Reviewing Global Crises, Global Solutions

gcgs.bmpProving once again that the “freelance writer” part of this blog’s subtitle isn’t just there to lend a false sense of legitimacy, I have another book review up on aBetterEarth. This time the subject is Bjorn Lomborg’s Global Crises, Global Solutions, the 650 page final report of the inaugural Copenhagen Consensus.

Due to the nature of the book, there was too much to cover for me to go into much detail on any particular chapter. I did have a few comments on the issue of climate change, however, that were (understandably) cut from the final draft that I want to discuss here. If you’re unfamiliar with the Copenhagen Consensus, read my review first and then come back to this entry. If you’re already familiar with the CC’s conclusions, feel free to just read on.

These are the paragraphs that were cut:

Understandably, the rejection of climate change as a viable opportunity is by far the most controversial conclusion of the Consensus. The various proposals’ low rankings are due in part to the methodology used by the panel. Standard cost-benefit analysis evaluates future benefits at their discounted present value. (Think of it as a reverse interest rate. At 10% interest, $100 today is worth $110 a year from now. Inversely, $110 a year from now is worth only $100 today. This is due in part to what economists call “time preference.” All else equal, we prefer to get our goods today, not tomorrow.) Since the benefits of reducing emissions will not come into effect for a century or more, their discounted present value is essentially zero. The costs, on the other hand, must be borne immediately. This makes carbon abatement a singularly painful policy to implement.

One may legitimately wonder if this is the proper way to think about global warming. William Cline, the author of the main paper on climate change and an advocate of aggressive carbon abatement taxes, suggests that we should abandon the traditional practice of adjusting costs and benefits for pure time preference on issues that stretch far into the future. Whether or not this approach tracks with one’s intuitions about our responsibilities to our descendants probably depends on what one expects global warming to be like. If one expects that climate change will be catastrophic, then choosing to ignore it because of an economic technicality probably seems monstrously shortsighted. On the other hand, if one thinks that higher temperatures will be just a gradual inconvenience to which people will be able to adapt, discounting the future probably makes sense.

In the interest of space I couldn’t go into detail about present value discounting. Let me clarify a bit here. With a few other complications, the Social Rate of Time Preference (SRTP) used in cost-benefit analysis is the sum of two rates: pure time preference and utility based discounting. Pure time preference refers to our innate tendency to want things now instead of later. The second rate derives from the assumption that since consumption is expected to rise in the future, the marginal utility of further consumption declines. Put simply, since the people of the future will be richer than we are, we shouldn’t value additional goods for them as much as we value additional goods for ourselves.

Cline accepts the validity of utility based discounting. He rejects pure time preference, however, because he feels it unfairly ignores the plight of future generations affected by climate change. Quoting Frank Ramsey, he calls discounting for pure time preference “a practice that is ethically indefensible and arises merely from the weakness of the imagination.” His recommended discount rate is therefore considerably lower than what the panel chose to employ (see pages 15-17).

I’m not entirely comfortable with the panel’s decision to discount for pure time preference. Lomborg argues that even if the U.S. and the rest of the world followed the Kyoto Protocol completely, global warming would only be postponed for six years. If Lomborg is correct, than I have no problem with the panel’s decision. On the other hand, Cline and other scientists caution that global warming may not affect the climate in such a predictably linear fashion. Specifically, a shutdown of thermohaline circulation in the North Atlantic could have potentially drastic consequences. If that’s a realistic threat, then I’m tempted to agree with Ramsey: glibly ignoring it because of our pure time preference would be ethically indefensible.

So who’s right? I don’t know. While I’m far from convinced that we should begin aggressively abating our CO2 emissions, I’d be lying if I said that science and economics tell us with certainty that we don’t have to worry about climate change. Thus my attitude is a bit more equivocal than what comes through in the review.

I may post further about that topic soon, but for now I’ll close with a couple of notes about which policy we should pursue. The Kyoto Protocol is regarded poorly by everyone commenting upon it in Global Crises, Global Solutions. Even Cline regards it as, at best, a “better than nothing” option. The main flaw with the KP is that it will divert emissions to developing countries rather than curbing them absolutely, imposing great costs while undermining its primary objective.

The panel ranks both of the abatement tax proposals very poorly, but a comment of Vernon Smith’s is worth repeating. He notes that if we decide to globally restrict emissions worldwide, it makes far more sense to do with tradable permits than with taxation. Permits would allow regulators to set the target level of emissions directly, whereas the latter approach would require regulators to pick a target level and guess the rate of taxation that will bring it about. Tradable permits would be simpler and more efficient. A proposal of that nature was not presented to the panel for consideration, but probably should be in the next Copenhagen Consensus.


4 thoughts on “Reviewing Global Crises, Global Solutions”

  1. Very fascinating stuff Jacob. Being a student of words and rhetoric more than science and economics, here’s my observations.

    You make some valid points about limited resources and wanting to do the most with it. When your average non-economist wants to spend some aid and hears “that won’t be cost-effective”, it comes across as cruel and cold. It seems to say “because I, the economist sitting in my comfortable office calculating abstract numbers, find this aid to fail my almighty standard of efficiency….these poor, suffering people aren’t worthy of our help.”

    Clearly, that’s not what you economist-types mean….but that’s how it comes across when you refer to “cost-benefit ratios” and the “most cost-effective aid.”

    That’s why I like your explanation about the limited amount of aid dollars in your review. You explain that it’s a matter of limited resources and wanting to do the MOST good with what we have. My one suggestion is that, in future conversations, insteading of talking about “cost-benefit” and other economic language, I’d speak in terms of doing “the most good with what we have.”

    If there’s anything I’ve learned in law school, it’s that it’s all about HOW you present your message.

  2. Thanks for the feedback, Ben. You’re right that economic lingo doesn’t often give one the warm and fuzzies. Glad you found the project interesting.

  3. That’s a nice review I enjoyed reading it and the idea is interesting (although I noticed at least 1 typo, the word would instead of world). Keep up the good work man.

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