Uncharted Territory

May 23, 2008

Still Sternly Bemused

Filed under: Economics, Global warming — Tim Joslin @ 3:29 pm

Following my previous post, I’m still mulling over the topic of whether we should “Pay Now or Pay More Later” for the costs of climate change. I feel a need to extract the bear bones of the argument questioning whether discount rates apply at all to the “costs” of global warming. The previous post muddies the waters a little by bringing in additional (though valid) arguments, such as that it may be necessary to distinguish between consumption and capital formation.

It still seems to me that the principle of internalisation of costs – which I thought was established in the mainstream as the way to deal with the global warming problem – and the idea that the polluter pays – which again I thought was not seriously doubted as the appropriate principle – lead to a need to consider carbon emissions made now as a debt owed by the emitter to the global population, not as a cost that might be incurred in the future which doesn’t matter much because we’ll all be rich.

If we do this, then it follows that we have to be temporally impartial. If I have a debt of the form that a cost will be occurred (global warming related losses in this case) at some unknown point in the future, then I can amortise the cost of that debt over time – i.e. pay interest – or, if I’m sensible, insure myself – but not reduce it simply because the risk has not yet materialised. To assume otherwise is to be like the Lloyds of London Names who were wiped out when they were hit with insurance losses due to asbestosis. Note also that the businesses the Names kindly insured may have made a profit for their shareholders, but only because the shareholders avoided paying the costs in damage to health that came to light later. The asbestos businesses are analogous to today’s carbon emitters.

It also follows from the debt idea that we must be utilitarian and not prioritarian. (This is quite apart from the fact that there is no justification for the assumption that we will all be richer in the future). Consider buying a PC. By (say) 1995, it was quite clear that we all had a choice between buying a PC for (say) $1000 or putting the $1000 in the bank and buying a much, much better PC for (say) $1400 ($1000 + compounded interest) in 2000. We all struggled with this choice. It generated a million letters to PC magazines asking “Should I buy now or wait?”. The point is that we didn’t say to ourselves: “I won’t forgo a PC now because in the future I’ll be able to afford PC’s easily”. This argument is analogous to that of the prioritarians. It has zero logic. Sorry, negative logic. I can only afford more computers in the future if I don’t spend all my money on computers now, not if I do! Duh!

The problem is that, in dreaming up their daft arguments for “prioritarianism” and “temporal partiality”, the economists have failed to think about how we attribute the costs of carbon emissions, either to mankind as a whole (and I’ve resisted the temptation in pointing out that the cost of species and ecosystem loss is not only infinite – extinction is forever – but that rich people, as we will supposedly all be in the future, put a higher relative value on the environment than do poor people, an argument that could actually make the discount rate negative), individual nations (which is particularly dumb, as the global community is going to hold the historical polluters to their share of the costs one way or another) or individuals. We don’t have to actually answer the question (not easy – it’s going to lead to a lot of argument over the coming decades!), but, as soon as we ask ourselves: “Who’s going to pay for the damage caused by these emissions?” it becomes obvious that the discount rate should be zero. Anyone who argues that we can simply reduce the debt by 1.4% a year or 6% a year or whatever daft figure they dream up is simply spouting tosh.

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1 Comment »

  1. […] have to say that the more I think about the issue of GW cost discounting, the more I harden my position. It seems to me that valuing […]

    Pingback by Sternly bemused at Realclimate « Uncharted Territory — May 26, 2008 @ 5:14 pm


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