All is robots: crowbarring open the Treasury’s climate model

Imagine a country that looks entirely like the UK, except populated by cold robots with Microsoft Excel for brains.  Their economy functions perfectly. There is no dole office in robot UK. They make perfect decisions based on full knowledge of what’s going to happen in the future.

And they aren’t inconvenienced by runaway carbon emissions. They don’t suffer from things like air pollution, what with not needing to breathe air. If it floods, they can carry on their business underwater. It doesn’t matter if their crops are devastated by increasingly severe winter rain, because they’re robots, so they don’t eat crops.

This is what the inside of an economic model looks like. Crowbar one open and you’ll see neat families of robots blinking back up at you.

But in the real world, people (well, most people) are squishy and unpredictable. They can’t always predict what they’re going to have for dinner, never mind the best way to react to 13 years of slowly changing prices and incentives. Their reaction to the prospect of future reductions in fossil fuels isn’t to calmly map out their consumption patterns but perhaps either go ‘meh’ or wibble their hands in the air and freak out a bit.

“Life? Don’t talk to me about life!”  – Marvin, the paranoid android

Which doesn’t mean economic modelling is hokum. It isn’t: it can give you valuable pointers for policy, as long as you’re frank about what it is you’re actually being told by your approximation of reality. But as I blogged a few weeks ago, you have to simplify to build a model, thus turning people into robotic simulacra of society.  And the tricksier issue and further into the future you’re trying to understand, the less use your android horde is likely to be to you.

So, to the Treasury, which has turned perhaps its most powerful economic model – a type of (bear with me) ‘Computable General Equilibrium’ model (CGE), run by HM Revenue and Customs – to looking at the possible impacts on growth of the UK’s ‘fourth carbon budget’. This legally-binding five-year cap on carbon emissions, covering the period 2023-27, is currently a hot political potato: George Osborne is furiously attempting to water down the budget from its already-set level.

Happily for Mr Osborne then, the HMRC model has concluded (2011 Carbon Plan, para B4.2)  that the more carbon you try to cut, the bigger the impact on GDP. In the year 2027:

• the fourth carbon budget at the already-set level of roughly 50% cut on 1990 levels, apparently reduces GDP by 0.6% from where it would otherwise be.
• But go for a slightly weaker budget, it reckons (equivalent to a 46% cut) and GDP is reduced by only 0.4%.

Further explanation is sparse. How is that figure arrived at? And how with any certainty can you claim to be launching anything more than an educated stab in the dark at what GDP in 2027 would look like anyway, never mind with different carbon cuts laid on top?

So with our friends at WWF-UK, we commissioned internationally renowned climate economist Dr Frank Ackerman to write (Mis)understanding climate policy – a look at the inner workings of the model.  We launched it this morning.

Dr Ackerman found two categories of big reason to treat the model’s findings with extreme caution. The first is the sheer difficulty of modelling how an entire economy will unfold in the next 13 years; I blogged about this a few weeks ago. Just as one (very pertinent) example, look at the extremely fast-changing economics of renewable energy, where the cost of solar panels has fallen 60% since 2011, attracting over £33 billion of investment in four years and now employing over 100,000 people. Thirteen years ago, how easy would that have been  to predict?

The HMRC model’s robots all have a job, so ‘green jobs’ can never be a benefit to the economy – and no other countries exist, so the UK can’t get trade advantages in any technology that is invested in due to carbon budgets. Yet in practice, the dole office very much exists, and investments like those of Siemens in Hull can revitalise areas of worklessness, together with putting the UK at the forefront of exporting new technologies like offshore wind.

And the model also misses out some other pretty relevant things, like cleaner air, which would be a welcome side-effect of policies to cut carbon. To make this point Dr Ackerman plugs in very conservative figures for the economic benefits of reducing toxic emissions and shows how easy it would be to wipe out the apparent ‘loss’ of GDP from a tighter carbon budget. Whatever number you want to use for the economic benefit of stopping people not being able to work through asthma attacks, I don’t think the right answer is ‘zero’.  But with models, the assumptions you plug in are everything.

Unfortunately the Chancellor’s developing a habit of pointing to the output of this model as post-hoc justification for doing something that he wanted to do anyway. A few weeks ago the Treasury released a report claiming that the £22 billion he has lost in tax revenue by jettisoning inflation-level fuel duty rises is good for the broader economy, proved by the HMRC model. (We were quick to point out then too the model’s disinterest in pretty important things in motoring policy, like lowering car fumes.)

And we know from leaked correspondence that the ongoing battle over the level of the fourth carbon budget – a charge led by the Chancellor, who has an ideological position that the UK should “go no faster than our fellow countries in Europe” – has seen Mr Osborne point to the outputs of the model as backing his position.  You can bet your bottom dollar that he hasn’t quite gone to the lengths of Dr Ackerman in running through the many ways in which the model’s outputs may bear little relationship to reality.

I’m not saying ‘scrap economic models’. Really, I’m not. But the caveats, limitations and assumptions that any model inevitably includes need to be slavered all over the results in red pen, lest any unwitting decision-maker be lured into thinking the results are more certain or significant than in fact they might be.

“I’ve calculated your chance of survival, but I don’t think you’ll like it” – Marvin

Blog written by David Powell, 30th April 2014.