October 31, 2006
The Stern Review on the Economics of Climate Change: A Comment by Richard Tol
Posted to Author: Others | Climate Change
Richard Tol, a prominent economist with appointments at Hamburg, Vrije and Carnegie Mellon Universities, has written a review of The Stern Report, which we are happy to make available for comment and discussion.
Richard's review can be downloaded here as a Word file.Posted on October 31, 2006 06:32 AM
I noticed that you criticize the low discount rate used in the report. While I haven't kept up to date on the literature, I do recall that there are disagreements in the field about what constitutes an appropriate discount rate when evaluating costs over long time periods -- William Kline comes to mind.
Correct me if I'm wrong but the basic objection to using standard discount rates for long-term problems like climate change is that they effectively devalue future damages to zero, which creates a bias against mitigation.
Thinking back to Kline's work, I believe that another one of his his objections whas that the issue of climate change is too often framed in terms of its effects over the next 50-100 years, despite the fact that it will last for millenia if not longer (e.g. sea level rise won't stop in 2100).
Any thoughts on these two issues?
Posted by: Marlowe Johnson at October 31, 2006 08:21 AM
There are arguments for low discount rates (it is the right thing to do) and there are arguments for high discount rates (it is what people use). That is not my point, however.
HM Treasury has clear guidelines on discounting. In fact, they recommend a discount rate that falls over time -- so that problems like climate change are not discounted away.
The Stern Review violates the guidelines of HM Treasury. This is most peculiar, as the Stern Review was written by civil servants of HM Treasury. This is bad procedure.
In my work, I typically present results for a range of discount rates -- and let the reader make her own choice.
The Stern Review does not allow this choice. This is bad style.
Posted by: Richard Tol at October 31, 2006 08:47 AM
The Stern report, was it peer-reviewed before release?
If yes. How did they missed all the Mr Tol has pointed out?
Posted by: Sylvain at October 31, 2006 09:18 AM
This is not quite right. The discount rate in the Green Book is a public sector discount rate to be used in appraising public investments. It is not an estimate of the social rate of time preference - the rate at which future consumption ought to be discounted to make it equivalent in social value to consumption today. The major reason for the difference between the concepts is that public sector investment may be at least in part at the expense of private sector investment rather than current consumption. Theoretically the best way to proceed is is to work out the relevant consumption streams and then use the social raten of time preference, but it is common practice to use a public sector discount rate that incorporates an average amount of crowding out of investment. I owe my understanding of these issues in part to an exceptionally clear article published in the 1960s by none other than David Henderson (noted critic of the IPCC). Since Stern is dealing explicitly with the consumption streams it is entirely right to use the social rate of time preference as the discount rate rather than the public sector discount rate.
Posted by: mike phelps at October 31, 2006 09:57 AM
How did they missed all the Mr Tol has pointed out?
Sorry should be:
How did they missed all that Mr Tol has pointed out?
Posted by: Sylvain at October 31, 2006 10:03 AM
I'm afraid the Stern Review is dead in the water regardless of its inherent strengths, weakenesses and flaws. It seems to have split the British Government
and has been rejected by OPEC no less
Does anyone seriously believe it will change the international impasse on Kyoto?
Posted by: Benny Peiser at October 31, 2006 01:17 PM
Mike Phelps has somewhat of a point. There is a difference between the public rate of discount and the social rate of discount. However, the Stern Review does not make that argument. Besides, the two should converge.
I agree that the social rate of discount should be used. I doubt that the average Briton has a pure rate of time preference of 0.1%, however.
Previous versions of the Stern Review were read by a number of academics. However, these reviewers worked for Stern. There was no idendepent editor.
At least some of my objections (discount rate; constant vulnerability in the PAGE model) were known to the Stern Review before publication. I had long discussion on discounting with Stern, and on PAGE with its architect, Chris Hope. Other objections should have been known (cf. Roger Pielke's parallel thread on cherry-picking).
Posted by: Richard Tol at October 31, 2006 01:17 PM
Richard Tol reports in his comment:
My calculator tells me that $85/tCO2 equals $23.18 t/C (ie, 12 g/mol C divided by 44 g/mol CO2). Seems Dr. Tol has created a specious outlier by including an unfortunate typo (one hopes that's all it is) in his comment piece.
Posted by: Tom at October 31, 2006 01:32 PM
It looks like Dr. Tol has consistently reversed his C/CO2 conversions- e.g. "it is unlikely that the marginal damage costs of carbon dioxide emissions exceed $50/tC [$14/tCO2] "
14t C ~ 50t CO2, not the other way around.
I don't know if he has simply reversed then number, or if he has miscalculated- $50tC would be about $183/tCO2
Incidentally, carbon taxes of this magnitude would be way lower that the current petrol taxes in the industrial world- $100/ tC would work out to about $0.10/ kilogram carbon, or about $0.06 per liter ($0.22 per gallon).
Posted by: Lab Lemming at October 31, 2006 02:15 PM
1 g C = 0.083 mole CO2 = 3.664 g CO2
$85 * 3.664 = $311
Posted by: Roger Pielke, Jr. at October 31, 2006 02:18 PM
I have oversimplified of course. But in the technical annex to Chapter two there is a full discussion of discounting including a prominent discussion of pure time preference. It concludes:
"Whether we are considering marginal or non-marginal changes or strategies the “pure time discount rate” is of great importance for a long-run challenge such as climate change. The argument in the chapter and in the appendix and that of many other economists and philosophers who have examined these long-run, ethical issues, is that ”pure time discounting” is relevant only to account for the exogenous possibility of extinction. From this perspective it should be small. On the other hand, those who would put little weight on the future (regardless of how living standards develop) would similarly show little concern for the problem of climate change."
The Green Book rate if very much a rule of thumb for evaluating public sector projects and is a compromise between various approaches.
Posted by: mike phelps at October 31, 2006 02:19 PM
OPEC doesn't like the report? I don't think that is a surprise now, is it?
The Stern report is most certainly not dead in the water. There are many reasons why the politics are playing out as they are. Almost all of them unrelated to Stern or climate change.
Gordon Brown is to be the follow up to Blair as prime minister in the near future. The Conservatives claim to be the green party now and yet have painted Brown with the label that he is a "tax everything" man.
Brown can't just introduce taxes as he would look bad and would damage his leadership chances. So other people are put forward to try and get us used to the whole concept. After all, as voters in the UK see climate change as a real issue politicians want to be seen to do something...
I speak to a lot of companies on this issue mostly in the energy industry and they are all convinced that some type of carbon trading or tax will be introduced on a global scale sometime in the next ten years.
Will our leaders take effective measures? Let's just say we have reason to be nervous...
Posted by: Acteon at October 31, 2006 02:43 PM
As Roger has pointed out, your calculator has led you astray.
Look at it this way: if it costs $85 to remove one ton of CO2, that same $85 is only removing 12/44 times 1 ton of carbon.
So you should be dividing by (12/44), not multiplying by 12/44.
Probably, your calculator should even apologize for any offense given, since your post was (uncharacteristically) harsh.
Posted by: Mark Bahner at October 31, 2006 02:51 PM
I was brought to this blog in trying to understand Dr Tol's widely circulated soundbite on the report:
"It [the Stern report] assumes that society will never get used to higher temperatures, changed rainfall patterns, or higher sea levels. This is a rather dim view of human ingenuity. The Stern Review can therefore be dismissed as alarmist and incompetent."
But on page 292 Stern states:
"Even if all emissions stopped tomorrow, the accumulated momentum behind climate change would ensure that global mean temperatures would still continue to rise over the next 30 to 50 years. (Following in bold) Thus adaptation is the only means to reduce the now-unavoidable costs of climate change over the next few decades (out of bold). But adaptation also entails costs, and cannot cancel out all the effects of climate change. Adaptation must go hand in hand with mitigation because, otherwise, the pace and scale of climate change will pose insurmountable barriers to the effectiveness of adaptation."
Seems like Stern precisely advocates adaptation. Why the dismissal of Stern on these grounds?
Posted by: Tom PIke at October 31, 2006 03:49 PM
OK - I see the soundbite has conjoined two disconnected sentences from Tol's comment. The listing of errors leading to Tol's condemnation and dismissal of Stern doesn't include the failure to include adaptation.
But the first sentence of the soundbite by itself implies Stern is incorrect in assuming adaptation cannot be a complete response. Does the phrase "getting used to" imply complete, eventually costless, adaptation to the effects of climate change (a "loss of Atlantis" scenario) or rather a compromised, degraded adaptation (I hardly notice the lost leg now - the replacement works well). If the latter, surely Stern has a point here that cannot be so easily dismissed.
Posted by: Tom Pike at October 31, 2006 05:40 PM
Tom and I are wrong in the math dept.- carbon is in the denominator, so cost per unitCO2 is equal to the cost per .334 units C.
But my carbon tax calcs are still right- most countries could get cheaper gas by replacing the current gas taxes with a $100/ton carbon tax.
Even in the US- land of the cheap gasoline, you increase the federal gasoline tax from 18.4 cents/gallon to 22, and redirect the funds from highway pork to carbon sequestration pork. The lobbyists need to switch clients, but in the rest of the country, nobody would even notice the change.
Posted by: Lab Lemming at October 31, 2006 06:05 PM
I'd like to offer an institutional perspective that might address Prof. Tol's stated puzzlement about HM Treasury's behavior, a couple comments on key economics issues, and then ask a fundamental question of political economy.
From 1988-98 I was a staff economist in the Office of Information and Regulatory Affairs, Office of Management and Budget. Among other things, I reviewed major draft regulations and wrote guidance on regulatory impact analysis. Our guidance was mostly Econ 101 level. However, in many instances agencies performed analysis to justify decisions, not to inform them. So OMB guidance was often disregarded if it was necessary to do so to reach the prescribed answer.
I see no reason why HM Treasury would behave differently. In the US, OMB acts as a predecisional peer reviewer and has a high level of ability to detect mischied, a much lower ability to correct it, and virtually no ability to prevent it. I do not believe that UK has an analogue, but if it does it faces the same set of problems. It's reasonable to believe that policy decisions were made before the Stern report was outlined, much less written.
THE DISCOUNT RATE
I am unsympathetic in practice to using the social rate of discount. In my experience, this was a magic wand waved to supplant OMB's default discount rate (7% real when I was there) with however low it needed to be to yield net benefits.
I prefer to use the consumption rate of interest for whomever bear the costs. Poor people have higher discont rates than rich people. If costs are going to be borne by poor people (either as a matter of policy or because it cannot be avoided), then a high discount rate is necessary to protect them from predation by the rich. A low discont rate has the effect of forcing the poor to value the future as highly as the rich. When the poor want current consumption, the rich force them to save.
