Friday, June 15, 2007

Discounting for Adaptation

Sir Nicholas Stern’s report on the economics of climate change has been, politically, hugely important. It is regularly cited by politicians justifying stringent steps to curb emissions thanks to its headline estimate that the harms from climate change could cost 5-20% of global GDP “now and forever”.

Stern’s report has been politically important despite, or because of, making some rather suspect methodological choices. Many of these choices have since been heavily criticised by researchers. Richard Tol was cited throughout Stern’s report but branded it “alarmist and incompetent”. An example of this alarmism is Stern’s penchant for using “this could mean up to…” statements. In discussing the numbers of people facing flooding thanks to climate change and melting glaciers he describes how up to 200 million people could face homelessness. Applying the same standard to nuclear proliferation it would be easy to justify nearly any action on the grounds that damages could be as high as 100% of GDP lost and 100% of the human population dead. This is quite a common strategy in making a rhetorical argument in politics but has little place in a supposedly rigorous study.

However, no element of Stern’s methodology has been more controversial than the decision to use a near-zero discount rate:

Stern’s call for rapid action to curb emissions is based around treating harms and benefits across generations as equally important regardless of when they occur. The “now and forever” amount is actually a sort of average of harms over hundreds of years. The majority of the harms he bases his analysis of the total cost of climate change on occur after the year 2800. This is such a long time away that with even moderate discounting the estimate of harms would fall drastically. Relying upon such long time horizons has to raise some questions about the Stern report’s reliability. Firstly, there are philosophical questions over whether we should be treating harms to the environment of different eras with very different material conditions as equally important. These have been addressed throughout the literature but particularly by Nordhaus. One example, he describes how under the Rawlsian moral logic the current generation deserves preferable treatment to subsequent generations with the good fortune to be born in what will probably be much wealthier ages. This is the same logic used to justify helping the poor within the current generation. However, there are also less high-minded, more practical reasons to question how seriously harms hundreds of years into the future should be taken.

Nordhaus briefly raises the question of changing preferences. After hundreds of years will those who we are saving from emissions necessarily want the lower levels of carbon dioxide that we have provided for them?

Nordhaus’ gives examples of possible alternate priorities: perhaps people will prefer higher productivity so that they can “develop fiendish new weapons”. There are a host of reasons why our descendants might prefer that we maximise growth instead of making efforts to cut climate change. One more prosaic example could be the possibility that, in around fifty to a hundred years time, we perfect the process of generating power through nuclear fusion. That would allow for massive cuts in carbon dioxide emissions at very little cost. A host of other technological changes could do the same job. That might cause our descendants to wish we had not taken action to curb emissions at a time when it is so expensive as we don’t have efficient alternatives to fossil fuels in place.

There are a host of other known unknowns and unknown unknowns that surround whether our descendants will value any cuts in carbon emissions we make. To illustrate the potential for surprises let’s pose a bizarre counterfactual. Suppose a Stern-like decision had been made during the Industrial Revolution. “We’re using coal at a dangerous rate and if it runs out we will lose a vital economic and strategic asset. To ensure that all generations take equal utility from limited stocks we have to impose taxes or rations on coal usage. Otherwise by the 21st century the UK will be utterly impoverished.” We would probably have a lot more coal right now but would be significantly poorer and history would not have looked kindly on those who made the decision.

Uncertainty over the value of decisions we make now to future generations is probably reason enough to be sceptical of near-zero discount rates. However, can we go beyond uncertainty and make an active case as to why our descendants are unlikely to value action now to curb climate change? I believe we can.

NASA administrator Michael Griffin laid out an important question. Why should we assume that our current level of emissions is the optimum?

“First of all, I don't think it's within the power of human beings to assure that the climate does not change, as millions of years of history have shown. And second of all, I guess I would ask which human beings — where and when — are to be accorded the privilege of deciding that this particular climate that we have right here today, right now is the best climate for all other human beings. I think that's a rather arrogant position for people to take.”

It clearly depends upon the timescale one is referring to. In the long-term there probably isn’t much reason to think a little extra warmth and CO2 will be a good thing or a bad thing. Equatorial regions might suffer but it is entirely possible that this will be counterbalanced by areas like Greenland, which might become green again, and Siberia which will be better able to exploit its huge natural resources. However, in the short-term our society is built around a particular temperature. We have cities built in flood plains without proper protection, railways built in Siberia that will collapse if the permafrost melts. This is to be expected. Our society has been built with the context of a particular temperature and there will be costs if we ask it to adjust.

This balance of short and long-term harms highlights the true nature of the challenge of climate change: its transience. This has to be crucially important to any discussion of Stern’s discount rate. If we have no reason to assume that a higher temperature will be much better or much worse for humans apart from the transitional costs that come with social adaptation then the expected future harms from climate change should tend to zero over time. Working out just how long it should take before the change in climate has been adjusted to is a matter for some study but it seems unlikely it would take more than a couple of generations. Certainly the harms that Stern identifies beyond the year 2800 have to be written off as quite likely utterly irrelevant to humans who have learned to live with, or take advantage of, warmer climates.

If we make this adjustment it will make the estimate of the costs to climate change far more realistic. That realism should feed into our policy decisions. It should reinforce the impression that global warming is a change we should work to adapt to rather than a catastrophe worth ruining the world economy to avert.

No comments: