The fact that the American Enterprise Institute (currently funded by ExxonMobil, but not for much longer it seems) is offering $10K a pop to scientists and economists willing to attack the IPCC report is all over the press and the blogosphere (a PDF scan of one of the letters has been posted here. I was alerted by David Adamson, who pointed me to this Courier-Mail report citing the Guardian. It’s striking to think that when I started blogging in 2002, the AEI was still widely respected.
Meanwhile Brad DeLong has suggested that he and I should put our hands up for the cash. Since we are closely familiar with all the main denialist arguments, it would be money for jam after all. Sad to say, this appears to be an invitation-only offer and neither Brad nor I is on the list. In any case as radek points out in comments
10K seems like a pretty low amount to pay for a shredded reputation. Unless, I guess, you ain’t got much reputation to begin with. Even market forces, politics and ideology aside, predict that whatever comes out will be of extremely low quality. You get what you pay for.
Of course, this applies equally to anyone willing to hire AEI itself.
In related shenanigans, another recipient of the ExxonMobil cash spigot, the Fraser Institute (whose efforts on this point are headed by the egregious Ross McKitrick) is holding an event on Monday in London, aimed at discrediting the IPCC. The Fraser Institute report has already been leaked and dissected at DeSmogBlog, which suggests that Fraser may be fronting for AEI. Any readers who happen to be in London might want to roll up and join the Rent-a-crowd there. No guarantee that you’ll get paid for attendance only, though.
And on the lighter side, the search engine on the White House website has been rigged to return no results for searches on “global warming”
John Quiggin 
If this is a fair sample, it appears that Greenpeace present a reasonable face in their web publications, but push a much more alarmist line in popular material, which is very poor practice.
On discount rates, I do plan a journal publication specifically related to climate policy. But I have already published a lot of material on the general issue of risk and discounting and my arguments draw on this. For example:
Grant, S. and Quiggin, J. (2000), The interaction between the equity premium and the risk-free rate, Economics Letters 69, 71–79.
Grant, S. and Quiggin, J. (2002), ‘The risk premium for equity: implications for the proposed diversification of the social security fund’, American Economic Review, 92(5), 1104–15.
Grant, S. and Quiggin, J. (2003), ‘Public investment and the risk premium for equity’, Economica, 70(February), 1–18.
Of course, these issues are controversial. But by your own criterion (at #41), you ought to note this rather than saying that the position of the economics profession is clearly settled.
IMO Richard Tol is right. Stern has admitted that in practice (as opposed to his theory)he used a discount rate of 0.1% to obtain his present value of damages of climate change, at less than 1% of GDP in 2100, of 5-20% now. Proof: we know what GDP is now, and so we know what 5% of GDP is now. Name the discount rate that produces the Future Value in 2100 of that PV now which is consistent with Stern’s projections of damages in 2100. And RT is right that in general the real bond rate has never been 0.1% pace JQ. BUT, there is always an exception, namely Japan where the real bond rate is likely negative and has been for the last decade. By coincidence, there will be no Japanese surprisingly soon given their lower than replacement birthrate, which has accelerated since their negative real interest rate policies. So what Stern and JQ propose is that we should all adopt their interest rate policy, which means eliminating both future generations and any damage to humans from climate change since with zero savings there will be no humans by 2200 (which is Stern’s endgame date).
Richard, since Tim cites you as claiming that the real discount rate in Stern is 0.1 per cent, I’ll leave it to you to correct him. I’ve given up trying.
“AEI” and “Greenpeace” as political brands?
“Greenpeace” and the “American Enterprise Institute” seem to project different brand images.
The “Greenpeace” brand is unabashedly a strong value statement, a commitment to the environment, almost regardless of its economic consequences. An environmental movement, it is associated with high profile emotional appeals. It is almost a faith-based movement that does not feel itself bound by science or evidence-based arguments. Its methods are political rather than rational.
Given the Greenpeace brand, it would surprise me somewhat to find Greenpeace taking the trouble to subject its claims to scientific methods.
The “American Enterprise Institute” brand image is that of a think-tank. It also unavoiodably stands for a strong value proposition. While its methods are also political, as a think-tank, it is bound by rigorous rules of enquiry. Presumably it would not compromise on rigour and rationality to advance its aims.
Given the AEI brand, it would surprise me somewhat to find the AEI violating rules of rational evidenced based enquiry to advance its values.
Are Greenpeace and the AEI both in the process of rebranding? Is one moving its brand position away from unabashed emotionalism towards an appeal to rationality? Is the other brand moving away from its values of enlightened inquiry to a faith-based movement?
The conduct being attributed to the AEI seem to be undermining its brand image as a think tank, and perhaps that is the problem. It may be in danger of pursuing short term gain at the expense of undermining its brand as a think tank, a dilemma that commercial orgaisations confront all the time. Perhaps the AEI is not quite sure what its core values are. Perhaps the AEI is in the process of rebranding to a more explicitly value-based movement, like Greenpeace? Or perhaps it has reached that position already in the public mind?
If the AEI is rebranding, those of us who deal with the AEI should take care to ensure we do not inadvertently become associated with a brand that is inconsistent with our values!
Well John you don’t have much luck explaining your view of the Stern Review’s choice of discount rate not merely to me but also to Nordhaus (“The Review proposes using a social discount rate that is essentially zero”, 2006:6; and “dsicounting involves a concept caleld the pure rate of time prefernce, I will call this the “social discount rate” for short, … and refers to the disount in future utility or welfare (ibid), or to Stern who uses exactly these terms and whose Table 6.1 explicitly states he used a social discount rate of 0.1. You yourself here at 47 state again – ” until I pointed it out, you [Richard Tol] appeared to be unaware that the discount rate used by Stern was about equal to the long-term real bond rate [which you have claimed elsewhere is or should be close to 0.1]..” Yohe (in the Integrated Assessment Journal, 2006: 68) also refers to “the 0.1% discount rate employed in the Review”. We all look forward to your forthcoming blockbuster that will inform us what was the rate used by Stern without himself being aware of it to discount future utility costs of climate change to PV today.