I am amazed that we are having a serious discussion about a phenomenon whose alleged mean damage is 5% of GDP and whose 95% CIs are 0.3% and 33%. The dominant policy option is sure to change several times over that span. That makes policy choice a crap shoot.
If GCC were a problem of only national scope, there is a serious risk that government would enact an aggressive carbon tax (or its emission allowance equivalent) just to collect the revenue. The history of governments enacting Pigouvian taxes is limited. Inevitably, the government becomes more interested in collecting the revenue than solving the problem for which the tax was instituted. Solving the problem kills the revenue. Because of the Master Settlement with State AGs, many have become financailly dependent on tobacco tax revenue and are now partners with the tobacco insustry, sharing a common desire to maintain cigarette smoking. Once government secures carbon tax revenue, it no longer will be interested in (say) replacing carbon-based energy technologies.
But GCC is a problem of international scope. Non-adpative interventions, such as transferrable permits, require well-defined property rights, easy contracting, and very low transactions costs for enforcing propery rights and contracts. Both are impossible in most of the world, yet without them transferrable permits will fail.
And here's the killer: property rights in carbon allowances, and contracts to buy and sell them, must be inviolable by government. The market cannot work if governments can expropriate property rights or void contracts.
I keep reading these reports that say what needs to be done to avert climate disaster. But they all practice magical thinking. None seems to ever acknowledge that if the problem is that great, and the strategy to avert disaster is a regulatory one, then success probably requires a relentlessly authoritarian government capable of exercising itas authority mercilessly world-wide.
Posted by: Richard Belzer at October 31, 2006 08:22 PM
Dr. Lor, if "there are sound arguments for emission reduction," could you kindly direct me to where you have been making them?
It seems to me the cost-benefit discussion has been overly simplified by all. Let me compound that problem by adding my own thoughts.
If we see climate change as a problem of market failure and underpricing of atmospheric GHG dumping that stems from the fact that the atmosphere is an open-access resource for which there no internationally effective or enforceable property rights, then the initial cost-benefit analysis is simply the question of when the net benefits perceived to be gained by moving to an internationally-agreed regulatory regime justify the costs of establishing such a regime. This question of when, if ever, such a regime should be established should be distinguished from the questions of what is the optimal global path for emissions reductions and how the burden should be distributed.
On this question, based on cost-benefit analyses performed years ago, most of the legwork on a menaingful international regime has already bbeen done. All of the significant emmitters have already signed the UNCCC, most of these have also signed the Kyoto Protocol, and most of those with GHG reduction obligations have rolled out the necessary implementation infrastructure.
What is left is largely simply the international gamesmanship referred to in the Stern report to bring the US and Australia into the accord and to impose GHG emission limits on China, India, South Korea, Brazil etc., in a manner that will then justify the performance by the EU, Canada and Japan of the measures to which they have already agreed (but have understandably withheld their performance of). There are costs to these negotiations, and to establishing domestic implementation measures, but they do not at all seem to be on the scale of the costs of the mitigation and adaptation measures themselves.
By failing to engage meaningfully, the US has clearly been both a spoiler and a free rider on the sincere efforts undertaken by its allies. Only the US, acting in concert with the EU, has the leverage to bring in China and India. It seems to me that one of chief purposes of the the Stern report is to strengthen the negotiating position of the British government in persuading the US to move, by firming up domestic support and sending a shot across the bow of the US (this may be a miscalculation, but clearly explains why Gore has been brought into the effort).
As to decisions about the emissions reduction curve, these of course are also fraught with gamesmanship, and not merely the difficult issues relating to equity/distribution, costs-benefits, mitigation/adaptation measures, and intergenerational risk shifting. However, I would note that at least conceptually a portion of any mitigation cost would simply reflect the marginal costs of GHG emissions.
While this is not directed specifically to Dr. Lor, I also note that virtually all of the so-called "skeptics" loudly worry that climate change measures will not only impose undue costs on the industrialized economies, but will dampen economic growth and thus hamstring the efforts of developing countries to grow and thus to adapt to the climate change. However, quite frequently (i) give slight mention of the fact that the greatest burden of climate change is likely to fall on the developing economies, even while the developed world is largely responsible for committed climate change, (ii) fail to note that we can have an effective international GHG regime without imposing emissions limits on the poorest countries (as they are insignificant emitters) and (iii) are rather silent on the need for the developed world to help strengthen the institutions of law, order and good governance that are the prerequisites to growth.
I suppose that this rather puzzling silence could indicate not only a lack of sincerity in their professed concern for others, but also a lack of appetite for the serious interational cooperation that would be required to ensure that measure to help developing countries to reform their domestic institutions.
Finally, to Dr. Lor, surely you understand that by broadly "dismissing" the Stern report as "alarmist and incompetent", without offering any summary of points on which you agree with Stern, you are simply providing "fodder for those skeptical of climate change and climate policy"? Is that your aim, or do you intend to help move the policy discussion forward?
Posted by: TokyoTom at October 31, 2006 11:49 PM
You're right to say that it's necessary to look at avoidable damage rather than total damage. But I don't think this is a huge concern given that most of the large cost numbers relate to warming of more than 2 degrees.
As regards the separate distinction between total and marginal costs, this cuts both ways. If you are evaluating a stabilization target of 500ppm as opposed to 600ppm, then the marginal benefit-cost ratio will be lower than the total ratio. But if you're evaluating doing something as opposed to BAU, then the marginal benefit-cost ratio will be higher than the total ratio.
As a single summary statistic, the ratio of total benefits (avoidable damage) to total costs seems reasonable, and consistent with standard practice in benefit cost analysis.
Posted by: John Quiggin at October 31, 2006 11:51 PM
Dr. Belzner, surely you are right to point out that one predictible consequence of Pigouvian taxes is that the government has an interest in maintaining the stream of tax revenues. But the example of cigarettes is inapposite; as no one is addicted to GHG emissions, surely taxes would move users to economize of GHG emissions and thus push economic activity in the direction of reducing GHG emissions. Absolute revenues might be maintained for a while, but ultimately the only way the government could maintain revenues would be to increase tax rates, which if agreed would remain efficacious in terms of reducing GHG emissions. However,
On another point, you are certainly right that "property rights in carbon allowances, and contracts to buy and sell them, must be inviolable by government. The market cannot work if governments can expropriate property rights or void contracts." However, your positions that (i)transferrable permits "require well-defined property rights, easy contracting, and very low transactions costs for enforcing propery rights and contracts" and that (ii) these "are impossible in most of the world" are both unsupported gross overgeneralizations that fail to recognize that property rights are not static but evolve.
Property rights regimes, whether relating to private or commonly-managed property, typically start when the benefits of establishing such property rights exceed the transactional costs in developing and enforcing them. Once established, property rights continually evolve, under pressure from owners and in the face of changing wealth, technology and markets, in the direction of clearer defintion, easier contracting and lower transactions costs.
The government can and should play a role in helping to establish effective property rights regimes, especially in cases of open-access resources where users have no responsibility for the costs they impose on others and on incentives to moderate their use or to conserve the resource. The recent efforts that the US has made towards establishing individual transferrable quotas (ITQs) in fisheries is something that I imagine you are aware of? Ron Bailey has recently discussed these efforts at Reason.com:
The evidence does not show that one can justifiably presume, as you do, that establishing meaningful property rights regimes in open-access resources "requires a relentlessly authoritarian government capable of exercising itas authority mercilessly world-wide." This instead appears to be over-blown and ideological.
I concede that open-access resource issues (whether climate change, fisheries or otherwise) are quite thorny, but surely you must acknowledge that simply throwing our hands up at them simply allows the perpetuation of problems of which we are aware, leading to negative results that are frequently irreversible. Is that the policy prescription you offer?
Posted by: TokyoTom at November 1, 2006 12:24 AM
FYI, Jim Giles at Nature has an excellent story on the Stern Report:
Posted by: Roger Pielke, Jr. at November 1, 2006 06:40 AM
Oops. My apologies, Dr. Tol, for my strange misspelling of your name!
Posted by: TokyoTom at November 1, 2006 07:24 AM
At the moment, a $7/tC carbon tax is unpalatable to Brazil, China, India, and the USA -- and even the price of carbon permits in the EU is below this.
Stern's argument that the price of carbon should be above $300/tC is perhaps not the best tactic in international negotiations. The fact that the Stern Review is full of holes further disqualifies the UK as a serious negotiation partner.
But, you are right. I should not have dismissed Stern without offering an alternative.
To Tom Pike:
The North Sea, for instance, was submerged some 6,000 years ago. This is not felt as an economic loss today. In fact, plans to empolder even small slices of the North Sea have faced fierce resistance.
Another peculiar assumption in the model, is that vulnerability to climate change is constant. For example, people continue to die of diarrhoea and malaria even if their average annual income exceeds $3000, even $6000, and even though bednets and ORT are quite cheap.
Both assumptions lead to a substantial overestimation of the economic impact in the Stern Review.
The Stern Review, indeed, includes adaptation in their economic estimates. They exclude adaptation for most of the sectoral impacts, e.g., water resources, health, sea level rise.
Posted by: Richard Tol at November 1, 2006 10:12 AM
Roger, Mark, Lab Lemming:
In my earlier message, I pointed out what I believe to be a simple arithmetic error in Dr. Tol's analysis. He multiplied tonnes of CO2 by 3.67 to get tonnes of C (in this statement from the bottom of page 3 of his comments (referring to Mr. Stern's report)):
"$85/tCO2 equals $314/tC, and is therefore an outlier in the marginal damage cost literature (Tol, 2005)."
I maintain that his calculation is backwards. One tonne of CO2 equals 0.27 tonnes of C. Therefore, $85 per tonne of CO2 works out to $23 per tonne of C. This is not an outlier, as mistakenly claimed by Dr. Tol. Furthermore, $85/tCO2 is clearly stipulated by Mr. Stern as being a high estimate -- here is what the Stern Report says (Part III, Box 13.3, page 137 of 140):
"Preliminary calculations with the model used in Chapter 6 suggest that the current social cost
Thus, I think it fair to suggest that Dr. Tol has skewed the discussion first by selecting $85/tCO2 (when he could have reported the same range as Mr. Stern used), and second, by wrongly inflating $85/tCO2 to $314/tC and claiming the latter is an outlier which––by my reading–– is just plain wrong.
