Climate Change: Good News, Less Than 1% Chance of Disaster. And the Bad News?

by Guest Author Andrew Butter

As the Durban Climate Change conference wheezes into obscurity with memories of a bunch of what the neo-cons call “balding ex-hippies” on one side; and a stack full of conveniently newly-leaked e-mails on the other…and America conspicuously absent, I am reminded of previous catastrophes.

Of other times when all the world’s wise men assured us that there was a less than a 1% probability of disaster.

According to the hippies that’s the chance that within the next 100-years, (a) small increases in global temperature might trigger the melting of the permafrost, which (b) would create a feedback loop by releasing frozen methane, a greenhouse-gas much worse than CO2, which (c) would dramatically increase global warming which (d) would melt the on-land ice-caps, which (e) would mean that sea-levels rose 10-meters, which (f) would mean that all of where 35% of the world’s GDP is created was underwater, and that’s not counting that 95% of the ports in the world would be underwater, so world-trade would stop.

But don’t worry, that’s just stoned hippies and UN officials talking; everyone knows that’s never going to happen, and in any-case we all know that the UN is where non-democratic governments and crony-dictatorships send their fool-nephews to learn how to steal…they send the smart ones to do internships at Goldman Sachs and Moody’s.

Except…hang-on, just a second, now where did I hear that word “underwater” before?

I got it…it’s coming…oh yeah…I remember!!

Remember when the wise-men in Moody’s and Fitch and Standard & Poor all worked out the probability house prices in USA would NOT go on going up forever, was precisely equal to the chance of a collateralized debt obligation lovingly crafted by Goldman Sachs and proudly displaying the (then) coveted AAA quality-stamp on one rump, and a flag-decal saying “Made in America with Pride” on the other one, defaulting?

And now, 35% of the houses in USA are…“underwater”!!

But the mighty conclusion of the Durban Divas is that there is a more than 66% chance that it will get hotter in some places, cooler in other places, there will be more rain in some places and more droughts in other places, and more storms and hurricanes in some places, and more balmy-skies in others, and the sea “might” rise 300mm in 100-Years (that’s a foot if you are American). That might perhaps, cause world GDP to drop 0.1% below its potential, every year…and perhaps not, and in any case…so what?!!

Not that there aren’t plenty of ex-hippy branding gurus jumping on the band-wagon to promote their “Green” credentials…we learn:

[Starbucks] is now preparing for the possibility of a serious threat to global supplies…What we are really seeing as a company as we look 10, 20, 30 years down the road – if conditions continue as they are – is a potentially significant risk to our supply chain, which is the Arabica coffee bean.” Jim Hanna, Sustainability Director, Starbucks, on the impacts coffee farmers are seeing from a changing climate with severe hurricanes and more resistant bugs reducing crop yield.

I went into a Starbucks the other day, for the second time in my life. That’s on account of I resent having to queue up like a politically-correct American to buy a $5 cup of coffee in a low-wage economy, particularly where my bill includes 15% “service” that I know doesn’t get anywhere near the low-wagers who served me.

Personally I prefer to be able to sit down and have one of them practice their six words of English on me, pay $3 for the coffee, plus $1 service and tax, and slip the low-wager $1 directly, not so much as a reward for muddling up the order, as for “attitude”.

But I was meeting a yuppie and the only place yuppies can meet for anything is Starbucks, so I made an exception. He was late so I ordered a double-espresso; and after standing in a queue for about five minutes, what I got came in a paper-cup.

I said, “I’m sorry; but I want a proper cup”. That’s the whole point about a $5 espresso; it comes in a real cup. The very nice “low-wage-team-member” explained to me with a brilliant smile, “sorry but people keep stealing them and we ran out”.  I said, “OK but I’m not going to steal the cup, I’ll give you a deposit if you like”…they graciously gave me my money back instead; clearly they took one look at me and didn’t think I was worth the risk.

My point, I think Starbucks can put climate change fairly low down on their list of urgent things that have to be fixed to make their business model work. Here is one idea, in low-wage economies where people will pay Starbuck’s prices so they can steal the cups, it might be a good idea to do away with the “customers like to queue so as to feel more in tune with low-wagers”, and have waiter service, that way they can at least keep an eye on the cups, and if they really want to be sure, they could have the waiters chain them to the tables!!

Outside of the politically-correct hype that is banded about like so much hot-air, is the problem with the current plans to combat global warming, is that they rely on the idea that the people who might have caused the problem make the ultimate sacrifice of having to forgo waiter-service and drink espresso out of paper-cups, and that the rest of the world continue to ride around on donkeys.

The Kyoto plan allows rich countries to do a deal with poor countries so that in return for continuing to ride around on donkeys, they get a little bit of money.

I suspect that plan was devised by a Lawrence Summers prodigy; it’s not much different from his plan for rich countries to pay poor countries to eat their rubbish.

