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January 25, 2008

Economist's View - 5 new articles

Trouble Right Here in River City

One of you got me in trouble. I received a big packet in campus mail from a law firm a few days ago demanding that I remove a defamatory, libelous comment from a post or face a lawsuit.

Someone had copied an article and posted it in comments (this was fairly recent). Subsequently, the author retracted the original article, admitted statements in the article were false, apologized, and it was removed from their website. Given that, I didn't see that I had much room to protest, and the lawyers at TypePad told me I was responsible for everything posted on my site, including all comments.

I had until the 23rd to remove it according to their demands, i.e. until midnight yesterday. I waited until 11:59 last night, then a half minute longer, then a few seconds more, then finally removed it just before the 23rd ended (a little voice keeps telling me to repost it every so often so that it stays in Google's cache, but I'm trying not to listen). I really wanted to fight it. But, given that the author had retracted the original, this didn't seem like the right place to take a stand.

No big deal I guess (or is it?), but I feel like I gave in too easily. I just didn't see how to resist in this case.

"Bill Gates Issues Call For Kinder Capitalism"

The last few days have been full of surprises. Bill Gates has "has grown impatient with the shortcomings of capitalism":

Bill Gates Issues Call For Kinder Capitalism, by Robert A. Guth, WSJ (Free): ...Bill Gates ... will call for a revision of capitalism. In a speech at the World Economic Forum in Davos, Switzerland, the software tycoon plans to call for a "creative capitalism" that uses market forces to address poor-country needs that he feels are being ignored.

"We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well," Mr. Gates will tell ... the forum...

Mr. Gates isn't abandoning his belief in capitalism as the best economic system. But in an interview with the Journal last week..., Mr. Gates said that he has grown impatient with the shortcomings of capitalism. He said he has seen those failings first-hand on trips for Microsoft to places like the South African slum of Soweto...

In particular, he said, he's troubled that advances in technology, health care and education tend to help the rich and bypass the poor. "The rate of improvement for the third that is better off is pretty rapid," he said. "The part that's unsatisfactory is for the bottom third -- two billion of six billion."

Three weeks ago, on a flight home from a New Zealand vacation, Mr. Gates took out a yellow pad of paper and listed ideas about why capitalism, while so good for so many, is failing much of the world. He refined those thoughts into the speech he will give today...

Among the fixes he plans to call for: Companies should create businesses that focus on building products and services for the poor. "Such a system would have a twin mission: making profits and also improving lives for those who don't fully benefit from market forces," he plans to say. ... Mr. Gates sees a role for himself spurring companies into action...

But Mr. Gates's argument for the potential profitability of serving the poor is certain to raise skepticism. "There's a lot of people at the bottom of the pyramid but the size of the transactions is so small it is not worth it for private business most of the time," says William Easterly, a New York University professor...

Key to Mr. Gates's plan will be for businesses to dedicate their top people to poor issues -- an approach he feels is more powerful than traditional corporate donations and volunteer work. Governments should set policies and disburse funds to create financial incentives for businesses to improve the lives of the poor, he plans to say today. "If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world,"...

In the interview, Mr. Gates was emphatic that he's not calling for a fundamental change in how capitalism works. He cited Adam Smith, whose treatise, "The Wealth of Nations," lays out the rationale for the self-interest that drives capitalism and companies like Microsoft. That shouldn't change, "one iota," Mr. Gates said.

But there's more to Adam Smith, he added. "This was written before 'Wealth of Nations,'" Mr. Gates said, flipping through a copy of Adam Smith's 1759 book, "The Theory of Moral Sentiments." It argues that humans gain pleasure from taking an interest in the "fortunes of others." Mr. Gates will quote from that book in his speech today. ...

To a degree, Mr. Gates's speech is an answer to critics of rich-country efforts to help the poor. One perennial critic is Mr. Easterly, the New York University professor, whose 2006 book, "The White Man's Burden," found little evidence of benefit from the $2.3 trillion given in foreign aid over the past five decades.