To put this error fully into context, Tol (2005) reviewed 28 studies of marginal damage costs of carbon dioxide emissions. In summarizing the results, he rightly excluded the studies what were not peer-reviewed, reporting:
"Excluding the studies that were not reviewed, the mean is $43/tC, with a standard deviation of $83/tC".
This range is fully consistent with Mr. Stern's report. Indeed, the figures used by Stern are all lower than Dr. Tol's calculated mean, when one properly converts CO2 to C (by dividing by 3.67, not multiplying by that factor!).
If nothing else, this discussion reinforces the need for all of us to use consistent units. We should all use tonnes of carbon, not carbon dioxide.
Posted by: Tom at November 1, 2006 10:49 AM
I welcome TokyoTom's comments, and respond to clarify...
First, I don't see how the comparison between tobacco and GHG is inapposite. If I understand the argument, the US and developed world generally are "addicted" to oil. As a lifetime nonsmoker, I certainly am more addicted to fossil fuels than I am to tobacco. But consumers are not the subject of the problem of addition to Pigouvian taxes. It is governments that get addicted. Recently the tax on telephones was repealed; the tax was enacted temporarily during, if I recall correctly, the Spanish-American war.
There are two problematic scenarios relevant to governmental revenue addiction. One involves a declining tax base, which presumably is the purpose of both tobacco and GHG taxes. As the base falls, government must increase the tax rate to sustain constant revenue. Every increase in the tax rate reduces the tax base, which requires further increases in tax rates. Pigouvian taxes are exponentially unstable tools to maintain a constant revenue flow. They only work if government forswears any desire for the money -- a counterfactual world if ever there was one. (In principle, one can design a Pigouvian tax such that all revenue is rebated immediately in the form of reductions in incentive-distorting taxes, such as on labor or capital. This eliminates the drug before addiction occurs. In practice, however, governments cannot be required to abide by principle.)
Second, I am a great fan of economic incentives. I wrote a dissertation on deposit-refund systems. At OMB I worked to persuade the Dept of the Interior to adopt ITQs in lieu of their traditional regulatory systems, which are proved to be ineffective, inefficient, and dangerous. (I singlehandedly ruined my wife's enjoyment of George Clooney's movie A Perfect Storm by noting that the event in question never would have happened if DOI had listened to me.)
But ITQs are inapposite to GHG allowances. ITQ enforcement is comparatively child's play. Fish are tangible; they cannot be counterfeited; violations can be detected and prosecuted. In contrast, GHG allowances are intangible; they can be easily counterfeited; violations are hard to detect and cannot be penalized, particularly when the violator is a sovereigh nation. If a GHG allowance regime evolves over time, it will be governed by entropy. It's best day will be the day before it becomes effective.
Third, I am **not** "throwing up my hands" at the GCC problem. I'm taking at face value the claim that GCC is an impending environmental disaster. I'm just not agnostic about policy instruments. I dont think there is any reason to believe that the policy instruments being advocated will be effective (never mind their economic efficiency). After reading Prof. Tol's review, and recalling my own experience with government analysis, I am concerned that advocates of aggressive action are being duped by those whose primary interest is increasing tax receipts and/or regulatory authority. They are quite happy to have an environmental excuse to collect more revenue or build a larger regulatory bureaucracy.
Advocates of aggressive action should devote more attention to implementation issues, especially the problem -- no, near certainty -- that their efforts will be (have been?) hijacked. Except on the economist's chalkboard, an effective system for GHG reduction cannot be tax-based or allowance-based.
Last night I wrote that it would require a "relentlessly authoritarian government capable of exercising its authority mercilessly world-wide." Yup, still sounds right, as much as I wish it were not so.
Posted by: Richard Belzer at November 1, 2006 12:01 PM
While I share your some of your misgivings about the potential for governments to become addicted to and/or abuse Pigouvian taxes, let me suggest that such misgivings apply to all forms of taxation and at the end of the day a pigouvian tax is morally more defensible than other forms of taxation, such as income or payroll taxes.
“…GHG allowances are intangible; they can be easily counterfeited; violations are hard to detect and cannot be penalized, particularly when the violator is a sovereign nation.”
I’m not sure what you mean by ‘intangible’, and I would argue that in a robust system it is in fact very difficult to counterfeit a credit. Here, I think a better comparison for a GHG trading system is with the NOx/SO2 trading system in the U.S. (and recently in Ontario).
Now I think that there is a legitimate question about what scope a GHG system should have. Should it be national or international, sector specific, cap-and-trade or open?
It is true that the NOx/SO2 trading system is simpler to the extent that it isn’t international in scope and involves relatively fewer sources (as a closed cap-and-trade system). The more restrictive the system, the less chance there is for abuse. But the tradeoff is that there is also less opportunity for less reductions. The trick of course is to find the right balance.
At the end of the day I think most people would agree that climate change requires an international response and that requires getting the developing world onboard. In principle CDMs help to achieve this. It seems to me that some reductions are more certain – or safer—than others; for example an allowance issued by the U.S. government compared to a CDM credit generated by using GMO cattlefeed to reduce methane emissions from cows in Africa. Now maybe you think that the CDM credit shouldn’t be allowed. Others might argue that sequestration or reforestation projects shouldn’t be included. These are all legitimate questions about what scope the system should have. Personally, I think that CDMs are a good idea (to the extent that they encourage participation by developing countries), but they should have some kind of rating attached to them based on the risk of leakage/fraud; similar to a bond-rating.
In a perfect world we could rely on a series of closed national cap-and-trade systems and carbon taxes to at least initiate meaningful reductions. But since we need the developing world onboard, I wouldn’t be surprised if some form of CDM doesn’t make it into Kyoto II (whatever that looks like).
Does this mean that I have a pollyanish attitude towards Kyoto? No. I share some of your pessimism about the feasibility of an international GHG trading system, and in particular wonder whether or not the transaction costs involved in setting up and monitoring such a system might not erase any efficiency gains compared to a straight tax, for example. Like you I’m not by any means agnostic about policy options. But for me action trumps efficiency, so if it takes a messy, corruptible system like Kyoto to do it, fine. If not, then lets find something else.
One last point. When talking about an international GHG system, you mention the difficulty of dealing with violators who are sovereign nations. This is indeed a problem, but I would argue that it is in no way unique to a GHG system. In the past, I’ve mentioned that one way around this free rider problem is via sanctions/tariffs and appeal through the WTO. In fact, in some circles "relentlessly authoritarian government capable of exercising its authority mercilessly world-wide" would be a pretty apt description for the WTO...
Posted by: Marlowe Johnson at November 1, 2006 01:58 PM
You write, "In my earlier message, I pointed out what I believe to be a simple arithmetic error in Dr. Tol's analysis. He multiplied tonnes of CO2 by 3.67 to get tonnes of C (in this statement from the bottom of page 3 of his comments (referring to Mr. Stern's report)):
"$85/tCO2 equals $314/tC, and is therefore an outlier in the marginal damage cost literature (Tol, 2005)."
I maintain that his calculation is backwards."
Well, you are absolutely, positively, and without a doubt WRONG.
It is you who has the calculation backwards.
As I pointed out, let's say you used one of Roger's favorite devices, an ambient air CO2 scrubber.
Let's say it cost you $85 to remove one ton of CO2 from the atmosphere.
How much would it cost you to remove 1 ton of *carbon* from the atmosphere? The answer is clearly and undoubtedly that it would cost you MORE than $85 to remove one ton of *carbon* from the atmosphere...since it cost you $85 to remove 1 ton of CO2...and one ton of CO2 only contains 12/44 = 0.272 tons of carbon. That means it costs you $85 to remove 0.272 tons of carbon, or $85/0.272 = $313 to remove one ton of carbon.
"If nothing else, this discussion reinforces the need for all of us to use consistent units. We should all use tonnes of carbon, not carbon dioxide."
"We" have no problems. It's YOU who has the problem. You're clearly wrong, and he is clearly right. The number that he identifies as an outlier...$85 per ton of CO2...really IS an outlier, because it represents $85/0.272 = $313 per ton of carbon.
No offense, but you're clearly an amateur. Dr. Tol does this sort of stuff for a living. You should always remember that. That obviously doesn't mean he doesn't make mistakes. But he has NOT made a mistake in this case. And you've essentially (repeatedly!) implied his NON-MISTAKE was not merely an error, but actually dishonest. Once again, you really should apologize to Dr. Tol.
Posted by: Mark Bahner at November 1, 2006 04:58 PM
Two points: First, here is a link to the excellent survey paper by Tol which reviews over 100 studies that estimate marginal costs of CO2 emissions:
The median value is $14/tC. That corresponds to a Pigovian tax of about 3 cents per gallon! I don't understand how anyone could complain about that level of taxation. As noted above, even $100/tC is only 20 some cents per gallon, barely noticeable these days.
Second: Tom, sorry, you're still backwards! You've got to learn unit conversion.
"I maintain that his calculation is backwards. One tonne of CO2 equals 0.27 tonnes of C. Therefore, $85 per tonne of CO2 works out to $23 per tonne of C."
$85/tCO2 * (1 tCO2 / 0.27 tC) = $315/tC
or put it another way:
1 gallon of gasoline equals about 4 liters. Therefore 20 miles per gallon works out to 20*4 or 80 miles per liter? I don't think so! You've got to divide by the 4 in this case, and by the 0.27 in your example, because the unit being converted is in the denominator of your original fraction.
Posted by: Hal at November 1, 2006 04:59 PM
Dr. Belzner, if you are NOT "throwing up your hands" at the GCC problem, and "take at face value" the claim that GCC is an impending environmental disaster, why don`t you constructively offer suggestions about policy instruments, but simply complain about how complex the problem is?
We all know the that the problem is difficult, which is why it remains unsolved. However, it would seem possible to create domestic, property-rights based systems that can later be linked internationally. No, emissions permits are not fish, but the point is that property rights systems once created will evolve towards greater effciency.
As to taxes, I agree that governments love them, and may become addicted to them. But unlike tobacco, fossil fuel users are NOT addicted to them and have a wide menu of where to get their GTUs; they simply need to have market signals that account for the costs of GHG emissions to shift their behavior (and to call forth appropriate investment).
Posted by: TokyoTom at November 1, 2006 05:49 PM
Dr. Tol, thanks for your response. Did you have any comments on the usefulness of bifurcating the cost-benefit analysis by distinguishing the decision to create a meaningful agreed international system from the decision as to how aggressive the GHG emission reduction curve should be?
