As I woke up this morning BBC Radio 4 was telling me the very encouraging news that an adviser to Barack Obama has questioned his policy on biofuels. I can find no reference to this story on the Web, but Obama’s website still leads its entire discussion of energy with a speech made in Des Moines, Iowa, capital of the corn belt. For some reason the BBC suggested the policy was to win votes in Illinois. I wonder whether they’ve muddled the two states: won’t Obama win Illinois anyway, being already senator for that state, and isn’t it Iowa that is famous for being corn-country? Though corn does grow in Illinois, too.

Anyway, apparently the adviser is a university professor and has pointed out that ethanol from corn does not reduce greenhouse gas (”GHG”) emissions because of all the inputs to produce the crop. He also noted that it displaces soya-growing from USA which leads to more GHG emissions if it is then grown in areas of virgin forest.

At this point I realised that my arguments about biofuels may be going over people’s heads. Not because it’s such a high-falutin’ line of reasoning. But because, owing to short-comings of the education system (more on this astonishing story in due course), not to mention the political process and processes of public discourse, the average decision-maker or influencer is no better than a drunk lying in the gutter, in terms of the analytical tools they are able to deploy.

Much as I want to get on and discuss the other aspects of my agenda to save the planet, I realised, while waking on a rapidly warming day of a sticky British summer (which, fortunately, inductive reasoning suggests is likely to last only a few days more), that I would have to spell out even more carefully how the issue is not just one of biofuels displacing crops into virgin forests. Such displacement is fairly inevitable, but even if it didn’t happen - let’s say the total global area of land being used for agriculture declines even as we produce more biofuels - then there is still the question of what you could do with the land instead of growing biofuels. A point people seem to find extraordinarily difficult to grasp. Sigh! I have a case of the Biofuel Blues. It’s Too Damn Hot, as someone once sang.

A small amount of progress has been made in thinking about how to deal with global warming (henceforth “GW”). A book discussing “Kyoto2″ is due out this week. George Monbiot (and I believe Mark Lynas) is enthusiastic so I looked at the web summary of the idea (if the book is out a few days early, as often happens, I’ll buy it today so I can sit under a tree out of the heat and read it!). The idea represents considerable progress. It advocates a supply-side solution, that is, restrictions on the production of fossil fuels rather than just their consumption. Correct. Targeting emissions alone will not in itself keep any oil, coal and gas in the ground. Much better to limit the amounts that are dug up, or pumped out. And, in conjunction with a supply-side solution, Kyoto2 advocates the use of existing market mechanisms - i.e. the price of oil etc. - to try to influence the whole global economy. Good work.

I too have been thinking along these lines. I too would like to treat the world as one global economy. I’ll comment when I’ve read the Kyoto2 book, but one problem is that we can’t do this. Unfortunately, as I’ve outlined, and even revisited once already, states and trading blocks distort the global economy. Massively. This has to be taken into account. I look forward to reading Oliver Tickell’s book to see if he’s done this.

But here’s what really baffles me. Why, oh why, does everyone advocate short-term - often annual targets for emissions? GW is a long-term problem. Any solution must be resilient through booms and busts, even wars. That’s why I’m Abebooks best customer right now for books on financial crises! If we’re going to try to solve GW through the price of commodities, such as oil, then we have to take account of the fact that demand and supply and hence commodity prices naturally fluctuate considerably.

GW is a long-term problem. Hold that thought.

Back to biofuels. Almost everyone analyses the problem in terms of the annual emissions of growing biofuels. So they consider the displacement of food crops onto other land as a short-term problem. This is fundamentally the wrong way of looking at the problem.

The last time I penned this argument I had Winnie the Pooh talking to Piglet about “100 Hectare Wood”. Very witty it was too, and highly topical just now, since the EU has banned the “acre”. (Sad, but maybe one less unit conversion to worry about). But then I got worried about whether or not Disney Corporation would be happy about a lengthy spoof on their “intellectual property” and wimped out of posting it. (I’ll leave it to another time to discuss whether we actually want a world where our rights to reference our cultural heritage actually are or should be allowed to be restricted in such a way).

