Understanding the economics of climate change mitigation

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6 Responses to “Understanding the economics of climate change mitigation”

  1. Eric Crampton says:

    The discount rate isn’t the only important variable: the eta coefficient also matters a lot. Delta (discount rate) tells you how much society values money tomorrow in terms of money today; Eta tells you how much society values a poor person having a dollar as compared to a rich person.

    So, first think about what your social preferences are over those two variables. How much weight should we be putting on the present as compared to the future. Suppose that we have two possible states of the world, A and B. In A, folks today have $100 and will have $110 in a century. In B, folks today have $101 and folks in a century have $105. Which is better? That tells you something about your preferred delta. If you pick A, you have a relatively low delta; if B, high delta. Ok. Eta. Suppose that we have two possible states of the world, A and B. In A, one group of people earn $20 and the other earn $100. In B, one group of people earn $30 and the other group earn $70. Which do you prefer?

    The Stern report takes a near-zero discount rate and an eta value of 1. In other words, Stern says that a dollar a century from now is worth the same as a dollar today, and that a dollar is worth as much to a poor person in Bangladesh as it is worth to Bill Gates. I’m not going to argue with those parameter choices, but I will point out that those choices are consistent with a lot of policies that most folks who like the Stern report would deem horrible. In short, if those parameters are true, then we should immediately abandon any economic redistribution programme currently in place that hurts economic growth. If taking a dollar from Bill Gates to give to a homeless person (via taxation and welfare) means that economic growth slows by even the slightest amount, we have to oppose that policy IF we accept Stern’s parameter choices.

    All I’m asking for is some consistency.

    It is awfully fun to watch. The right wingers who’ll typically argue against redistribution on the grounds that it hurts economic growth are basically on Stern’s side when it comes to the parameter choices, but they oppose Stern’s conclusions. The lefties who’ll typically argue that we should expropriate the rich and give everything to some homeless guy because economic growth is evil anyways support Stern’s conclusions, despite his parameters being opposite to theirs.

    Me? I think a delta of zero and an eta of one are both ridiculous.

  2. DougO says:

    I stumbled on this earlier this week. Seems relevant to the discussion.

    “What is the economist’s bottom on global warming? The fundamental problem is the climate-change externality – a “global public good.” Economic participants (millions of firms, billions of people, trillions of decisions) need to face realistic carbon prices if their decisions about consumption, investment, and innovation are to be correct. To be effective, we need a market price of carbon emissions that reflects the social costs. Moreover, to be efficient, the price must be universal and harmonized in every sector and country. But a major economic question remains: what is the appropriate price of carbon?”
    Nordhaus. W. 2008. The Challenge of Global Warming for the Global Economy. World Bank slide presentation, 9-11-08. http://nordhaus.econ.yale.edu/WorldBank_091108_post.ppt

  3. spazzm says:

    I salute you, Cory, for countering Platt’s lies with reason, evidence, and fact.

    Thanks.

  4. ksheeran says:

    This is a useful website. If you want a broader understanding of the economics of environmental issues from economists whose research supports a progressive environmental agenda, check out Economics for Equity and the Environment Network (www.e3network.org). Their climate taskforce includes some of the most innovative researchers in the climate arena.

  5. Stefan Jones says:

    @NJP: Do you have that in a file somewhere, for easy cut n’ pasting to any remotely related comment thread?

  6. Dayv says:

    Cory, thanks for these posts.  I was irritated by Charles Platt’s posts prior to yours, and it’s good to be reminded that Boing Boing is not one single viewpoint or voice.

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