The Economics of Climate ChangeWho matters?

Who decides who matters?

Philosophy of Social ScienceWeek 1, Winter Term, 2011

The Stern Review on the Economics of Climate Change (30 October 2006)

• Commissioned by Gordon Brown, UK Chancellor of the Exchequer, ‘to understand more comprehensively the nature of the economic challenges and how they can be met in the UK and globally’.

• For a US take: cf. Jorgenson, Dale W., Richard J. Goettle, Brian H. Hurd, and Joel B. Smith. 2004. U.S. Market Consequences of Global Climate Change.

The Review met with hugely mixed reception…

The Stern review on the economics of climate change completely fails to acknowledge the imminent decline in global oil productionDavid Strahan

www.prospect-magazine.co.uk/article_details.php?id=8954 - 53k

Not stern enoughThe Stern review offers a way out of climate change catastrophe - but only by playing down the scale of the problem. //www.guardian.co.uk

Stern warning:The review on climate change marks a turning point.From The Times

The Stern Review: "It's balls” Recall the government’s “dodgy dossier” on

Iraq? Now it’s issued another scare story. Am I the only businessman who is just a little bit dubious about economist Sir Nicholas Stern’s findings?GB Magazine, Jan 2007 by David Soskin

• He was Adviser to the UK Government on the Economics of Climate Change and Development, reporting to the Prime Minister from 2003-2007 and during that period headed both the Stern Review on the Economics of Climate Change and the Government Economic Service.

• From 2000-2003, Sir Nicholas was World Bank Chief Economist and Senior Vice President, Development Economics.

• Lord (Nicholas) Stern is currently the IG Patel Professor of Economics and Government at LSE and chairs LSE’s Grantham Research Institute on Climate Change and the Environment and is also a Professor of the College de France. He sits as a cross-bencher in the House of Lords.

Baron Stern of Brentford

The Stern Review forecasts that 1% of global gross domestic product (GDP) must be spent on tackling climate

change immediately.

It warns that if no action is taken:

• Floods from rising sea levels could displace up to 100 million people.

• Melting glaciers could cause water shortages for 1 in 6 of the world's population.

• Wildlife will be harmed; at worst up to 40% of species could become extinct.

• Droughts may create tens or even hundreds of millions of "climate refugees”.

Compare• The cost of a global stabilization of

greenhouse gas concentrations: 1% global GDP (Stern Review) and higher by others, e.g. 2% (Lomborg, Kool It).

• This is 4% - 8% of United States GDP. If the United States bore the entire cost alone.

• Compare: Freeman and Guzman calculate US domestic costs of climate change impacts to be between 10% and 20% GDP.

• But note: all the figures are controversial. 7

• “The conclusion of the review is essentially optimistic,” said Sir Nicholas. “There is still time to avoid the worst impacts of climate change if we act now and act internationally. We can grow and be green.”

• The report identified carbon pricing, including carbon-emissions trading worldwide and green taxes, improved low- carbon technology, energy efficiency and halting deforestation as the main methods of cutting greenhouse-gas emissions.

• Recommendations from the Stern review aim for a temperature change of about 2˚C in 100 years, stabilizing at 3˚.

• “By contrast, along the more-gradual majoritarian optimal trajectories, CO2 concentrations a century from now are >600 ppm and E[ΔT] ≈ 2.5˚C – with temperatures expected to continue rising to well above E[ΔT] ≈ 3˚ after year 2105.” (Weitzman, 2)

BUT see The Guardian, 6 August 2008Prepare for global temperature rise of 4C, warns top scientist…Defra's chief adviser says we need strategy to adapt to potential catastrophic increase.

10

IPCC2007FourthAssessment Report

• The Stern review recommends immediate, decisive and expensive measures starting now to reduce CO2 emissions and green house gases.

• Because “our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and economic depression of the first half of the 20th century.”

Dietz and Stern“The case for strong and urgent Action set out in the Review is based, first, on the severe risks that the science now identifies (together with the additional uncertainties that it raises but that are difficult to quantify) and, second, on the ethics of the responsibility of current generations for future generations. It is these two issues–risk and ethics—that are crucial.” (p 2)

“…ethics must be at the heart of the economic analysis and cannot be put to one side.” (p 4)

12

Simon Dietz: • Co-Director, Grantham Institute• Environmental

economist

Stern Review: ethical assumptions• “The breadth, magnitude and nature of impacts

imply that several ethical perspectives, such as those focussing on welfare, equity and justice, freedoms and rights, are relevant … Questions of intra- and inter-generational equity are central.” (Stern 25)

• “…the strong, immediate action on climate change advocated by the authors is an implication of their views on intergenerational equity; it isn’t driven so much by the new climatic facts the authors have stressed.” (Dasgupta 2)

Milton Friedman: positive economics--

It’s both• Possible• Desirable

14

• Chicago School economist

• Nobel prize winner• Monetary theory,

consumption analysis, stabilization policy

• Anti-Keynes• Anti-government

intervention• Regan economic advisor

Positive and normative economics• Positive v normative economics

– Positive economics – “ a body of systematized knowledge concerning what is”. (JN Keynes, in Friedman, 3)

– Normative economics – “a body of systematized knowledge discussing criteria of what ought to be”. (JN Keynes in Friedman, 3)

• Means v ends: Normative economics – or someone outside economics altogether – sets the ends; positive economics describes the means.

The value-free idealPositive (value-free) economics: Establish ‘objective’ claims ‘objectively’.• Objective claims: report positive facts• Objectively: use ‘objective’ methods – methods that

do not presuppose the truth of any value claims.

