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The Stern report on global warming
No, I am not going to read the whole 645-page report. But I have read the material on discount rates, and I offer a few points...
1. Stern never says what discount rate he is actually using. I find this bizarre, to say the least. One account from the FT estimates he uses a figure between 2 and 3 percent.
2. The correct rate depends on a society's rate of investment. If government regulates, taxes, or otherwise pulls resources from the private sector, we need to estimate how much of these resources would have gone into investment and how much would have gone into consumption. Stern never does this.
3. The resources that would have gone into investment should be discounted by the (risk-adusted) rate of return on investment. This will be much higher than two or three percent, although of course it does not apply to the entire gross upfront cost.
4. The resources that would have gone into consumption are harder to discount, especially if we are comparing those resources across the generations, and if the change in question is "large" rather than "small." I tend to favor a very low or zero discount rate in these settings, if only because there is no pure time preference across the generations. (Before you are born, you are not sitting around impatiently, waiting, unless of course you are a character in Maeterlinck's The Blue Bird.) In any case this is predominantly an ethical question, and no correct answer follows directly from examining marginal analysis and market prices.
If the change is "small" for the affected people, in the precise sense of not much affecting their marginal utility of wealth, we should discount by the market rate of interest, adjusted for risk, taxes, transactions costs, etc. I don't find Stern very clear on such matters.
5. Since the Chinese save and invest more than do Americans, the correct social discount rate should be higher for China than America. If the Chinese are earning ten percent a year on savings of fifty percent, that gives a rough discount rate of about five percent. Don't tell me that US and A is saving zero percent a year (no way), but we are saving less than the Chinese.
All other things equal, that means we should invest more to stop global warming than should the Chinese, and that is not even considering our higher income.
6. Stern argues that if the environment is worsening, this might justify a negative discount rate for some environmental amenities. This is theoretically possible, but with substitutability between environmental and non-environmental goods, it is unlikely.
7. Cost-benefit analysis works best for small changes which can be evaluated at market prices. I don't think it tells us much about evaluating the costs of, say, one hundred million poor "climate-change" refugees. Under my ethical views, which refer to a notion of property rights, the true costs of those refugees are higher than market prices/incomes will indicate.
8. Lower discount rates don't always make global warming costs more important. Say the rate of discount is zero. This implies that one-time adjustment costs fade into insignificance, compared to ongoing gains from economic growth.
9. For this entire exercise, the results are very very sensitive to the choice of discount rate. Some of this requires ethics, not just economics. Stern notes this clearly, but the relevant caveats don't seem to find their way into his final presentation of the estimates.
The bottom line: Stern avoids many of the common mistakes in this area. He stresses that a multiplicity of discount rates is required. But his treatment of discount rates is far from transparent and it is in some regards incorrect. That said, the "mistakes" slant the analysis in both directions, rather than confirming any prior that global warming is a significant economic problem.
The other bottom line: I do understand, and accept, the case for doing something. But I don't yet see how this report adds to that case. Maybe I'll read on.
Here is a critique from The Economist, and here. Here is Cass Sunstein on the study. It also seems the report relies on excessively high estimates of econoimc growth. Here is one critique of the science. Here is a detailed Bjorn Lomborg critique. New Economist blog points to these supporting materials.
Posted by Tyler Cowen on November 4, 2006 at 06:54 AM in Science | Permalink
Comments
Why would the risk-adjusted discount rate be much higher than 2 or 3 per cent? The usual story we tell about risk premia is that most investments returns are positively correlated with consumption, that is, they pay off best when we need it least, and pay worst when we need it most.
If the movements in the benefits from investing in reducing greenhouse gases are uncorrelated with the business cycle - a not unreasonable approximation, as far as I can tell - then the risk premium would be zero. The discount rate would be the one used to discount utility. The 2-3% range appears to be the consensus in the macro modelling literature, so it's a reasonable choice to make here.
