Environment

Brad DeLong carries on the discussion about discounting and the Stern Review, responding to a critique by Partha Dasgupta that has already been the subject of heated discussion. As Brad says, all Dasgupta’s assumptions are reasonable, and his formal analysis is correct

But … The problem I see lies in a perfect storm of interactions:

This brings me to one of my favorite subjects: the equity premium puzzle and its implications, in this case for the Stern Review. I’ll try and explain in some detail over the page, but for those who prefer it, I’ll self-apply the DD condenser and report

Shorter JQ: It’s OK to use the real bond rate for discounting while maintaining high sensitivity to risk and inequality.

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MSNBC prints a puff piece from Forbes on Richard Branson’s approach to charity – he’s been for it since September, apparently. “At Bill Clinton’s Global Initiative in New York, Branson pledged all proceeds from Virgin Group’s transportation divisions be donated to develop alternative fuel sources and alleviate global warming. His pledge amounts to about $3 billion over ten years.”

But get this: “Branson didn’t even believe in global warming until five years ago. Then he read Bjorn Lomborg’s, The Skeptical Environmentalist.”

Just imagine if he had been reading Quiggin’s posts – on his own website back to August, 2001, and here and here and here and here, for example. On the other hand, could it be that Lomborg served as the thin edge of the wedge and that Branson allowed himself to be convinced by the evidence only because the “solution” Lomborg presents is pretty much to wait until technology solves the problem? Regardless, and not to quibble about the definition of “charity” at work in the article, it’s certainly good that Branson is putting money toward developing alternative fuel sources.

In yet another round of the controversy over discounting in the Stern Report, Megan McArdle refers to Stern’s use of “a zero or very-near-zero discount rate”. Similarly Bjorn Lomborg refers to the discount rate as “extremely low” and Arnold Kling complains says that it’s a below-market rate.

So what is the discount rate we are talking about? Stern doesn’t pick a fixed rate but rather picks parameters that determine the discount rate in a given projection. The relevant parameters are the pure rate of time preference (delta) which Stern sets equal to 0.1 and the intertemporal elasticity of substitution (eta) which Stern sets equal to 1. The important parameter is eta, which reflects the fact that since people in the future will mostly be richer than us, additional consumption in the future is worth less than additional consumption now.

Given eta = 1, the discount rate is equal to the rate of growth of consumption per person, plus delta which is 0.1. A reasonable estimate for the growth rate is 2 per cent, so Stern would have a real discount rate of 2.1 per cent. Allowing for 2.5 per cent inflation that’s equal to a nominal rate of 4.6 per cent. The US 10-year bond rate, probably the most directly comparable market rate, is currently 4.44 per cent; a bit above its long-run average in real terms. So, Stern’s approach produces a discount rate a little above the real bond rate.

Arguments about discounting are unlikely to be settled any time soon. There’s a strong case for using bond rates as the basis for discounting the future. There are also strong arguments against, largely depending on how you adjust for risk. But to refer to the US bond rate as “near-zero” or “extremely low” seems implausible, and to say it’s below-market is a contradiction in terms. It seems as if these writers have confused the discount rate with the rate of pure time preferences.

Over at Econolog, TCS writer and right-wing hack Arnold Kling reports, under the headline “The Stern Swindle”:http://econlog.econlib.org/archives/2006/11/the_stern_swind.html , that Cambridge economist Partha Dasgupta “criticizes the Stern report”:http://www.econ.cam.ac.uk/faculty/dasgupta/Stern.pdf for applying a very low discount rate to the interests of future generations. Kling writes:

bq. What Dasgupta is saying is that the approach Stern uses to evaluate intertemporal trade-offs would, if applied generally, suggest that our consumption should drop from over 80 percent of GDP to 2.5 percent, in order to leave the target legacy to our children. What Dasgupta’s comment does is crystallize for me the magnitude of the intellectual swindle that Stern is attempting to pull off. Any time you assign a far-from-plausible interest rate to a long-term intertemporal problem, you get distorted results.