The point is that if we have an area of land - say 100 hectares - we could use it to grow trees or we could perhaps use it to grow biofuel crops. The one is the opportunity cost of the other. If you do an MBA (and I recommend you do, since they are clearly not actually teaching how our society works in schools), one of the things you will learn is that for any investment project you have to tally up the costs and benefits of doing it and the costs and benefits of not doing it and compare the two. You may want to compare a number of alternatives.

For example, a project to manufacture widgets may make use of a factory already owned by the company you work for. You might mistakenly base your business case for manufacturing widgets on the cost of the factory being zero. If you did that, though, you would be sadly disabused of your opinion by your company accountant. It would be such a howler that he might even verbally abuse you as well.

Even if you weren’t charged for the factory space through internal company cost control processes you would still have to include in your business case a benefit in the alternative project of not manufacturing widgets. For the sake of argument this benefit would be the rental value of the factory through the period over which it is proposed to manufacture widgets. It is quite plausible that once the opportunity cost of renting the space to someone else is taken into account, it would make little business sense to use the factory to manufacture widgets. It might be much better to simply rent it out. This is the way you have to “run the numbers”. It is elementary.

In an MBA of course, costs and benefits are considered in cash terms. But we can do the same thing with carbon.

We could either grow biofuel crops on our land or we could simply leave it alone and trees would grow. Carbon would build up in the soil because it is not being ploughed. There would be other benefits, aesthetic and practical. All these benefits are positive to the project of not growing biofuel crops. Remember, to work out if the project makes carbon business sense we’re going to compare the two projects - growing biofuels and not growing biofuels - in fact, just as in the example of manufacturing widgets, we will have to subtract any benefits of not growing biofuels from the case for the project to grow biofuels.

When we correctly evaluate the case for growing biofuel crops it is a no-brainer. We could either grow crops for 100 years or grow a forest over that time. Even allowing for the possibility of fire, we can, on average, expect a hectare of forest to store at least 100 tonnes of carbon after 100 years. Once we allow for the energy costs of production, fertiliser and so on, it turns out that, in temperate regions, you will not be able to grow enough biofuel crops on a hectare of land to displace a tonne of carbon emissions a year. Nowhere near.

In tropical regions the case for growing biofuel crops also needs to be assessed in this way. I suspect, though, that, once realistic figures are used for the benefits of allowing forest to regrow (my 100 tonnes/hectare is a deliberately low figure, since the argument against growing biofuel crops in temperate regions is so strong there’s no need to make any potentially contentious assumptions), and for the carbon stored in forest soils, compared to the likely depletion of soils used to support annual biofuel crops, and for the value of water retention and maintained biodiversity, once all these figures are put together, the argument for growing biofuel crops will be seen to be remarkably weak.

This argument is developed further in my Biofuel papers.

I’m hoping that Obama doesn’t have straw for brains and won’t follow the yellow brick road being built by the corn ethanol lobby. Like that of the Wizard of Oz, their vision is an illusion. (Oh, sorry about the plot spoiler!).

Damn, I was hoping to end there, but now I remember I wanted to highlight two policies from Obama’s website:

“Expand Locally-Owned Biofuel Refineries: Less than 10 percent of new ethanol production today is from farmer-owned refineries. New ethanol refineries help jumpstart rural economies. Obama will create a number of incentives for local communities to invest in their biofuels refineries.” [I won't digress now - I'll explain why "rural economy" is a contradiction in terms some other time].

“Confront Deforestation and Promote Carbon Sequestration: Obama will develop domestic incentives that reward forest owners, farmers, and ranchers when they plant trees, restore grasslands, or undertake farming practices that capture carbon dioxide from the atmosphere.”

Here’s a way out, Mr President-in-waiting (careful with the triumphalism, mate, we had a guy called Kinnock over here once, you may have heard of him). I’m not entirely unfamiliar with the political imperative to find ways to allow your constituency to have their cake and eat it. Here’s my advice: make it a no-brainer for land-owners to choose the second set of incentives over the first. That way you may still be able to tell everyone just what they want to hear! Isn’t politics great?

It’s hot - this flat wasn’t built for today’s climate so woe betide the poor wretch who has to live here in 50 years time. I’m going for a swim. Right now.