Posted by: Stephen Gordon at Nov 4, 2006 11:37:38 AM
One should be leery of Stern from the get-go. Stern was one of the economists in '80's predicting disaster for Britain if Thatcher implemented her economic plan. Since even at the time Thatcher was obviously on the right track, this suggests Stern's powers of analysis and economic prognostication are not to be trusted. Prof. Cowen implicitly confirms that impression.
Posted by: DaSarge at Nov 4, 2006 1:20:45 PM
I haven't read the very long report either. But I do have some observations of mistakes people tend to make about the economic costs of a much warmer planet, regardless of why it warms.
First, to say there is a huge range of estimates on how much warming will take place is an understatement. One should only buy insurance for something is one can't afford to pay for it when the accident comes. Otherwise one is better off not buying insurance or a warranty.
Therefore one can't simply look at the worst case scenario and say we must insure against that. One must also take into account the risks of "doing something" for no good reason. One such risk is that fears are seriously overblown, and as a result we will all be much worse off as a result of spending say 1% of GDP annually by throwing money down the drain.
Second, the notion of increased storms due to global warming looks to be mainly a scare factor, and most of those who study things like hurricanes see no evidence that is brings such disasters. Thus the economic costs of "doing nothing" are exaggerated.
Third, when people talk about oceans rising, keep in mind that first of all these estimates are all over the map. But regardless of how high they rise, it will happen gradually. Thus there won't be masses of refugees from rising oceans in Bangladesh or elsewhere.
Fourth, in many if not all cases, economicaly speaking, the costs of adjusting to global warming are likely to be smaller than $450,000,000,000 per year, year after year,which is what this economist who wrote this report considers to be a small price to pay. A much better use would be as oceans gradually rise, we help pay for the Dutch to build dikes/levees in bangladesh and elsewhere. To say that this would be cheaper is an understatement.
Fifth, compounding is important. There is so much pain and misery in the third world, and only just very recently are so many of these populous countries starting to make the macroeconomic changes they need to lift themselves out of horrific poverty. Slowing down economic growth by the massive amount (not small as the reports author states) the author seems to think we "need" to do means much more death, pain, and misery for hundreads of millions of people than would otherwise be the case. Today that is, not one hundred years from now.
Sixth, the human mind is a wonderful thing that Malthus and his intellectual cousins radically underestimate. There is a mad scramble in the private sector right now to come up with cost competitive substitutes for coal, natural gas, and oil. These are already creeping into use and will likely cost us far less than about $450,000,000,000 per year.
Seventh, we already have the means to radically reduce carbon burning. It is called nuclear power and anyone who is serious about global warming and is worried about a nearing "tipping" point being realistic ought to be strenuously pushing hard for nuclear power now. When the greens start pushing hard for nuclear power then I'll start worrying that this is more than just neo_Ludditism. Current (so called third generation) designs of nuclear plants are supposed to be price competitve with coal dn much safer than the already very safe second generation nuclear power plants.
Posted by: happyjuggler0 at Nov 4, 2006 2:20:58 PM
"I haven't read Doctor Zhivago myself, but I condemn it wholeheartedly..."
Posted by: A Tykhyy at Nov 4, 2006 3:48:36 PM
Happyjuggler sounds like an oil industry troll.
1. " to say there is a huge range of estimates on how much warming will take place is an understatement.."
Different estimates found in different sources typically result from different definitions and do not reflect uncertainties in the underlying radiative transfer
http://en.wikipedia.org/wiki/Greenhouse_effect
"Since 2001, no climate scientists have expressed skepticism that warming, of the magnitude described by the IPCC, has occurred."
http://en.wikipedia.org/wiki/Global_warming_skeptic
2. "Second, the notion of increased storms due to global warming looks to be mainly a scare factor.."
"the frequency of hurricanes has not increased on average over the long term [but has significantly increased over the last 12 years]. However, scientists believe that global warming will result in more intense hurricanes, as increasing sea surface temperatures provide energy for storm intensification. An MIT study published recently in Nature provides the first data analysis indicating that tropical storms are indeed becoming more powerful over time..."
http://www.pewclimate.org/hurricanes.cfm
3. "But regardless of how high they rise, it will happen gradually."
