Ken, I do like your way of looking at this!FYI I attach the part of my book Kyoto2 which addresses these questions. Oliver.
On 14/09/2013 17:02, Ken Caldeira wrote:
Had the Romans discovered fossil fuels, and invented automobiles and power plants and so on, and applied the logic recommended by Nordhaus, right now-- the great ice sheets would be melting, with sea-level probably rising a meter per century-- oceans would be acidified, coral reefs gone -- the arctic as we know it today would be gone -- the tropics would be suffering from blistering heat -- etcWould we be glad that the ancient Romans listened to their economists, and maximized their net present value so they could go on a fossil-fueled spending binge for a century or two?----As an aside, when I say we should or should not do something, or that something is good or bad, I am presenting my personal opinion as a human being and not pretending that it is a scientific result.When Eduardo Porter repreresents Nordhaus as says, "If investments in CO_2 abatement are not competitive, we would do better by investing elsewhere and using the proceeds to cover warming’s damage.", is this supposed to be a representation of personal values, or is this a finding of the "science" of economics? If the latter, then I would know to see how this "science" proceeds from empirical facts to prescriptive statements about what we ought to do. What is the experiment that would demonstrate the truth of the quoted sentence?Science tells us facts about the world. Religion and morality tell us about what we ought or ought not to do. Is economics a science or a religion?----I prefer the speed of light to be 6 x 10**8 m/s, instead of a measly 3 x 10**8 m/s. Is this like Nordhaus saying he prefers a discount rate of 4%? Do facts matter here, or do we just dress up our values with a little mathematics and pretend it is a science?_______________ Ken Caldeira Carnegie Institution for Science Dept of Global Ecology 260 Panama Street, Stanford, CA 94305 USA+1 650 704 [email protected] <mailto:[email protected]>http://dge.stanford.edu/labs/caldeiralab@kencaldeiraOn Sat, Sep 14, 2013 at 11:40 AM, Greg Rau <[email protected] <mailto:[email protected]>> wrote:http://www.nytimes.com/2013/09/11/business/counting-the-cost-of-fixing-the-future.html Interesting article navigating the SCC (social cost of carbon) issue, critical measure for evaluating the applicability of any mitigation action/technology. One revealing quote from Nordhaus: “Investments in reducing future climate damages to corn and trees and other areas should compete with investments in better seed, improved rotation and many other high-yield investments.” If investments in CO_2 abatement are not competitive, we would do better by investing elsewhere and using the proceeds to cover warming’s damage. We would still have money left over. Professor Nordhaus says he prefers a 4 percent discount rate. Using it in “A Question of Balance,” he calculates that the optimal carbon tax comes in at around $11 per ton of CO_2 . Greg-- You received this message because you are subscribed to the GoogleGroups "geoengineering" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected] <mailto:geoengineering%[email protected]>. To post to this group, send email to [email protected] <mailto:[email protected]>. Visit this group at http://groups.google.com/group/geoengineering. For more options, visit https://groups.google.com/groups/opt_out. --You received this message because you are subscribed to the Google Groups "geoengineering" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected].To post to this group, send email to [email protected]. Visit this group at http://groups.google.com/group/geoengineering. For more options, visit https://groups.google.com/groups/opt_out.
-- You received this message because you are subscribed to the Google Groups "geoengineering" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. To post to this group, send email to [email protected]. Visit this group at http://groups.google.com/group/geoengineering. For more options, visit https://groups.google.com/groups/opt_out.Title: Costing the future
Costing the future - From Kyoto2 chapter 4 by Oliver Tickell (Zed Books)
How are we value the future? The question is an important one in considering the economics of climate change, as we have to balance the optimum balance of inter-generational transfers of wealth and of costs. Should we assess the wealth and economic wellbeing of future generations on a par with our own? Or should we apply a 'discount' to the future so as to value it less?