Mr. Gates said he hated the book. His feelings surfaced in January 2007 during a Davos panel discussion with Mr. Easterly... To a packed room of Davos attendees, Mr. Easterly noted that all the aid given to Africa over the years has failed to stimulate economic growth on the continent. Mr. Gates, his voice rising, snapped back that there are measures of success other than economic growth -- such as rising literacy rates or lives saved through smallpox vaccines. "I don't promise that when a kid lives it will cause a GNP increase," he quipped. "I think life has value."

Brushing off Mr. Gates's comments, Mr. Easterly responds, "The vested interests in aid are so powerful they resist change and they ignore criticism. It is so good to try to help the poor but there is this feeling that [philanthropists] should be immune from criticism."

A core belief of Mr. Gates is that technology can erase problems that seem intractable. ... Describing himself as an "impatient optimist," Mr. Gates said he will ask each of his Davos listeners to take up a "creative capitalism" project in the coming year.

And he vows to keep prodding them. "I definitely see, once I'm full time at the foundation, reaching out to various industries -- going to cellphone companies, banks and more pharma companies -- and talking about how...they can do these things," he said. [Full, much longer article - free - here]

"The Costs of a Different World"

What will it take to meet the challenge posed by climate change? This research concludes that "massive changes are required":

What a different world. Costs and policy for a low carbon society, by Valentina Bosetti, Carlo Carraro, Emanuele Massetti, and Massimo Tavoni, Vox EU: No longer confined to the roundtables of politicians and scientists, the debate on climate change has become a mounting wave that doesn't seem to be losing momentum. Both policy and research communities have focused on the need to stabilise atmospheric CO2 concentrations at about 550 ppm (parts per million, all greenhouse gases included). This is generally considered a very ambitious, hardly feasible target with drastic implications for our economies and lifestyles.

Given projected world population dynamics, this objective requires reducing per capita emissions in the second half of this century from about 2 tonnes carbon equivalent (tC) to about 0.3 tC per year. In other words, the world will have to cut emissions to the per capita average of India today – quite a significant reduction for most industrialised countries (US average per capita emissions are about 5tC) and for countries that aim at similar lifestyle standards. For example, 0.3 tC is the amount of greenhouse gases emitted by an individual flying – one way – from the EU to the US East coast!

Clearly, a world with 0.3 tC per capita per year will be a different world. What are the optimal strategies and the related economic costs of achieving this ambitious, but seemingly inevitable, target?

Energy efficiency and de-carbonisation Let us assume that economic and population growth cannot be targeted by climate policy. It is clearly undesirable to solve the problem by reducing economic growth and likely politically undesirable to focus on population growth. Emission reductions can then be achieved mainly by increasing energy efficiency and by reducing carbon intensity. Energy efficiency improvements beyond the baseline scenario are the first option to endorse; yet, especially for ambitious emission reductions, energy de-carbonisation is eventually essential.

To achieve a low carbon energy supply, power generation is one of the best options, because of the relative weight on global emissions and the availability of alternative technologies. However, to optimally achieve a 550 ppm concentration target, almost all electricity (around 90%) will have to be generated at low, almost zero, carbon rates by 2050. This is a drastic change and currently pursued through three options: carbon capture and sequestration, nuclear energy and renewable sources. Carbon capture and sequestration (CCS) allows the power sector to continue to use coal, the most available and affordable fossil fuel. However, the necessary investments are very large. To achieve the 550 ppm target, between 30 and 40 1 gigawatt (GW) coal-with-CCS power plants need to be built each year from 2015 onwards, a value in line with the historical capacity building of traditional coal plants (that make up for roughly 50% of electricity generated in the world). A number of large-scale pilot plants should thus be put into place in the next ten years to ensure the feasibility of such a massive deployment.

