Topic: Energy and Environment

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.   

Global Warming Showdown

The media is increasingly embracing the idea that anyone in the scientific community who doesn’t wet their bed over the prospect of future warming is some sort of (a) flat-earth know-nothing, or or (b) a cynical money grubber who allows oil and coal companies to buy their expertise despite knowing full well that doom is on the horizon.

Well, today you can judge for yourself.  At a conference co-sponsored by the Western Business Roundtable and the Business Industry Political Action Committee (BIPAC), Cato senior fellow Patrick J. Michaels (who, more relevantly, is a professor of environmental science at the University of Virginia and a member of the International Panel on Climate Change) will debate Klaus Lackner, a professor of geophysics at the Earth Sciences center at Columbia University.  The debate begins at 1:30 Mountain Standard Time and will be webcast live for all interested.  If you count yourself among them, you can go sign up here to listen.  

Judging Kyoto

Next Wednesday, the Supreme Court will hear oral argument in Massachusetts v. EPA, the blockbuster environmental case of the term. The issue: Does the Clean Air Act, a 1970s-vintage anti-smog statute, require the EPA to regulate greenhouse gas (CO2) emissions from new American cars? A number of states and enviro groups say “yes!” The EPA–in an exceedingly rare example of administrative self-restraint–says “no.” The stakes? Big: If the petitioners win, American carmakers may face the equivalent of Kyoto global warming standards, imposed by judicial fiat, despite Congress’s umpteen rejections of the Kyoto regime.

Cato filed an amicus brief on the EPA’s behalf, written by environmental law whiz Jonathan Adler and joined by lawprofs James Huffman and Andrew Morriss. Read it here. We argue that the petitioners lack standing to sue the EPA and also argue, for good measure, that nondelegation principles should counsel against creatively translating the Clean Air Act into a template for federal global warming regulation.

Cato’s intrepid Pat Michaels also filed a brief, joined by a number of other prominent climatologists, which tackles the dubious scientific claims of the environmental petitioners.

For more on the case, and its implications, Professor Adler recently participated in a panel discussion of the case at the American Enterprise Institute, which will be replayed on C-Span 2 tonight at 6 p.m. However, you can watch the archived video anytime here.

Apocalypse Cancelled

Remember in the 1990s, when the rainforests were alleged to be disappearing and forests of all kinds were being clear-cut around the globe at such an alarming rate that mass species die-offs were inevitable and the planet’s lungs would soon give out lest we, I don’t know, turn the globe into one giant Ted Kaczynski National Forest

Well, it turns out that this is yet one more doomsday predication that won’t likely pan out.  According to an article that appears today in the Proceedings of the National Academy of Sciences, 22 of the 50 countries around the world with the most forestland saw forest acreage expansions over the past 15 years, and most of the rest are transitioning from deforestation to reforestation.  Now that’s out of the way, let’s move on to the next “end is near” prognostication ….

Hollywood - Green Thyself!

Next time you run across some self righteous, moral preening Hollywood-type going on about the environmental doom that awaits us like the Gaian sword of Damocles lest we turn away from our gluttony, our self interest, and money-grubbing capitalist ways, keep this in mind: a recent study has found that the movie industry is the second largest source of pollution in LA.