Yes, both India and China have indicated a preference to continue to emit on an uncapped basis; that`s the preference of the US as well and frankly all nations would prefer to be free riders on the efforts of others (which is why governments have overallocated permits in the EU). But the EU and the US have the ability to affect the preferences of others, especially China and India - we have our open markets to offer as both a carrot and stick, and we could also find ways to compensate China and India for accepting obligations. Clearly the US will not throw its weight behind a Kyoto II without bringing these nations in.
Posted by: TokyoTom at November 1, 2006 06:02 PM
Benny, I mis-posted this on the earlier thread, so I take the liberty of reposting here:
Benny, you are an astute observer of the things you wish to see.
You trumpet your fear that “the Stern Review is dead in the water”, regardless of its inherent strengths, weakenesses and flaws, because “It seems to have split the British Government.” The spilt is easily explained, as the Government believes green taxes are needed but does not wish to do so at its competitive disadvantage and certainly not until the US is also on board. Doesn’t the Times article make this clear? “yesterday both Mr Brown and Tony Blair emphasised the importance of international action - rather than domestic taxes - to reduce carbon emissions.”
Naturally OPEC can be expected to disfavor green taxes and other policies directed towards GHG emissions – the fact that markets exist mean that inevitably a portion of the tax or demand reduction will be felt by OPEC members. Your concern for the welfare of OPEC members is commendable, but are you suggesting that we should not tackle climate change mitigation issues because it would be unfair to OPEC? (And if so, couldn’t we address that issue by direct compensation to OPEC for their losses?)
You ask whether “anyone seriously believe[s] it will change the international impasse on Kyoto”. As I noted on the previous thread, I believe that the Stern report should and will be taken seriously by business leaders and politicians in the US and abroad, despite the fact that, given the scale of the problem, many simply prefer not to address it.
There is already a majority in the Senate ready to act on climate change, so if there is a change in control of the House, I think it is pretty clear that we will see the log jam start to break up. Democrats have incentives to push the issue, already have support from key Republicans in the legislature (and Schwartzenegger in California). There are a number of federal court cases underway that are eroding the Administration’s position that it has no current authority to act and that create opportunities for action at the state level. Industry is looking for consistent policy at the national level, in lieu of many different state and local policies, and Republicans now have too much to lose politically from by direct obstructionism – which is why Bush hired Paulson as Treasury Secretary and has been trying to limit political damage by the empty Asia-Pacific Coalition and trumpeting his rather feeble nuclear and coal pork projects.
It makes sense to move domestic policies quickly in directions that favor clean power generation and a public that is tired of expensive, ineffective and counterproductive wars in the ME is likely to be receptive to policies that appear to move to reduce our reliance on ME oil. And domestic industry concerns that have jammed policy action (in part counterbalanced by those looking to profit from new technologies) can be met by the right mix of pork and by free distribution of emission rights.
So yes, we are ready for change, and the Stern report and “An Inconvenient Truth” are likely to resonate not only with a US public repulsed by Republican excesses but also by industries that want to see a clear set of rules, rather than a thousand cuts.
Posted by: TokyoTom at November 1, 2006 06:12 PM
Question for someone who actually has the energy to wade through the entire Stern report. Is there a stated or implied assumption in the report that all alternatives to fossil fuels are substantially more expensive, cannot be implemented for decades and can only be developed with government subsidies?
Given the probability that we are at or very near (at most a decade or two away from) world peak oil production, I see the proposed carbon taxes as being trivial in comparison to the inevitable market-driven increases in oil and other fossil fuel prices. At least in the US, coal prices are limited by the price of oil, so if oil goes up, coal goes up too.
Posted by: DeWitt Payne at November 1, 2006 08:25 PM
It goes back to the end justifying the means. No matter what else, the end includes said means.
There is certainly a larger chance that we are eventually going to price ourselves out of fossil fuel usage than there is that AGW will be catastrophic, and sliding into cost effectiveness of alternatives will (according to market theory) be smoother than relying on fiction to allow "babysitters" to make the choices for us.
The statement is: If fiction is used as the means, fiction is involved in the end. The concept of conserving fossil fuels is one thing, the alarmist projections of the Chicken Littles concerning AGW is another, and tends toward a higher probability of more corruption in the end.
Posted by: Steve Hemphill at November 1, 2006 09:56 PM
Thanks for your response. You're right, loss of the North Sea is not now felt as an economic loss. But the costs of adaptation may be permanent, as in the annual maintenance of a sea-defence system even after the effects of climate change have stabilised. Aren't these at least a portion of Stern's enduring costs to preserve part of the economy? I can see, for instance, why sea defences to preserve economic output appear just in the costs, and not as any benefit of adaptation in Stern's model. So I am still puzzled by the criticism that "It [the Stern report] assumes that society will never get used to higher temperatures, changed rainfall patterns, or higher sea levels." Even if we adapt completely, we have a permanent ongoing cost, so we don't really get "used to it" in economic terms.
Your comments on Stern are, in a disingenuously edited form, being used by the very climate-change sceptics you obviously disdain. In the light of your qualifications to date, is an amended version of your comments forthcoming?
Posted by: Tom Pike at November 2, 2006 01:22 AM
There are reasons to believe that an international agreement that starts with tough enforcement of soft targets will have a greater chance of succeeding than an agreement that starts with soft enforcement of tough targets. The main reason, I think, is that you create a vested interest -- in the first case, for emission reduction; in the second case, for fraud.
To Payne DeWitt:
In the scenarios considered by the Stern Review, conventional oil and gas is indeed exhausted -- but replaced by unconventional oil and gas (tar sands, ultra-deep oil, clathrates) and coal (incl. coal-to-liquids). This increases CO2 emissions.
If you disagree, and argue that conventional oil and gas will be replaced by renewables and nuclear in the absence of climate policy, then there is hardly a climate problem. Few would say that is impossible, but most would say that this is unlikely.
Posted by: Richard Tol at November 2, 2006 01:55 AM
To Marlowe Johnson:
The SOx trading regime is instructive as a model for a GHG trading regime. USEPA did **not** create a legally enforceable property right. It reserved the right to expropriate them at any tme. Several states actively interfered in the market to deny trades. The price of acid rain permits was discounted accordingly.
Assuming arguendo that WTO provides an **effective** system for enforcing GHG permits, it is a hugely inefficient one. Its transactions costs are astounding. For any policy, the higher are transactions costs of enforcing it, the fewer violations are worth enforcing. The fewer violations that are enforced, the greater certainty there is that the policy will fail. The UN's Oil for Food program may be a better model for how an international GHG regime would work in practice.
I apologize for appearing to be just complaining. I don't have any brilliant ideas concerning how to construct an effective international GHG trading regime. My constructive suggestion is that advocates of aggressive action should give more consideration to these implementation issues rather than simply assume that they will be worked out. Instead of getting excited about a report prepared under the auspices of HM Treasury, they should be gravely concerned that their issue is about to be (has been?) hijacked. Treasury-types are prone to see sugar plums of tax revenue dancing before their eyes.
Never mind economic efficiency; start with carefully examining whether proposed policy instruments will be effective. If they won't, then you should not embrace them under any circumstances. Policies that are not effective simply waste scarce resources. For advocates of aggresive action, effectiveness ought to be prerequisite. They cannot win the argument by promoting pain without gain.
Your confidence that there is majority support in Congress for aggressive action may be misplaced. Congressional support for policies tends to decline when their chance of enactment rises above zero. This is akin to a stated-preference survey of consumer willingness to pay for a hypothetical commodity. If they ever take action, they will evade responsibility by delegating the painful decisions to an Executive branch regulatory agency. (Later, they will complain bitterly when the agency implements their policy in ways that disadvantage their constituents.)
Meanwhile, supporters will have varying motivations. Some will care about climate change. Many will just be rent-seeking. In any contest between policy advocates and rent-seekerrs, I will bet that the rent-seekers win.
Congress does respond to public opinion; the place to see this clearly is in situations where the public demands actions that have little or no logical foundation. The best example I can think of right now is "energy independence." Keep in mind that if Congress were to enact law requiring this, no GHG trading regime would be permissible.
Jim Giles refers says the Stern report's conclusions "were immediately attacked by right-wing commentators and other economists." I understand why you'd be happy that he quoted you and cross-linked your analysis, but apart from that there is nothing "nice" about his reporting. It's rather venal, actually.
Posted by: Richard Belzer at November 2, 2006 05:30 AM
Lomborg has an op-ed on the Stern repprt in today's Wall Street Journal. See http://online.wsj.com/article/SB116243506287110986.html?mod=opinion_main_commentaries or email me offline for a copy if you can't access it.
Near the end of the article, he says the following:
"Moreover, there is a fourth major problem in Mr. Stern's argument that has received very little attention. It seems naïve to believe that the world's 192 nations can flawlessly implement Mr. Stern's multitrillion-dollar, century-long policy proposal. Will nobody try to avoid its obligations? Why would China and India even participate? And even if China got on board, would it be able to implement the policies? In 2002, China decided to cut sulfur dioxide (SO2) emissions by 10% -- they are now 27% higher despite SO2 being nationally a much bigger health and environmental problem than climate change."
This picks up on the issue I initially raised about the need for highly repressive worldwide governmental authority to implement proposed GCC regulatory interventions. It's certainly possible that the Chinese government was never serious about SO2 control. It's also possible that they were quite serious, but that they were unable to regulate effectively despite enjoying significant skill and capacity to engage in authoritarian behavior. The (now aborted, pardon the pun) one-child policy comes to mind.
Posted by: Richard Belzer at November 2, 2006 01:14 PM
To Tom Pike:
If the North Sea had been dry, we would have had more land, and a shorter coast line. More land plus less dikes means more economic resources, means richer people. All true.
However, no North Sea also implies no England as we know it -- and history would have been very, very different. In fact, history would have been so different that we cannot even begin to think whether it would have been better or worse.
At a smaller scale, the Dutch were forced to protect their land at great expense. This lead to substantial technological prowess that is now a major export industry -- to the benefit of Dutch engineers and all those countries that can import superb wet engineering knowledge.
In an economic system, the first order effect is dominant in the short run. In the long run, second, third, and even seventeenth order effects take over.
The second reason why I believe that climate impacts will fade if the climate is stabilised, is that human ingenuity is the ultimate resource. Whatever the constraints of geography and climate may be, one day some clever thing will find a way around it.
I am perfectly aware that not everybody agrees with the above.
An updated, extended and sanitised version of my comments can be found at:
Posted by: Richard Tol at November 2, 2006 02:35 PM
Thanks for your comments. You certainly aren't the first to suggest that the world's major challenges (including climate change) would be easier to solve with a Leviathan-type global government.
