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Simple sense about discount rates
Geoffrey Heal writes:
Sterner and Persson...talk about the effect of changes in relative prices rather than consumption of produced and environmental goods, but the point is the same. If we consume both produced goods and the services of the environment...then we can expect that with climate change environmental services will become scarce relative to produced goods and therefore their price will rise relative to that of produced goods. Consequently, the present value of an increment of environmental services may be rising over time, and the consumption discount rate on environmental services may thus be negative...This could be the case even with a positive pure rate of time preference...
Here is the paper. Here is an ungated version. In the interests of fairness to both sides of this debate, I should note that while I believe the costs of climate change are higher than most people think, I also believe that the costs of fixing the problem are higher than people think.
Posted by Tyler Cowen on April 12, 2008 at 12:54 PM in Economics | Permalink
Comments
Tyler,
I'm curious why you have such certainty about the impact of warming being a net negative. Before I ask why I'd like to check joint assumptions.
Some warming has occurred over the last 50+ years - a magnitude of about 0.6 Celsius. If we double that to a total of 1.2 Celsius it would defy most physics. Larger numbers assume that climate has some run away process - which is silly if you think about it.
So, being conservative 2 degrees Celsius may in fact net increase both productive land and overall productivity while lowering energy use by decreasing the amount of home heating necessary to sustain everyone. How does lowering costs and increasing output hurt? To illustrate my point historically, during the Medieval Warm Period it appears that the weather lead to stronger GDP growth then.
-Gene
Posted by: Gene Hoffman at Apr 12, 2008 2:23:54 PM
Larger numbers assume that climate has some run away process - which is silly if you think about it.
... why so?
Posted by: david at Apr 12, 2008 2:34:08 PM
If climate were an extreme tipping point phenomenon, then the plausibility of that tipping point being reached in previous periods should be very high - yet over long periods of time all the historical data we have show evidence of gradual change.
The problem with the run away process model of climate is that it doesn't know with any certainty what the impact of water vapor - clouds - is on global temperature. Increased temperature should lead to increased water vapor. More water vapor is more clouds and more clouds lead to cooling and precipitation. Run away temperature models assume that more clouds lead to a positive feedback loop that drives more warmth - which kind of ignores the effect that additional cloud cover has on reflecting sunlight back into space. Some will argue that water vapor is the actual cause of out of control warming. The point here is that the real questions in climate science is what sign (positive or negative) to put on the net effect of water vapor in climate models.
I'm however skeptical that a natural process is as fragile or as runaway as some models currently suggest.
-Gene
Posted by: Gene Hoffman at Apr 12, 2008 3:33:56 PM
Heal seems to miss two obvious and important points (unless in skimming I missed that he in fact addressed them):
(1) future people will probably be able to address or mitigate the harms of global warming much less expensively than we can, due to having more technological capabilities and choices and a much better scientific understanding of climate change. The cost of reducing or mitigating the harm from a unit of CO2 now is almost surely much greater than the cost of reducing or mitigating the harm from that same unit of CO2 will be in 2050. This should be incorporated into the discount rate. Furthermore, R&D that gives future people these capabilities and options may be more productive, perhaps far more productive, than direct greenhouse-gas reducing actions taken today.
(2) Most of the propose solutions involve regulations imposing costs (via taxes, requiring the purchase of emissions rights, or other regulations) on goods such as gasoline or coal. An analysis thus distinguishing "environmental services" from "goods" as if they were traded in a free market doesn't take into account this (counter-) externality.
Posted by: nick at Apr 12, 2008 6:07:26 PM
In addition to the cost you have the risk of failure of mitigation.
Posted by: Russ Nelson at Apr 12, 2008 9:05:50 PM
Gene: Please find in IPCC the relationship between water vapor and temperature then explain to us your line of reasoning based upon the physics.
Posted by: Don at Apr 13, 2008 7:48:43 AM
Are the first steps to reduce warming costly at all?
A carbon tax should be a benefit rather than a cost as it displaces more distortionary income / payroll taxes. Is the concern that a new tax will inevitably lead to new spendings? Is there any research to support that?
Mitigating expenses is also much easier over the long-term than the short-term (e.g. building patterns, powerplant lifespans ...). Reducing emissions in 2050 will be much easier if we start shifting course now and making it clear that absent a better solution carbon taxes will continue to rise.
Tom
Posted by: Tom G. at Apr 13, 2008 8:46:13 AM
I have to admit, due in part to reading this site I have changed my mind on this issue.
I wouldn't have agreed with Tyler a year ago; now I do.
Posted by: meter at Apr 13, 2008 9:17:12 AM
Gene, your argument about it not making sense for the climate to be run away because it probably would have already reached the tipping point... makes sense if the only parameter for the climate of Earth was the temperature. But presumably this run away effect would also depend on the concentration of carbon in the atmosphere. High levels of carbon may have never been reached in the billions of years Earth has been around, for obvious reasons, until just recently. Also, don't we have at least one example that there is some other equilibrium that would be very undesirable to us? Venus? I'm not saying Earth is going to turn into Venus overnight but this should give some evidence that there can be positive feedback in terms of temperature.
Posted by: Garrett at Apr 13, 2008 9:47:10 AM
could someone please answer the first question -- why we're so sure the effect is negative (and/or more costly than the costs of trying to fix things (even assuming there's a politically viable way to fix things)). thx.
Posted by: dj superflat at Apr 13, 2008 11:23:05 AM
I have the same question as Tom G. If there are costs to global warming and other environmental damage, and they aren't being paid by the producers of the damage, then there is a negative social surplus involved in these activities. A tax that distributes this cost to the producer would align the incentives in trade with the total costs.