I once visited an art installation which consisted of a pool of oil maybe 10m long by 5m wide at about 1.25m high. It was indoors and still, so, at the angle you looked at it, the reflection was near-perfect. Apart from a few dust motes on the surface it was like a supernatural (using the word in the sense made popular by the late Lyall Watson) mirror onto the world.

Let’s see what light reflecting on oil can shed on the current economic turbulence.

My thoughts on the price of oil were prompted by a piece “Welcome to a world with $500 oil” by Willem Buiter at the FT (non-subscribers may not be able to view Buiter’s blog) a week ago. I was away from a computer, made some notes, lost them, and now I’ve found them again. So here goes…

If you’re not living on a desert island you will be aware that we are witnessing “demand-destruction” at current oil prices around $130 a barrel. How, you may wonder, could reputable economists predict a price of $500/barrel?

To answer this question we’ll have to explore the pathologies of the global economy. In short, when it comes to oil, the global economy is being severely distorted. The price you pay at the pump is not simply a result of supply and demand for oil around the world. Yes, we’re all connected in one global economy. But the global economy is as imperfect as the image seen in a fairground distorting mirror. The actual price of oil to consumers in (say) the developed countries is a result of political decisions, exchange rate manipulation and subsidies, in short government interference conducted on a colossal scale.

Now, in trying to prevent global warming, effective solutions will have to rely on market-forces. Perhaps, before proceeding, we need to consider how well our market is actually operating.

We live in a complex world, but let’s consider three classes of nation state:

- the “developed” (I hate this term) countries, in particular the EU and US - those who either are or can be expected (from 2012) to attempt to meet Kyoto-style consumption targets;

- the industrialising countries, such as China and India;

- the oil-producing countries, especially OPEC and Russia.

Developed Countries

With oil at $130 we are seeing demand destruction in the developed countries. Probably enough demand destruction to cause a cyclical downturn in the price of oil. As such cycles always overshoot, my bet is that we will see $50 oil again at some point in the next few years. Of course, once we have made efficiency improvements (in particular more mpg), consumption will increase again, since driving will be good value once more.

But this demand-destruction is only happening because governments are (by and large) making sure consumers pay the true supply and demand price of oil. In fact, they are even prepared to make consumers pick up the cost of some of the externalities of oil use by imposing fuel duty. Carbon-trading, where it is applied, represents an attempt to ensure consumers pay for the global warming externality.

Oil well and good.

Industrialising Countries

These countries do not, in general, pass on the full cost of oil to consumers. In India, for example, heating oil is subsidised. The price of oil doesn’t increase only far enough for consumers to change their habits. The government has to feel the pain and then impose a price rise on an unhappy population.

Not only that, but the currency of many countries is artificially pegged to the dollar.

Digression: Trade Imbalances Cause Credit Crisis AND Oil Spike

Here’s some food for thought. For years the Jeremiahs* have been warning us about trade imbalances. Now I just wonder if this isn’t an underlying cause of both the credit crisis - since the real problem was the cheap loans, partly made possible by the need to invest trade surpluses, which drove house prices up in the first place - and the oil price rise (and commodity inflation). What is happening in the world today, I suggest, is that - looking for gold at the end of the development rainbow - many people are doing work for much less than its true economic value. Many are being exploited and living in appalling conditions on low wages. But for other occupations in the same economy - say IT work in India, white-collar jobs carried out by the burgeoning Chinese middle class - consumption patterns are approaching those in developed countries. Such workers cost much less in dollar terms not because they are more efficient than the developed country competition (likely they are less efficient) but because they are in a “developing” country. In short, they benefit from the vast army of cheap labour.

Cheap Labour and the Cause of Trade Imbalances

Here’s my proposition:

1. Exploitation lowers costs indirectly for developing country exporters. It’s not that the IT worker in Bangalore is directly exploited. It’s the exploitation of the guy living on a few dollars a day who brings the lunch to the IT worker’s desk which allows the IT worker in Bangalore to undercut the IT worker in Basingstoke.

2. The inefficiency in labour terms of making the IT worker redundant in Basingstoke in order to employ two in Bangalore to do the same job allows the developing country to build up a trade surplus.

