Reader Charles Young has sent me a response to Bjorn Lomborg’s latest outing, pushing yet again the claim of a trade-off between doing something about climate change and increasing aid to poor countries. It’s over the fold.
I’ll just repeat that, as far as I know, Lomborg has never shown any interest in aid to poor countries except as an alternative to Kyoto. The Copenhagen Consensus exercise produced some important and controversial results in the relative ranking of, for example, health and education projects, but I’ve never seen a piece by Lomborg discussing these results and their implications, other than relative to climate change. Feel free to correct me.
Young on Lomborg
Ought I to stop smoking? Or would it be better to donate some money to Oxfam? Certainly the immediate increase in global welfare would be much greater if I were to give some money to Oxfam. So I’ll have another cigarette.
Most of us will have no difficulty in seeing the flaw in this line of reasoning – and will recognise a type of casuistry at which addicts excel. However, if we substitute “tackle HIV/Aids� for “give money to Oxfam� and “reduce greenhouse gas emissions for “stop smoking�, and if we get a number of eminent economists to confirm that the first gives more immediate benefits, then we have the message being conveyed by Bjorn Lomborg (“Climate Change can Wait�, 2/7/06) – and most of us are too overawed by the Nobel prize-winners to spot the flaw. This message, as Lomborg states it, explicitly suggests that inaction on climate change is acceptable for the present. Moreover it implicitly suggests – to those who are severely addicted, or very stupid, or a bit of both – that it is even misguided to take action on climate change, since doing so might get in the way of the other worthy goals.
Of course, the less money I spend on cigarettes, the more I will have available to give to Oxfam. Equally, if global welfare is increased by some of the steps that can be taken to combat climate change, then taking these steps will make it easier, not harder, to address the other challenges.
The obvious step for tackling greenhouse gas emissions is to tax them. Indeed, the proposal put to the Copenhagen Consensus group in 2004 by Dr William Cline essentially considered various levels of carbon tax. Those who opposed his proposals suggested that the level of tax that he proposed was too high. Neither of the two “opponent� papers considered by the Copenhagen group advocated inaction – one advocated a carbon tax, but at a lower level, the other proposed that tradeable carbon permits be used instead of a tax.
In popularising the results of the meeting, Bjorn Lomborg has said that the problem is how best to invest a fixed sum of money – say $50 bn – as between the various desirable goals. But the step being proposed against global warming requires no investment – it merely involves shifting the tax burden from one place to another. Far from representing a budgetary cost, a carbon tax could either raise additional resources for government action on the other global priorities, or could allow other taxes to be cut, or both.
All taxes distort, and a carbon tax will cause a reallocation of spending right now. If it is to be shown that this reallocation represents a net cost to the present generation, the impact of a carbon tax must be compared to the distortions caused by the other taxes which it would replace. As far as I can tell, this issue was not considered in the deliberations of the Copenhagen Consensus. Many taxes – for example payroll taxes, like National Insurance, which reduce the demand for labour and thus cause unemployment – have undesirable side-effects. Replacing distorting taxes with taxes that offset environmental costs (known in the trade as “Pigovian� taxes) is likely to improve the allocation of resources immediately. One (perhaps unexpected) recent proponent of shifting more of the tax burden onto Pigovian taxes in general, and carbon consumption in particular, is Greg Mankiw, Chairman of President Bush’s Council of Economic Advisers until last year.
It used to be feared that taxes on energy had a uniquely baneful economic effect, since the petrol price increases of 1973 and 1979 both led to global recessions. However, the global economy has adjusted to the high oil prices of the last two years with little difficulty, so this particular fear, which played a major part in previous assessments of the cost of carbon taxes, can now be discounted.
At a more fundamental level, we should question whether the views of economists, even Nobel prize-winners, ought to be decisive. It is certainly useful to have them consider various courses of action on a consistent basis. But global warming raises one issue which economics is ill-suited to answer, and another which is contentious among economists, and between economists and philosophers.
Economics assumes that what people want – their tastes, or preferences – are exogenously given, and do not change. If an economist could set up an experiment to work out the cost of giving up smoking, it would involve offering the smoker, every time he reaches for his pack, whatever sum of money would induce him to forego the cigarette. Altering his preferences is ruled out by assumption. Naturally, the cost of giving up smoking would turn out, on this measure, to be exorbitant, and on the same measure, which is the only one that can be and is used by economists, so is the cost of mitigating global warming. Those who succeed in giving up smoking in practice change their preferences as well as their behaviour. Economics can say nothing about whether the man who craves, and gets, his cigarettes, is better off than the man who does not smoke and does not want to. Yet these lifestyle changes will be needed if we are to cut greenhouse gas emissions. Even if we hope that technical fixes will make our present lifestyles once again sustainable, these fixes will come a lot faster if we incentivise them with carbon taxes.