I'd argue that the WTO is the closest thing we have right now to Leviathan, for better or worse, and it seems reasonable to me that free riders in any international climate change agreement will ultimately be addressed via sanctions/tariffs -- which is where the WTO would come into play. Now this may indeed by a grossly inefficient way of doing things, but there doesn't seem to be any other any other meaninful alternative that has a chance of being "effective".
While I think it's perfectly legitimate to criticize the current approach embodied by Kyoto, I'm not sure it follows that advocates of action (who are well aware of these problems) should spend more time on implementation issues than they already are.
Do you believe that there is another approach that has even a remote chance of being effective? Are you suggesting perhaps that a wiser course of action would be to simply have governments throw massive amounts of dollars into R&D and hope that we find some magic bullet(s) rather than spending money on setting up emission inventories, monitoring systems, registries, etc?
"Several states actively interfered in the market to deny trades. The price of acid rain permits was discounted accordingly."
Apologies to others, as this is slightly OT, but but I'm having a hard time following the logic of this statement. How would lack of trading cause the price of permits to drop? Doesn't this imply that there would be fewer permits available, which would in turn lead to a higher price? Now if states increased the supply of permits I could understand the drop in value, but I don't see how limiting the flow has this effect.
Posted by: Marlowe Johnson at November 2, 2006 02:54 PM
Those who hope that the rebuff of the Stern Review will remain limited to the world's superpowers, OPEC or members of the House of Lords would be well advised to note the first signs of public dissent emenating from within Labour's own heartland. No surprise here as the working poor in Britain are almost certainly going to pay the price of higher energy and environmental taxation.
Posted by: Benny Peiser at November 2, 2006 03:09 PM
Lomborg - why is it that so many are so beguiled? His arithmetic is wrong in that article; where he writes 700% it ought to read 600%. Does it matter? Well his day job is allegedly in teaching statistics isn't it? As it's by what I believe to be his knowing abuse of real researchers' data and calculations that he pursues his anti-environmentalist political agenda then yes, I'll call him on it, because this is his own modus operandi.
Substantively, Lomborg's critique is beside the point as is all the formulaic nitpicking by self-professed smarty critics of the Stern Report. Sure we could all have done better than Stern ourselves, we know, but Lomborg and his amen group succeed in miring at a kindergarten level what should be debate on serious issues. For instance we hear in that article Lomborg's heartfelt concern for the size of a putative $450bpa bill for greenhouse stabilisation versus his own imaginary $75b to "save the world for the children!". For me at least to take him seriously would require him to explain why carbon taxes collected by governments around the world shouldn't be used to roll back other taxes or sources of state revenue, and for him then to explain why the money is comparable to his proposed $75b expenditure - as clearly it's not - and for him to do the analysis to prove that the effect of reducing those other state revenues would not in reality have a positive (rather than negative) effect on the economy. This would be an improvement I think on the stultified level of what passes for "debate" from Lomborg and the fan club; Roger's fine site here may be the place to get it started one might naively hope.
Posted by: winston at November 2, 2006 03:20 PM
Note that all of Richard Tol's comments now [Richard Tol at November 2, 2006 02:35 PM] about the triumph of human ingenuity etc apply immediately to our greenhouse problem. Is the conclusion agreed then that we treat it as seriously as did the Dutch the threat of the ocean to their lands, implement immediately a Pigouvian carbon tax worldwide with all the accoutrements to make it work, and wind back things like income and payroll taxes to make it short term revenue-neutral, then revel in the fruits of reinvigorated human creativity? I say yes.
Posted by: winston at November 2, 2006 03:37 PM
To Richard Tol:
Thanks for your reply. I suspect the costs and implementation time for petroleum alternatives like tar sands recovery and coal-to-liquids, both financial and environmental, have been underestimated by most, probably including Stern. (I'm going to have to break down and buy a copy of Beyond Oil by Deffeyes and actually read it instead of relying on reviews by others.) This would make the report's estimates of future economic growth suspect at best. Renewables are even more pie-in-the-sky. I thought nuclear might be a possibility, but the comments of KevinUK at Climate Audit are making me more pessimistic about that.
I think it at least moderately likely that the world economy will collapse sometime this century under the strain of increased energy costs, or worse, resource wars. Barring some (unlikely) breakthrough in fusion in the very near future, we're probably screwed. Reducing current GDP by restricting carbon-based energy by whatever means makes this scenario more likely, IMO, because it will hamper and/or discourage innovation.
Posted by: DeWitt Payne at November 2, 2006 04:17 PM
I'm not quite sure I understood the part of your October 31 11:49 post concerning Kyoto. You said, "most of the legwork on a meaningful international regime has already been done."
You then note that the US and Australia have not signed, that the agreement by its terms does not cover "China, India, South Korea, Brazil etc.", and that the countries that it does cover are not living up to it. Yet, you seem to say, if the US were only to sign on the dotted line, everybody would come on board and actually limit their emissions. This does not seem realistic to me.
Have I misinterpreted you?
You also seem to say that even though Kyoto has accomplished nothing yet, and will not without strengthening, it will undoubtedly be strengthened, and the US will be a free rider on those future benefits. This seems to contradict the preceeding argument.
Posted by: Roger Sweeny at November 2, 2006 06:41 PM
"The second reason why I believe that climate impacts will fade if the climate is stabilised, is that human ingenuity is the ultimate resource. Whatever the constraints of geography and climate may be, one day some clever thing will find a way around it."
What positively stuns me is that the Stern Review is so obviously wrong on a fundamental and trivial level.
We are told that 20 people have allegedly spent ***one year*** making a good-faith effort to investigate the economics of climate change. However, their answer is that climate change damages will allegedly cost 5% of GDP "now and forever."
Well, let's spent less than *2 minutes* thinking about that:
1) The world GDP in 2050 will allegedly be $110 trillion. (That's ridiculously low, but I digress...)
2) Five percent of $110 trillion is $5.5 trillion per year.
3) Roger has pointed out that ambient air CO2 scrubbers can remove CO2 from the ambient air at an approximate cost of $400-500 billion per ppm reduced:
Let's say the value is $450 billion per ppm reduced.
4) $5.5 trillion can therefore reduce CO2 concentration by 12.2 ppm.
5) Let's say the atmospheric concentration in 2050 is 500 ppm, and rising by 3.2 ppm per year (both are ridiculously high, but I digress).
6) Therefore, spending $5.5 trillion per year could reduce ambient CO2 concentrations by 9 ppm per year (that's 12.2 ppm minus the 3.2 ppm that the concentration will be hypothetically rising).
7) The concentration is hypothetically 500 ppm in 2050, and the pre-industrial concentration is 280 ppm. Going down by 9 ppm per year means the pre-industrial could be reached in 220/9 = 24 years.
Yet the Stern Review would have us believe the actual cost is 5 percent of GDP "now and forever."
What an unbelievable crock. I literally could do a better economic/technical analysis in 2 minutes.
If the British government wanted a decent economic/technical analysis, they should demand their money back. But I doubt a decent economic/technical analysis was the goal in the first place.
Posted by: Mark Bahner at November 2, 2006 06:50 PM
"Are you suggesting perhaps that a wiser course of action would be to simply have governments throw massive amounts of dollars into R&D and hope that we find some magic bullet(s) rather than spending money on setting up emission inventories, monitoring systems, registries, etc?"
If those are the only two alternatives, the first does seem wiser than the second.
Posted by: Roger Sweeny at November 2, 2006 06:53 PM
"How would lack of trading cause the price of permits to drop?"
If you had a house, and then the government said you could only sell your house to someone whose birth initials were RWJ...would your house go up or down in value?
Posted by: Mark Bahner at November 2, 2006 07:14 PM
To Payne DeWitt:
I would not be so pessimistic. A lot of alternative energy sources are competitive, today, at an oil price of $100 a barrel. Technological progress will bring that down.
The oil price went up to $78 a barrel recently without crashing the economy.
Posted by: Richard Tol at November 2, 2006 11:35 PM
Winston, the dutch did not build their dikes to ward off the threat of the sea. They built them to make it possible to increase the size of their country. The threat to the Netherlands has alwyas been flooding form the huge rivers in the area, not inundation because of rise in sea level.
You need to understand the difference here to really see the ingenuity and success of the Dutch. They claimed land from the sea long before they became a really wealthy nation. And when you see that you might begin to realise that while Bangladesh is "low in the water" there are better solutions to her problems than setting up a tax in the UK. And then maybe you will begin to realise something else. Maybe.
Posted by: Anders Valland at November 3, 2006 03:03 AM
Mark Bahner as always is spot on. I would welcome his and anybody else's comments on my own Notes on Nick Stern's "Science" (sic).
1. The Science
1.1 The Stern Review’s Chap.1 stresses that the science underpins its economics. The core theory is that while the sun’s radiation has no difficulty penetrating the earth’s atmosphere, the atmosphere’s greenhouse gases, of which the most important by volume is carbon dioxide, have the effect of blocking “some” (Stern, Fig.1.2) of the infrared radiation from earth back to space, resulting in the claimed warming effect. Stern (Fig.1.2) concedes that “most” of the infrared radiation does get out to space. If this science is so compelling, why are we not given precise measurements of the “most” that reaches space and the “some” that does not, and even more relevant, what is the precise annual rate of increase in the “some” infrared that does not make it to space? The current energy-balance climate models are rudimentary, ignoring winds and waves and (for the most part) cloud and water-vapor feedbacks.
Posted by: Tim Curtin at November 3, 2006 04:46 AM
"Are you suggesting perhaps that a wiser course of action would be to simply have governments throw massive amounts of dollars into R&D and hope that we find some magic bullet(s) rather than spending money on setting up emission inventories, monitoring systems, registries, etc?"
I don't agree with the premise of this question. I don't agree that governments would be required to "throw mmassive amounts of dollars into R&D" to produce commercially viable non-CO2-emitting energy systems.
I've proposed the U.S. government (or any government) set up a series of fusion technology prizes. The specific set of prizes I proposed are just wild first stabs at some possible prizes. These prizes would be open for any type of fusion device that is not a tokamak device (e.g. dense plasma focus fusion, Koloc spherical reactor, field-reversed configuration, pyroelectric fusion, sonofusion, etc.):
1) Five prizes of $10 million each for generating 10 fusion watts for 1 hour, within a factor of 10 of breakeven.
2) Five prizes of $50 million each for generating 100 fusion watts for 1 day, within a factor of 3 of breakeven.
