"...the discussion of discounting has been truly awful, and it should not have been".
is what Lord Stern said, to summarize his discussion of discount rates, the work of Bill Nordhaus, and the work of most economist impact modellers (including his own work heading the Stern Review), in a major speech delivered at the IMF last April. The IMF has the video of the speech *here<http://www.imf.org/external/mmedia/view.aspx?vid=2274660864001> * EETV has the transcript up *here<http://www.eenews.net/videos/1659/transcript> * A few exerpts from the EETV transcript follow: Stern, on Nordhaus: "Bill Nordhaus, who has been in this game a long time, a scholar a gentleman and *a friend*, has built the generic model DICE. Now in the DICE model you lose 50% of output at 19 degrees Centigrade. At 19 degrees, well, you're probably dead at 7, 8, 6. Fifty percent of output at 19 degrees, it can't be sensible in relation to the kinds of events that we're talking about, yet these are the kinds of modelings that people use, including the United States, to measure the social cost of carbon and so on. It's worse than that, actually, because what you have is not simply a multiplicative loss function, which occurs period by period, with no account of history. What you also have is a exogenous growth rate. So you have a production function of capital, labor, whatever, multiplied by a damage function, which is very small, as I've just described, and multiplied by an exogenous growth factor. Well, put in one or two percent in your exogenous growth factor and over a century you've got an overall multiplicative factor of two or three, up to eight or nine, depending on what growth rate that you put in. If you knock off even 50 percent of output, you're still forecasting in a very destructive world output and incomes higher than now. It just doesn't resonate with the kind of problems that we're talking about." Stern, on the assessment of risk published by the Stern Review which he headed: "we badly underestimated or badly under-portrayed the kind of risks which we faced" Stern, on how economic modellers get it so badly wrong: "what you find often is people focusing those models on bits they can understand. So they'll tell you that at four degrees, the agricultural output in Northern India may go down by 20 percent. Well, that's relevant, but it doesn't take into account the rerouting of the flows of the rivers of the Himalayas. It doesn't take into account the disruption of the monsoon. It leaves out, in other words, most of the things that are important. And of course, those of you who know India well will know that agricultural output is only about 15 percent of GDP, so if you take away 20 percent of 15 percent, you knock GDP down by 3 percent, and that's in the agricultural part of the economy, and you don't model the impact so well on the service sector, so you end up with actually rather trivial statements of a radical, of small losses, but a radical transformation of what's going on." He elaborated on this point a bit later in the speech: "If we had to describe the really destructive events of the last century, the First World War, the Second World War, the Holocaust, the loss of life of tens of millions under Stalin's Russia and the different structures of collectivization, the great famine in China, where 30, 35 million people died around 1960, we wouldn't do it in terms of one aggregate GDP. That wouldn't convey to people the kind of things that we're worried about." Stern, on why he feels qualified to discuss discount rates: "I was the editor of the Journal of Public Economics for about 17 years, from the end of the seventies through the eighties to the early years of the nineties...." Stern, on how he feels about the work of many of his colleagues: "and sometimes I despair at the ignorance of modern public economics...." Stern, on discount rates, or how economists magically transform dire warnings issued by climate scientists into statements that whatever happens, it hardly matters: "Essentially, we discount for two reasons, if we're thinking about the ethics of discounting. One is because future generations may be better off or worse off than us. If they're worse off than us, then we would be thinking of attaching a strong discount to extra benefits that might occur to people who are much better off than ourselves, and we understand the redistributive reasons for that. But of course, as I've argued, they could well be poorer than us, and we have to take that endogeneity of income in a story which is all about big changes in standards of living. In those circumstances, of course, they're going to be much poorer than us, you'd want negative discounting rather than positive discount rate. There's also the question of pure time discounting, and that's how you value lives. How much more or less do you value a life, an identical life, in the future relative to now? If you think it should be less, then that's pure time discounting, separating out anything about standard of living, taking an identical life. Well, most of, when we approach ethics, we think of symmetry between people. We would regard discrimination by date of birth as arbitrary, from an ethical point of view, and you'd have to have some special reason to do that. Mostly, we think people's sort of human rights and their values of lives as standing equally. So we should have had, and I did start it, but I should have gone much further in the Stern Review, on the basic underlying principles of discounting. You absolutely can't read off from markets, for example, a discount rate for a collective decision over 100, 150 years, from personal decisions in markets which might be 10 years or so. Sometimes in these discussions, the role of risk has been muddled up, and in many of the models we're dealing with, you take an expectation across states of nature of utilities, so if you have a discount story within the model before you take the expectation, then that discount would be the risk-less discount, because you're taking the discount risk elsewhere. I could go on, but the discussion of discounting has been truly awful, and it should not have been. And I think if we go back to the basic principles of whether future generations will be better off or worse off, then we will be, you get to the heart of the matter of discounting, and then take on directly the ethical question of whether you want pure time discounting or discrimination in relation to date of birth." * * * *On Saturday, September 14, 2013 11:56:38 AM UTC-7, Ken Caldeira wrote: > > At a 4% discount rate, one would be willing to take $1 today in return for > causing $2500 in damages 200 years from now. > > If we were investing that $1 with the intent that the proceeds would be > given to people 200 years in the future, there might be an argument. But if > we are just going to increase current consumption at the expense of future > generations, then this is not an ethical stance. > > We are appropriating assets that should be available to future generations > and liquidating them to increase our current consumption. > > > _______________ > Ken Caldeira > > Carnegie Institution for Science > Dept of Global Ecology > 260 Panama Street, Stanford, CA 94305 USA > +1 650 704 7212 [email protected] <javascript:> > http://dge.stanford.edu/labs/caldeiralab @kencaldeira > > > > > On Sat, Sep 14, 2013 at 2:30 PM, Marty Hoffert <[email protected]<javascript:> > > wrote: > >> Hi Ken: >> >> The more I read your quips on economics versus physics, the more I see >> the value of your undergraduate major in philosophy. >> >> Marty >> >> Sent from my iPhone >> >> On Sep 14, 2013, at 12:02 PM, Ken Caldeira >> <[email protected]<javascript:>> >> 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 >> -- etc >> >> Would 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 CO2 >> 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 7212 [email protected] <javascript:> >> http://dge.stanford.edu/labs/caldeiralab @kencaldeira >> >> >> >> >> On Sat, Sep 14, 2013 at 11:40 AM, Greg Rau <[email protected]<javascript:> >> > 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 CO2 >>> 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 CO2. >>> >>> Greg >>> >>> -- >>> 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] <javascript:>. >>> To post to this group, send email to >>> [email protected]<javascript:> >>> . >>> 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] <javascript:>. >> To post to this group, send email to [email protected]<javascript:> >> . >> 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. 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