That is the issue – weighing up mutually exclusive groups of lifestyles and the preferences that go with them – on which economists have nothing to say. The issue which was contentious among the economists at Copenhagen was whether, and by how much, the costs imposed on future generations by carbon emissions should be discounted. £100 in ten years time is worth only £73 now, if I have the chance of investing it at 3% interest. Because the costs of global warming affect later generations, discounting them at the rates normally used in cost-benefit analysis leads to the conclusion that it is not worth the present generation’s while to bother too much about them. (At 3%, £100 in 200 years time discounts to 22p). It is right to discount things that can be produced in growing quantities, wrong to discount the irreplaceable. (Indeed, one of the Nobel prize-winners on the Copenhagen team, despite giving a low priority to Dr Cline’s proposals, has elsewhere proposed that we should use a negative rate of interest for the costs of mitigating climate change. Thomas Schelling has pointed out that although the benefits will accrue later than the costs, the main beneficiaries are likely to be the descendants of today’s poor, who may be less poor than their parents, but are likely still to be poorer than those in today’s rich countries who will bear most of the cost of reducing greenhouse gas emissions. In his view, this justifies negative interest rates, though most of the Copenhagen team felt that Dr Cline had used rates that were too low). Weighing up the cost of lifestyle changes now against the gains to future generations is a political decision that cannot properly be hived off to economists, even if they have won the Nobel prize.
I have used the smoking analogy because it is clearly the case that huge savings in greenhouse gas emissions can be made without putting at risk anything that is essential to a comfortable and civilised life. We all love our habits, and if asked to change them, even for the best of reasons, we are all adept at dreaming up, and eager to make use of, even the most specious of arguments that appear to deny the need to change. It is in this category of argument that Dr Lomborg’s use of the Copenhagen Consensus findings belongs.
John Quiggin 
‘a type of casuistry at which addicts excel.’
Yes, but what they really say is not ‘so I’ll have another cigarette’; rather, they say ‘well, I’ll have another cigarette while I think about it’. This isn’t a quibble, it’s a significant difference.
Tim Flannery has pointed out frequently that we can all do something about global warming without doing ourselves much harm: make our next hotwater service a solar one; make our next car a hybrid; and switch over immediately to the slightly more expensive ‘green electricity’ option offered by all Australian utilities. None of these choices is unaffordable to the people contributing to this blog, IMHO.
Hence, we can have the cigarette and contribute to Oxfam, and if we do only the former, having consciously considered the issue, we are not just casuistical, we are making a profoundly immoral choice.
Why make this obvious point, which is implicit in JQ’s argument anyway? Well, governments have the same set of choices, as JQ has also said, and the Australian government has had the luxury of successive surpluses which could have painlessly done quite a lot towards ameliorating Australia’s future greenhouse emissions. It has not done so. Doing nothing and pretending to ‘think about it’ is a dishonest but effective policy.
Sorry, for ‘JQ’ read ‘reader Charles Young’.
Of course, not considered here is the idea that foreign aid is actually harmful to the recipient, as argued by Deepak Lal.
But this is an aside. The important part of this, IMHO is this bit:
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If it can be shown that it is replacing even more distortionary taxes, then a carbon tax may be a net gain. Of course, (if I understand it correctly) opportunity cost theory says we should look at the benefits of simply abolishing the distortionary tax without replacing it with a less distortionary tax – so there is a cost after all.
This, however, is said without support from the rest of the piece:
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No such thing is “clearly” the case from what was said above and I would dearly like to see an appropriate source or analysis for this. I believe that, even if it can be shown that a carbon tax is less distortionary than a tax it may replace, there is still a cost to its introduction and, particularly in some of the middle income countries as well as for the poor in our own, this may indeed precude, or at least delay, “…a comfortable and civilised life…” for many people. We still need to evaluate it against the many competing alternatives, not just what is currently there.
Great post.
“Economics assumes that what people want – their tastes, or preferences – are exogenously given, and do not change.”
I wouldn’t be able to agree with the above statement.
Economics does not assume anything. Economics is a name given to a field of inquiry which is concerned with the material welfare of humans.
That part of economic theory, which takes its philosophical origin in ‘libertarianism’ of past centuries, takes preferences of individuals as given. This is how it should be on methodological grounds. That is, if one wishes to model what happens if people have a mind of their own and can make decisions, then (logically) one can’t do anything else beside taking preferences of individuals as given. The question, how do people acquire the preferences which they have is outside the boundary of inquiry. But this is not the same thing as saying ‘economists assume that preferences are exogenous’.
