Wednesday, December 19, 2007

Green Gas Emissions, Risks and Uncertainty: When Kenneth Arrow Speaks – Just Listen

Kenneth Arrow explains the general issue thusly:

Two factors differentiate global climate change from other environmental problems. First, whereas most environmental insults – for example, water pollution, acid rain, or sulfur dioxide emissions – are mitigated promptly or in fairly short order when the source is cleaned up, emissions of CO2 and other trace gases remain in the atmosphere for centuries. So reducing emissions today is very valuable to humanity in the distant future. Second, the externality is truly global in scale, because greenhouse gases travel around the world in a few days. As a result, the nation-state and its subsidiaries, the typical loci for internalizing externalities, are limited in their remedial capacity. (However, since the United States contributes about 25% of the world’s CO2 emissions, its own policy could make a large difference.)


While Arrow notes that the critics of the Stern Report cite the role of uncertainty as their rational for taking no action, he fires back with his own analysis of the roles of uncertainty and risk.



There is greater disagreement about how much to discount the future simply because it is the future, even if future generations are no better off than us. Whereas the Stern Review follows a tradition among British economists and many philosophers against discounting for pure futurity, most economists take pure time preference as obvious. However, the case for intervention to keep CO2 levels within bounds (say, aiming to stabilize them at about 550 ppm) is sufficiently strong to be insensitive to this dispute. Consider some numbers from the Stern Review concerning the future benefits of preventing greenhouse gas concentrations from exceeding 550 ppm, as well as the costs of accomplishing this. The benefits are the avoided damages, including both market damages and non-market damages that account for health and ecological impacts. Following a “business as usual” policy, by 2200, the losses in GNP have an expected value of 13.8%, but with a degree of uncertainty that makes the expected loss equivalent to a certain loss of about 20%. Since the base rate of economic growth (before calculating the climate change effect) was taken to be 1.3% per year, a loss of 20% in the year 2200 amounts to reducing the annual growth rate to 1.2%. In other words, the benefit of mitigating greenhouse gas emissions can be represented as the increase in the annual growth rate from today to 2200 from 1.2% to 1.3%. As for the cost of stabilization, estimates in the Stern Review range from 3.4% of GNP to -3.9% (since saving energy reduces energy costs, the latter estimate is not as startling as it appears). Let’s assume that costs to prevent additional accumulation of CO2 (and equivalents) come to 1% of GNP every year forever, and, in accordance with a fair amount of empirical evidence, that the component of the discount rate attributable to the declining marginal utility of consumption is equal to twice the rate of growth of consumption. A straightforward calculation shows that mitigation is better than business as usual – that is, the present value of the benefits exceeds the present value of the costs – for any social rate of time preference less than 8.5%. No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5%.


4 comments:

Robert D Feinman said...

The unwillingness of those in the advanced societies to take steps to mitigate future damage at some cost to themselves in terms of profligacy is, I think, proof that people don't believe in an afterlife.

What would be the likelihood that one would go to their heavenly rest when their current selfishness contributed to the future misery of billions of people?

People who true believers should be at the forefront of efforts to curtail current harmful activity.

Anonymous said...

probably i did not understand the post, but it looked to me like another case of the mathematically talented taking a number of completely off the wall assumptions, known and unknown, and predicting the future a hundred years from now as well as how people are going to feel about it to the third decimal place.

in the meanwhile global warming has increased the range of the mosquitoes that carry dengue fever.

and we all know how much utility we get out of dragging the strip on saturday night.

Anonymous said...

actually let me risk being rude here.

you guys are economists so i guess you have to talk in terms of GDP in order to have anything to talk about at all.

but is there ANY sense in which it is meaningful to talk about "growth" or GDP two hundred years into the future?

to use my own example above, are we going to put a money value on treating dengue fever and say that because the economy is spending 2 Trillion Galts a year on such treatment that the GDP has increased "1.2%" per year since the days when dengue fever went untreated and the cost of a pickup was only G 20 (constant Galts)??

(oh, the Galt will be the new global currency. a "pickup" was a late twentieth century mode of transportation and sexual display).

again, what rational basis of comparison can make any of this meaningful at all?

and remember when the best things in life were free?

Myrtle Blackwood said...

"While Arrow notes that the critics of the Stern Report cite the role of uncertainty as their rational for taking no action.."

Who are these critics?

Because, this week's news was the Australians in general have reduced their 'personal' greenhouse emissions by 14% per capita. This is happened because they are concerned about global climate change.

So, I repeat, who are these critics that refuse to take any action?

I believe the answer to that question is that these people are the significant global capitalists. Not ordinary folks. They are those people and their institutions that are into making things for profit. For profit only and in a system of unequal exchange that can only be sustained with the continued use of fraudulent cost-benefit analysis - the very analysis of the kind we find in neoliberal (conservative) economics.

Capitalism by another name.

Capitalism doesn't address costs
"in the distant future" and out there in the atmosphere somewhere.

Global climate change, global peak oil, global peak water, global peak minerals, global peak topsoil. How can they be addressed under a global economic system that uses a narrow monetary aim and definition of profit and loss??

And Coberly, I agree with you. Kenneth Arrow, no matter how clever he is, cannot begin to quantify GNP or anything much at all in year 2200.