3. The problem would be much reduced if the IT worker in Bangalore had to pay the UK price for petrol. If it’s subsidised (or even if there is less duty and/or carbon tax included in the retail price) he will be able to consume more relative to the value of what he produces. The trade surplus allows more oil to be consumed than would otherwise be possible. [Actually India wisely allows the rupee to float, so doesn't have an overall trade surplus. The argument applies insofar as India has a massive trade surplus in IT services].

How Developing Countries Will Cause the Next Oil Price Spike

I mentioned that many developing country currencies are pinned to the dollar allowing trade surpluses to be maintained, albeit at the cost of some inflation. Surely if the currencies were allowed to appreciate then developing countries could afford even more oil? Well, yes, they could as long as they were able to maintain their trade surpluses.

Here’s the problem for developed country consumers. If developing countries (China, you know who you are!) break the dollar peg (i.e. allow their currencies to appreciate) they will be able to push up the price of oil (at the expense of some loss of exports).

If they maintain their trade surplus (by keeping their currency low) they will be able to push up the price of oil, until the trade imbalances becomes unsustainable. Without currency movement this will happen in the worst case when developed countries are unable or unwilling to service their debts, but before then when they are unable to borrow or borrowing becomes too expensive. Recognise anything yet?

One problem is that the developed countries such as the UK and US seem to be happy to nationalise private debt either directly (Northern Rock, Fannie and Freddie) or indirectly by tax-giveaways and budget deficits. The wrong policy in my opinion, but let’s not digress too much.

The conclusion is that because of their trade surpluses and unwillingness to pass the true supply and demand cost of oil onto consumers, the developing countries will be able to push the price of oil up well beyond today’s levels. Many scenarios are possible, but here’s a likely one. Once demand-destruction in the US in particular pushes the cost of oil down to around $50, it will bounce because of demand from China and India, in particular, which will continue to increase even as the developed countries move away from oil. Until…

All this is a colossal mistake of course, because, in a short-termist rush to develop, economies are being created that are not only highly inefficient (in labour terms) but also reliant on limited supplies of energy. If we continue on this path, then somewhere along the line this inefficiency will be exposed, and there will be economic meltdown on the scale of the fall of the Soviet Union or the Great Depression.

Maybe the developing countries could push oil to $500/barrel, but there are other players in the market.

It gets even worse.

The Oil Producers

Now, here we have a real problem.

Oil producers get free money.

It’s only in the last half-century or so that countries have not had to work for resources. The security guarantees of the present world order, coupled with the voracious global appetite to consume, provide unparalleled riches without the burden of corresponding military expense.

Oil producers get free money.

They give oil (and money) away to keep their population happy. This raises the price of oil by reducing the amount available for export, that is, the supply to consumers in importing countries.

They have built up huge sovereign wealth funds (SWFs). They practically have more money than they know what to do with. More to the point, the larger the SWF, the more the oil-producing country can afford to consume each year. The process is cumulative.

Venezuela is giving away oil for political influence.

The Gulf states are building colossal cities. Building these consumes oil. The cities are unlikely to promote efficient use of oil, because it’s cheap in these countries. And worst, these projects, even if they could not be justified without the surplus capital from oil revenues, create industries and put money in the hands of their populations, leading to still more oil consumption.

Now, the oil producers only judge they need so much money from exports.

Here’s the screamer: the higher the oil price, the lower proportion of their oil the oil-producing countries will tend to export.

I see I should have written this blog post a week ago, since a comment on Willem Buiter’s blog makes a similar point, referring to a blog from India (hi over there!).

So over a period of decades there is a massive positive feedback in the system.

I suggest we’re witnessing only the First Oil Demand Shock, as consumers in “developed” economies are forced to cut back on their use. I suggest the most destructive in human terms will be the Second Oil Demand Shock when those countries who are currently building economies reliant on affordable oil are forced to cut back their consumption. If I had to guess I’d expect this Shock in about 2020. The Third Oil Demand Shock will be a long drawn-out affair when one by one the oil-producers are unable to maintain the profligate lifestyles of their populations and are afflicted by the Curse of Oil.

Unless of course we think in the meantime of some way of keeping the stuff in the ground.

* I wonder whether the language police have ruled this usage (”doleful prophet or denouncer of the present age”, Concise Oxford Dictionary 7th edition, 1982) ideologically unsound for some reason, since it doesn’t appear in Wikipedia, the Wiktionary or dictionary.com. Sorry if anyone’s offended.

