Environmental Securities and Risk

I read an interesting critique of the current U.S. economy…the general premise was that a significant amount of American finance has replaced investments in real goods and services with investments in financial derivatives (investments in ‘repackaged money’).

This is a cautionary tale…the more abstract our economy becomes, the more risk our society assumes.

I’ve also read the pros and cons of speculation as ‘indicators’ of where economic sectors are going…and the pros and cons of options and derivative investments to hedge against risk.

As I thought, a light went on about environmental investments. With prudent assessment and valuation, environmental securities have very knowable risk profiles, and the ability to accumulate valuable assets becomes easier than in other securities markets.

I note than there is significant emphasis in the carbon market on environmental registries, and they are important. They need to not only use great care in processing these environmental securities, but go further than merely registering ‘qualified’ credits, etc. In order to reduce risk, we need to connect the security knowably (quantifying both environmental return and risk) to the environmental processes and outcomes that underlie the security.

Is adequate work being done in that area? If it is, environmental markets will surpass other markets because they are the most stable investments.

Globalization

I’ve watched with interest the various conversations, policies, and politics of globalization over the past few years. It is a vast concept…and suffers from great generalizations in the media and the political arena.

I’ve been a bit of a skeptic about much of the trade liberalization…at the same time I’ve read many well-respected economists riding the ‘globalization bandwagon.’ My concerns have been both systematic (how can we really manage the economic systems that arise?) as well as ethical (one person’s ‘good’ can be very different from another person’s ‘good’). I also see globalization often driven by the commercial desire to expand the sale of products and services I consider of little value (KFC, for example).

Today I read an article that discusses ‘globalization withdrawal’ by some of the economist that were the biggest cheerleaders:

http://www.business24-7.ae/articles/2008/7/pages/07132008_0e2fdaac2526432cad20a95916ed4bc4.aspx

It led me to research the author, Dani Rodrik, and find he does a very interesting blog:

http://rodrik.typepad.com/dani_rodriks_weblog/

I’ve always considered my skepticism was merely a lack of knowledge (‘too stupid to see the value’) and a bias toward local thinking. I find it hard to conceive of ‘global’…so how can we plan economies based upon concepts that are infinitely complex?

Climate Change and Land Management

Freeman Dyson is a professor of physics at the Institute for Advanced Study at Princeton University.

His thoughts on “Climate Change and Land Management”…

The main subject of this piece is the problem of climate change. This is a contentious subject, involving politics and economics as well as science. The science is inextricably mixed up with politics. Everyone agrees that the climate is changing, but there are violently diverging opinions about the causes of change, about the consequences of change, and about possible remedies. I am promoting a heretical opinion, the first of three heresies that I will discuss in this piece.

My first heresy says that all the fuss about global warming is grossly exaggerated. Here I am opposing the holy brotherhood of climate model experts and the crowd of deluded citizens who believe the numbers predicted by the computer models. Of course, they say, I have no degree in meteorology and I am therefore not qualified to speak. But I have studied the climate models and I know what they can do. The models solve the equations of fluid dynamics, and they do a very good job of describing the fluid motions of the atmosphere and the oceans. They do a very poor job of describing the clouds, the dust, the chemistry and the biology of fields and farms and forests. They do not begin to describe the real world that we live in. The real world is muddy and messy and full of things that we do not yet understand. It is much easier for a scientist to sit in an air-conditioned building and run computer models, than to put on winter clothes and measure what is really happening outside in the swamps and the clouds. That is why the climate model experts end up believing their own models.

There is no doubt that parts of the world are getting warmer, but the warming is not global. I am not saying that the warming does not cause problems. Obviously it does. Obviously we should be trying to understand it better. I am saying that the problems are grossly exaggerated. They take away money and attention from other problems that are more urgent and more important, such as poverty and infectious disease and public education and public health, and the preservation of living creatures on land and in the oceans, not to mention easy problems such as the timely construction of adequate dikes around the city of New Orleans.

