Topic: Energy and Environment

It’s Official - Economists Think Stern’s Nuts

In this month’s issue of the Economists’ Voice, Robert Whaples, chair of the economics department at Wake Forest, reports on a survey he recently conducted in which he sent questionnaires to 210 Ph.D. economists randomly selected from the American Economic Association.  His charge: to find out how much disagreement there is within the profession and a number of high profile public policy issues.

What did his respondents have to say about the impact that global warming will have on the economy? 

  • 19.6% agreed with the Stern Review on the Economics of Climate Change, that is, that U.S. GDP per capita would be reduced by 5% or more by the end of the 21st century if the world did nothing to address industrial greenhouse gas emissions;
  • 35.7% believed that warming would reduce U.S. GDP by less than 1% and may even increase it up to 1%!;
  • 21.4% agreed with Yale economist William Nordhaus in that U.S. GDP losses would be somewhere between 1-5%;
  • 16.1% believed that U.S. GDP would increase by 1-5% as a consequence of warming; and
  • 7.1% though U.S. GDP would increase by more than 5% because of warming!

In short, the number of economists who thought global warming would improve the U.S. economy outnumbered the number of economists who thought that global warming would harm the economy to the extent feared by the Stern Review.

Will those who demand that we bow down to the consensus of scientific opinion likewise demand the same regarding the consensus of economic opinion?  Not bloody likely.

Sen. Richard Lugar: Public Menace

Representatives of NATO are in Latvia this week to talk about the alliance. But no international gathering is safe from the careful eye of Sen. Richard Lugar (R-IN). On the eve of the NATO meeting, Lugar gave a speech at conference sponsored by the German Marshall Fund arguing that NATO must be capable of responding if producing states use energy “as a weapon” to cut supplies to NATO members.

Now, think about this for a minute. Lugar is implying that if A decides not to sell to B, then B has the right to shoot A in the head. If A decides to sell less to B than B might like, B is apparently also justified in shooting A in the head.

Sometimes, however, military retaliation might be a bit over the top – even for Sen. Lugar. In those cases, Sen. Lugar proposes that consumers diversify their sources of supply as a preventative measure. Apparently, this would never occur to market actors. This would only occur to United States Senators.

And now, let’s toast the new Democratic majority in the Senate ….

Global Warming? Let’s Hope So …

If the climate researchers at the Russian Academy of Sciences are right, global warming might turn out to be a blessing. Based on their analysis of solar cycles, scientists there are increasingly worried that a mini ice-age is around the corner. Warming might be the only thing standing between us and a glacial blitzkrieg due around 2055.

Just throwing that out there ….

Enviro Myth-Making about Easter Island

If you pay attention to the enviro press, you’ll find a lot of references these days to Jared Diamond, author of Collapse: How Societies Choose to Fail or Succeed. Time after time, we’re told, human societies have collapsed upon themselves because they didn’t pay enough attention to what they were doing to Mama Earth. Past is prologue, so if we don’t start paying attention to the Green doomsayers, we might as well kiss our butts goodbye.

But is it true? Take, for instance, the example of Easter Island, one of the main exhibits in this enviro show trial. Did the natives really go nuts strip-mining that island of resources? It turns out that the answer is no. According to a new study forthcoming in the Journal of Archaeological Science, the entire Diamond narrative is bunk:

Easter Island (Rapa Nui) has become the paragon for prehistoric human induced ecological catastrophe and cultural collapse. Today a popular narrative recounts an obsession with monumental statuary - a mania for moai - that led to the island’s ecological devastation and the collapse of the ancient civilization. Scholars offer this story as a parable for our own reckless destruction of the global environment.

In this paper, I critically examine the historical and popular narrative of human-induced environmental change, its causes and consequences, for Rapa Nui. I review new and emerging Rapa Nui evidence, compare ecological and palaeo-environmental data from the Hawaiian and other Pacific Islands, and offer some perspectives for the island’s prehistoric ecological transformation and its consequences. I argue here that a revised, later chronology for Rapa Nui calls into question aspects of the current model for the island’s ecological history. A critical examination of the paleo-environmental and archaeological records also reveals a more complex historical ecology for the island; one best explained by a synergy of impacts, rather than simply the reckless over-exploitation by prehistoric Polynesians. While my focus is on the palaeo-environmental record, it is essential to disentangle the related notion of prehistoric “ecocide” with the demographic collapse (i.e., post-contact genocide) that would come centuries later with European disease, slave-trading, and the other abuses heaped upon the Rapanui people. Contrary to the now popular narratives (e.g., Diamond, 1995 and Diamond, 2005), prehistoric deforestation did not cause population collapse, nor was it associated with it. Such an argument can be based only on facile assumptions and an uncritical faith in contradictory accounts from the island’s oral histories; but this is a critical subject worthy of detailed, continued examination (see Metraux, 1957, Peiser, 2005 and Rainbird, 2002).

There’s a reason people like me are deeply suspicious of virtually everything environmentalists have to say. After you run across this and similar vignettes hundreds of times over, you get to the point where you don’t believe a word these people say. They might be right here and there, but you’ll never know for sure unless you check it out for yourself.

Dasgupta vs. Stern

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.