Secondly, regarding the question relative cost of mitigating damage if done by different generations:
While future generations may have better technology, allowing them to mitigate damage more inexpensively than the current generation, the relative difference of this cost is related to the amount spent on R&D now. So, any money spent now to mitigate costs, would presumably also result in decreased costs for future generations. Thus, a policy that creates a market for mitigating environmental damage, like carbon taxes or carbon-offset trading, would mitigate damage now, while also reducing the price to mitigate in the future.
Does this make sense? Other than the obvious question of whether there is social surplus lost to reduced trade levels based on higher costs of industrial production, is there anything else that I am missing?
Posted by: Sam at Apr 13, 2008 12:09:12 PM
dj superflat,
I am not the right guy to answer your question, but here's my uninformed shot. Our current world, including where people live and what they farm are based on our current climate. Change it significantly enough, you will incur enormous transaction costs while we shift to a new equilibrium, including potentially the loss of a lot of species along the way. And as I said I still don't know why a carbon tax (at least at some level) is a cost and not a benefit.
For example, maybe Canada will gain as much habitable land as Bangladesh will lose. But that does not mean the world, and the Bangladeshis in particular will be indifferent.
Tom
Posted by: Tom G at Apr 13, 2008 1:15:21 PM
Don,
Here is where the water vapor uncertainty shows up in the IPCC: http://www.grida.no/climate/ipcc_tar/wg1/268.htm
This is not a scientific background of certainty in the least.
-Gene
Posted by: Gene Hoffman at Apr 13, 2008 1:43:44 PM
i follow the warming debate in pretty serious detail. i've seen nothing that suggests that we conclusively know that the harms outweigh the benefits, let alone the costs of doing something meaningful. just saying things will change is not saying much. things changed when it got really warm some centuries back, and pretty handled it well, even flourished. yes, there's obviously some displacement when there's change. the question is what's the net. i haven't heard any real answers, let alone good ones.
Posted by: dj superflat at Apr 13, 2008 1:52:11 PM
btw, re bangladesh, obviously we look at the global net. if not, US, canada, russia, etc., have little reason to do anything. that is, if we're going to consider cost/benefit at the level of nation states in this discussion, nothing's going to get done (because many of the most powerful have little reason to care).
Posted by: dj superflat at Apr 13, 2008 2:01:50 PM
dj superflat,
Are you saying there would not be transition costs? Or that they are irrelevant?
I am not sure by what you mean by "conclusive." I doubt we know very much about the future conclusively.
Since you follow the debate in "pretty serious detail," what assesment of the costs and benefits struck you as the best?
Tom
Posted by: Tom G. at Apr 13, 2008 3:40:19 PM
1. um, i mentioned net. so obviously you consider transition costs (along with everything else -- benefits, harms, practicability, etc.)
2. w/o a fairly conclusive answer -- not just on whether it's getting warmer cause of us, but whether it's worth caring -- it seems like inaction is probably the best course, leaving the future to fend for itself, which it generally does (unless you buy the precautionary principle).
3. lomborg (both books).
Posted by: dj superflat at Apr 13, 2008 8:26:39 PM
@Gene
Arguing that the water vapour feedback is weak is not supported by empirical evidence. The size of the orbital forcings that cause the ice ages is known, and the resulting temperature change is known. If the water vapour feedback was much smaller then the temperature change between ice ages would not have been as much. The models do a good job of furthur refining understanding gained from the rough empirical calculations.
Yes there is a large uncertainty around the anthropogenic water vapour forcing, and it's possible that the sign is negative, though not likely. You should however not confuse this forcing with the water vapour feedback - they are two completely different processes, and its the feedback that has much more effect on temperature.
Also, try looking in the most recent IPCC assesment report, rather than the previous one. I've included a excerpt from the technical summary below:
There is now increased confidence in the
understanding of key climate processes that are
important to climate sensitivity due to improved
analyses and comparisons of models to one another
and to observations. Water vapour changes dominate
the feedbacks affecting climate sensitivity and are now
better understood. New observational and modelling
evidence strongly favours a combined water vapour-lapse
rate9 feedback of around the strength found in General
Circulation Models (GCMs), that is, approximately
1 W m–2 per degree global temperature increase,
corresponding to about a 50% amplification of global
mean warming. Such GCMs have demonstrated an ability
to simulate seasonal to inter-decadal humidity variations
in the upper troposphere over land and ocean, and have
successfully simulated the observed surface temperature
and humidity changes associated with volcanic eruptions.
Cloud feedbacks (particularly from low clouds) remain
the largest source of uncertainty. Cryospheric feedbacks
such as changes in snow cover have been shown to
contribute less to the spread in model estimates of climate
sensitivity than cloud or water vapour feedbacks, but they
can be important for regional climate responses at mid-
and high latitudes. A new model intercomparison suggests
that differences in radiative transfer formulations also
contribute to the range. {3.4, 8.6, 9.3, 9.4, 9.6, 10.2, Box
10.2}
http://ipcc-wg1.ucar.edu/wg1/wg1-report.html
Posted by: me at Apr 14, 2008 6:35:47 PM
Why are so many readers of economist's blogs so ignorant of climate science, yet so willing to pretend that they know more than the climate science community itself. If you think you can contribute to the debate - please - write an paper for nature - and stop trying to convince the public that you're right.
Posted by: me2 at Apr 14, 2008 6:39:13 PM
dj superflat,
If Lomborg's work is your favorite, then I guess you agree that the expected value of warming is negative (just that there are other priorities).
How is it rational to do nothing then? Do you believe that all possible responses are expensive? Wouldn't taxing carbon be better for the economy than taxing savings or income?
Tom
Posted by: Tom G. at Apr 14, 2008 10:27:53 PM
Why do people seem to think that Bangledesh will stop sinking if the globe warms less?
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