‘the long-term real bond rate [which you have claimed elsewhere is or should be close to 0.1].”
Sadly, no.
Tim: Stern used a utility discount rate of 0.1% per year; a money discount rate of 1.4% per year.
KY Choong: I fully agree with you on Greenpeace. You may be a bit optimistic on the AEI.
51.
John, I read these papers. None of them contain any empirical material on the pure rate of time preference. Did you refer me to the correct papers?
Richard, I didn’t mean to say that these papers have empirical material relating to the pure rate of time preference considered in isolation. But in any plausible CCAPM model with rising incomes, the real bond rate provides an upper bound for the pure rate of time preference, so understanding the determination of returns to bonds and equity is crucial if you are going to get this issue right.
More importantly, what matters is not the pure rate of time preference but the appropriate rate of discount for public projects. The Economica paper makes a case that the appropriate rate is close to the real bond rate, which is obviously relevant to the current debate.
All true and old hat, but this does not justify Nick Stern’s discount rate.
What these and related papers do is to demonstrate that attempts to dismiss Stern’s discount rate as “inconsistent with observed market behaviour” don’t stand up. Some market outcomes, like the observed bond rate, give at least prima facie support for Stern’s view, others don’t, and working out which ones should guide policy is a difficult and unresolved problem.
John,
You missed the point entirely.
Yes, the social discount rate of money should not be too far from the risk-free bond rate. Bob Lind and all that.
All empirical studies of the risk-free bond rate that I have seen and seen quoted, show that the pure rate of time preference is much greater than 0.1% per year. You have not provided a single piece of empirical evidence to the contrary.
As far as I know, you have not conducted empirical research in this matter, and your gut-feeling dismissal of a large body of fine research is rather worrying.
Even more worrying is that you side with Broome and Stern and try to elevate your personal preferences to the social norm.
Where I came from, first-year students in the social sciences are taught the fallacy of introspection. You must have slept through that particular lecture.
That’s the friendly way of putting this. A more honest assessment would probably land me in court.
JQ,
Drudge has all sorts of ‘skeptics’ lined up today:
http://www.drudgereport.com/flash.htm
http://www.washingtontimes.com/national/20070211-112902-4433r.htm
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/02/11/warm11.xml
http://www.timesonline.co.uk/tol/news/uk/article1363818.ece
Notwithstanding the annoying continuing prevalence of ‘skeptics’ incapable of conceding any ground to the scientific consensus, or for that matter willing to betray anything less than perfect confidence in their Panglossian forecasts, one makes a fair point: to say that the science is ‘settled’ is to make a statement at odds with scientific history. So the question is, does it make sense to change the way we speak about the science of AGW from its being ‘settled’, to one that appropriately relates the policy implication of the science without overstating our grasp of natural phenomena? A technicality to be sure, but it’s a slippery slope when rhetorical imperative trumps factual accuracy (as AEI, Exxon and Co. no doubt attest).
Richard, you don’t exactly win friends and influence people with this kind of thing.
My requests to you for citations to this large literature on the pure rate of time preference you keep referring to produced nothing of substance. I’ve been reading the discussion of Stern reasonably closely and have seen nothing much along these lines.
RE discount rates, I don’t see as there are any ‘risk free’ investments to be had these days from which to infer a risk free rate. Between the very real risk of dollar flight and the inevitable banka-rupta stress such an event would put on financial institutions currently flooding the market with ‘low risk’ overnight funds, repos, commercial paper, cds, demand deposits, etc., are there really any instruments out there that are truly ‘risk free’?
Some would argue, probably correctly, that the amount of return the average investor would currently give up for the mythical risk free asset vs. the actually existing and (currently perceived to be) close enough alternatives is probably very low. After all, required rates of return are historically compressed, so the argument goes. But when you consider that gold yields nothing- i.e. bears a 0% required rate of return- and yet it has more than doubled in 5 years, you have to wonder if the market doesn’t perceive risks greater than the inability of borrowers to repay.
In any case, as ever, the appropriate discount rate to use is the one that applies to the opportunity cost of the project. Given that there appears to be far more capital than investment opportunities in today’s world, spending on global warming would appear to have a low internal rate of return hurdle to meet indeed…
John,
I remind you that I earlier referred you to the works of Newell and Pizer, and Evans and Sezer — and also said that with a bit of effort you could trace this all the way back to via Koopmans and Ramsey to Aquinas, Augustine and Aristotle. If you are lazy, you could try Arrow’s chapter in the IPCC SAR; but the book by Portney and Weyant is also well worth a read.
In case you forgot, Arrow also gives the Ramsey / neo-classical equation for the relationship between the money discount rate and the utility discount rate.
Richard I think your arguments suggest you must believe that “democracy” means leadership by the mob. I don’t myself think that’s the strength of democracy, which to me has more to do with the fact that at regular intervals people do get to vote freely for their leaders. Consider for instance: you must be aware that the behaviour of politicians changes between the times when they’re running for office and later, if they’ve been elected. They know that to be elected they should act as though the voters’ pure rate of time preference is probably something worse than 25%pa – the punters want things and they want them NOW. As a consequence politicians’ promises at these times are known in many parts as “pork-barrelling” and they and the electorate act as though what mostly matters is “what can you do for me today?”