Nuclear power is at the moment the only proven base load generation for large-scale electricity decarbonisation. In addition, it will become extremely competitive for the range of carbon prices implicit in the adoption of a climate policy designed to achieve the 550 ppm target. However, 20 1GW nuclear plants or more would need to be built each year in the next half century, bringing the nuclear industry back to the construction rates of the 1980s. External costs, such as those related to nuclear waste disposal or proliferation risks, could make this scenario undesirable. In any event, some innovation in the technology as well as in the institutions regulating the global implications of a massive deployment of nuclear energy would need to accompany this expansion.

Renewables, especially wind power, have developed at an impressive rate in recent years (up to 10GW per year), but the limited annual operating hours and costs constrain their potentialcontribution. Despite a small absolute potential of renewables, an almost three-fold capacity expansion with respect to a baseline scenario – more than for any other generation technology – and an overall 17-fold expansion of present installed capacity should be achieved by 2050. This is equivalent to about 60,000 new large open-sea wind turbines. What a different world!

Carbon abatement in non-electric energy may be mostly achieved by improvements in energy efficiency – i.e. through measures meant to reduce fossil fuel consumption – because of the dispersion and limited array of carbon free technologies. Decarbonising such sectors as transport, residential, etc. would significantly ease the attainment of the climate stabilisation target; yet, carbon abatement alternatives beyond energy savings are still expensive and unproven at large scales. Innovation in fields such as batteries, bio-energy conversion, and so forth would open up new possibilities, but they are still in their infancy and might come at unexpected costs, as the recent sensitivity of food prices to energy crops has shown.

The costs of a different world What are the macroeconomic costs of such drastic changes in world energy systems? How much investment and R&D expenditure are required? Assuming a "cap and trade" stabilisation policy with a perfect international market for emission allowances, our work shows that the total direct cost in terms of undiscounted GDP losses in 2030 would be 1.2 - 1.7% of the world GDP (see Table 3 in Bosetti, Carraro, Massetti and Tavoni, 2007). In the Intergovernmental Panel on Climate Change's most recent report, the median value for the total direct cost of 550 ppm stabilisation is 0.6% (IPCC 2007). Our cost estimate is larger than the typical IPCC estimate because the inefficiencies and market imperfections introduced in our model better mimic the behaviour of markets and policymakers. In particular, we adopt a non-cooperative game-theoretic framework to better describe global strategic and policy interactions.

The macroeconomic cost of stabilising greenhouse gas concentrations is obviously larger if the time horizon is lengthened. According to our calculations, the cost would be between 2.1 and 3.7 % of world GDP over the course of the 21st century. The cost would be even larger if only a subset of countries adopt climate policies. Therefore, the costs of moving to a drastically different energy system are probably substantial.

Accounting for additional emission reduction measures, such as in the agriculture and forestry sectors, could increase the feasibility and decrease the cost of the climate target. The key role of forestry management in contributing to the overall emission reduction effort has been recognised and emphasised in the United Nations' Bali Action Plan. For the set of carbon prices implicit in the 550 ppm stabilisation scenario, forestry management could save up to 1.5 gigatonnes of carbon per year in the next fifty years, a figure equivalent to 20% of today's world emissions. This would have a significant impact on the carbon market, decreasing costs by as much as 30-40% (Bosetti and Tavoni, 2007). Nevertheless, this might also delay ultimately crucial investments and innovation in carbon-free technologies.

Technical change is, without any doubt, a key component of any policy designed to stabilise greenhouse gas concentrations. However, investments in energy efficiency R&D declined after 1980 and have remained low in recent years despite their potential to seriously contribute to achieving the stabilisation target. Innovations in carbon capture and sequestration and nuclear energy are crucial. Low carbon alternatives in the non-electric use of energy are also indispensable.

What is the cost of innovating to achieve the 550 ppm stabilisation target? In our work we show that a dedicated long-term research effort is needed, entailing as much as a tenfold expansion in energy R&D investment by 2050, to reach an annual figure in excess of $100 billion. In terms of GDP share, R&D expenditure in the energy sector should increase from about 0.2% of GDP to about 0.6% by 2050. This important and crucial effort cannot entirely rest on the shoulders of the private sector. Public policies, both domestic and international, are necessary. Domestic R&D incentives and a global R&D fund are likely to be plausible options.

