employee of ExxonMobil.  He was, in fact, a climatologist at the Jean Moulin University in France, and the director of the Laboratoire de Climatologie, Risques, et Environment at the University.  A real climatologist, in other words, and one who lived in the world of data, rather than the world of models.

The attitude of many Russians, in government but especially in the scientific community, towards the anthropogenic global warming hypothesis (yes, it is a hypothesis) is quite fascinating.  Many respected Russian climatologists are clearly in the skeptic camp. And last week, the Moscow-based Institute for Economic Analysis called bullsh*t on the Hadley CRUT (yes, the same outfit embroiled in Climategate).  IEA points to another, completely different possible scientific sin committed by Phil Jones and the gang:

The IEA believes that Russian meteorological-station data did not substantiate the anthropogenic global-warming theory. Analysts say Russian meteorological stations cover most of the country’s territory, and that the Hadley Center had used data submitted by only 25% of such stations in its reports. Over 40% of Russian territory was not included in global-temperature calculations for some other reasons, rather than the lack of meteorological stations and observations.

The data of stations located in areas not listed in the Hadley Climate Research Unit Temperature UK (HadCRUT) survey often does not show any substantial warming in the late 20th century and the early 21st century.

The HadCRUT database includes specific stations providing incomplete data and highlighting the global-warming process, rather than stations facilitating uninterrupted observations.

On the whole, climatologists use the incomplete findings of meteorological stations far more often than those providing complete observations.

IEA analysts say climatologists use the data of stations located in large populated centers that are influenced by the urban-warming effect more frequently than the correct data of remote stations.

The scale of global warming was exaggerated due to temperature distortions for Russia accounting for 12.5% of the world’s land mass. The IEA said it was necessary to recalculate all global-temperature data in order to assess the scale of such exaggeration.

Global-temperature data will have to be modified if similar climate-date procedures have been used from other national data because the calculations used by COP15 analysts, including financial calculations, are based on HadCRUT research.

This allegation of cherry picking is extremely serious, if true.  Certainly, if the data/station selection procedure has a material impact on the results, the procedure should be made transparent (including release the code), and the underlying data should be made available so that others can devise alternative procedures and test the robustness of results to said procedures.  Given that (a) the CRUT procedure seems to produce the politically desired results, and (b) the emails that have been released colorably support the allegation that CRUT has an agenda, it is more than plausible that the discarding of the majority of Russian sites was not accidental, or driven by legitimate concerns regarding the quality of the sites and their records.  This skepticism would be bolstered if the IEA accusations that the omitted stations were better on crucial dimensions (notably, continuity of coverage and rural location unaffected by the effects of urbanization) are correct.  Omitting the stations that a priori would seem superior and getting “warmer” results would be highly, highly suspicious.

This is of course important for understanding the average global temperature data.  But AGT is merely a convenient summary statistic, and shouldn’t be given that much weight.  What is more important for the purpose of testing the implications of climate models is the spatial pattern of temperature changes–the “fingerprint” of global warming.  One implication of these models is that heating should be pronounced at northern latitudes, including in Siberia.  And indeed, this is one of the implications that advocates of the AGW hypothesis claim has been demonstrated empirically to support their call for draconian restrictions on carbon emissions.

But, what if this supposed empirical demonstration is based on data subject to a biased selection procedure?  If that’s true, one of the main empirical supports for the AGW hypothesis disappears.  Thus, the quality of the Russian data is a major, major issue that must be resolved in order to evaluate the empirical validity of climate models specifically, and the AGW hypothesis generally.  If the IEA is correct in its assertion that including the excluded stations would result in a lowering of the worldwide average temperature, the effect would be even more pronounced in northern latitudes, and CO2 would not have left the damning fingerprint that would convict it of a crime against Gaia.

The fingerprint evidence is already suspect.  Richard Lindzen of MIT has repeatedly emphasized that the tropical troposphere has not heated as predicted by the climate models.  That is a big empirical strike against the AGW hypothesis–but one that has not received sufficient attention.  If, in addition, the warming at northern latitudes is weaker than has been asserted heretofore based on censored/selected data, or does not exist at all, the empirical damage would be–or at least should be–fatal to the climate models (which emphasize the role of positive feedback effects to generate predictions of dramatic warming).

Thus, of all the fallout from the HadleyCRUT scandal, this could be the most important.  The full Russian record should be evaluated thoroughly, and stat, to understand what is truly happening in Siberia.

The American Thinker has a couple of interesting pieces on Climategate.  Definitely worth reading is this article by scientists David Douglass and John Christy about the blatant manipulation of the peer review process by AGW advocates masquerading as scientists.  I thought it was impossible for me to be more cynical about the peer review process than I already was based on almost 20 years of experience watching the sausage being made, and more than a few times through the grinder myself.  I was wrong.  This shorter article on the lengths to which AGW advocates will go to control more popular sources of information on climate change science is also quite illuminating.

That drip, drip, drip you hear isn’t rain.