Governments however collectively know better than the punters who elect them, and consequently governments when investing for the future act in a well founded belief that time preference must be much closer to zero. Some especially far sighted governments, such as Japan’s after WWII, behave as though the pure time discount rate ought to be less than zero.
Around these parts you are of late seeming to argue that the world ought to prepare for war, famine, drought and disease – the big issues that is – as though they deserved the same PRTP as do say my mum and dad’s decisions about consumer discretionary expenditure. I think you’re mistaken. Indeed I think you shouldn’t forget that any economist who really believed that her investment modelling, her theories of optimal capital allocation, were a faithful reflection of the realities of her life – wouldn’t have children would she? That this is a simple and time-honoured criticism of economics doesn’t make it a trite one – economics is not called a “dismal” science for no reason at all, my friend.
Richard, since we didn’t seem to be getting anywhere, I decided to look at your own work on this topic. The first paper I looked at in Environmental Science and Policy (2006) gave the following discussion
“The PRTP is the ‘utility discount rate’,which reflects our time preference for utility. Estimates of utility discount rates for individuals are almost always positive – an estimate of 1.5% is considered plausible for the UK for instance (HMTreasury, 2003) – for the simple reason that humans prefer good things to come earlier rather than later. Given the inevitability of death for individuals, a preference for benefits to accrue earlier rather than later is entirely sensible. At the social level, however, the arguments are more nuanced, and indeed whether or not the PRTP should be equal zero has been debated by philosophers and economists for decades. Cline (2004), for example, proposes to use a zero PRTP in evaluating climate change policies. Reasonable ethical considerations suggest using a zero PRTP—a positive PRTP involves placing a lower weight on the welfare of future generations, which is impartial and contrary to intergenerational equity. However, there are also persuasive arguments for employing a very small positive PRTP.” (emphasis added).
and considered PRTP rates of 0,1 and 3 per cent.
I don’t find anything to disagree with in your discussion, and I think the range of PRTP rates you have considered here is reasonable. But I find it a bit hard to square with some of the claims you’ve made in this discussion.
Frankis: Indeed.
Democracy implies that governments should not stray too far from the will of the people, and if the people discount their future, so should their government.
Of course, opinion leaders are entitled, and should be encouraged, to try and educate the great unwashed.
That is not the same, however, as picking one particular opinion leader and forcing her opinions on the rest of us.
And that is essentially what Nick Stern did. He picked the opinion of John Broome, an unelected academic, and used it to proscribe climate policy. Fortunately, Stern failed. That does not make his behaviour acceptable, though.
By the way, Broome does not like democracy either. He thinks that votes should be proportional to learning, and that philosophy professors at prestigious universities should get more votes than anybody else.
Well, Richard, who is it apart from Broome that you think may feel they deserve more votes than the rest of us? I’d have thought we’d agree, actually, with something along the lines of “Democracy’s the worst system in all the wide world … but for all the rest of ’em”.
I also assume that we all agree that some discounting of the future is almost always appropriate, with argument to be joined as to the appropriate rate. But are you implicitly suggesting that an appropriate PRTP for say long term infrastructure investment ought to be roughly the same rate as that which studies or polling might indicate to be the public’s preference for things like consumer discretionary spending? I’d have thought not.
Frankis: You and I agree. Private and public discount rates should diverge, and they do; specifically, public discount rates should be and are lower.
That is not the same as saying that they should be as low as Stern’s.
What discount rate did Stern use to obtain his claim that “comparing the social costs of carbon on a BAU trajectory and on a path towards stabilisation at 550 ppm CO2e, the excess of benefits over costs, in NPV terms, from implementing strong mitigation policies this year (2006), … the net benefits would be of the order of US$2.5 trillion”? {Stern, xvii).
Tim:
We do not know. At one point, Stern claims to use Ramsey discounting, with the CRRA of one and a PRTP of 0.1. That is, the money discount rate is 0.1 plus the region-specific growth rate of per capita consumption. At another point, Stern claims to use a 1.4% money discount rate throughout. 1.3% is the assumed average economic growth rate for the world. The two are quite different really.
Many thanks, Richard – in short the discounting in Stern’s Review is a muddle, one of many! Another is the frequent comparisons of stocks with flows, as in the quote, where NPV (a stock) is related to GDP (a flow).
Richard- based on your comment and considering forecasts of demographic growth of about 50% over the next 45 years or so, doesn’t a 1.4% ‘money’ discount rate imply a higher PRTP than you, apparently, find reasonable?
Btw, this discount rate mumbo jumbo is economics at its most sclerotic. No one can say for sure what the feedback effects of AGW are- assuming of course, it’s really going on- and some have demonstrated that these could be cataclysmic, notably including the release of massive volumes of carbon trapped in ice/permafrost reservoirs. So, please the experts, is there any consideration given to the empirically observed exceptional risk aversion that individual’s have to extreme events in Stern’s analysis or any others, or are we trying to make policy decisions based on fanciful linear preferences? Do we really have to stretch to come up with extreme sacrifices people are willing to make to ensure the continued existence of their families, cultures and nations? Anyone here familiar with WWII?
Paradoxically, if anything, all of the effort to quantify the cost of safely probable outcomes seems to have slowed efforts to turn the bismark around.
Majorajam:
The growth rates I quoted are all per capita.
Stern uses a rate of risk aversion of one, which is indeed on the low side, and, surprise surprise, works to increase his damage estimate.
