No Matter Your View on Climate Change, Pricing CO2 is Harmful… Why?
By Dr Lars Schernikau
No matter your view on climate change, pricing CO2 is harmful… why?
One-sentence answer: … because pricing one externality but not others leads to economic and environmental distortions… causing human suffering.
1,600 words, 6-minute answer:
Growing up in Eastern Germany, I was taught in school that – in so many words – money is the basis of all evil, particularly if it is made in the Western free-market system. Having spent now 20 years in commodities and energy markets, I concluded otherwise and find that distortions of artificial incentives, rather than those that arise freely, are the source of much perversion.
Among these distortions of markets is the pricing of carbon dioxide, which harms not only people – especially the poor – but also the environment. This is obviously contrary to what we commonly read and certainly inconsistent with what my children are taught in school.
Let me start with the usual disclaimer that I (and most knowledgeable scientists) agree that (1) Earth’ climate is changing, (2) the world has been warming since the 1800s, the Industrial Revolution and the end of the Little Ice Age, (3) Humans have contributed to this warming, and – also – (4) human CO2 emissions have contributed.
However, this article is not about the causes or the negative or positive effects of a warming planet and higher CO2 concentrations (see WEF and NASA on global greening). This article is also not about the scientifically undisputed fact that we don’t know how much warming CO2 causes (McKitrick 2022 and Scafetta 2022). Nor do we discuss the fact that each additional ton of CO2 in the atmosphere has less warming effect than the previous ton (IPCC). See my note at the end of the article on damages from climatic changes and Figure D.
Instead, this article is about the environmental and economic sense or “none-sense” of pricing CO2 emissions as currently practiced in most OECD countries and increasingly in developing nations. It is about the sense or “none-sense” of measuring practically all human activity with a “CO2 footprint”, often mistakenly called “carbon footprint”, and having nearly every organization set claims for current or future “Net-Zero”.
Before you put the article aside and call me bananas, or worse, give me 5 minutes of your time and read on. I promise that I care about the future of both our children and the planet we inhabit. I am aware that fossil fuels cannot power forever ~80% of our world, as they currently do.
I recently discussed the issue of “environmental footprint” with a distinguished Swiss journalist in Zurich. We agreed that our entire existence is based on taking things from nature (“renewable” or not), so the “Net-Zero”-anything discussion ignores a fundamental requirement for our sustenance. We also agreed that it should be our aim to reduce this footprint as much as possible as long as our lives, health, and wealth don’t deteriorate. Now, I am sure, here some readers and many “climate activists” may disagree, which I respect but find unrealistic at a global level. However, I would assume that most agree life ought not to be harmed or shortened for the sake of reducing an environmental impact. Otherwise, there is little room for a conversation.
Figure A: German installed power capacity, electricity production, and primary energy
In any case, it is by now undisputed amongst energy economists that large-scale “Net-Zero” intermittent, unpredictable wind and solar energy increases the total or “full” cost of electricity (OECD 2018 p39, OECD 2019 p19, and our own academic study) primarily because of their inherent net energy and raw material inefficiency, mounting integration costs for power grids, and the need for a 100% backup system because of their intermittency.
My native country of Germany, where electricity costs are the highest of any larger nation, is the best example. Installed wind and solar power capacity is now about 1.5 times higher than “conventional” fully predictable power capacity, or total peak power demand (Figure A). This variable “renewable” wind and solar power capacity now produces about a third of the country’s electricity and contributes about 5% to total energy supply (Figure A). Europe, by the way, is “far” ahead of the world, with about 70% of its total energy supply coming from oil, coal and gas in 2022 compared to about 80% for the rest of the globe (IEA).
Obviously and undisputedly, higher energy costs hurt less affluent people and stifles the development of poorer nations (Figure B). Thus, a move to variable “renewable” energy has “human externalities”. At the margin, poorer people will be “starved off” energy they can’t afford. This means a literal reduction in life expectancy and therefore ending life early (another way of saying “killing”).
The year 2022 was the first in modern history that the number of people without access to electricity did NOT decline. Rather, it increased by a whopping 20 million (IEA) because COVID lockdowns starved people financially. High energy costs do the same, it impoverishes people and causes energy starvation even for entire industries (Financial Times, Economist, on eROI)
To return to CO2 pricing, the Swiss journalist and I agreed that the environmental footprint of our energy systems is multifold. It includes emissions (various chemicals, particles, and greenhouse gases), raw material input, energy input (that is the energy needed to actually produce the energy we consume), land or space requirement and impact on local climate, animal and plant life, as well as lifetime operational maintenance, waste disposal, and so much more. In addition, there are human health, safety, and financial considerations.
Figure B: Household income spent on energy by total household income
We also agreed that these “footprints” need to be considered along the entire value chain all the way from resource extraction, processing, transportation, manufacturing and operation to recycling and disposal. Figure C illustrates how virtually all CO2 pricing or taxation happens only at the stage of “operation” or combustion. How else could a “Net-Zero” label be assigned to a solar panel produced from coal and minerals extracted in Africa with diesel-run equipment, transported to China on a vessel powered by fuel-oil, and processed with energy from coal- or gas-fired power using partially with forced labor? All this energy-intensive activity and not a sing single kilogram of CO2 is taxed (Troszak 2019)? The same applies to a wind turbine and an electric vehicle.
For example, in 2022, Germany reached an average “CO2-Certificate” price of 80 EUR/t, more than 3x higher than in 2020 and 13x than in 2017 (Fraunhofer). This price was solely charged for measured CO2 emissions from fossil fuel combustion increasing power prices accordingly. Needless to say, wind and solar are not charged. Electric vehicles are not charged, diesel and gasoline powered cars are. CO2 emitting companies can off-set their CO2 emissions in elaborate off-set schemes that often have questionable, if any, environmental benefits (Guardian)
Remember also, that CO2 tax is basically just a means to redistribute wealth, with the collecting agency (government) deciding where the funds go. Yes, a CO2 tax does incentivize industry to save CO2… but at a cost to economies, the environment, and often children.