The statement ‘economists assume that preferences do not change’ is also not true in general. Even in cases of multiperiod models with ‘preferences being taken as given’ there is nothing in the general theoretical models which rules out that people’s choices differ over time. Moreover, these models allow for people’s preferences to be state dependent. That is, an individual’s choice, given the information ‘no human induced global warming from CO2 emissions’, may be different from that if the information is ‘human induced global warming from CO2’ for any given time.
To the best of my knowledge, a difficulty with these models arises from intergenerational factors. How does one characterise the preferences of people who take future generations into account? The situation is a little more complicated than altruistic preferences for contemporary individuals because in contrast to contemporary altruistic preferences, people have no way of getting any information about future generations.
“Altering his preferences is ruled out by assumption” I don’t understand this statement. What would be the purpose of having the notion of ‘preferences’?
Was ‘state contingent valuation’ mentioned at the Copenhagen Congress?
Andrew Reynolds,
If Lal is claiming that aid hinders development then he is merely repeating a canard that has little basis in recent research. Indeed, the majority of recent studies investigating the impact of ODA on GDP show that ODA flows do tend to lead to higher GDP levels. This is particularly the case when development aid is separated from humanitarian assistance. See for example:
http://www.imf.org/external/pubs/ft/fandd/2005/09/radelet.htm
Moreover, when the impact of aid is measured directly vis a vis outcomes that it is targeted to (i.e reducing poverty, increasing education) rather than just raising GDP it’s positive impacts become clearer still. See for example:
http://www.dev-zone.org/cgi-bin/knowledge/jump.cgi?ID=9706
Above and beyond this, the real question that ought to be being debated by folks such as Lal, Easterly, and Sachs and Clemens is not whether aid per se is good or bad, but what type of aid achieves the best results. Campaigns like the Small Pox vaccination campaign along with programmes to treat River Blindness, for example, have been huge successes. While there have been numerous other projects (including any number of large dams) that have failed totally. Were we simply to focus on the things that aid does well we might get considerably more bang for our ODA buck.
Ernestine Gross has some valid points. I shouldn’t have said economics supposes exogenous and unchanging preferences. I should have said “virtually all current and past writings on normative economics suppose…� The problem is that if you do not make this assumption, it is very difficult to get to a conclusion about the conditions in which people are “better-off�. One attempt to explore alternatives is in Jon Elster’s book “Sour Grapes�. Another is at http://idei.fr/doc/conf/jjl/papers/23weizsacker.pdf. This paper shows that you can get to welfare conclusions, even when preferences change, provided that they only change in such a way as to favour ever more strongly the goods that one already has or regularly consumes, However, the most notorious cases of goods that people want more of once they are already using them are addictive drugs. So this line of enquiry leads, even more strongly than most welfare economics, to the conclusion that heroin addicts are much better off than the rest of us.
I agree with the moral statement that one ought to take people’s preferences seriously, but not with the empirical statement that preferences never change. The existence (and size!) of the advertising industry attests to the falsity of that assumption.
Ernestine is quite right to say that the key assumption is about how we treat future generations. As to whether contingent valuation was discussed at the Copenhagen gathering, I have no idea – I don’t think there is a record of the discussions that led to the ranking. I don’t recall it being mentioned in the climate change papers that were put before the committee, though it may have been part of the assessment of costs and benefits that they took over from previous writings.
Ernestine does make some good points. I’m impressed.
I also thought that Charles contribution was good. I like this bit:-
If I was employed to split hairs then I would have used the term “unproductive labour allocation” rather than “unemployment” in the quoted section. Some taxes can keep us very busy doing paperwork and attending tax minimisation seminars (or selling advice at such seminars). However the sentiment was right.
This idea of tax revenue substitution is something the Greens in New Zealand were saying years ago. Unfortuately the Greens in Australia (ie the political party) are watermelons who have rarely met a tax they didn’t like (ie they are socialists).
To compare global warming to smoking is ridiculous.
Is the earth better off now that it is ~0.8 degrees Celsius warmer than it was during the Little Ice Age?
I think it is. Who thinks it isn’t?
Continue that train of thought. Will the world be better if it’s 0.5 degrees Celsius warmer than now? 1.0 degee Celsius warmer? 1.5? 2.0?
EVENTUALLY, I would get to a point that I’d agree that the world was clearly, on average, worse off (even then, cold places like Russia, Canada, and Alaska still might be better off). But that would probably be at least 2.0 degree Celsius warmer than now.