"researchers say that current projections of sea level rise should be considered a minimum to expect, and the levels could be much higher and happen more quickly. 'Most of the sea level rise we're now expecting in the next 200 years is due to thermal expansion of water, not the overall loss of ice from Greenland and Antarctica," said Peter Clark, a professor of geosciences at OSU. "But recent events we've studied with improved observational systems and computer modeling suggest there may be much more going on.'...What has caught the attention of scientists in recent years is the rapid collapse of some glaciers near the coasts of Greenland and Antarctica..."
4. "Fourth.. the costs of adjusting to global warming are likely to be smaller .."
Global warming can only be countered by changes to our economic paradigm, not a simple change to national budgets.
5. "Slowing down economic growth ..means much more death, pain, and misery for hundreads of millions of people than would otherwise be the case."
Not if the economic paradigm is changed to target the meeting of needs rather than (what it is currently) the making of corporate profit. What is 'economic growth'?
6. Sixth, the human mind is a wonderful thing .. cost competitive substitutes for coal, natural gas, and oil...
Changes in technology alone will not be anywhere near enough to counter catastrophe. Not just global warming induced disaster but others arising from overconsumption and overproduction generally. Pollution, disease, scarcieties of raw materials, fresh water and so on.
7. "Seventh, we already have the means to radically reduce carbon burning. It is called nuclear power.."
Nuclear power causes thermal pollution (warming) and very long term radioactive waste.
www.exxonsecrets.org
Documenting Exxon-Mobil's funding of climate change skeptics.
Posted by: Brenda Roser at Nov 4, 2006 7:05:06 PM
The Economist critique strongly supports Stern, arguing that we insure against risk in many fields and it is prudent to do so in case of climate change.
Posted by: Derek Wall at Nov 4, 2006 7:08:31 PM
From Brenda Roser:
7. "Seventh, we already have the means to radically reduce carbon burning. It is called nuclear power.."
Nuclear power causes thermal pollution (warming) and very long term radioactive waste.
You've _got_ to be kidding.
Nuclear power causes no more or less thermal pollution than the fossil fuel plants it would replace. Brenda, I fear you don't, but I hope you understand that global warming is not about the small amount of thermal pollution, 15 terawatts at the most, from all human sources, but that it is about the small percentage increase in the amount the earth retains from the relatively huge huge 175 PETAwatts of heat that the earth receives from the Sun.
Having said that, one point nuclear power foes seem to ignore is that although radioactive waste is measurably radioactive for a long time, and very dangerously radioactive when first pulled out of the power plant, because it's a mixture of short-lived-but-very-radioactive isotopes and long-lived-but-much-less-radioactive ones, the danger after a few tens of years becomes tolerable -- and certainly so when compared to hideous figures of hundreds of billions of dollars per year. I'm sorry -- if global warming is as bad as Stern maintains I would cheerfully agree to make ten square miles of Nevada uninhabitable to prevent it -- and so would anyone who ruminates on the figures.
I infer, from the fact that the global warming alarmists are not shouting from the rooftops that they want more nukes, that they don't believe their own rhetoric and are just using global warming as a stick with which to beat political opponents [or they are sufficiently ill informed on issues of global energy that they can be safely ignored].
-dk
Posted by: Dick King at Nov 4, 2006 10:16:32 PM
Dick, there MUST be something wrong with nuclear power. Don't be too hard on Brenda -- she needs a straw to clutch at.
Brenda, you should understand that most Real Economists don't talk about stopping or reducing global warming. They talk about dealing with the changes. This is a much more sensible approach than silly maunderings about changing the weather. You say that changes in technology won't be enough. Paul Ehrlich made that error most famously twenty years ago; why do you repeat it?