What Dasgupta _actually says_ :

bq. I have little problem with the figure of 0.1% a year the authors have chosen for the rate of pure time/risk discount….(p. 6)

Dasgupta’s real argument is that Stern shouldn’t adopt the egalitarian approach it does to intergenerational well-being whilst being _at the same time_ indifferent to inequality among members of the present generation. Dasgupta thinks the well-being of the actual poor should take priority over climate change abatement. Of course, we’ve heard arguments along these lines before, but Dasgupta, as someone with a record of concern for development and the well-being of the global poor, is someone who should be taken seriously when voices them and might be expected to devise and support policies that benefit the worst off. Right-wing hacks, are, needless to say, a different matter.

(Dasgupta’s critique seems to me to support the idea that economies like China and India shouldn’t be pressured into climate change abatement because the value of the benefits their growth brings to the poorest outweighs the harms to future generations. It doesn’t look anything like so plausible to claim that the least advantaged would be similarly harmed by the wealthier countries cutting back their carbon emissions.)

The release of the Stern review on the economics of climate change has had a huge impact on the climate change debate in Australia. There had already been signs of movement, but the government was still adamant in rejecting both the Kyoto protocol and any form of emissions trading. And, although the offical position did not dispute the science of climate change, many of the government’s supporters in the media, and even some ministers, were pushing the denialist line.

That was only a few weeks ago. Now the Australian government has endorsed emissions trading (in principle at least) and is calling for a ‘new Kyoto’. Ratifying the old Kyoto is still a step too far for a government that has never disagreed with George Bush on anything, but it’s hard to see how long this position can last.

Given the impact of the Stern review, it’s important to see if it stands up to scrutiny, and I’ve done a series of posts on parts of the report at my blog. My main conclusions:

(i) Stern’s estimates of the cost of stabilising CO2 levels (1 per cent of GDP by 2050) are optimistic, but in the right ballpark
(ii) Stern’s treatment of discounting is correct (More to come on this, I hope)
(iii) Stern underestimates the costs of Business As Usual, particularly in relation to environmental damage
(iv) Headline reporting of Stern overstates the risks of worst-case outcomes in the long tail, but critics are wrong to suggest that low-probability extreme outcomes should be ignored.

Overall, my conclusion is that the Stern review gets the basic economics and the policy recommendation right, even if the presentation is inevitably political.

Which of these claims has not been put forward by prominent global warming denialists ?

A Cycle analysis by a well-known astrologer proves that global temperatures will soon decline
B Data supporting global warming was faked by NASA along with the bogus moon landings
C There is no such thing as global average temperature, and therefore the whole idea is meaningless
D A voyage through the Arctic Circle by the Chinese fleet in 1421 proves that temperatures were much higher then

Answer over fold

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US newspaper headlines are understandably focused on the upcoming election, but another development that will have as much, if not more, effect on us all is headline news in the UK. The Stern report on climate change, commissioned by Gordon Brown, was launched yesterday by Brown and Blair. Stern spells out the economic basis for action on climate change. He warns that if we do nothing, climate change could cost anything between 5% and 20% of global output. If we start now, it will cost about 1% of global output to stabilise carbom emissions. The 700 page report shows that failing to act will cost our economies more than limiting carbon emissions – and not in 2100, but beginning in the next 20 years. The UK is calling for a treaty to limit carbon emissions by taxing or trading to be in place by 2008. To succeed, the UK must convince the US, China and India to join the club.

Climate change denialists should note that Paul Wolfowitz says the report “provides a much needed critical economic analysis of the issues associated with climate change”. Countries like the UK will still struggle with the politics of economic self-restraint when it comes to convincing voters that, for example, one pound flights to Carcassonne were a historical blip. But this report – and the united Blair/Brown staging and messaging behind it – could be the turning point in making climate change a mainstream political issue. If Tony Blair ever wanted to call payback time on his supine special relationship with the US, the moment has come.