BTW, Weitzman has joined the crowd of Stern-bashers:
Click to access JELSternReport.pdf
I’ve read Weitzman’s paper. He sent me a copy for comments and I agreed with nearly all of it. In particular, I agree that Stern’s treatment of risk is a somewhat unsatisfactory attempt to respond to the weakness of current methods in dealing with long-tail events, something I’ve posted on quite a few times. There is a difference between disagreeing with Stern on some points (as Weitzman does and I do) and being a Stern-basher, obviously an accurate characterization of your own position.
Also, can I quote you in support of the existence of a strong case for a zero rate of pure time preference, or is the para I cited above not an accurate summary of your views?
Thanks for that link to Weitzman Richard. Having taken a brisk look through his draft report I’d say he’s worth quoting so (cherrypicking furiously let me tell you):
…
…
…
I think (on admittedly cursory inspection but I believe I’ve just accurately conveyed his take-home message with the quotes above) it’s a very good piece of criticism of Stern that, better still, makes some cogent points in its own right. I’m with him.
Richard,
Great catch. The paper reads like the iocane powder battle of wits dialogue in the Princess Bride. Nevertheless, I’m not sure I see how it falls in the genre of Stern bashing- and certainly not by virtue of discount rate. Notably, if you agree that the returns associated with public projects are not highly correlated with returns to the economy as a whole, and are not sitting around waiting for 6% risk free returns to materialize, presumably alongside Elvis in a flying saucer, according to Weitzman you end up with a Stern-esque discount rate (1.7% using a correlation value that strikes me as far too high).
Of course you are correct in that the paper is (persuasively) dismissive of the way in which Stern arrives at the parameter values used in his analysis, even going so far as to suggest a rather plausible rationale for his distorted choice of parameter values. And if he is indeed correct in that rationale, I am sympathetic to Stern. Before I get to that, I figured I’d share with you this bit of Weitzman’s work that you’ve so clearly overlooked:
The general point is that from limited empirical data alone one cannot acquire sufficiently accurate information about the probabilities of tail disasters to prevent the expected marginal utility of an extra sure unit of consumption from becoming unbounded whenever there is positive relative risk aversion. This mechanism explains the asset-return puzzles for reasonable values of p and n as being due to a fear of relatively rare tail disasters that is theoretically difficult or impossible to eliminate when the underlying structure remains uncertain. The same general mechanism applies to climate change as a specific application. Structural uncertainties about what global warming will do to the left tail of the g-distribution are quite naturally modeled as if caused by limited experience, which makes it all but inevitable that this aspect is critically important because it can so easily drive the outcome of any cost-benefit calculation. Therefore, to ignore or suppress the significance of rare tail disasters in an application of expected utility theory like cost-benefit analysis of climate change, where there is so obviously limited data and limited information about extremes, is to ignore or suppress what theory is telling us loudly and clearly is potentially the most important part of the analysis. While it is always fair game to challenge the assumptions of any model, when pure economic theory proves a generic theorem (like “free trade is Pareto optimal”) the burden of proof is commonly taken as resting on whomever wants to overturn the result in a particular application. The take-away message here is that the burden of proof in the economics of climate change is upon whomever wants to model optimal-expected-utility growth under endogenous greenhouse warming without uncertainty tending to matter more than risk. Such a center-of-the-distribution modeler needs to explain why the inescapably-thickened tails of the posterior-predictive distribution, for which the thick left tail represents rare disasters under uncertain structure, does not play a critical role in the analysis.The Review puts it directly: “Averaging across possibilities conceals risks. The risks of outcomes much worse than expected are very real and they could be catastrophic. Policy on climate change is in large measure about reducing these risks. They cannot be fully eliminated, but they can be substantially reduced. Such a modeling framework has to take account of ethical judgements on the distribution of income and how to treat future generations.”
All that said, I have to wonder whether this ‘critique’, which as per those passages is actually more a critque of the Stern bashers, will help or hurt. If the Stern ‘backdoor’ methodology has proven to be insufficient to get the clinically intransigent skeptics on board, how is a prescription for a ‘middle course’ going to get us off our hands? After all, Pangloss is sure to make hay with anything that leaves the possibility of a sunnier tomorrow. Meanwhile a few billion more for Exxon. All of which gives you a strong dose of the exasperation that Weitzman sensed in the Stern report. I for one see it as beyond obvious that something needs to be done about climate change- in the same way and directly analagous to my preference for looking out for my children before my net worth. Yet wherever you look, people with no survival instincts are busily obfuscating away. Present company excluded of course.
Upon further review, my html formatting errors ate some of my comment, especially the distinction between the two cited passages, the second (starting from “The Review”) being the passage in Stern’s review cited by Weitzman that hinted at his underlying justifications.
Btw, I should point out that my agreement with Weitzman was clear from my prior comment about risk aversion, made before I read his paper, despite the fact that his thesis regards uncertainty. I say that because the two concepts are to some extent interchangeable- greater risk aversion to downside/leftside outcomes impact policy recommendations in the same direction as higher probabilities of those outcomes (and there are insufficient degrees of freedom in the formulation to determine which notion is responsible for empirical outcomes).
Weitzman is not a “Stern basher”. Far from it.
The Stern bashers are those who variously claim that: climate change is not occurring, or that if it is occurring it is not caused by human activity, or that if it is occurring and caused by human activity, nothing should be done about it.
Weitzman’s excellent paper says none of these things. His view is that “the world needs desperately to start confronting the reality that burning carbon has a significant externality cost … establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate change policy”.
If this isn’t Stern’s key message, what is?
Weitzman’s disagreements with Stern, seen in the context of the major issues that are stake, are mere technical quibbles.