Posted by: Russell Nelson at Nov 5, 2006 1:58:52 AM
It's impossible to have an honest discussion about global warming without being called an oil industry stooge if you question anything other than most alarmist predictions. This is why I frankly am inclined to oppose it: it smells too much like leftie perfidy to take seriously. If someone stomps their foot and insists that only massive tax increases and vast cultural revolutions will Save The Planet, they should be questioned most rigorously and forced to prove themselves. It is not up to you to defend against them as they reach for your wallet and seek to dictate how you live your life.
Posted by: Foobarista at Nov 5, 2006 2:06:10 AM
'It also seems the report relies on excessively high estimates of econoimc growth. '
Be careful with that one. Stern uses the A2 scenario. This actually has 'less' economic growth than hte other IPCC scenarios., It also has (for linked reasons) the lowest level of future technology and the largest population.
The other scenarios actually have 'higher' economic growth and fewer emissions.
Posted by: Tim Worstall at Nov 5, 2006 7:27:39 AM
Neither the Stern report nor the critics are using what is the
increasingly philosophically sophisticated approach to the
social discount rate for environmental issues: the "green
golden rule" approach of Chichelnisky, Heal, Beltratti, et al.
The argument is that one should use a variant of the hyperbolic
discount rate, with it varying over different time horizons.
The ethics are that "the present should not exploit the future"
(presumably an outcome if the rate is too high) and "the future
should not exploit the present" (will occur if rate too low).
We already know that psychologicall people internally use
hyperbolic discounting, higher rates for shorter time horizons,
lower for longer.
So, in the short run the rate should be closer to a market rate
to avoid misallocations of investment. As the time horizon goes
out the rate should decline to some social time preference, viewed
as lower than market rates, and arguably lower than that for very
long periods, possibly down to 1%, but not necessarily zero, despite
Frank Ramsey. Actually, if one were to pick a single rate to hold
over all time, 2-3% might not be too far off for a range.
Posted by: Barkley Rosser at Nov 5, 2006 3:58:07 PM
"It also seems the report relies on excessively high estimates of economic growth."
Balderdash. The Stern Review does not overestimate future economic growth. It dramatically *underestimates* growth. The world GDP in 2050 is likely to be approximately $600-700 trillion, or 6 times higher than estimated in the Stern Review, and the world GDP in 2100 is likely to be >100 times what is estimated in the Stern Review:
http://markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html
http://markbahner.typepad.com/random_thoughts/2005/11/why_economic_gr.html
Posted by: Mark Bahner at Nov 5, 2006 4:06:03 PM
All,
I hate to split hairs... But I can't resist. Nuclear power plants are somewhat less thermally efficient than conventional fossil fuel plants... And considerably less efficient than combined cycle units... In other words, they produce more waste heat than gas, oil, and coal fired units.
The reason is lower steam turbine inlet tempatures and pressures. Of course, combined cycle units use both gas and steam turbines.
Note that Dick King is correct. Waste heat from power plants is a negligible consideration overall.
Posted by: Peter Schaeffer at Nov 5, 2006 11:46:04 PM
Peter,
The impact on global warming from fossil fuel plants does
not come from their "waste heat." It comes from their
emissions of greenhouse gases. That nuclear power plants
emit extremely little of those is why they would be better
for avoiding global warming than fossil fuel plants, although
clearly they have other problems.
Posted by: Barkley Rosser at Nov 6, 2006 12:44:34 AM
One other point I feel I should mention ... since the human race's power consumption appears to be about 0.007% of the solar radiation, and since [I recall] approximately 0.1% of the solar radiation that strikes the planet is converted into wind, we would have to capture 7% of the earth's wind power to replace all of our energy consumption, and more than that as huge third world countries strive for a strong economy. Of course we're going to capture considerably more than that percentage in smaller regions, since nobody believes we can capture a significant piece of the trade winds that blow incessantly over the Pacific ocean or things like that.
I can't imagine that this is a good idea. We're now having second thoughts about the amount of hydropower we use, to the extent of breaching dams, and if we really go for windmills in a big way we may create deserts as moisture-laden air doesn't get where it's been going for millenia, and we may be sorry.
