The Stern report on global warming

by on November 4, 2006 at 6:54 am in Science | Permalink

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.

Stephen Gordon November 4, 2006 at 11:37 am

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.

happyjuggler0 November 4, 2006 at 2:20 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.

Brenda Roser November 4, 2006 at 7:05 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.

http://www.exxonsecrets.org
Documenting Exxon-Mobil’s funding of climate change skeptics.

Dick King November 4, 2006 at 10:16 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

Foobarista November 5, 2006 at 2:06 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.

Barkley Rosser November 5, 2006 at 3:58 pm

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.

Peter Schaeffer November 5, 2006 at 11:46 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.

Dick King November 6, 2006 at 12:45 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

Peter Schaeffer November 6, 2006 at 6:22 pm

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.

Foobarista November 6, 2006 at 6:59 pm

It ain’t about saving the earth. It’s about a megalithic bureaucracy wanting to crawl into your wallet.

Doctor G November 7, 2006 at 2:07 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.

Dirk November 11, 2006 at 3:17 pm

Stern uses a discount rate of 0.1% p.a. (!!!!!) This says everything.

See page 19 in in this part of the report.

Sketchy November 14, 2006 at 12:15 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.

Sketchy November 14, 2006 at 3:27 pm

To AdamSmithee,

Your logic appears to be…

You have a house with fouled gutters and unsound foundations.
You have funds to fix the foundations but would rather clean the gutters first and hope that the foundations hold till you find more funding.

Ok, maybe it is only probable that the foundations are unsound but a builder told you that they were, whereas your bank manager told you everything would be fine.

I find that as convincing as DaSarge using the following (il)logical argument.
A said B
A said C
B is false, therefore C is false.

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Anonymous October 14, 2008 at 2:35 am
flash games May 10, 2009 at 1:33 am

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.

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