At three points, Weitzman says that Stern reverse-engineered the assumptions to reach the desired conclusion. He says that Stern fails miserably by several orders of magnitude. He refers to the Wizard of Oz. He refers twice to a priori philosopher-king-like arguments, and calls it a decidedly-minority paternalistic view, and accuses Stern of imposing his possibly less-representative views on the rest of society. He describes Stern’s choices as picking the gloomiest possibilities as base case scenarios.
Ringing endorsements, each and every one of them.
And yes, Weitzman argues towards the end that Stern is right for the wrong reasons. Seeing that glass as half-full is a bit of a stretch.
77.
I’d be happy to be part of a survey that measures time preference. However, to stay with Weitzman, my views (like Stern’s) are utterly unrepresentative.
Richard Tol here and Martin Weitzman (JEL forthcoming) have clarified the main issues concerning Stern’s use of discount rates, so it now appears that he must have used a “rate of interest� of r=1.4% to achieve his NPV of the net benefit of climate damage avoided by 2100 as of 2006 (in Ramsey’s equation r = p + ŋg) and NOT the “pure rate of time preference� itself (p = 0.1) (where ŋ is either the elasticity of marginal utility or equivalently the coefficient of relative risk aversion and g is the rate of growth of consumption at 1.3% pa). For Stern’s statement (p.xvii) that the PV of climate damage avoided to 2100 less the costs of avoidance would be US$2.5 trillion as of 2006 is only consistent with a discount rate of 1.4% p.a. for “goods�, i.e. consumption (using an estimate for world GDP of US$36 trillion in 2006).
But my earlier point that comparing the NPV of a future flow of net benefits with current GDP is invalid, and wilfully designed to inflame debate, remains valid. The NPV is capitalization today at the chosen discount rate (Stern’s 1.4% for “goods�) of the net flow of the costs and benefits of avoiding damage from climate change to 2100. That means it should not be compared with a FLOW concept like GDP (i.e. income) but with the stock of CAPITAL that produces that income. It is fair to assume that world GDP represents a return of 5% on the world’s current stock of capital, so that if world GDP in 2006 was US$36 trillion, then the stock of capital in 2006 was US$720 trillion, and the net PV benefit of avoiding the alleged costs of climate change is Stern’s US$2.5 trillion/US$720 trillion, or 0.35% of the capital stock, a much less scary figure than the 5-20% of GDP “now and forever� that he dishonestly trumpeted.
As I think I’ve pointed out before, the stochastic and variable flow of net benefits/costs is converted into a flow set at a constant proportion of GDP. You and Richard may not like the parametric assumptions but there’s no dimension problem here – JQ
Richard,
You have failed by several orders of magnitude at reading comprehension. The Wizard of Oz was a whimsical jibe aimed at the ‘black box’, not Stern himself. And no, Weitzman does not claim that the reviews findings were “reverse engineered” anywhere, much less on three occasions. He does find his choice of parameter inputs a stretch which he attributes to Stern’s personal concerns (whose rightful analytical place is within a methodology that focuses extensively on the large fat tail risk). That indeed is not flattering, however certainly falls short of the charge of reverse engineering, (meaning denialists monopoly here is safe).
Interestingly enough, as I mentioned, Weitzman also demonstrates that low estimates of p and n objectionable to Stern bashers, (which is to say, that Stern bashers are clinging onto for dear life), are not necessary to employ a discount rate in roughly the same ballpark as that he uses, (uh oh!). The first conclusion in this regard is the correlation of the g variable to the return to global warming prevention- given that this is likely to be relatively low when you consider the predicted fallout, (he gives the impact on land use of rising sea levels as one example), the appropriate discount rate drops dramatically. So will it drop further when you consider the uncertainty around estimates of r.
That leads nicely into Stern’s “failure” of several orders of magnitude. A wily distortion if there ever wasn’t one. Is this by chance the passage you are referencing?
As will later be elaborated, there are other empirical calibrations of taste parameters to stylized economic facts, which arguably are far more directly relevant to discounting investment possibilities than observed savings behavior and for which both sets of taste parameters (Stern and non-Stern) fail miserably by several orders of magnitude.
Figures. Not that the denialist camp mind if you bash the folks their busily celebrating, so long as you also bash the guy whose conclusions they don’t like. After all, confusion is good. In any case, in case you missed it, the bookend to the above passage is this:
Critics of the Stern Review are fond of pointing out that p = 0, n = 1 is inconsistent with observed economic behavior, especially savings behavior. While this may be true, it is just the tip of an iceberg that threatens all such formulations -not just Stern’s. The biggest and most troubling disconnect between the numbers that theory predicts we should be using for discounting and the actual discount-rate numbers that are out there concerns the asset-return puzzles. These puzzles very strongly suggest that something fundamental is amiss in the paradigm framework for pricing assets and deriving the rates of return that we are relying upon to produce discount rates for evaluating new investment opportunities. For example, perhaps the taste parameters p and n that we are commonly using (here p = 2% p.a. and n = 2) are wrong. If we treat (4) and (5) as two equations in two unknowns (p and n), we can then invert the two equations to back out the hypothetical values p^ and n^ that would “explain” the stylized-fact empirical observation that rf = 1% and re-rf = 6%. When this is done (for u = 2%, sigma = 2%), it produces the mega-puzzle that the estimated rate of pure time preference is p^ = 151% per year and the coefficient of relative risk aversion is n^ = 150… So much for the fantasy that values of the taste parameters p and n should be chosen to be consistent with the revealed-preference stylized facts of economic behavior!
Which pretty well lampoons the Stern critics I’d say, right smack in the heart of an analysis that supports Stern’s recommendations, in particular a carbon tax. You did catch that part, right?
So much as well for denialists trying to strengthen their position on the back of academic work that contradicts their worldview.