Nordhaus vs. Stern

When the Stern Review on the Economics of Climate Change was released a few weeks back, I got a bevy of calls from reporters asking what I thought of it.  Of course, it’s hard to say anything intelligent about a 700+ page report that was released only hours earlier, so all I could do was quickly peruse the executive summary, speed-glance through the most pertinent sounding chapters, and opine like the wind.  While I thought I did a reasonable enough job summarizing the main issues at hand given the circumstances, the experience demonstrates a fundamental problem with journalism that is unlikely to ever go away.  To wit, reporters demand an immediate reaction when some new study or paper comes out, and the news cycle doesn’t last long enough to allow for particularly informed and/or careful review of many of these said studies or papers.  By the time that informed and careful response is ready, reporters have moved on to something else.  The deck is stacked in favor of the authors, who seldom have to defend against anything but superficial or relatively poorly-informed criticism in the popular press.

One of the things I was most interested in at the time was what economists who specialized in the economics of climate change had to say about the Stern Review.  The leading academic on this subject is William Nordhaus, an economist at Yale (another is Prof. Robert Mendelsohn at the same university.  Prof. Mendelsohn’s response to the Stern Review will be published in the next issue of Cato’s Regulation magazine).  When I emailed Prof. Nordhaus about the Stern Review, I got a rather short and vague reply.  Nicholas Stern is a good economist, Prof. Nordhaus said, and the report looked like a serious undertaking; the right questions were asked and the answers provided looked interesting.  Beyond that, little else.  Reporters I talked to told me this is what he had sent them as well.  Apparently, Nordhaus was not ready to jump into the discussion yet.

Reporters moved on, but Nordhaus did not.  Over the next several weeks, he apparently went to work on the document and by last week he was ready to offer up some thoughts.  Despite the fact that this highly credentialed economist finds that ”it is impossible for mortals outside the group that did the modeling to understand the detailed results of the Review,” his analysis is illuminating.  While no reporter is likely to write about Nordhaus’ take on Stern now, it is worth your time if you wonder whether an economic disaster of epic proportions really awaits us lest we do something drastic to reduce greenhouse gas emissions.  The answer; probably not.

The gist of the matter is this:  Academic economists who specialize in climate change generally agree that warming - if the “consensus” of scientific opinion as reported by the Intergovernmental Panel on Climate Change is correct - will only reduce global GDP by 0-3% per year and that those costs won’t be evident until well into the future.  The Stern Review, however, reports that losses may total as much as 20% of global GDP if warming is left unaddressed.  Why the disagreement?

While there are a number of issues in play, the main thing explaining the differing calculations is the extent to which future warming is discounted into the present.  Most economist use discount rates ranging from 3-5% when trying to put a price tag on future damages.  Stern argues that this is ethically indefensible - losses tomorrow, or even 200 years from tomorrow, are just as worth worrying about as losses today.  If you apply a 0.1% discount rate (Stern’s figure) rather than, say, a 5% discount rate (my suggestion, which matches the return on Treasury bills - or, put another way, the figure people apply themselves when considering the value of money today versus the value of money tomorrow) or a 3% discount rate (Nordhaus’s figure, although he is happy to confess that other figures are perfectly defensible), then you’re going to get a huge price tag for global warming.  Apply higher discount rates, and the price tag deflates to such an extent that it’s impossible to justify spending anything near what Stern wants us to spend to reduce greenhouse gas emissions.

Is Stern right to argue that we are morally required to treat losses to future generations in exactly the same manner that we treat losses to present generations?  Not necessarily:

Quite another ethical stance would be to hold that each generation should leave at least as much total societal capital (tangible, natural, human, and technological) as it inherited.  This would admit a wide array of social discount rates.  A third alternative would be a Rawlsian perspective that societies should maximize the economic well-being of the poorest generation.  Under this policy, current consumption would increase sharply to reflect likely future improvements in productivity.  Yet a fourth perspective would be a precautionary (minimax) principle in which societies maximize the minimum consumption along the riskiest path; this might involve stockpiling vaccines, grain, oil, and water in contemplation of possible plagues and famines.  Without choosing among these positions, it should be clear that alternative perspectives are possible.

Note that if you are an admirer of political philosopher John Rawls - as most of the Left most definitely is - then you should probably embrace the use of a high discount rate. 

Anyway, what if we use Stern’s discount rate regardless?  Nordhaus thinks it leads to palpably ridiculous policy prescriptions:

Suppose that scientists discover that a wrinkle in the climatic system will cause damages equal to 0.01 percent of [global] output starting in 2200 and continuing at that rate thereafter.  How large a one-time investment would be justified today to remove the wrinkle starting after two centuries?  The answer is that a payment of 15 percent of [the] world’s consumption today (approximately $7 trillion) would pass the [Stern] Review’s cost-benefit test.  This seems completely absurd.

Still happy with a near-zero discount rate?  What if we applied that philosophy in other policy arenas where the same issue arises - like, say, foreign policy?  Nordhaus echoes an argument I made myself several years ago:

While this feature of low discounting might appear benign in climate-change policy, we could imagine other areas where the implications could themselves be dangerous.  Imagine the preventative war strategies that might be devised with low social discount rates.  Countries might start wars today because of the possibility of nuclear proliferation a century ahead; or because of a potential adverse shift in the balance of power two centuries ahead; or because of speculative futuristic technologies three centuries ahead.  It is not clear how long the globe could long survive the calculations and machinations of zero-discount rate military powers.

Nordhaus’s commentary on Stern is only 21 pages double-spaced, and there’s more intellectual goodies therein.  Read it.  Learn it.  Live it.