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After the arguments, the figures still justify swift climate
action by MARTIN WOLF
Published: Nov 15, 2006, Financial
Times www.ft.com
Those who believe in the free market are highly resistant to the idea of
man-made climate change, let alone to arguments for government action to halt
emissions of greenhouse gases. Is this resistance rational? Or is it another
case of the human desire to believe true what is merely convenient?
On one point these sceptics are correct: the man-made climate change
hypothesis appeals to believers in environmental limits to growth, the evils of
capitalism and the need for government regulation. Lord Lawson, the former
British chancellor of the exchequer, makes that point well in a recent assault
on the activists.* But what should matter is not the emotions that drive the
people on either side of the debate, but rather whether the arguments advanced
are persuasive.
Sceptics start by arguing that the science behind the man-made warming
hypothesis is flawed. Some even argue that it is a fraud, in which case it would
be the biggest and potentially the costliest ever. Scientific knowledge is
indeed provisional.
But those who attack an emerging consensus have often been proved wrong: even
Albert Einstein was mistaken about quantum mechanics. In this case, as a recent
paper from the Royal Society makes plain, the strength of the consensus is
evident.** To bet everything on the assumption that the hypothesis is false
would be irrational.
The sceptics add that the Stern report has vastly exaggerated the costs of
unmitigated climate change. Bjorn Lomborg, Denmark's "sceptical
environmentalist", argued in the Wall Street Journal (November 2 2006) that
Yale's William Nordhaus, the most respected economist in the field, sets the
costs at only 3 per cent of world gross domestic product. So how, he asked, did
the Stern report reach costs as high as 20 per cent?
The answer, as Sir Nicholas has explained in the Financial Times (November 7
2006) is three-fold: first, his report takes into account possible increases in
average temperatures of 5°C or more by the 22nd century; second, it takes into
account a wide range of possible outcomes and builds in aversion to risk;
finally, the report adds rough and ready estimates of the monetary equivalent of
health and environmental impacts (see chart). These changes greatly increase
costs in the 22nd century.
Critics also argue that the report has grossly underestimated the costs of
mitigating the build-up of greenhouse gases. Its central case is of a modest
cost of just 1 per cent of GDP, although with a range from minus 1 per cent (a
gain) to 3.3 per cent, or minus $50 to plus $100 per tonne of carbon dioxide in
2050. Learning-by-doing and innovation consistently lowers costs. As a result,
past improvements in energy efficiency have been large. Nobody believes they
have yet been exhausted (see charts).
At this point critics raise the most difficult question of all: the discount
rate. The costs of mitigating the build-up of emissions occur largely in the
21st century, while the benefits of doing so are postponed mainly until the 22nd
century. So how do we relate costs and benefits?
Market costs of capital, for example, reflect possibly myopic choices of this
generation. Equally, the target social return on capital for standard public
investment projects is designed to ensure efficiency of the marginal project.
But deciding the state of the world 100 or more years hence is no such project.
Standard theory suggests that we need, instead, to determine three things: the
pure rate of time preference; the nature of the relationship between changes in
consumption and welfare; and the prospective rate of growth of consumption.
The Stern report suggests, persuasively, that there is no compelling reason
to value the welfare of future generations much below our own. The only reason
to do so, it argues, is the possibility of extinction. It suggests, accordingly,
that the pure rate of time preference should be 0.1 per cent a year.
The report assumes, in addition, that a doubling of consumption halves
marginal value (so-called "unit elasticity"). If we assume a rate of
growth of consumption of 1.5 per cent a year, the discount rate would then be
just 1.6 per cent a year. With 2 per cent consumption growth, it would be 2.1
per cent.
Because the rate of growth of consumption is itself affected by the
mitigation scenario, this is not exactly the approach taken in the report.
Instead, welfare is compared directly across all scenarios. The conclusion is
that the so-called "balanced growth equivalent" of the losses caused
by "business as usual" are between 5 and 20 per cent of consumption.
Now suppose that one objects, as critics do, that these assumed discount
rates are far too low. The implication is that we should care less about the
impact of climate change on the standard of living of future generations because
they are expected to be vastly richer than we are today. This, of course, is a
distributional judgment. Its implication is that we should care far more about
the distribution of income across the globe today than we do. I wonder how many
sceptics accept that implication? Few, if any, I imagine.
The final argument against making climate change a priority comes also from
Mr Lomborg. It is the view that spending just $75bn (£39bn) a year (0.2 per
cent of global income) might give everyone clean drinking water, sanitation,
basic health care and education now. In accordance with his "Copenhagen
Consensus", this, he suggests, is a far higher priority than lowering the
remote risks of climate change.
I agree. But why is this the alternative? The question is not whether dealing
with climate change (at a cost, on the report's estimation, of $450bn a year) is
less valuable than eliminating destitution. It is rather whether it is less
valuable than all the other things we do with our resources? I suggest it is
not.
Some of the points of the critics, particularly on discount rates, have
force. But the low estimated costs of reducing emissions justify action. I agree
that lowering the risks of climate change should not be undertaken regardless of
the cost. But it is a sensible goal, all the same. Policymakers should try to
discover the true costs of reducing this risk, by imposing a global carbon tax.
Will they dare to do so? I doubt it.
*The Economics and Politics of Climate Change: an Appeal to Reason,
www.cps.org.uk, November 2006;
**A guide to facts and fictions about climate change, www.royalsoc.ac.uk
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