-dk
Posted by: Dick King at Nov 6, 2006 12:45:59 AM
Dick King said:
"Brenda, I fear you don't, but I hope you understand that global warming is not about the small amount of thermal pollution, 15 terawatts at the most, from all human sources..."
+
"one point nuclear power foes seem to ignore is that although radioactive waste is measurably radioactive for a long time, and very dangerously radioactive when first pulled out of the power plant, because it's a mixture of short-lived-but-very-radioactive isotopes and long-lived-but-much-less-radioactive ones, the danger after a few tens of years becomes tolerable --"
Brenda R: Could you provide your references, please? Thermal pollution does have a significant effect on the local ecosystems affected by water warmed by these plants btw.
Links:
Radiation induced cancer from low-dose exposure
http://www.ratical.org/radiation/CNR/RIC/chp1.txt
Deadly Deceit, Low-Level Radiation, High-Level Coverup
http://www.ratical.org/radiation/inetSeries/DDoverV.html
Let the Facts Speak
(Long list of nuclear accidents etc)
http://prop1.org/2000/accident/facts.htm
16 Million Radiation Deaths and Counting
http://www.ratical.org/radiation/inetSeries/RB89.html
Matthew Bunn, Harvard Uni
http://bcsia.ksg.harvard.edu/publication.cfm?ctype=book&item_id=2
For nuclear power to meet more than a few percent of the world's greenhouse-constrained energy needs in the 21st century would require a world of thousands of gigawatts of nuclear capacity, rather than hundreds. For such a broad expansion of fission-generated power to become broadly acceptable would require: (a) avoiding any further catastrophes, such as major reactor accidents or theft of weapons-usable nuclear material for use by proliferating states or terrorists; (b) development of new technologies that would address the complexity, cost, safety, waste management, and proliferation concerns that have so far limited utility, government, and public acceptance of nuclear power; and (c) profound transparency and democratization in nuclear decision-making, putting a better-informed public in a position to ensure that its concerns are fully addressed. To achieve both objective (a) and objective (b), the industry would be well-advised to stay away from production of additional weapons-usable separated plutonium for decades to come, as continued processing, transport, and use of tens of tons of this material every year will increase the chance of a theft or similar catastrophe, raise costs, and exacerbate political controversies. Several measures that could by taken by governments and industry to achieve these objectives are recommended.
Don't build nuclear plants, green advisers tell Blair
http://www.guardian.co.uk/nuclear/article/0,,1725210,00.html
http://gristmill.grist.org/story/2006/4/16/05244/7609
Posted by: Brenda Rosser at Nov 6, 2006 7:36:00 AM
Barkley Rosser,
Dick King wrote "Nuclear power causes no more or less thermal pollution than the fossil fuel plants it would replace"
This is not true and I corrected him. Should I post a set of thermal efficiency statistics?
However, Dick King is entirely correct in pointing out (to Brenda) that thermal pollution from power plants isn't material as a cause of global warming.
Posted by: Peter Schaeffer at Nov 6, 2006 6:22:24 PM
The anti-nuclear campaign has been going on since I was in third grade or so, and they haven't changed any of their tactics. These include a) never making an apples-to-apples comparison of deaths/harms per kilowatt-hour acorss power sources (nuclear tends to win big over everything but natural gas--including rooftop solar panels), b) insisting on wildly disproportionate safety regulations for nukes (e.g. routine radioactive emissions lower than coal plants) and then then saying nukes are too expensive, c) acting like radiation is much more mysterious than chemical poisoning from air pollution, which is emphatically not the case, d) creating disproportionately strict safety requirements for nuclear waste products compared to other power sources and then saying that "there's no good way to dispose of the waste," e) exaggerating risks such as core meltdown beyond all reason, f) obscuring technological options (e.g. comparing Cheyrnobyl to light-water reactors or ignoring thorium-burners or pebble-bed designs), g) pretending that power reactors are a plausible source of bomb-grade fuel.
The tradition continues.