I will discuss the global warming problem in detail because it is interesting, even though its importance is exaggerated. One of the main causes of warming is the increase of carbon dioxide in the atmosphere resulting from our burning of fossil fuels such as oil and coal and natural gas. To understand the movement of carbon through the atmosphere and biosphere, we need to measure a lot of numbers. I do not want to confuse you with a lot of numbers, so I will ask you to remember just one number. The number that I ask you to remember is one hundredth of an inch per year. Now I will explain what this number means. Consider the half of the land area of the earth that is not desert or ice-cap or city or road or parking-lot. This is the half of the land that is covered with soil and supports vegetation of one kind or another. Every year, it absorbs and converts into biomass a certain fraction of the carbon dioxide that we emit into the atmosphere. Biomass means living creatures, plants and microbes and animals, and the organic materials that are left behind when the creatures die and decay. We don’t know how big a fraction of our emissions is absorbed by the land, since we have not measured the increase or decrease of the biomass. The number that I ask you to remember is the increase in thickness, averaged over one half of the land area of the planet, of the biomass that would result if all the carbon that we are emitting by burning fossil fuels were absorbed. The average increase in thickness is one hundredth of an inch per year.

The point of this calculation is the very favorable rate of exchange between carbon in the atmosphere and carbon in the soil. To stop the carbon in the atmosphere from increasing, we only need to grow the biomass in the soil by a hundredth of an inch per year. Good topsoil contains about ten percent biomass, [Schlesinger, 1977], so a hundredth of an inch of biomass growth means about a tenth of an inch of topsoil. Changes in farming practices such as no-till farming, avoiding the use of the plow, cause biomass to grow at least as fast as this. If we plant crops without plowing the soil, more of the biomass goes into roots which stay in the soil, and less returns to the atmosphere. If we use genetic engineering to put more biomass into roots, we can probably achieve much more rapid growth of topsoil. I conclude from this calculation that the problem of carbon dioxide in the atmosphere is a problem of land management, not a problem of meteorology. No computer model of atmosphere and ocean can hope to predict the way we shall manage our land.

Here is another heretical thought. Instead of calculating world-wide averages of biomass growth, we may prefer to look at the problem locally. Consider a possible future, with China continuing to develop an industrial economy based largely on the burning of coal, and the United States deciding to absorb the resulting carbon dioxide by increasing the biomass in our topsoil. The quantity of biomass that can be accumulated in living plants and trees is limited, but there is no limit to the quantity that can be stored in topsoil. To grow topsoil on a massive scale may or may not be practical, depending on the economics of farming and forestry. It is at least a possibility to be seriously considered, that China could become rich by burning coal, while the United States could become environmentally virtuous by accumulating topsoil, with transport of carbon from mine in China to soil in America provided free of charge by the atmosphere, and the inventory of carbon in the atmosphere remaining constant. We should take such possibilities into account when we listen to predictions about climate change and fossil fuels. If biotechnology takes over the planet in the next fifty years, as computer technology has taken it over in the last fifty years, the rules of the climate game will be radically changed.

When I listen to the public debates about climate change, I am impressed by the enormous gaps in our knowledge, the sparseness of our observations and the superficiality of our theories. Many of the basic processes of planetary ecology are poorly understood. They must be better understood before we can reach an accurate diagnosis of the present condition of our planet. When we are trying to take care of a planet, just as when we are taking care of a human patient, diseases must be diagnosed before they can be cured. We need to observe and measure what is going on in the biosphere, rather than relying on computer models.

Everyone agrees that the increasing abundance of carbon dioxide in the atmosphere has two important consequences, first a change in the physics of radiation transport in the atmosphere, and second a change in the biology of plants on the ground and in the ocean. Opinions differ on the relative importance of the physical and biological effects, and on whether the effects, either separately or together, are beneficial or harmful. The physical effects are seen in changes of rainfall, cloudiness, wind-strength and temperature, which are customarily lumped together in the misleading phrase “global warming”. In humid air, the effect of carbon dioxide on radiation transport is unimportant because the transport of thermal radiation is already blocked by the much larger greenhouse effect of water vapor. The effect of carbon dioxide is important where the air is dry, and air is usually dry only where it is cold. Hot desert air may feel dry but often contains a lot of water vapor. The warming effect of carbon dioxide is strongest where air is cold and dry, mainly in the arctic rather than in the tropics, mainly in mountainous regions rather than in lowlands, mainly in winter rather than in summer, and mainly at night rather than in daytime. The warming is real, but it is mostly making cold places warmer rather than making hot places hotter. To represent this local warming by a global average is misleading.