3) Three prizes of $100 million each for generating 1000 fusion watts for 1 week, within a factor of 2 of breakeven.
4) Three prizes of $200 million each for generating 10,000 fusion watts for one month, above breakeven.
5) Three prizes of $1 billion each for generating 1 megawatt by fusion, for one year, at at least 10 percent greater than breakeven.
If all the prizes were collected, for a total potential cost of a measly (to the U.S. government) $4.2 billion, fusion would essentially be developed to very near commercialization (which would be done by private industry).
If the U.S. government wanted to do the whole deal for zero cost, they could stop their funding for the ITER (International Thermonuclear Experimental Reactor...a tokamak device).
A similar set of technology prizes could be developed for photovoltaics, advanced batteries (to allow cars to run as "plug-in hybrids"), home and transportation fuel cells, biodiesel, or whatever else was appropriate.
The key advantage of technology prizes is that the government doesn't fund the research. The private industries fund the research themselves (i.e., take the risk themselves) in order to obtain the prizes. If no one can attain technological goals required by the prizes, the government pays nothing.
Posted by: Mark Bahner at November 3, 2006 07:08 AM
To Anders Valland
There is a common misperception that the Dutch reclaimed Holland from the sea. In fact, there used to be high fens in this area -- cushions of water-saturated vegetation, that were high above sea and river. As of the 10th century, population growth necessitated and technological progress allowed (some say that the Medieval Optimum played a role too) that the high fens were drained and cultivated. Unfortunately, drainage led to oxidation and hence subsidence. Dikes had to be build to keep out river and sea. Human-induced subsidence continues until today.
Although large parts of the Netherlands are reclaimed, they were land first, then flooded, and finally reclaimed. The Dutch did not conquer their land, but reconquered it.
Essentially, each generation of Dutch solved their land problem but caused greater flood problems for the next generation.
It's a nice metaphor for climate change. After 10 centuries, the Dutch still pass the problem to the next generation.
Posted by: Richard Tol at November 3, 2006 09:07 AM
The flip side of your analogy is that there are a fixed number buyers and they can only buy a house from the person who has the initials RFJ. What do you think would happen to the value of the house? If you constrain supply then prices should go up, right? My question is what effect government interference has had on permit prices. If anything I would think that any restrictive actions which constrained supply would drive the prices up, not down since demand is fixed (in the sense that everyone still needs to comply at the end of the day).
Wrt to your discussion of prizes. You've posted your idea many, many times. If you think it's an appropriate response fine, but surely you can understand why others might not see it that way. As I've said before, $4 billion to address a problem whose costs might very well run in the trillions is close to a do-nothing policy and is a pretty risky strategy, as there is no guarantee of any magic bullet. What do you do if no one claims the prizes? Increase the amount? Build dams? I'm not saying that prizes aren't a good idea. They might be, but they should be part of a larger policy program to address the problem.
I think the useful aspect of the Stern report is that it at least gives a sense of the potential order of magnitude of costs. This in turn helps to put the appropriate policy response in context (i.e. be prepared to spend billions, not millions). I don't know whether or not the Stern report's methodology is sound, but I'm willing to accept that it isn't off by an order of magnitude. Having said that I'll still wait for the AR4 report from WG III for a more definitive answer -- I'm certainly suspcious about the need for the Stern report in the first place given the existence of WG III.
Roger Sweeny -- I don't by any means think that its either Kyoto or R&D. There are of course plenty of other options out there. But let me suggest that while a government-funded R&D program might be easier to set up, it is also less likely to marshall the same level of resources that the private sector could collectively under a GHG regulatory framework. And the bottom line is the less money you throw at a problem, the less likely you are to solve it.
Richard Tol -- Frankly, I'm a little bit surprised that there hasn't been a greater economic impact from the recent sustained rise in energy prizes. Not complaining of course! To me this suggests that the global economy is probably more resilient to energy prices than commonly assumed, and therefore the projected costs of mitigation (which would lead to higher energy prices) might turn out to be lower than we predict.
A small nitpick regarding your comment about renewables and oil. Renewables generally compete with coal not oil, and the price of coal isn't likely to go down any time soon. If renewables are getting more competitive, wouldn't you agree that it is in part because governments are forcing the coal companies to internalize some of the costs of production? In this context I don't think that a GHG trading system is all that revolutionary.
If oil prices go up and stay high over the long term, then it creates a greater demand for fuel efficient vehicles more than antying. Apologies if you were referring to biofuels when talking about renewables. Even there though, I don't think that the statement holds --recent trends suggest that ethanol prices continue to track the price of gasoline (i.e. no indication that they are becoming more competitive).
Richard Belzer -- Coming back to your original comments, I think I may have misunderstood your concerns. Let me know if the following is off-base. Advocates of agressive mitigation understimate the leakages in any international GHG trading system and the costs involved in setting up, monitoring, and enforcing such a system. Consequently, the costs of mitigation are (significantly?) underestimated. Have I got it about right? I'm not very familiar with the work put out by WGIII or the Stern report so I can't really provide any useful opinion on whehter this is true or not.
I would add though, that if it is true that we routinely understimate the start-up costs of these types of regulatory systems, is not also true that we routinely underestimate the ingenuiety of the marketplace, which in turn leads to an overestimate of costs. In other words, the two errors tend to cancel each other out...
Posted by: Marlowe Johnson at November 3, 2006 02:51 PM
Suppose for a moment that you and your neighbors have been pooping in your backyards for years. By now thanks to rising population and limits to natural biological remediation you are threatened by a rising tide of excrement, and it is this particular negative externality of your lifestyles which has caught your attention this morning. Do you recommend to your town committee this evening that dykes be constructed all over Boomtown to hold back the approaching waves of poop, or listen to Slow Dave next door who claims that imminent inundation of your living rooms be but one of many undesirable consequences of pooping as usual?
SlowDave says that it could turn out well were you all to try a little harder to address the root cause of your problem but that you'd need to weather the storm from your better off and pretty pleased about it friends, who'd say stuff like "But if I had to pay for the poop I wouldn't be able to afford my annual vacation in upstate Fragrantville, or dine so often at the all you can eat buffet at McFriendly's!" Formidably argumentative opponents these doods - what're you gonna do?
Posted by: winston at November 3, 2006 03:45 PM
To Richard Tol:
I hope I'm too pessimistic.
As far as the recent peak in spot oil prices, I suspect that most major oil consumers are on long term contracts and the price didn't stay up long enough to work all the way through the economy. Of course, that assumes that the recent slowdown in productivity, retail sales and the possible bursting of the housing bubble in the US has nothing to do with the price of oil. Back to pessimism. I think we'll look back fondly on $78/barrel oil as still being part of the era of cheap oil.
Yes Alberta tar sands are being converted to oil and sold apparently at a profit. However, the Energy Returned Over Energy Invested is only about 1.5 compared to 30+ for Middle East Oil. Also, the energy invested is currently coming from relatively inexpensive (to them) natural gas. The process also uses lots of fresh water so scaling up production may be a problem. The economics become less clear if you have to bootstrap the energy off the oil produced. This does not include the cost of environmental remediation, by the way, which if the pictures I've seen (recovering tar sands is done by strip mining) are any indication , will be high.
On a positive note, the Qatar gas-to-liquids project is now producing liquid (i.e. easily shippable) fuel from natural gas that had been flared. That could make a small dent if expanded to other oil fields where methane is flared rather than recovered because transportation of the gas is not profitable.
Posted by: DeWitt Payne at November 3, 2006 05:36 PM
I don't have time to address all your comments, but here are some brief responses:
You write, "Wrt to your discussion of prizes. You've posted your idea many, many times. If you think it's an appropriate response fine, but surely you can understand why others might not see it that way."
No, frankly I can't. I seems to me that those who put down the feasibility and likelihood of success of technology prizes--for fusion, but also photovoltaics, advanced batteries, home and auto fuel cells, and other technologies--may not indeed want a simple and inexpensive solution to the global warming "problem." When people talk about worldwide carbon dioxide emission limits and emissions trading (as you and Tom do), I'm reminded of great doctors' lines from Monty Python:
"This looks like it will require a total cashectomy," and
"There's nothing wrong with you that expensive and unneccessary surgery can't prolong."
You also write, "I think the useful aspect of the Stern report is that it at least gives a sense of the potential order of magnitude of costs."
Oh, really? I think the Stern Review is a road of clap. I think it's one of the most thoroughly dishonest documents I've ever seen by an "authority"...and it is completely devoid of economic/technical merit. So suffice it to say, we reach different conclusions. Let's try to figure out how we reach such different conclusions.
One of the major conclusions of the Stern Review is:
"Using this model, and including those elements of the analysis that can be incorporated at the moment, we estimate the total cost over the next two centuries of climate change associated under BAU emissions involves impacts and risks that are equivalent to an average reduction in global per-capita consumption of at least 5%, now and forever."
Can you even tell me what that translates to, in year 2006 U.S. (or Canadian) dollars?
For example what is the Stern Review saying the cost of climate change is in these periods:
Posted by: Mark Bahner at November 4, 2006 06:46 AM
Thanks for your comments. You say that *Policies that are not effective simply waste scarce resources. For advocates of aggresive action, effectiveness ought to be prerequisite.* I agree, but think this truism does not obviate the need for greater discussion about what policy measures might be most effective. You fail to make any suggestions, but simply throw up doubts. Are internationally coordinated taxes better?
You are also correct to mention "rent-seeking", but fail to provide any context. In the absence of any coordinated international action, surely you recognize that the absence of of any pricing mechanism for use of open-access resources such as the atmosphere is in effect an ongoing subsidy for current consumption that will compound the negative effects that such use produces. Can I presume that you are not in favor of this continuing subsidy?
At some point, it becomes in the respective users' best interests to develop a system that manages the resource and limits the continuing tragedy of the commons, and success on developing a management regime depends much on the gamesmanship of the parties involved. The history of the negotiations of both the UNFCCC and the Kyoto Protocol make clear that the international community has been ready to make climate change a priority, but a truly effective international regime remains hostage to gamesmanship/equity issues.
You indicate a concern that steps towards a more effective international regime may be vitiated by "rent-seeking", but it seems to me that you have your paradigms confused, at least on the international level. There is simply NO international government before which one or more nations might seek rents; rather, we have a system of separate nation-states openly negotiating about what rules each is willing to accept.