Posted by: srp at Nov 6, 2006 6:33:27 PM
It ain't about saving the earth. It's about a megalithic bureaucracy wanting to crawl into your wallet.
Posted by: Foobarista at Nov 6, 2006 6:59:26 PM
It's not an unreasonable request for commentators to provide webpage links with evidence of assertions made. I fail to see how my statements can critiqued otherwise.
Posted by: Brenda Rosser at Nov 7, 2006 1:34:07 AM
Well Lovelock, among others, is calling for more nuclear plants.
And yes, srp, the nuclear argument has gone on for a long time, and both sides' tactics are getting boring. In part that's because nothing has changed in a long time. The change I'd most like to see is to remove government indemnification, making possible a reduction in government regulation. If utilities had to insure themselves for the full risk of running a nuclear plant they would have to run them well, or not at all.
As it is I fear that the rising cost of other fuels will soon enough make nuclear power cost-competitive again, but the indemnification will demotivate utilities from building the safer new designs you mention. More plants, same old designs, same stupid regulations -- more chance of accidents. I was in Harrisburg the day Three Mile Island went out of control, and that was close enough for me.
Posted by: Doctor G at Nov 7, 2006 2:07:01 AM
There's something very wrong about the structure of the fossil fuel and nuclear energy industries. They are dominated by a small number of very large corporations with a frightening degree of economic and political power. Indeed, this scenario is not unusual across the spectrum of industries - transport, retail, voting machines, communications, chemicals and pharmaceuticals...
Political power translates to the ability to set social agendas. To create industry 'norms'. The nuclear model of energy generation is one such rationalised 'norm' that is being and has been foisted on country after country with 'global warming' now being used as the moral justification for further expansion of such an extroardinarily controversial industry model with a proven history of catastrophe. With a government eager to continue to wipe its hands of responsibility under the banner of deregulation.
We should examine the long history of inaction on the environment by governments and industry. Read the warnings that have now been out there since the 1950s. It's very clear that these concerns are not their real agenda, although the environmental crises remain confronting.
It doesn't make sense to respond to our predicament with a continuation of the formula that has created the problems in the first instance - over consumption, over production, centralisation of power, monopolised industry, self-seeking profiteering behaviour. Why aren't we exploring how power can be diffused, how industry can be localised and enterprise diversified?
Who's setting this discussion agenda?
"We (the transnational corporations) are now in the driver’s seat of the global economic engine. We are setting government policies instead of watching from the sidelines." (quoted in CCPA Monitor, 1996).
David Rockefeller
Posted by: Brenda Rosser at Nov 7, 2006 5:44:13 AM
Stern uses a discount rate of 0.1% p.a. (!!!!!) This says everything.
See page 19 in in this part of the report.
Posted by: Dirk at Nov 11, 2006 3:17:21 PM
The problem (a problem) with the discount rate set at 0.1 is that I can find lots of investments that make sense at that level --why would I choose avoiding climate change? If I was worried about the happiness of my grandkids, I'd put the money I was going to spend on averting climate change and stick it in the stock market instead, deeded over to them. The utils they would get from selling the stocks will be far larger than the utils they'll loose from the climate change I haven't averted, if Stern's numbers are right... Or, being more public minded, I'd bet they'd be very happy not dying of AIDS or malaria, let's spend the money on that, first...
Posted by: AdamSmithee at Nov 13, 2006 1:17:45 PM
Firstly, Paul Ehrlich is mentioned earlier. He has been responsible for many predictions that have not true but one has been absolutely spot on.
He made a prediction, early on in the climate change debate, that those who disputed climate change would start with outright denial. As time passed, and predictions became more concrete, this stance would change to one of acceptance but denial of human blame. This stance would finally give way to fatalistic acceptance, ie that we have reached a point where we con do nothing to change the situation so we should endevour to find a way to live with the consequences.
The accuracy of this prediction is all too clear from just reading these comments.
Posted by: Sketchy at Nov 14, 2006 12:15:54 PM