The fundamental reason why carbon dioxide in the atmosphere is critically important to biology is that there is so little of it. A field of corn growing in full sunlight in the middle of the day uses up all the carbon dioxide within a meter of the ground in about five minutes. If the air were not constantly stirred by convection currents and winds, the corn would stop growing. About a tenth of all the carbon dioxide in the atmosphere is converted into biomass every summer and given back to the atmosphere every fall. That is why the effects of fossil-fuel burning cannot be separated from the effects of plant growth and decay. There are five reservoirs of carbon that are biologically accessible on a short time-scale, not counting the carbonate rocks and the deep ocean which are only accessible on a time-scale of thousands of years. The five accessible reservoirs are the atmosphere, the land plants, the topsoil in which land plants grow, the surface layer of the ocean in which ocean plants grow, and our proved reserves of fossil fuels. The atmosphere is the smallest reservoir and the fossil fuels are the largest, but all five reservoirs are of comparable size. They all interact strongly with one another. To understand any of them, it is necessary to understand all of them.

As an example of the way different reservoirs of carbon dioxide may interact with each other, consider the atmosphere and the topsoil. Greenhouse experiments show that many plants growing in an atmosphere enriched with carbon dioxide react by increasing their root-to-shoot ratio. This means that the plants put more of their growth into roots and less into stems and leaves. A change in this direction is to be expected, because the plants have to maintain a balance between the leaves collecting carbon from the air and the roots collecting mineral nutrients from the soil. The enriched atmosphere tilts the balance so that the plants need less leaf-area and more root-area. Now consider what happens to the roots and shoots when the growing season is over, when the leaves fall and the plants die. The new-grown biomass decays and is eaten by fungi or microbes. Some of it returns to the atmosphere and some of it is converted into topsoil. On the average, more of the above-ground growth will return to the atmosphere and more of the below-ground growth will become topsoil. So the plants with increased root-to-shoot ratio will cause an increased transfer of carbon from the atmosphere into topsoil. If the increase in atmospheric carbon dioxide due to fossil-fuel burning has caused an increase in the average root-to-shoot ratio of plants over large areas, then the possible effect on the top-soil reservoir will not be small. At present we have no way to measure or even to guess the size of this effect. The aggregate biomass of the topsoil of the planet is not a measurable quantity. But the fact that the topsoil is unmeasurable does not mean that it is unimportant.

At present we do not know whether the topsoil of the United States is increasing or decreasing. Over the rest of the world, because of large-scale deforestation and erosion, the topsoil reservoir is probably decreasing. We do not know whether intelligent land-management could increase the growth of the topsoil reservoir by four billion tons of carbon per year, the amount needed to stop the increase of carbon dioxide in the atmosphere. All that we can say for sure is that this is a theoretical possibility and ought to be seriously explored.

USDA CEAP

In 2003 the USDA began the Conservation Effects Assessment Project (CEAP) to quantify the environmental benefits from conservation practices on private lands. Andy Manale, a Senior Analyst at USEPA, has been working on the team and has spoken well of CEAPs work.

They have been working on a number of pilots that carefully quantify environmental effects from specific conservation practices. For more:

http://www.nrcs.usda.gov/technical/nri/ceap/index.html

Highway Taxes

This morning on National Public Radio news, there was a report on the state of highway tax revenues. Driver miles were down last year over 3 percent, leaving a significant hole in the highway tax pot (money we pay through gas taxes).

There have been discussions of tax increases, but the Bush administration is advocating for a complete reform of the system for financing our transportation infrastructure. They are proposing a ‘driver-based’ system whereby drivers would pay based upon the type of use they make of cars, public transportation, etc….think ‘toll roads’

Yes, they’re discussing more monitoring by the federal government to make the system work. But the upside is that it would be a much more responsible system of funding infrastructure while providing incentives for more environmentally friendly transportation use.

For the whole story see Fight Gridlock Now

http://www.fightgridlocknow.gov/

Mathematics and Policy

I noticed that John Phipps had posted today about the poor state of American math and science education. At the end of his post, he drew a parallel to ‘why mathematical evidence seems to carry very little weight in policy debates’.

I’m well aware of the problems with using scientific and mathematical evidence in policy debates, but never related it to a lack of education. My own experience is that there is a huge ‘barrier to entry’ in using science and math in policy discussions. Unless you are ‘preaching to the choir’… most of the decision-makers will have very little comparative experience with the evidence. No matter how relevant and accurate, it will have no meaning!