Yes, on the domestic front, the US and others face numerous rent-seekers who wish to affect government policy in a manner that is beneficial to them. But what you fail to note is that it is precisely such rent-seeking that has held up even an open discussion of policy options in the US. Fossil fuel producers and users together have, in a campaign closely orchestrated with political opportunists in the Republican party, deliberately and cynically masked the ongoing subsidies to fossil fuel use and GHG emissions, by questioning the motives and loyalties of both scientists, "liberals" and "enviros". (See the Luntz memo.)
It is ironic that, as a reason NOT to move, together will the rest of the international communitiy to solve this open-access resource issue, you point a finger at unnamed rent-seekers, but conveniently overlook the gross rent-seeking that has long been underway and has been the hallmark of the Bush administration.
Finally, you say that my *confidence that there is majority support in Congress for aggressive action may be misplaced. Congressional support for policies tends to decline when their chance of enactment rises above zero.* Your observation actually cuts the other way - Republicans who have advocated climate change policies have actually had to buck the political orthodoxy. When that orthodoxy crumbles, we can expect a tide in the direction of action on climate change. (Of course there will be a welter of reasons, including a desire not to surrender too much political advantage to Dems.)
Posted by: TokyoTom at November 4, 2006 11:12 PM
It seems you have misunderstood my comments on Kyoto and gamesmanship. I certainly do NOT think that "even though Kyoto has accomplished nothing yet, and will not without strengthening, it will undoubtedly be strengthened, and the US will be a free rider on those future benefits."
My points are that (i) the failures of Kyoto are in part the predictible consequence of the failure of the US to join the accord, (ii) despite Kyoto's failures, the UNFCCC and Kyoto are valued additionsl to the global infrastructure needed for effection coordinated action on climate change and (iii) in order to make further progress, the US must decide it wishes to join in some manner and must, together with the EU/Japan, negotiate terms on which China and India accept meaningful GHG emission caps.
The problem up to now has been the desire of the Bush administration to essentially turn its back on the rest of the world community and to ignore the long-term best interests of its own citizens in favor of short-term political advantage and for the financial advantage of fossil fuel producers and users. But that has long been the story of this Administration.
Let me add that Clinton/Gore have responsibility for enabling the Bush climate change denial/fossil fuel favoritism approach by not insisting that China or India accept any GHG emmision obligations at the time Kyoto was negotiated.
Posted by: TokyoTom at November 4, 2006 11:30 PM
You say, "The history of the negotiations of both the UNFCCC and the Kyoto Protocol make clear that the international community has been ready to make climate change a priority..."
I think the history shows quite the opposite. The "international community" has been very willing to say that climate change is a priority but has been unwilling to actually do anything about it. Just about every nation that has signed Kyoto is in violation of it and not on a path to be in compliance with it either.
You are absolutely right. We need real discussion about climate change and what should be done. But it's got to be realistic.
Posted by: R at November 5, 2006 08:33 AM
I've actually taken the weekend off, so I am waaaay behind here and I'm not sure I'll ever catch up...
Marlowe, uncertainty about whether government will let you buy, sell, or use an asset is captalized into its market value -- in particular, it reduces it. SO2 allowances would have been worth more if they were actually property rights, and especially if they were iron-clad property rights. But they were neither.
We should not look at supply and demand conditions in the SO2 allowance market and try to draw inferences about the magnitude of this discount. It's better to think of the actual SO2 allowance as a different (and lower-valued) commodity than what it would have been if it had been a legally enforceable property right.
Uncertainty about the legal status of GHG allowances will diminish their value. This is true even no GHG allowances in the market are counterfeit. If there are counterfeits, then there is even greater uncertainty because buyers cannot be sure whether they are buying genuine or fraudulent allowances. If there is additional uncertainty about how genuine and fraudulent products are distinguished -- or what is the same thing in practice, high transactions costs to make these distinctions and both false positives and false negatives in the determinations themselves -- then market value is discounted further. And if there is a latent threat of expropriation of genuine allowances -- or what is the same thing in practice, a change in the definition of a legal allowance -- yet another discount applies.
In short, the value derived on the economist's chalkboard is the upper-bound of market value. I wish it were otherwise, as it would make our work a lot easier.
Posted by: Richard Belzer at November 5, 2006 07:55 PM
Marlowe, a response to (I think) your second reply to me...
I can't give an informed reply about whether well-done mitigation cost estimates are too low. I haven't reviewed them; this is not my primary field. What I've seen looks to me like wishful thinking about both proposed carbon taxes and allowances with respect to how they would work in practice. I suspect that taxes have much lower uncertainty and transactions costs than allowances, for the reasons I've already mentioned, but in many parts of the world tax administration is not exactly free of corruption.
My reaction to Prof. Tol's review of the Stern report (and news stories I've read about it) is that UK policy is now in the hands of the treasury, and that means carbon taxes because treasuries want revenues. Governments get addicted to sin taxes, and let's be clear: a carbon tax is the mother of all sin taxes. To maintain constant revenue they have to ratchet up the price of sin. As long as the demand for sin is price elastic, its quantity will decline. But as the quantity of sin declines, they have to ratchet up the price again, ad infinitum. Sin taxes are justified by the external costs caused by sin, but quickly the tax rate rises well above its marginal damage. Revenue needs take over.
In terms of administering a GHG allowance system, the UN's Oil for Food Programme strikes me as our best example of what we should expect. The level of "leakage" (read: corruption) in that program would be unaacceptible and programmatically fatal from a US perspective. I guess that Europeans would be embarrassed about it but they'd suck it up. Meanwhile, from a Russian or Chinese perspective, if only a tenth or so of the program's value was stolen it would be an historic achievement. I don't know how to reconcile these conflicting cultural values into a workable voluntary global policy. It could be reconciled by force, which is what I suggested in my original post.
Posted by: Richard Belzer at November 5, 2006 08:30 PM
I quoted one of the Stern Review's primary conclusions:
"Using this model, and including those elements of the analysis that can be incorporated at the moment, we estimate the total cost over the next two centuries of climate change associated under BAU emissions involves impacts and risks that are equivalent to an average reduction in global per-capita consumption of at least 5%, now and forever."
I asked Marlowe Johnson, "For example what is the Stern Review saying the cost of climate change is in these periods: 2000-2050? 2050-2100? 2100-2150? 2150-2200?"
At the time, I hadn't seen the Stern Review's Figure 6.5d:
The Stern Review's dishonesty in their "conclusion" is at once breathtaking and sickening.
I guess it just goes to prove the old adage, "Figures don't lie, but liars can figure."
Note that it takes more than *70 years* before the worst-case calculated damage hits 5 percent of GDP. Yet they use the term, "now and forever." Unbelievable.
Posted by: Mark Bahner at November 5, 2006 08:48 PM
I am sorry nobody has reacted to my comments on the Stern Review's science, which in my view is at least as bad as his economics.
AS for the economics, Richard Tol's comments on Stern's use of a virtually zero discount rate is spot on. Stern's method also misses the purpose of discounting, which is to determine the opportunity cost of alternative investments. Setting the rate to 0.1 or even 0.0 for evaluating climate change adaptation or mitigation costs is "ethical" according to Stern, but also penny wise and pound foolish. Consider an evaluation of whether it is better to replace coal or gas power with nuclear or solar, using data from Finland and IEA for nuclear, and from Australia's coal and power industry plus its proposed solar power plant in Victoria, and using Stern's US$85 per tonne of CO2 as the climate cost averted by reducing CO2 emissions. Using a zero discount rate, both nuclear and solar yield positive net cash flows vis a vis replacing coal, but only solar is cash positive for replacing natural gas (because of the lower CO2 saving). Using the internal rate of return, nuclear but not solar shows a return higher than the current market opportunity cost of capital (8%)for coal replacement, and both nuclear and solar fail this market test vis a vis natural gas replacement. So the correct decision is to replace coal with nuclear and leave natural gas in place. By adopting using Stern's zero rate and replacing gas with solar because it is cash positive despite a real rate of return of only 0.16 per cent, we forgo the 8 per cent return on the alternative use of those funds which would enable us to fund more replacement of coal. Using a zero rate leads to inefficient policy outcomes.
Posted by: Tim Curtin at November 5, 2006 09:30 PM
You write, "I am sorry nobody has reacted to my comments on the Stern Review's science, which in my view is at least as bad as his economics."
Yes, I know you invited me specifically. Sorry, there are only so many hours in a day. Here is my personal take on the science:
1) I personally use a climate sensitivity of 2.2 deg C per effective CO2 doubling. People who use anywhere from ~1 to ~3.5 deg C per CO2 doubling use numbers that seem reasonable to me, so I don't much debate anything in that range.
2) What bothers me much more about the IPCC TAR is that they use such unrealistically high values for methane atmospheric concentrations, and CO2 emissions and atmospheric concentrations. Even reasonable values for climate sensitivity will produce unreasonable temperature projections when the model inputs (CH4 and CO2 atmospheric concentrations) are unrealistic. Garbage in, garbage out...as computer programmers say.
3) The Stern Review was prepared by people who (allegedly) know economics. So it's far more disturbing to me when they do things that are misleading or just plain wrong on economics matters.
That's why I've focused more on the Stern Review's economics.
P.S. I've just glanced at your comments on discounting. They seem to be "spot on." ;-) Stern (and even more William Cline, from his work in Bjorn Lomborg's Copenhagen Consensus evaluations) seem to think that the only outcome of using a low discount rate is that it promotes "generational equity" (or some such idea). But as you point out:
"By adopting using Stern's zero rate and replacing gas with solar because it is cash positive despite a real rate of return of only 0.16 per cent, we forgo the 8 per cent return on the alternative use of those funds which would enable us to fund more replacement of coal. Using a zero rate leads to inefficient policy outcomes."
...using a very low discount rate leads to bad *present* decisions (e.g. replacing natural gas with solar) by essentially ignoring opportunity costs.
When I was reading William Cline's input to Bjorn Lomborg's Copenhagen Consensus it hit me very strongly that Cline simply didn't like what conventional economics methods--i.e., that "benefits" that accrue 50-100+ years from now aren't very valuable--so he decided to simply ignore conventional economics.
That's more like religion than science.
Posted by: Mark Bahner at November 6, 2006 10:42 AM
Oops. A bit of a typo there. That last paragraph should have read:
When I was reading William Cline's input to Bjorn Lomborg's Copenhagen Consensus it hit me very strongly that Cline simply didn't like what conventional economics methods were telling him--i.e., that "benefits" that accrue 50-100+ years from now aren't very valuable--so he decided to simply ignore conventional economics.
Posted by: Mark Bahner at November 6, 2006 10:48 AM
A comment on discount rates
Posted by: KFog at November 7, 2006 09:21 AM
"First, it is necessary to agree that on a very long term, the discount rate must eventually go down to zero."
