The academic criticisms of the Stern Review on the Economics of Climate Change keep pouring in. Prof. William Nordhaus’ trenchant critique is echoed by Prof. Partha Dasgupta, the Frank Ramsey professor of economics at Cambridge. Dasgupta, like Nordhaus, finds that the difference between Nicholas Stern’s calculations regarding the future costs associated with global warming and the far less alarmist calculations that characterize the academic literature has little to do with new facts about warming, better computer models, or anything of the kind. It’s all about discount rates.
Like Nordhaus, Dasgupta thinks that Stern’s moral admonition to treat generations the same across time is demonstrably ridiculous no matter how superficially attractive the idea might be at first blush. Assume, for instance, that we apply a 0.1% discount rate for future investment and assume a social rate of return on investment of 4% a year.
It is an easy calculation to show that the current generation in that model ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. Should we accept the Review’s implied recommendations for this country’s overall savings? Of course not. A 97.5% savings rate is so patently absurd a figure that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to impoverish itself for the sake of future generations.
As economist Stephen Landsburg once famously wrote at Slate, anyone honestly concerned about equity would happily confiscate as much of the wealth from future generations that they could get their hands on. Anyway, read Dasgupta’s paper here.