The Irish Times reports that the UK government has actually hired Al Gore to raise US public awareness of climate change. The Guardian reports that the Treasury is sending Sir Nicholas on a tour of China, India, the US and Australia to sell the message and urge rapid action. The FT reports that the Germans, who will head both the G8 and the EU next year, are making supportive noises. (In-depth FT analysis of the report here.) Let’s hope the stars are moving into alignment.

With the major issues in the scientific debate over climate change having been resolved, attention has now turned to the economics of stabilising the climate and to the costs of doing nothing. Following the House of Lords economic committee inquiry last year, which spent most of its time promoting denialist attacks on climate science, and had little of value to say on the economic issues, the UK government commissioned Sir Nicholas Stern, former chief economist of the World Bank to look at the issue properly.

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As everyone knows (or ought to know by now), one of the main reasons controversy over climate change is continuing in the face of overwhelming evidence is the fact that ExxonMobil has the cash spigot open to fund anyone willing to deny the evidence – the Competitive Enterprise Insitute, George Marshall Institute and the old tobacco industry network run by Steven Milloy, Fred Seitz and Fred Singer have been among the main beneficiaries. The Royal Society wrote to them recently, asking them to turn off the money tap.

Exxon’s response

The Royal Society’s letter and public statements to the media inaccurately and unfairly described our company.”

It went on: “We know that carbon emissions are one of the factors that contribute to climate change – we don’t debate or dispute this.”

So, they know the groups they are funding are lying, but they need to promote the idea that there is so much uncertainty that we should do nothing. The best way to do this is to create as much Fear, Uncertainty and Doubt as possible by promoting those who claim that global warming is a fraud.

There are a few places on Earth where it makes little sense to have a car. The innercity of Venice, for example. Or Manhattan. But apart from these exceptional places, is it possible for families in post-industrial societies to live comfortably without a car? [click to continue…]

The war on science driven by a combination of Republican* ideology and corporate cash has been ably documented by Chris Mooney (see the Crooked Timber seminar here). Now, finally, science is striking back at one of the worst corporate enemies of science, ExxonMobil. As evidence of human-caused global warming has accumulated, leading energy companies like BP have seen the need to respond, with the result that industry groups like the Global Climate Coalition have broken down, leaving ExxonMobil to carry on a rearguard action through a network of shills and front groups. Now the company is finally being exposed by a major scientific organisation.

In an apparently unprecedented move, the British Royal Society has written to Exxon, stating that of the organization listed in Exxon’s 2005 WorldWide Giving Report for ‘public information and policy research‘, 39 feature

information on their websites that misrepresented the science on climate change, either by outright denial of the evidence that greenhouse gases are driving climate change, or by overstating the amount and significance of uncertainty in knowledge, or by conveying misleading impression of the potential impacts of climate change

(full copy of the letter here)

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Arguments about DDT have been going on for a long time in the blogosphere and similar circles. These debates typically involve a confusion between two unrelated issues
* The bogus story, popular in rightwing circles, in which the US ban on agricultural use of DDT, inspired by Rachel Carson, is morphed into a global ban on DDT, bringing to an end a previously successful compaign to eradicate malaria
* The real disputes, among malaria experts, about the relative merits of insecticide-treated bednets and spraying of house walls, and of DDT and alternative insecticides.

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Australia rarely attracts much international attention, which is probably a good thing. For the last week or so, things have changed, though not for in a good way. First, there was the Downer-Zombietime fiasco, and then the death of Steve Irwin. Now our (intentional scare quotes) “national newspaper”, the Murdoch-owned Australian, has received international publicity for a report on global warming that (along with an editorial and additional coverage) adds new errors to the denialist case on global warming, while recycling many of the old ones.

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There’s been a lot of discussion about claims that world oil output is going to reach a peak some time soon. If you look at the recent numbers, there’s a pretty good case to be made that world all output has already reached its peak at about 73 million barrels a day, a level reached in mid-2004, and sustained for the past two years.

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