Examples of positive facts:– The force exerted by the magnet is 2dynes.– The grass in my garden now is greener than in my friend’s

garden in Northern Alberta.– The charge of an electron is…– The import elasticity of demand for automobiles in Britain in

1979 is 1.3.– Nancy is 5’5” tall.

Issues in Stern Review for value freedom

1. The recommendations depend on certain ethical assumptions. But economics should be value-free (wertfrei). Or should it?

2. These assumptions are made by the wrong persons. Or not?

3. Values for specific parameters are too ethically demanding. Or are they?

– δ – that measures how much the welfare of future generations counts.

– η – that reflects trade-offs between the poor (us!) and the rich (future generations!).

How far does positive economics reach?

• Friedman: The distinction is relatively clear and positive economics rules: “I venture … that currently in the Western world…differences about economic policy amongst disinterested citizens derive predominantly from different predictions about the economic consequences of taking action – differences that can in principle be eliminated by the progress of positive economics – rather than from fundamental differences in basic values, differences about which men can ultimately only fight.” (5)

• Broome: “Economics is a branch of ethics… A great deal of economics is explicitly practical, and this practical side is a branch of ethics.

The problem: the intertwining of ‘facts’ and ‘values’

Example in Stern Review: Discounting

Rich v poor Present v future generations

These occur in choice of values of δ and η.

How this happens• For public choice calculations, use a ‘rational choice’

framework where the aim is to maximize total utility.– Utility = whatever it is that ‘really’ matters.– Money is often a surrogate measure.

• Or, given ignorance, total expected utility.•So maximize the expected value of

U = ∑riUi(c).

• Given the difficulty of counting individuals, use ‘representative agents’ from each generation.

20

Importance to Stern results of the choice of discount rate

Weitzman: ‘The question for the Stern Review analysis then effectively becomes: is it worthwhile to sacrifice costs C ≈ 1% of GDP now to remove damages D ≈ 5% of GDP a century from now…by picking the extreme values η = 1, δ = 0.1%, Stern….is really stacking the deck in favour of approving such kind of fractional

GDP swaps across time.’

Martin Weitzman, Harvard environmental economist

Discounting

• So, what is r doing there? That’s the rub.• It is typical in economic calculations to

discount the future, because….1. The future is uncertain.2. The future is less valuable.

– To whom? And who decides?– Note for our discussion: the answer must depend

on the role the discount factor plays in the model and what the model is for.

22

• Justification for using a positive discount factor by economist/philosopher Amartya Sen in a different context (a model by Robert Lucas) : We may reasonably think the existence of future generations is uncertain… nuclear war for example.

• BUT (points out economist Tony Atkinson) in that context if you think that it is 40% probable we don’t survive into the next century this gives a discount factor of .5%: “an order of magnitude smaller” than the Lucas’s 1/0.95.

• What’s the analogous probability for the Stern Review discount factor?

Uncertainty about the future

The future matters less

We see this typically in savings and investment rates. We neither save nor invets as much as we should if we valued the futre as much as the present. But • Whose future? Future generations.• Matters to whom? To the social welfare

calculation.• Who decides that?

24

The welfare of future generations• Stern Review

– ‘We take a simple approach…: if a future generation will be present, we suppose that it has the same claim on our attentions as the current one.’ (35)

– ‘It is hard to see any ethical justification for [discounting the welfare of future generations]’. (35)

• That is clearly a value judgement.• But then any choice of a discount rate is a moral

judgement.• The ‘maximize-expected-utility’ framework forces moral

judgements in modelling assumptions.

Why discount future generations: η?

If consumption grows, future people are better off.• How much better off is measured by η: the

elasticity of marginal value wrt consumption.• Suppose that a unit at the margin gives less

utility to the rich than the poor. This, ala Broome, favours prioritarianism over (Broome’s version of) ‘pure’ utilitarianism:

Broome: ‘According to the utilitarian formula, an addition to a person’s wellbeing counts the same whenever it occurs and to whomever it occurs.’ (5)

• A moral judgement is required willy-nilly.

White’s Professor of Moral Philosophy,OxfordFormerly an economist at Birkbeck and at Bristol University

Why discount future generations: δ?

• ‘…δ is the rate of pure time preference…’ (Weitzman 5)

• Why discount future generations?– They may not be there. δ measures that. – ‘Impatience’

• This hardly seems relevant across generations.

– We are the ones who decide what to do now and we decide not to care about future generations.

• Again, any value reflects a moral judgement.

So who should decicde, and how?

• Stern Review: This a social policy issue and demands an ethical decision. All standard ethical frameworks deliver the same results: treat every generation equally.

• Weitzman: Stern is playing philosopher king. The people should decide. And we know what they think: just look at the actual savings rate.

28

Some (nontechnical) Stern and Dietz rejoinders

• The savings rate reflects what we do about our own futures, not about – what we should do – what we believe we should do .

• Because of– Weakness of the will– Bad calculations– Bad information– Pessimistic predictions about living into the future.

29

Some rejoinders (cont.)

• The savings rate is about our own future. That’s not the issue.

• The issue is: What rate should be used in a public policy calculation?

• How should a rate for this public policy calculation get settled then?– Democratically? Who gets to vote?– By ethical theory? Which?– …?

30

Assignment for Friday discussion

• Please prepare a defense of how the rate should get set, with some good reasons to back up your view.

• Be prepared to explain what the rate means and how it figures in the Stern review.

• Be sure you understand and can explain what a study like Stern’s of the economics of climate change is trying to do.

31