I believe you start seeing my point. Any economist will confirm that pricing one externality but not others leads to economic distortions and, many would say worse, environmental impacts.
Distortion is another word for unintended consequence to the environment, our economies, and the people. Pricing CO2 only during combustion but not pricing methane, or raw material inefficiency, or embodied energy, or energy shortages, or recycling inefficiency, or land requirement, or recycling inefficiency, or greening from CO2… will cause undesirable outcomes. The world will be worse off economically and environmentally.
Protest if you must, but let me offer a simple example. The leaders of the Western world seem to have united around abandoning coal immediately because it is the highest CO2 emitter during combustion (UN). Instead – demanding reliable and affordable energy – Bangladesh, Pakistan, Germany, and so many more nations have embraced liquified natural gas (LNG) as a “bridge” fuel to replace coal. This “switch” is done despite questions about LNG’s impact on the environment, including the “climate”. This policy, supported by almost all large consultancies, indirectly caused blackouts affecting over 150 Million people in Bangladesh in October 2022 (Reuters and Bloomberg).
For full disclosure, I support all reliable and efficient means of energy supply, including gas. I own shares in gas companies, and I have worked a significant portion of my time in the commodity and coal industries. However, trust me, I gain nothing from this article or my position.
Prof. Claudia Kemfert (green “energy transition” protagonist, energy economist, “climate scientist”, energy advisor to the German government) wrote an academic paper in 2022 pointing out that fugitive methane from gas production has a higher “climate” impact than CO2. Our own earlier academic paper from 2022 available in German and English at Elsevier’s SSRN goes one step further (see also on YouTube). Using only IPCC and IEA data, it turns out that LNG on average is “worse for the climate” than coal. It turns out that anthropogenic airborne CO2 “only” accounts for 35% of all anthropogenic greenhouse gases at the IPCC’s 20-year Global Warming Potential GWP20. Now, I do have concerns about the validity of those GWP and climate sensitivity assumptions of the IPCC, but we used them anyway, maybe we shouldn’t have.
So, the world is embarking on an expensive, Putin-supporting venture to replace as much coal as possible with more expensive LNG. As a result, energy costs go up, dependencies increase, lights go off, and, as per the UN’s IPCC, the “climate gets worse.”
Figure C: Environmental Impact of Energy Systems
This is exactly the result of CO2 taxation – just one example of an environmental and economic distortion. By focusing only on CO2, Bangladesh is driven to overreliance on LNG and goes dark. If methane (CH4) from LNG’s production and other sources were taxed, the world changes. Now imagine what would happen if we would truly take into account all environmental and human impacts – both negative and positive – along the entire value chain of energy production, transportation, processing, generation, consumption, and recycling… in so many words… you would be surprised! You would look with different eyes at fossil fuels and certainly nuclear.
That is why I do not support any CO2 pricing, even not along the entire value chain. That is why I fight for honest environmental and economic justice to make a truly positive difference for our future generations, to avoid energy starvation and resulting poverty. We need INvestment in, not DIvestment from 80% of our energy supply to rationalize our energy systems and to allow people and the planet to flourish.
I strongly support increasing adaptation efforts, which have already been successful in drastically reducing anyone’s chance of dying from natural disasters during the past 100 years and reduced GDP adjusted financial damage from those same disasters (OurWorldInData, Pielke 2022, Economist).
Please tell me where I got the logic wrong.
Dr. Lars Schernikau is an energy economist, commodity trader, and author based in Singapore and Switzerland. He studied finance at New York University, received his MBA at INSEAD in France, and obtained his PhD in Energy Economics from the Technical University of Berlin, Germany. Prior to joining the commodity business, Lars worked for several years at the Boston Consulting Group in the US and Germany. His recent book “The Unpopular Truth… about Electricity and the Future of Energy” is available at Amazon and www.unpopular-truth.com
Supplementary commentary and notes
Author’s note on damages from climatic changes (Figure D):
- McKinsey estimates annual costs of 9.2 Trillion USD until 2050 to reach “Net Zero” CO2. This is roughly 8% of global annual GDP, every single year until 2050. It must be noted that McKinsey did not model the cost of methane “NetZero” nor any cost to the environment, the population, or industries from rising energy costs and energy shortages (Bloomberg)… therefore, in my humble view, the costs are drastically underestimated.
- Future cost of climatic changes were calculated by Prof. Nordhaus (2018 Noble Price Winner in Climate Economics for exactly this calculation) to be 3.8% of GDP in the year 2100 in his base case – or no climate policy scenario – at 4 °C warming from pre-industrial times until 2100.
- It must be noted that (1) the GDP in 2100 is expected to be ~4.5x higher than today… so after 3.8% reduction it would result in “only” ~4.3x higher, (2) Nordhaus used the unrealistic5 emissions scenario and assumes no adaptation, (3) UN Climate Change informed in October 2022, the world is “on track for around 2,5 °C of warming by the end of the century” not the 4 °C assumed by Nordhaus, and (4) the IPCC 2018, p256 mentioned a 2.6% GDP loss in 2100 at 3.7 °C warming.
- Interestingly, Prof. Nordhaus concluded in his Noble Price winning paper “… there is virtually no chance that the rise in temperature will be less than the target 2°C even with immediate, universal, and ambitious climate change policies.”
Figure D: Peer-reviewed literature confirms «un-catastrophic» GDP Impact of projected temperature increases… we should still adapt and further reduce any impact.
Source: Schernikau adapted from Kahn et al 2021 (their best estimates shaded in grey)