Yes, finally the Ofcom has spoken. Not very loudly, it seems. It’s really just a rap on the knuckles for “The Great Global Warming Swindle”, largely because:

“…whilst Ofcom is required by the 2003 Act to set standards to ensure that news programmes are reported with ‘due accuracy’ there is no such requirement for other types of programming, including factual programmes of this type.”

Unbelievable. What planet are they (or rather the legislators responsible for this insanity) on? One that is going to get a hell of a lot warmer, it seems, if we can’t work out how to make rational, science-based decisions. How can the category “factual programmes” even exist without “standards [of] due accuracy”? Has anyone thought about what the word “factual” actually means??

Remind me if I don’t return to this argument later on, but to state the thesis briefly, in complex domains, problems - whether big ones (like GW itself), or small ones, like “Swindle” - almost always have many causes. Dealing just with the immediate cause may be futile. In the case of “Swindle” it may be most effective putting effort into changing the rules of the media game, rather than engaging in trench warfare. Because, if the ultimate arbiter of truth is not factual accuracy then we just end up with a popularity contest. Hey, why not incorporate audience votes in science programmes? Phone-in to vote for your favourite theory of gravity!

Luckily, in the case of “The Great Global Warming Swindle”, the programme:

“…broke rules on impartiality and misrepresented the views of the government’s former chief scientist…” even though it “was ‘on balance’ cleared of ‘materially misleading the audience so as to cause harm or offence’”. (Quotes from the Guardian’s news story on the findings).

But what if they hadn’t broken any rules?

And at least in this case George Monbiot got his retaliation in first, with a comment (and CiF) piece in today’s Guardian, as well as an essay in G2. [Illustrated with the usual photographs, incidentally: someone should devise a market instrument for investors in pictures of power stations, melting ice and - my personal tip - pictures of solar panels and photogenic children in Africa. Oh, sorry, it slipped my mind for the minute that markets are in the dog-house right now.]

George does an excellent job, as usual, in his forensic G2 piece (though there’s a touch of conspiracy theory in his analysis of Channel 4) but in the very last column it all falls to pieces. [See yesterday's post for my views on conspiracy theories and the need to read the detail - in this case right to the end - to avoid Taleb's randomness illusion]. Even so, I urge you to read George’s dissection of “Swindle”: you may be surprised. I recollect that I had moreorless bought into the idea (which Monbiot debunks) that Thatcher’s espousal of GW science was partly due to her search for weapons to use against the UK’s coal-mining industry.

Remember, though, that, as well as the particular pathology - in this case the way “Swindle” was given a platform - we also need to look at the underlying causes.

This is where a major problem lies in George’s piece:

“[Channel 4] says [its scheduling of "Swindle" and other programmes] ‘is against the background of the IPCC [Intergovernmental Panel on Climate Change] stating that there is a 90% certainty that the causes of global warming are man-made, it follows that there is a 10% uncertainty. Yet this 10% uncertainty receives a disproportionately small amount of airtime.’ I [George continues] find this argument extraordinary. A 90% level of confidence does not mean that 10% of the evidence suggests that an effect is not occurring — in fact, there is no reliable evidence showing that man-made global warming is not taking place. It is expressed in this way because there is no absolute certainty in science. The ‘very high confidence’ the IPCC expresses in the global warming thesis is the strongest statement any reputable scientist would make about his area of study. It is legitimate and right to stress that there can be no absolute certainty about global warming.” [my italics stress].

90% is not in fact a very high probability when we are discussing scientific findings. In my opinion, it would be more than justified to say that we’re “virtually certain” that “man-made global warming is [...] taking place”, and by virtually certain I mean at least 99%. A 99.9% claim would be perfectly reasonable. So why does the IPCC not say this? Saying 90% gives the green light to people like Martin Durkin (the maker of “Swindle”).

I’ve just done a bit of weight-training and consulted the IPCC’s latest massive report (The Fourth Assessment Report, or “AR4″). If we look at Table 1 on pages 120-1 of the Scientific Basis (there are 3 parts to the overall report) we see that, although the IPCC is happy to use the words “virtually certain”, it only does this when a result “can be estimated probabilistically”. For example, a particular set of data may have a definable probability of indicating a trend.

