Tuesday, July 17, 2007

Does discount?

There's a useful exchange of views in the Policy Forum of Science (13 July) between William Nordhaus (Critical Assumptions in the Stern Review on Climate Change) and Nicholas Stern and Chris Taylor (Climate Change: Risk, Ethics, and the Stern Review).

Nordhaus concludes:
The Stern Review's unambiguous conclusions about the need for urgent and immediate action will not survive the substitution of assumptions that are consistent with today's marketplace real interest rates and savings rates. So the central questions about global-warming policy--how much, how fast, and how costly--remain open.
Stern and Taylor say:
In addition to revisiting the ethics, we also incorporated the latest science, which tells us that, for a given change in atmospheric concentration, the worst impacts now appear more likely. Further, the science also now gives us a better understanding of probabilities, so we could incorporate explicit risk analysis, largely overlooked in previous studies. It is risk plus ethics that drive our results.

...Traditionally, the discount rate has been applied to policies and projects involving small changes with direct benefits and costs over less than one generation (say a few decades at most), which means that people are feeling the impact of their decisions in their own lives. However, climate change is an intergenerational policy issue, and thus, we must see as a parameter capturing discrimination by date of birth. For example, applying a 2% pure time discounting rate ( = 2) gives half the ethical weight to someone born in 2008 relative to someone born in 1973. Surely, many would find this difficult to justify.

...as people become richer and environmental goods become scarcer, it seems likely that, rather than fall, their value will rise very rapidly, which was an issue raised in chapter 2 of our review and has been investigated in later analyses. And the flow-stock nature of greenhouse gas accumulation, plus the powerful impact of climate change, will render many consequences irreversible. Thus, investing elsewhere and using the resources to compensate for any later environmental damage may be very cost-ineffective.

...Many of the comments on the review have suggested that the ethical side of the modeling should be consistent with observable market behavior. As discussed by Hepburn, there are many reasons for thinking that market rates and other approaches that illustrate observable market behavior cannot be seen as reflections of an ethical response to the issues at hand. There is no real economic market that reveals our ethical decisions on how we should act together on environmental issues in the very long term.

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