Meeting the climate challenge Climate change is a serious threat to the stability of the world's economic system. The stabilisation of greenhouse gas concentrations at 550 ppm could prevent most damages from climate change but requires drastic changes in the energy sector. These changes are costly and can be achieved only if large investments in energy infrastructures and in R&D are undertaken in the next forty years. That requires farsighted and well-designed public policies to provide adequate economic incentives and to mobilise sufficient financial resources.


Bosetti, V., C. Carraro, M. Galeotti, E. Massetti and M. Tavoni, (2006). "WITCH: A World Induced Technical Change Hybrid Model." The Energy Journal, Special Issue on Hybrid Modeling of Energy-Environment Policies: Reconciling Bottom-up and Top-down, 13-38. Bosetti, V., C. Carraro, E. Massetti and M. Tavoni, (2007). "Optimal Energy Investment and R&D Strategies to Stabilise Greenhouse Gas Atmospheric Concentrations", CEPR Discussion Paper 6549. IPCC (2007) "IPCC Fourth Assessment Report, Working Group III". Tavoni, M., Sohngen, B., Bosetti, V. "Forestry and the carbon market response to stabilize climate", Energy Policy, 35 (2007), 5346–5353.


1 This target roughly coincides with IPCC Post-TAR stabilisation scenario B, which is close to the EU objective of keeping future temperature changes below 2 degrees Celsius. 2 See our paper on "Optimal Energy Investment and R&D Strategies to Stabilise Greenhouse Gas Atmospheric Concentrations" CEPR Discussion Paper 6549.

"Beyond Payday Loans"

Bill Clinton and Arnold Schwarzenegger want to increase the availability and awareness of financial products that serve the needs of low income households many of whom rely, unnecessarily, on high cost alternatives:

Beyond Payday Loans, by Bill Clinton and Arnold Schwarzenegger, Commentary, WSJ: The American dream is founded on the belief that people who work hard and play by the rules will be able to earn a good living, raise a family in comfort and retire with dignity.

But that dream is harder to achieve for millions of Americans because they spend too much of their hard-earned money on fees to cash their paychecks or pay off high-priced loans meant to carry them over until they get paid at work.

Here is one initiative that can ... help... the "unbanked" enter the financial mainstream by opening checking and savings accounts, and working collaboratively with financial institutions and community groups to develop and market products that work for this untapped market. ... And it won't cost taxpayers a dime.

Imagine the economic and social benefits of putting more than $8 billion in the hands of low- and middle-income Americans. That is the amount millions of people now spend each year at check-cashing outlets, payday lenders and pawnshops on basic financial services that most Americans receive for free -- or very little cost -- at their local bank or credit union. Over a lifetime, the average full-time, unbanked worker will spend more than $40,000 just to turn his or her salary into cash. ...

More than 20 million Americans cash more than $60 billion in checks each year at check-cashing businesses. Full-time workers without a checking account typically pay $40 on average to cash their paychecks. And payday lenders sell an additional $40 billion in expensive small-dollar loans each year that carry fees 30 times the average credit-card rate.

But these Americans can become bank customers if they have access to the right products at the right terms, and the support they need to make good, responsible financial decisions. ... The vast majority of people without bank accounts work, and they have an average household income of $27,000. Most are also married, have at least one child, and are employed by a small business. ...

This year, California will become the first state in the nation to launch an effort to help unbanked residents open starter accounts... Approximately 11% of California households, including 25% of Latino and African-American households, do not have a checking account. And nearly half of households in the state don't have a savings account.

In coordination with the Federal Deposit Insurance Corporation, we will partner with financial institutions to increase the supply of starter accounts that work for unbanked consumers and banks. We will form regional ... groups to market accounts and help the unbanked build financial literacy. And we will build on work already being done in San Francisco, where city officials, working with banks and credit unions, have already signed up 11,000 individuals who previously had no checking or savings account. ...

links for 2008-01-24

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