[Note that our ability to calculate such statistics requires us to make assumptions about randomness - i.e. a bell-shaped curve or Gaussian distribution. This implies that we have a theory about the causes of variation in the data in the first place! For example, if we say we're 99% certain that the glaciers are melting this finding must have been calculated against a null hypothesis that changes in glacier volume are subject to random fluctuations. This may not be true. There could be reasons we are entirely unaware of for all the world's glaciers to either melt or grow at the same time (on top of reasons for correlation between glaciers in the same region which have presumably already been taken into account). Such "unknown unknown" correlation would invalidate the null hypothesis and hence the 99% "virtual certainty". If we're 99% sure what the data tells us, then surely we must be at least 99% sure of our theoretical understanding. I'm sure Taleb would agree with me! It's entirely illogical to have more faith in data-driven findings than in any aspect of the underlying theory explaining them! But this is not my main point today.].

No, what baffles me is why the IPCC restricts itself to a maximum of “very high”, that is, 90%, confidence when it comes to “scientific understanding”.

Politics may have played a part in the IPCC process. Some governments may have lobbied for 90% rather than 99% as the maximum possible confidence. But let’s put that to one side. I want to argue that a critical factor is widespread misunderstanding of the scientific process.

Practising scientists often cite the philosopher Karl Popper. They understand that theories can be “falsified”. Some may even have heard of Thomas Kuhn and appreciate that such “falsification” takes place in “scientific revolutions”.

But what happens in such revolutions? In fact, scientific theories are superseded rather than “falsified”. Let’s consider one or two examples very briefly. When Einstein “overturned” Newton’s theory of gravity he didn’t demonstrate that Newton’s equations were wrong. Rather, he showed the limitations of Newton’s theory. Crucial experiments (where the difference was large enough to be measurable) showed that Einstein’s theory made more accurate predictions than Newton’s. In effect, Einstein incorporated Newton’s findings in his own theory of gravity. Albert never said: “Silly old Isaac’s made a mistake there.”

A case closer to the topic in question is the oft-cited theory of the 1970s that we were about to enter a new ice age. Now this theory hasn’t gone away. The Earth would be cooling (though there is debate as to when the next ice age would occur), if it weren’t for global warming. The current theory of global warming includes the ice age cycle as well as all other prior theories for the variation in the Earth’s climate, such as the effect of volcanic eruptions. Quantitative statements about man-made global warming take into account numerous other causes of climate variation.

Now, it’s possible to imagine reasons why the Earth might not warm as much as projected. For example, the solar system could enter some as yet undetected dust cloud. But any quantitative estimates of the effect of such a dust cloud would have to include the effects of man-made GW. And if the planet cooled dramatically as we entered the dust cloud we’d still have to worry about its temperature rising beyond today’s level because of our greenhouse gas emissions when we came out again. Just the same as, if we solve the problem of global warming and get the climate back to something resembling its pre-industrial state, we will - over the longer timescale of millennia rather than decades - need to take account of the Earth’s ice age cycle which was apparently of such concern in the 1970s.

There are examples in science of theories that are (or could be) flat wrong. But these are theories for which there is no evidence or for which the evidence has been misinterpreted due to problems inherent in the data-gathering process. This is most likely when observations are difficult, such as at the frontiers of physics. For example, the infamous string theory could be wrong because it makes no new predictions.

Any replacement for a theory with lots of firm data, such as global warming, would have to provide explanations for all that data. Clearly this is easiest if the new theory explains the old theory as a special case, rather than by invalidating it entirely.  In the history of science theories are almost always shown to be incomplete rather than “wrong”.  In my opinion, Imre Lakatos understands this process most clearly, even though this aspect of his ideas is rarely stressed.

The probability of the theory of global warming actually being wrong is therefore vanishingly small.  Our level of certainty is, in fact, far more than 99%.

So one of the underlying causes of programmes like “Swindle” is that even the scientific establishment is unclear as to the nature of its theory. Even if there are unknown unknowns and the planet does not end up warming over the 21st century and beyond this would not in itself invalidate the theory of global warming.