Marjorie at 85 claims (1) that Stern never did any reverse engineering, and (2) that Weitzman never said Stern did. But in Weitzman we find:
1. page 20 Stern “subliminally picks” whatever values of n that [he] wants to support the activist conclusions that [he] wants to “reverse engineer”, and “here [Stern] is really cooking the books” (by choosing n>1 whenever he wants to show his care for the poor).
2. page 21 choosing n=1 when Stern’s Review wants to “reverse engineer the really low discount rates it needs to prop up its technical case for immediate urgent action”.
3 page 23: “choosing p=c.0, n=1, D/Y = c. 5% in order to reverse engineer the drastic slowing measures” that [Stern] wishes us to adopt.
So dear Marjorie, Weizman does state that on at least 3 occasions Stern did reverse engineer his preferred conclusions. Try using the Find tool in Adobe before you accuse Tol of falsehood.
Moreover neither Tol nor Weitzman is a denialist. Try reading their papers, not JQ’s renditions.
There is more research than Stern’s that has reached similar conclusions but without the same level of stage management.
On earlier blogs of JQs I have remarked that the Energy Futures Forum of CSIRO and partners did an assessment, using risk weighting, of moving from a fairly severe (A2-type as used by Stern) to a 550-type stabilisation where the 2010 to 2050 component was costed. Using UK Treasury Greenbook discount rates (3.5% reducing to 2.5% after 75 years or so) we found that there was a high to very high likelihood that a net economic benefit would be gained by 2100, ignoring allied social and environmental benefits, and without any double counting. The costs of mitigation ranged from 1.7 to 2.6% in 2050. Admittedly the figures are imprecise, but this is proof of concept and will continue to be refined.
Reading the debate here is wearing because the elephant in the corner is that if Stern is wrong, what is different to BS (before Stern)? Within a risk framework, modest assumptions about economic costs and benefits along with associated social and environmental benefits over a limited time frame (year 2100 not the 2180 – 2200 used by Stern), the outcome of mitigation from the reference scenario still looks positive under most values of climate sensitivity, except for the lowest values. That’s what we found, and continue to find under a wide range of circumstances, not just those described in the Stern Review. So discount at roughly 3%, increase mitigation to 2.6% in 2050, and hold damages at roughly 2% GDP for 3 degrees warming in 2100 (the risk-weighting takes account of the range of climate sensitivity producing a large range of warming by 2100) – the argument still holds for a scenario where we go from reference 900 ppm (plausible if India and China move forward, with limited technology beyond 2050 – lots of oil sands and coal – we’re confident about very high pre 2050 emissions with current growth patterns) to 725 based on efforts to 2050 (this accounts for the pre 2050 component on a pathway to 550 ppm ands omits post 2050 benefits).
In a risk framework the risks of acting are much less than those of not acting. Why bang on about Stern? The subject matter is larger than that.
We want to try these methods on more reference and policy combinations of GHG and economy (e.g. high tech beyond 2050/peak oil), to test whether the findings are robust under a broadly acceptable range of possible futures, using sensitivity testing most liberally.
Regards adaptation which has not been adequately costed to date, with Richard Tol making the most comprehensive fist of it, there are two models that are “both” true in some respect. One is the Ricardian model where one goes from one climate average to another, with the economic change being described by comparing the current economic response for both climates, and climate change having to deal with adjustment costs (related to rate of change, addressed conceptually in a 2003 paper by Pr Q). Greenhouse specials such as higher CO2 and more intense rainfall and drought can be added, but exogenously. So can productivity changes not related to climate. Dynamic models (e.g. crop models) are also useful here, but don’t account for adaptation intrinsically – it needs to be added. Neither get the same results, so we have a mismatch between biophysical and economic approaches that needs to be explored.
The other model of adaptation is the coping range model, where the farther one goes from the range that has been adapted to, the larger the damage. This is the model best accomodated in the “burning embers” diagram of the IPCC Third Assessment Report. This fits ecosystems and systems heavily impacted by extreme events (Hmm, a great deal of them). These are impacts that are hard to cost and, some of us argue, should be accounted for in a multi-criteria framework as species numbers etc. rather than being monetised with high value uncertainties.
No doubt both are true in certain situations but we need to understand in which contexts. This is critical to understanding how adaptation and mitigation may best be combined.
To me, the debate has descended to one about the Stern Review rather than the underlying subject matter. It should not stand or fall on the basis of that review, which, at the very least, will serve as a catalyst to broaden and improve the research.
If you post long enough, I suppose you will end up getting caught out on something you misread, mistyped, misunderstood, what have you. That it had to be by Tim Curtain is a humbling experience I will suffer privately. I should point out that I didn’t accuse Weitzman of being a ‘denialist’- quite the opposite. But, as the professor points out, Tim is invariably wrong and would not have wanted to soil his perfect record with a fair correction.
As regards the meaning of my post, it continues to loom over Tol’s position. This boils down to his use of a paper to substantiate a criticism of Stern without noting that it also debunks his criticism. I’m also happy to wrest my rebuke of his sardonic quip on the “Stern’s failure” contortion. And right around now, even I have grown tired of the subject matter.
With that, I’m with Roger Jones- this issue is larger than Stern, and in that context, open and shut as to the case for very significant and very immediate steps to reduce carbon emissions.
Marjorie Jam: that was not a very graceful apology but better than none, so well done! Perhaps you could now help me by pointing to statistical analysis explaining away the not strong and in fact a priori negative correlation between the large CO2 accretions in the northern hemisphere during its winter and the accompanying very low temperatures (minus 20 in Finland last week), and the drop off in those accretions (see the Mauna Loa graphs) just as it starts getting warmer in the north? Would carbon dioxide uptake (strongly denied by Stern) have anything to with the latter? And while you are at it could you kindly cite EITHER the statistical analysis OR the experimental lab data showing why the tiny portion of the infrared spectrum occupied by CO2 has such a disproportionate effect in preventing radiation to space? I am agnostic on these issues so remain to be convinced, with your help. Thanks!