Well, I don't agree with that. Your attitude is exactly that of William Cline. You don't like the answers generated by conventional economics (e.g., non-zero discount rates), so you insist that it "is necessary to agree" with YOUR opinion.
Sorry, I don't. You're going to have to actually provide some supporting evidence for your point of view.
Your point of view reminds me of the anecdote about a professor of astronomy lecturing his students. The professor says, "In 5 billion more years, the sun will expand, and earth will be incinerated."
One of his students jumps up and says, "Oh my God!"
The professor then says, "Well, I don't think we need to worry so much...5 billion years is a long time."
The student says, "Oh! 5 billion! I thought you said 5 million!"
If an asteroid the 100 km in diameter is expected to hit the earth in the year 2300, that does NOT mean we should be doing something about it right now...even though such an asteroid would essentially wipe out civilization (i.e., have essentially infinite cost) if it hit in 30 years, instead of 300.
Not to brag, but I consider myself to be better able to predict the likely rate of increase in world GDP per capita than 99+ percent of economists (including Robert Lucas Jr., who won a Nobel Prize in economic growth theory):
If I'm right about future economic growth (and I'm willing to bet that I am right, which I doubt anyone associated with the Stern Review is willing to do)...then the long-term discount rate should actually be HIGHER than the short-term discount rate. In fact, if I'm right, the discount rate for any period more than approximately 70 years into the future should be ***infinite***, not zero.
Posted by: Mark Bahner at November 7, 2006 10:44 AM
Hi Dr. Bezler,
Thanks for your thought-provoking comments. I agree that uncertainty in the rules of the market will devalue credits. Consequently, emitters will be less likely to trade and more likely to reduce emissions internally (which may prove to be the more expensive option)since they still must meet their regulatory obligations. In the context of your original point, it's not supply/demand considerations that matter, its the confidence in the basic fairness and institutional robustnesss of the market. Presumably many third world currencies are devalued for the same reasons.
I also agree that the UN Oil for Food program may make for a better comparison than the U.S. NOx/SOx trading company because of its international character. Given the highly politicized nature of the discussions, it will be very interesting to see what kind of measures, if any, are taken to ensure that the process for monitoring and enforcing a global GHG agreement remain as transparent as possible. You correctly note that there are different cultural norms regarding corruption, and it may be that Kyoto II will turn out to be a hugely expensive exercise that doesn't do much to address the problem. It's possible. But I would submit that it's a risk we should be prepared to consider given the potential risks associated with doing nothing (or doing very little).
Kfog -- I agree with you that there should be much more discussion about discount rates and how they inform economic analyses of climate change. I agree with Richard Bezler that one should present results using a range discount rates rather relying on one particular number, for the simple reason that there is no “correct” number. The choice of discount rate is fundamentally based on normative considerations (i.e. what is the right/moral thing to do) not some positivist/objective criteria. Lower discount rates place a higher value on the autonomy of future generations. Higher discount rates place a higher value on the interests of present generations.
Mark Bahner’s request for some “evidence” in this context is therefore misplaced IMO since it is impossible to “prove” something that is fundamentally based on a moral considerations. To me the topic of discount rates simply highlights the fact that it is not possible to conduct a purely objective economic analysis of climate change and that ANY estimates of costs/benefits need to be taken with a large grain of salt.
Posted by: Marlowe Johnson at November 7, 2006 01:28 PM
I'm not really sure you understand what the effect of the discount rate is in the context of a cost/benefit analysis. If you set the discount rate to infinity then what you are in effect saying is that no amount of future damages (e.g. $1,000,000,000,000,000) could justify spending even a penny today on mitigation. By your logic, if we know an asteroid will impact the earth in 71 years then...meh
Posted by: Marlowe Johnson at November 7, 2006 01:55 PM
"Not to brag, but I consider myself to be better able to predict the likely rate of increase in world GDP per capita than 99+ percent of economists (including Robert Lucas Jr., who won a Nobel Prize in economic growth theory)...In fact, if I'm right, the discount rate for any period more than approximately 70 years into the future should be ***infinite***, not zero."
Yes if you are right and no matter what happens we will be able to buy a new Earth at Wal-Mart by the year 2076, then of course you should be awarded the Nobel Prize.
Posted by: Aaron_M at November 7, 2006 04:25 PM
On declining discount rates:
A declining discount rate is not the same as a low constant discount rate, though.
On asteriods and expanding stars:
Asteriods are different. With a high discount rate, we might ignore this. With a low discount rate, we might invest in technology to divert the asteriod from its collision course. But there are surely limits on how much we would like to spend on such technology.
On social discount rates:
At the same time, government behaviour should reflect the will of the people. If everybody is impatient, then the government should be impatient too.
Posted by: Richard Tol at November 8, 2006 12:50 AM
To Richard Tol:
You are right, of course, on the reclamation issue. The dutch always call it "reclamation", at least when they write english. Thus noone is trying to say that this part of the earth was never above or below the sea.
The point of my post was that we ceratinly do have the knowledge to make sure areas such as the Eurpoean lowlands and Bangladesh can be made prosperous even though they face challenges posed by their rivers.
The main threat to the Netherlands today is from its rivers, as they will do the greatest damage in case of flooding. The sea can pose threats such as storm surges, but those are fairly short lived compared to possible flooding from the rivers.
The same goes for Bangladesh and other areas such as New Orleans. If you use the Dutch knowledge these areas can be made safe for generations to come.
You try to say that the Dutch have only warded off the sea for the current generation. What is this based on?
Posted by: Anders Valland at November 8, 2006 01:41 AM
To Anders Valland:
Water management in the Netherlands still causes subsidence. Therefore, the dikes have to be raised periodically to keep flood safety at a constant level. Besides, they're still building in the flood plain.
Sea level rise and higher river run-off in winter and spring exacerbate this problem.
Posted by: Richard Tol at November 8, 2006 02:00 PM
Discount rates again
Posted by: KFog at November 9, 2006 03:38 AM
Richard Tol writes, "There are arguments for using a declining discount rate. The best one is intuitive. With a constant discount rate, the relative weights of year 10 and year 11 are equal to the relative weights of year 100 and 101. With an appropriately declining discount rate, the relative weights of year 10 and 11 are equal to the relative weights of year 100 and 110."
Do you agree that there are two assumptions in the argument that a declining discount rate is appropriate:
1) Per-capita economic growth is not accelerating, and
2) There will not be any future time at which money itself is no longer relevant?
If you agree that those are assumptions in the argument for using a declining discount rate, do you think they’re valid assumptions for the entire 21st century (let alone the 22nd or 23rd)?
"On asteriods and expanding stars: In a policy analysis, they only things that matter are those things we can do something about. Whatever discount rate we'd use, the sun will expand and Earth will be vaporised."
Well, geez, Richard...you must not read much science fiction! Way back in 1950, Robert Heinlein was expecting us to colonize (Jupiter’s moon) Ganymede by 2050:
We don't look like we'll make that target date, but it seems like in even a hundred years or so, colonizing Ganymede ought to be possible. (In my opinion, development of fusion power is absolutely necessary before such ventures can even be contemplated.) And it seems unlikely that it would take more than 1000 more years to colonize something outside this solar system. This is particularly true if we thought this solar system would not be habitable in a couple thousand years.
“Asteriods are different. With a high discount rate, we might ignore this. With a low discount rate, we might invest in technology to divert the asteriod from its collision course. But there are surely limits on how much we would like to spend on such technology.”
Suppose we have a situation that we absolutely know that a 100 km diameter asteroid will strike the earth in the year 2250, without intervention. (Note: Such an asteroid is 10 times larger than the asteroid that’s thought to have wiped out the dinosaurs at the end of the Cretaceous.)
In the event this hypothetical situation were to occur, what is your opinion about how much we should be spending right now to avoid that event (which would wipe out all human civilization, if it hit in 2020)? In my opinion, the answer is "Probably a factor of 10 LESS than the 1 percent of GDP that the Stern Review recommends we spend on climate change."
Posted by: Mark Bahner at November 9, 2006 10:38 AM
Discounting is complex. I would suggest that you read Robert Lind's excellent book before we continue this discussion.
Discounting is related to the opportunity cost of capital, and it is related to impatience. Both are lower for society than for an individual, because an individual is more constained and has less risk to pool (capital) and an individual has a greater probability of dying without kids (impatience).
So, the social discount rate should be lower than an individual discount rate.
Lower does not imply zero though.
Posted by: Richard Tol at November 9, 2006 11:00 AM
To Mark Bahner:
In fact, I'm a great SciFi fan. However, space travel is too expensive and too slow to be lucrative.
Some people will go to quite some extremes to avoid imminent, virtually certain death (my kingdom for a horse), but their willingness to pay drops rapidly if the risks is smaller or more distant. And if death is deemed inevitable, some would rather throw their last big party.
I would not be able to give a number, but it would not be big, indeed.
Posted by: Richard Tol at November 9, 2006 04:08 PM
When Mark writes "And it seems unlikely that it would take more than 1000 more years to colonize something outside this solar system. This is particularly true if we thought this solar system would not be habitable in a couple thousand years" he is certainly sounding more relaxed about the possibility of the solar system becoming uninhabitable than I am. His discount rate for investment to mitigate the risk would consequently be a lot higher than is mine. In fact I think I really quite liked the natural environment of Earth the way it was about 150 years ago, call me old fashioned I suppose.
Posted by: winston at November 9, 2006 06:55 PM
"In fact I think I really quite liked the natural environment of Earth the way it was about 150 years ago...
Wow. I didn't know any people that old were still around.
Oh, you mean you like the idea of the way the earth was 150 years ago.
Would you go back? Outhouses, measles epidemics, no computers. How much would you be willing to give up for that "natural environment?"
Posted by: Roger Sweeny at November 10, 2006 03:12 PM
Oh I'd definitely want to take the good things back from the present and also avoid the oldtime nasties like measles and outhouses if that's OK. It's the "natural environment" not technology or civilization that I preferred as it was back in those long gone halcyon days of Earth's youth, in the 19th century say ... transported back there I'd be keen to take plenty of the benefits of more recent human progress with me.
It's not a zero sum game though is it - not that medicine and motorcars and aircon necessarily must cost us Earth's natural beauty and life sustaining environment is it? Many advocates of free market capitalism seem to feel that if there's one thing a high material standard of living can buy you it's a quality environment; I'd like to think it'd be on the top of the xmas wish list for today's smart plutocrat.
Posted by: winston at November 11, 2006 01:03 AM