To discount the future is normal practice, often by a fixed annual rate, which might typically be several percent - effectively valuing the future of our great-grandchildren a century hence at about a tenth of our own present. One reason for this is that people alive now are not going to be too bothered about people in a century or more's time - who will after all (as we may imagine) have all kinds of undreamt-of technologies with which to solve the problems we have left them with. Politicians promising a richer world two centuries hence will not attract many votes - most people want benefits now.
One economic justification arises from comparing the future value of two investments: one in reducing some future damages, and another in the economy. Because an investment in the economy (for example, lending money at interest, or equity investment in companies) will generally rise in value over time, an investment in reducing future damages needs to give a return at least as great as the economic investment in order to be justified. Otherwise the future will be better off putting up with the damages, but with with the benefit of the cumulative return on the invested capital.
Discounting may also be justified in economic terms as a reflection of anticipated higher incomes in the future - implying that future generations can better afford reductions in their incomes than we can now. As Oxford economist Paul Klemperer explains in the Financial Times,
"The root of the problems is that the costs of preventing climate change start now, while many of the benefits come in a hundred years or more. If growth continues at its recent historical rate, world GDP per capita will be at least five times higher in 100 years. So we should not feel too obliged to make sacrifices that make future generations even richer, any more than our grandparents should have given up their only television so that we can have yet one more set in the house." [1]
He is of course right that there is no reason for us to sacrifice our televisions today for our grandchildren's future televisions, which are in any case likely to get cheaper and cheaper, and better and better. But the picture changes when we consider natural resources such as soil, forests and wildlife, which are irreplaceable or regenerate over long periods of time. As environmental economist Michael Jacobs, now a member of the Council of Economic Advisers at HM Treasury, wrote in 1991 in The Green Economy,
"The landlord deciding whether to spend money on soil conservation measures will not be so concerned about loss of productivity in, say, the year 2050. But the people who will be living in 2050 will be concerned; they would have wanted the farmer to have taken every measure for conservation to keep the soil at least as productive. Discounting thus means that a market system does not provide fully for the future. This is especially true for resources which regenerate very slowly, such as tropical forests and whales. [...] it pays a timber company or whaler to deplete the resource as fast as possible, making maximum profits while spending the minimum in interest payments on their capital requirements." [2]
Discounting applied to the environment, he explained, rests on a
"mistaken premise, namely that the environment behaves like, and can therefore be compared to, money. This view has no doubt arisen because in their attempts to incorporate environmental criteria into their cost benefit analysis - the arena where discounting is actually practised - environmental economists have tried to express the environment in monetary terms. Having done this, they have assumed that '£1 million worth' of environment is just like £1 million of cash." [2]
Klemperer allows that his earlier discussion " ... doesn't mean that because most likely climate-change scenarios leave economic growth broadly unchanged, we can stop worrying: it simply means that the outcomes that really matter in cost-benefit calculations about climate change are those that are so disastrous that they wipe out the benefits of economic growth." [1] In other words, the future can take a few knocks from us that will make it a bit less well-off than otherwise, but not full-on catastrophe.
A similar view comes from climatologist Stefan Rahmstorf, who believes that the uncertainties inherent in climatic prediction mean that we need to move to a 'risk assessment' approach.