There is only one way to stop the emissions of greenhouse gases…ban them except for certain vital activities, and tax those heavily. That worked for chlorinated hydrocarbons, the ozone layer is slowly repairing itself; although getting Americans to pay same amount of tax on gasoline that the Europeans pay (an extra $3 a gallon), and then doubling that, is going to take more that some ex-hippies and a room full of crooks with UN-nametags, to make the sale, but anything less than that is just “Starbucks Talk”.

So, the best thing is just to forget about it and hope for the best?

I remember, twenty years ago, designing a land-drainage system for a smart Big Name “international” engineering consultancy. I got handed down a report that said the sea-levels might rise 300mm during the design life (50-Years), so that’s what I designed for.

The system cost 10% more to build (10% more fees), and I can guarantee that whenever the sea level does rise 300mm, my system will work great, except since then the sea level rose just 50mm in twenty-years so it doesn’t look like they will have a chance to test my brilliant engineering capability for another 60-years or so, on the current trend-line.

My point, the 300mm as a design parameter was a good one, regardless of what it was that caused the (small) rise, and regardless of the logic, they did at least get the right answer as an input for conservative engineering design. Which suggests that perhaps the logic might have been somehow correct…and remember, that was twenty years ago.

Source: NASA via Bad Astronomy blog

Work this one out:

A: There is a 66% probability that the avoidable effects of climate-change will cause a drop in world GDP of no more than 0.1% per year going forwards.

B: There is a 1% probability that will cause a drop in world GDP of more than 35% in one-go some time after 10 years and before 30 years from now.

What’s the Net Present Value of the lost cash-flow of (A) and (B), or more to the point, which is bigger?

You probably need a Black Scholes to work that one out (and significantly the hippies didn’t even try), but back-of-the-envelope, I figure the answer to (A) is $23-trillion in today’s prices, and the answer to (B) ranges from $19-trillion to $53-trillion, based on a world GDP in 2010 of $63-trillion.

That’s the amount of money at break-even it might be worth spending now or say over twenty-years, so as to reduce the risk, assuming of course that collectively spending that amount of money now could make a difference.

That’s say $1.1 trillion a year best-case over 20-Years, up to $2.5 trillion worst-case; of course remember that expenditure would have a trickle-down, and a big part of that might simply be tax-hikes on production of greenhouse gases to reflect the damage they do to the community in general (that would include taxing the unnatural practice of raising beef in feed-lots, which is a major source of methane).

I have three points:

1: If the dysfunctional hippies at the IPCC could get their sums in a row, they might be able to get hold of a chunk more money to spread around their fool nephews.

2: You can’t even run a decent sized war these days with $1.1 trillion, but therein lies a question, which is more important, discovering weapons of mass-destruction in Iraq or doing something proactive to “Save the World” for our grand-children?

3: USA spent or printed at least $3 trillion on the Credit Crunch to paper-over the consequences of not understanding how black-swans can sneak up and nip you in the posterior, the European Union is about to spend that sort of money for the same thing, perhaps that money might have been better spent, elsewhere?


Perhaps it’s time to take the hippies a little bit more seriously?

Perhaps also, the next time someone designs a port, one of the parameters given to the engineers to play with might be the question, “So how will the port work if the sea level suddenly goes up by 10-meters over five-years?

I know that sounds stupid, but if the engineers who designed Japan’s Fukushima power-plant had imagined that the sea-wall designed to deal with a tidal wave, stood a 1% chance of being breached once in 100-Years.

And based on that, they had located the diesel generators that were necessary to power the pumps to cool the reactors after the earthquake sensors closed the plant down (so there was no electricity)…on the roof, instead of on the ground so they were flooded when the water came over the top of the wall, then the reactor wouldn’t have blown up.

That might have added $25 million to the CAPEX…and the cost-benefit? Well they are still working out how much that black-swan cost, but numbers in the range $70 billion to $250 billion are being floated, that’s an ROI in retrospect of 10,000 to One.

On top of that there is the cost of the needless paranoia founded on the premise that it’s impossible to design against a black-swan, so it’s better just to do nothing and pray.

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About the Author

Andrew Butter started off in construction in UAE and Saudi Arabia; after the invasion of Kuwait opened Dryland Consultants in partnership with an economist doing primary and secondary research and building econometric models, clients included Bechtel, Unilever, BP, Honda, Emirates Airlines, and Dubai Government.

Split up with partner in 1995 and re-started the firm as ABMC mainly doing strategy, business plans, and valuations of businesses and commercial real estate, initially as a subcontractor for Cushman & Wakefield and later for Moore Stephens. Set up a capability to manage real estate development in Dubai and Abu Dhabi in 2000, typically advised / directed from bare-land to tendering the main construction contract.

Put the unit on ice in 2007 in anticipation of the popping of the Dubai bubble,defensive investment strategies relating to the credit crunch; spent most of 2008 trying to figure out how bubbles work, writing a book called BubbleOmics. Andrew has an MA Cambridge University (Natural Science), and Diploma (Fine Art) Leeds Art College.

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