Oh dear. I’ll go ahead and presume you wrote that in earnest, although I know how the lads like to get up to a bit of chicanery. I’m sure you were a hell raiser back in your day.
I’m astounded to hear it was minus 20 in Finland the other day, a usually quite temperate country this time of year. I’m wondering if word has been sent to IPCC that it’s time to pack the bags and go home? My understanding is that they tend to differentiate between weather and climate, but I’m sure you can set them straight. As for your basis for agnosticism, I think I may be able to help you there.
You see Timmy, there are these things called plants. Plants grow better on land than they do on water. This means that there are substantially fewer of them in the southern than the northern hemisphere. As a result, during the northern hemisphere’s winter, the number of CO2 molecules that are being photosynthesized globally drops substantially, which increases its atmospheric concentrations. The effect is quite evident in the data, including by such innovative analysis as bivariate correlations.
See there, that wasn’t so hard. Now you can rest your little agnostic head easier, and maybe even give us a small break from your profoundly ignorant blather.
Hi Marjorie Jam
I see you are not able to cite either experimental or empirical evidence. Do look at Ben Selinger’s book with its chart showing the infrared spectrum and the two skinny slivers where the CO2 is – why does the much larger non-CO2 area which dominates not dominate? Of course if you do experiments with cylinders composed 100% of CO2 you will get the results you want. If you are so smart, do one with a representative sample of the atmosphere.
Best, Tim Curtin
Tim, you’ve amply demonstrated your ignorance of economics, climate science and (in the various Lancet threads I’ve seen) sampling theory and demography. Don’t you think it’s time to expand your horizons a bit? How about string theory, for example – there’s a huge amount of room for ill-informed commentary there.
Look guys just admit it to Tim that Lefties hate people and it is all a socialist/commie scam.
Tim C, John Ray has it all worked out at http://antigreen.blogspot.com/
“This site is in favour of things that ARE good for the environment. Most Greenie causes are, however, at best red-herrings and are more motivated by a hatred of people than anything else.”
you won’t take in anything here, so why not go have a chat with John R? Tell him you did your best but these lefties are just too full of hate to see the truth.
Been having a bit of a read of Wietzman’s paper. It is a good summary of some of the issues to do with discounting that relates to Stern’s estimate that compares business as usual (BAU) costs to mitigation costs. The discussion of the Frank Ramsey equation is quite interesting, and I like the idea of treating growth as a random variable.
Stern’s estimate (using something called PAGE2002) that BAU would cost 5% to 20% GDP while stabilisation would cost -2% to 5% GDP generated quite a few headlines. Politicians like these sorts of estimates, because unless it is obvious to them that BAU costs much more that doing something about it, they probably wont do anything. The problem with using any integrated assessment model (IAM) is that it is modelling a hypothetical situation (be it BAU or a stabilisation level) involving the impact of something as complex as climate change on something as complex as the global economy. This is especially the case when modelling BAU, because of the greater uncertainties associated with high greenhouse gas (GHG) levels.
A good economist would be more interested in comparing the cost of mitiagtion at a particular stabilisation level with the cost of anthropogenic global warming (AGW) at that level. Stern understands this, and throughout the review states that a carbon price should be set which approximately matches the AGW costs. Costing climate change at a particular stabilisation level would have less of the uncertainties (including slightly less discounting issues) than costing BAU.
Unfortunately, much of the discussion about discounting mischaracterises the Stern Review as being built around and dependent on the PAGE2002 IAM estimate. The PAGE2002 model is discussed in Chapter 6 at the end of part 2 of the review. Stern’s most important policy recommenedation is probably that we should aim at a GHG stabilisation level somewhere between 450 and 550 ppm CO2-e. This recommendation is made in chapter 13 at the end of part 3 and the recommendation is made for a host of reasons, of which the PAGE2002 estimate is relativly minor in importance. The most important seems to be the consideration of how the risk of various impacts occurring is associated with various different stabilisation levels (see Fig 13.4 on page 294). At 550 ppm CO2-e, there is an estimated 24% chance that temperatures will exceed 4 degrees C, and exceeding this level increases risks of extremely damageing phenomenea. On page 295 the PAGE2002 model is discussed with respect to stabilisation, where different different temperature increases are costed, which include the mean and 5-95% estimates. For me the most interesting aspect of the stern review is the discussion of the economics of mitigation, most of which also does not depend on the PAGE2002 model.
I don’t have a problem with the low choice by Stern for the pure rate of time preference. It is quite appropriate to take ethical considerations into account when considering questions like this, and it is good that Stern has presented a degree of clarity about ethical assumptions. A problem with using integrated assessment models is that they will cost economic externalities, but generally not environmental ones. How does one cost species loss? The direct economic impacts of the loss of a species such as Sturgeon would include the cost of Caviar that is no longer produced. Some species may contain molecules that contain medicines that have not been discovered yet, so there are those unknown costs. However, valuing the intrinsic value of a species is a profoundly ethical decision, for which the underlying ethical assumptions need to be made explicit. I suspect when these costs are taken into account the cost of climate change is likely to be much higher than suggested by PAGE2002. Of course, by how much depends on one’s ethical world view.
Cost is a function of ethics.