So while smoking even one cigarette is bad for one’s health, a world that is 0.5 or 1.0 or 1.5 degree Celsius warmer isn’t even necessarily worse off.
(Note: The Copenhagen Consensus background material put the point at which the world starts being worse off at about 1.2 degrees Celsius warmer than now, as I recall.)
Better for whom, Mark? I agree that Canada and Russia will benefit from some global warming, but it is not clear that global temperatures can rise much without jeopardising the welfare of the much larger, and much poorer, populations of India and Bangladesh. Also, there is a risk of muddling up the change in global average temperatures with the increase in the variance around these temperatures. This is a well-known problem with the Nordhaus and Boyer models which were heavily used in all three papers presented to the Copenhagen meeting. (see, for example,
http://www.hm-treasury.gov.uk/media/E79/EB/climatechange_tufts_1.pdf)
To discuss the costs and benefits of a carbon tax, without netting off the distortions caused by the taxes it could replace, seems a quite egregious mistake which invalidates not only Nordhaus and Boyer, but most other writings on this issue. I’ll be grateful if anyone can direct me to an economic assessment which steers clear of this error.
Hi Charles,
You write, “Better for whom, Mark? I agree that Canada and Russia will benefit from some global warming, but it is not clear that global temperatures can rise much without jeopardising the welfare of the much larger, and much poorer, populations of India and Bangladesh.”
I agree that temperature rise tends to hurt India and Bangladesh, which are already probably too hot. But another point is that most climate models have more of the warming occurring near the poles and night than during the day. So let’s say–just hypothetically for illustration–you have 0.5 degree Celsius overall global rise, but it is distributed such that there is 1.0 degree Celsius rise over the north and south halves of the planet that are nearest the poles. Then there is zero rise over India and Bangladesh (and Mexico, Indonesia, the Philippines, etc.)
So I totally agree with your point, but still maintain my point is completely valid. It’s ridiculous to compare something that may indeed produce net benefits (i.e., global warming) to something like smoking that is clearly harmful. (Note to the rest of the world that has not been exposed to the wonderful humor of The Simpsons: There is a show that has self-help videos, including, “Smoke Yourself Thin.”) 😉 (And: “Get Confident, Stupid!”) 🙂
You also write, “Also, there is a risk of muddling up the change in global average temperatures with the increase in the variance around these temperatures. This is a well-known problem with the Nordhaus and Boyer models…”
I’m not an expert on this, but I completely disagree with your assessment. Global warming can be expected to happen most strongly at night and during the winter. It can be expected therefore to lower both the daily (diurnal) temperature swings, as well as the temperature variation from winter to summer.
To my knowledge (and again, I’m not an expert on this) looked *extensively* to try to find increases in extreme weather. To my knowledge, they found none.
Your reference also disparages the Nordhaus and Boyer estimate of the “positive amenity aspect” of 20 degrees Celsius. (Your reference thinks it should be much lower.) But there’s a way to check for the temperature that has the biggest “positive amenity aspect.” Look at large countries (e.g. the U.S., Canada, Russia, China, Brazil…possibly Australia) and see whether people move to warmer places or to cooler places.
Here in the U.S., everyone moves to Florida and Arizona when they retire. I know that most of the population in Canada is as far south as they can go and still be in Canada. 😉 Just looking at my National Geograhic map of the world, it appears most of the population of Russia is in the south.
One interesting question I’d have even about India…where do people in India go when they retire (if they’re fortunate enough to have that kind of money)? Do they go to warmer places, or cooler places?
Mark
Hi Charles,
Oh…I’m sorry, I missed that you are apparently the guest author of this editorial.
If so, I have one more HUGE comment. In your editorial, you wrote:
“Thomas Schelling has pointed out that although the benefits will accrue later than the costs, the main beneficiaries are likely to be the descendants of today’s poor, who may be less poor than their parents, but are likely still to be poorer than those in today’s rich countries who will bear most of the cost of reducing greenhouse gas emissions.”
Well, I hate to tell you, but Thomas Shelling is wrong. And not just a little wrong. Thomas Schelling is colossally, stupendously, and monumentally wrong. 🙂 (Says me.) (And Arnold Kling.) (And probably Ray Kurzweil, though I’ve never seen him do actual numbers.) (And maybe Robin Hanson, but I’ve never understood whether he’s predicting or merely hypothesizing about possibilities.)
The world per capita GDP in the year 2100 will be more than $10 MILLION (in year 2000 dollars). In other words, in 2100 there won’t be a single person who is not a millionaire at birth…and who can not his or her whole life without working a day.