"In view of the uncertainty, what is needed is a risk assessment rather than predictions of abrupt climate change - rather like assessing the risks of a nuclear accident. Abrupt climate changes could be considered 'accidents' in climate change. In addition to the risk of a sudden change in ocean currents, there are other risks which must be considered - such as the risk of the West Antarctic Ice Sheet disintegrating due to global warming (raising the sea level by several metres), or the monsoon circulation changing, or large areas of rainforest drying out. Although the probability of such 'climate accidents' is fortunately not very high, the risks need to be investigated in more detail." [3]
The question of how to incorporate the risk of future catastrophe into our costings of climate change has attracted the attention of Harvard's Martin Weitzman, as in his review [4] of the Stern Review of the Economics of Climate Change [5]. Here he argues that the main problem we need to address is the possibility of truly extreme and catastrophic change, such as a temperature increase of 10C or more, which would bring costs of such a scale and nature as to destroy not only the global economy but the planet that we live on, at least as we know it. As such
"Spending money now to slow global warming should not be conceptualized primarily as being about optimal consumption smoothing so much as an issue about how much insurance to buy to offset the small chance of a ruinous catastrophe that is difficult to compensate by ordinary savings." [4]
Weitzman went on to undertake a mathematical analysis of the "bad fat tail" - named after the appearance of the curve representing cost and probability of climate change outcomes, in which major catastrophe has a low probability but essentially infinite cost. His treatment, On Modeling and Interpreting the Economics of Catastrophic Climate Change, overturns conventional cost-benefit analysis which does not adequately account for the risk of low-probability, extreme impact outcomes, and instead places these at centre-stage. Investing in preventing such extreme outcomes, rather than finding an optimal position on a smooth and predictable cost-benefit curve, therefore becomes the main purpose of climate policy. [6]
The main lesson is that we need to refocus the objectives of climate change policy. Rather than trying to limit warming to some more or less arbitrary number of degrees, we must aim to avoid Weitzman's "ruinous catastrophe" or Ramstorf's "climate accident" with a decent safety margin. This means we must first define, and then achieve, an emissions trajectory to that end, paying particular heed to potential climate tipping points. As an extra insurance policy, we to research geo-engineering options so as to have the option to forestall catastrophe should it threaten to overwhelm us.
When Nicholas Stern addressed the question of whether to discount the future, he came to the conclusion that in the context of global warming policy, there is no justification for discounting, except for a small factor reflecting the possibility that humanity might come to a catastrophic end - for example as a result of an asteroid strike:
"If your, if that consumption is going to come that period after mine, do I give less value? I think the answer to that question should be no. In other words, basically the first approximation for the pure time discount rate which is in the jargon what Im talking about, should be zero. Now Im in good company saying that. Frank Ramsey, Amartya Sen, Bob Solow, Pigou, a lot of people have thought seriously about this issue and suggested that pure time discount rating is, pure time discounting, is not ethically justified." [7]
Indeed there is a case for applying a negative discount rate - that is, to value the environment more in the future than now:
- As people get richer, and better able to meet their immediate needs, so they will value the quality of the environment more highly.
- Progressive depletion of environmental resources will make them scarcer, and so more valuable.
- As populations increase, we must multiply rising individual valuations of the environment by a greater number of people.
- Certain environmental damages have consequences which multiply over time; the 'runaway greenhouse effect' [see Chapters 1 and 8] is one powerful example of this.
But for the purpose of Kyoto2, we set aside the discount rate question (in any case a blunt and inadequate instrument) and instead focus on the ethics of what we reasonably may, and may not, do to the future. We may reasonably impose on future generations some reduction in their enjoyment of industrial and technological progress, however we may not destroy the irreplaceable essentials of the biosphere - such as healthy soils, water, atmosphere, wildlife, forests and other ecosystems, and equable climate. Thus we should make our main objective the prevention of serious climate accidents and the ruinous catastrophe of runaway global heating, whose essentially limitless costs would overwhelm all the benefits of economic growth and other human progress.
References
1. Paul Klemperer, "Awkward questions on behalf of our children", Financial Times, 11 May 2007.
2. Michael Jacobs, The Green Economy, Pluto Press, 1991.
3. Stefan Rahmstorf, "Abrupt climate change", Weather catastrophes and climate change - the state of science, Munich Re 2004.
4. Martin L. Weitzman, review of "The Stern Review of the Economics of Climate Change", JEL, 31 April 2007.
5. Nicholas Stern, Stern Review on the Economics of Climate Change, HM Treasury 2006.
6. Martin L. Weitzman, On Modeling and Interpreting the Economics of Catastrophic Climate Change, unpublished draft, 5 December 2007.
7. Nicholas Stern, Gurukul Chevening Lecture 2006, LSE, 7 November 2006.