JQ: You are too kind, especially in adhering so scrupulously to the rules of hospitality when inviting contributions to your Blog (by your cookies). Re Iraq and the demography of The Lancet, do you consider it is legitimate:
1. To use a figure for the population of Iraq in 2004 which exceeds the estimates of the World Bank and WHO by up to 2 million and 1.5 million respectively, bearing in mind that when extrapolating from a sample survey of deaths in a population of 12,000, whether the national total is 27 million or 25 million has some significance. Or am I wrong yet again?
2. Is it legitimate to rely on the Lancet’s mortality estimate from its sample for 2002 of 5.0 or 5.5, when the WHO’s life tables for Iraq in 2001 showed a crude mortality rate of 9.3 per thousand? If yes, I am wrong yet again!
3. Does it matter if excess deaths as computed by The Lancet were 633,000 from its baseline or 305,000 using the using the WHO as baseline? If not, I agree I must be wrong again.
4. Does it matter that The Lancet’s sample implied that deaths of those aged 0-14 accounted for 17% of all deaths in 2002, while the WHO showed that this age group accounted for 50% of all deaths in 2001 (unrelated of course to UN Sanctions and the rorting of the oil for food program by AWB et al)? Might this not suggest some need for reconciliation by any sincere demographer? If not yet again I am wrong!
5. Would not a demographer of the claimed standing of JQ think that a total n for all deaths recorded by The LANCET in 2002 of 82 for all age groups was just a touch skinny? Oh dear, I must be wrong again.
Well, Tim, you;re making progress. Five correct statements (or the same correct statement five times) in one post. As you say, you are wrong, wrong, wrong, wrong and wrong. Apply to Deltoid for details.
As regards hospitality, I’ll try to spell it out more clearly. You wore out your welcome here a long time ago with abusive and ignorant comments.
As a general point to trolls, please don’t whine about your treatment here. People who adhere to the rules of civilised discussion will be treated accordingly. Those who don’t will be deleted or mocked, depending on which seems more appropriate to me at the time.
#87
Roger, you’re right. An economic case for greenhouse gas emissions reduction can be made. It was first made in 1977 by Bill Nordhaus, and repeated many times since. 550 ppm can only be justified, however, by cooking the books.
You’re also right that Nick Stern put the economics of climate change on the public agenda. That may be good in the long term. For now, everyone who wants to make an economic case for climate policy first has to explain that Stern is right for the wrong reason, and that makes a lot of people dismiss the case as mumbo-jumbo.
Richard said:
As we are well aware, this figure depends on abatement costs, and the cost of global warming. Lets have a look at the abatement costs, for which I believe the biggest cause of uncertainty is the amount of savings due to energy efficiency, reduced dependency on nonrenewable resources subject to price instability, and other negative costs. There are also possible negative costs when carbon taxes or emissions trading schemes replace distorting taxes such as payroll tax.
Market failures responsible for profitable efficiency measures not being taken up result from market failures such as poor capital allocation, organisational failures, regulatory failures, informational failures, and perverse incentives. Addressing these failures provides opportunities for savings and profits. When sulphuir dioxide emissions were reduced through flexible cap-and-trade schemes, costs were 3-10 times cheaper than predicted.
I understand that you do not believe that there is much opportunity to save money while reducing emissions. In your paper “Modelling the costs of emission reductions: different approaches” Pac. and Asian J. of Energy 10(1) 1-7, you write:
I didn’t see any just justification or citation for this statement, and would be very interested why you believe this to be the case. I also noticed in your paper “Methane Emission Reduction: an Application of FUND” Climate Change 57: 71-98, 2003, that when costing methane emission reductions in the Netherlands you “add an arbitrary DGl. 165 per kilotonne of methane to all costs of all options, so that the cheapest reduction costs DGL 5 per kilotonne of methane (instead of a negative DGl. 160).” citing that there may be missing costs. This would lead to about 13% of methane emission reductions having positive, rather than negative costs.
#98
There are three sources of negative abatement costs.
First, engineers often make Quigginite assumptions, the sort that will not stand scrutiny but do put the project in a positive light.
Second, analysts often confuse the base scenario with the frozen scenario. In the base scenario, there are typically massive emission reduction (all for free) compared to the scenario that has today’s technologies and efficiencies but tomorrow’s economy and population.
These two are common mistakes, and they are just that. This is the sort of mistake that John Quiggin or Nick Stern would make. Plain silly, and not necessary as there are a thousand papers showing just how wrong it is.
Third, the tax sytem is distortionary, and green tax reform may improve that. The theoretical and empirical evidence has that such tax reform has to be very well-informed and carefully implemented to acheive this effect. To date, each climate policy proposed or implemented increased distortions.
So, this third option is highly unlikely.
Richard-
That’s a garbled mess. As I see it, your odds of writing clearly go up an order of magnitude when take the keyboard out of your mouth. Not to mention, with all that rabid froth you’re libel to electrocute yourself and break Tim’s heart.
By the way, I have learned a great deal from reading your posts here. For example, I have learned how game theory shows that carbon treaties aren’t plausible, even as the many countries/US States that are currently taking serious steps to reduce carbon emissions may be under the impression that some aren’t pulling their weight. I have learned that the pure rate of time preference cannot be zero unless you are an ideologue, though the reason why and anointed parameter value probably got chewed up along with the space bar. I have learned that Greenpeace is just as much a menace to the public interest as are the oil companies, though again you wretched when it came to siting equivalent instances of influence peddling. I have learned that it is good practice to cherry pick passages from academic work manifestly at odds with your own professed position to denounce academic work manifestly at odds with your own position. And on account of all that new knowledge, I can truly say I understand what compelled my grandmother to sometimes remark, “the sights you see when you’re out without your gun”.
Were that your academic career had been as productive.