See details here:
http://www.longbets.org/194
http://markbahner.typepad.com/random_thoughts/2005/11/why_economic_gr.html
http://markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html
Oops. Blew the punch line…
“…and who can not live his or her whole life without working a day.”
P.S. And you can can take that to the bank.
Geez. The problems with posting in haste during lunch. This should have been:
“To my knowledge (and again, I’m not an expert on this) the IPCC TAR (Third Assessment Report) looked *extensively* to try to find increases in extreme weather. To my knowledge, they found none.”
o.k. its entertainment time.
Mark Bahner, have you considered retiring in Florida? The humidity of the place might be useful to contemplate the distinction between possibilities and probabilities. Think of alligators.
Terje. On watermelons and reasoning by analogy: Watermelons are suitable for dry countries. New Zealand is not a dry country. Canberra became so dry during the recent past that the fringes of the city got singed.
“The humidity of the place might be useful to contemplate the distinction between possibilities and probabilities. Think of alligators.”
I’m not sure what you mean…but my prediction for the 50% probability value for world per-capita GDP in 2100 is $10 million. If that is so, the probability is essentially 100 percent that every single person will be a millionaire at birth.
Let’s assume that income is 75% of GDP. If per-capita GDP is, on average, $10 million, that means essentially half the population makes $7.5 million a year. Every year. For their professional life. At a mere 30 years of professional life (i.e. start work at 25, retire at 55), that would be a total lifetime income of 225 million. If they give only 2 percent of their lifetime income to charity, that means even the poorest people would be able to get a couple million dollars.
Mark,
Not quite correct. It really depends on the standard deviation of income. Personally, I believe that the deviation wlll reduce, so that your analysis is pessimistic. but I know others would argue otherwise. Do you have any justification for the need to only donate 2% of lifetime income?
Terje, I’m not up on the most current version of Australian Greens policy in this area, but certainly in the past the policy has advocated using income raised from taxes on CO2 and other pollutants to lower or replace a range of other taxes.
Overall the Greens generally support a higher level of taxation, but in the unlikely event of the Greens being swept to power at the next election more of the money raised from pollution taxes etc would probably be directed into replacing other taxes than into increasing the total tax take.
Mark, just checking you realise that your figures imply a per-capita GDP growth rate of 7% every year, without a single global recession. Can you name one year in which global economic growth has been that big?
I would be remiss if I did not sound the Mark Bahner klaxon, warning of imminent bandwidth waste ahead.
Best,
D
“Reader Charles Young has sent me a response to Bjorn Lomborg’s latest outing, pushing yet again the claim of a trade-off between doing something about climate change and increasing aid to poor countries. It’s over the fold.
I’ll just repeat that, as far as I know, Lomborg has never shown any interest in aid to poor countries except as an alternative to Kyoto. The Copenhagen Consensus exercise produced some important and controversial results in the relative ranking of, for example, health and education projects, but I’ve never seen a piece by Lomborg discussing these results and their implications, other than relative to climate change. Feel free to correct me.”
JQ,
It seems to me the ‘trade-off’ problem is artificial because, if development aid is a policy objective then all or part of emission taxes could be given as development aid. (For emission taxes, substitute proceeds from sales for emission rights).
What am I missing except an appreciation of and lack of patience with seemingly endless politicking eminating from special interest groups?
Stephen,
Forgive me if I find your position in this regard optimistic in the extreme.
Regards,
Terje.
Global warming and the political and economic issues surrounding it seem to be an abiding interest of many contributors to this blog. The link below is to an article in the New York Review of Books.
I know this posting is not quite on topic, but there is enough of a connection to justify my posting…
http://www.nybooks.com/articles/19131
StephenL writes,
1) “Mark, just checking you realise that your figures imply a per-capita GDP growth rate of 7% every year, without a single global recession.”
Yes, my prediction represents an AVERAGE per-capita GDP growth over the century of 7% per year. But my specific predictions are for per capita annual GDP growth to average 3% per year at the beginning of the century, rise to about 8% per year by mid-century, and continue to rise to over 13% per year by the end of the century. See here:
http://markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html
2) “Can you name one year in which global economic growth has been that big?”
No…can you name one year in which it has been possible to buy a computer for $1,000 with the capability of a human brain? Can you name one year in which the added computer capacity (in “human brain equivalents”) has exceeded the human population of the world?
http://markbahner.typepad.com/random_thoughts/2005/11/why_economic_gr.html
If your answers to both questions are “no,� that gives you your explanation why global per-capita economic growth hasn’t been 7% per year…yet.