The Stern Review on MER/PPP

John Quiggin34 Comments

One of the issues that’s been debated at length here is the choice of exchange rates to use in converting different currencies for projections of future economic growth and energy demand. The scenarios developed by the IPCC have used market exchange rates (MER) Ian Castles has argued, in very strong terms, that it’s crucial to use exchange rates adjusted so as to exhibit Purchasing Power Parity (PPP). In my submission, I made a couple of points. First, that there is no uniquely satisfactory method of obtaining PPP exchange rates. Second, and more importantly, the choice doesn’t make much difference to projections of energy use or CO2 emissions, as long as the same values are used consistently. A method like MER, which tends to overstate income differences between poor and rich countries relative to PPP will yield a lower income elasticity of demand for energy. And since MER data have been, until recently more readily available for more countries, there are some practical arguments in favour of using them.

That said, there are a couple of reasons to favour a move to PPP-based scenarios. First, since these are now becoming the norm, continued use of MER numbers is likely to cause confusion. Second, while the crucial numbers regarding emissions aren’t much affected (and any error may be either up or down) other variables, particularly those used in calculations of economic welfare, might be significantly affected.

In this context, it’s unfortunate that the debate has been seized upon by denialists as a basis for attacking the whole IPCC process. The energy that’s gone into pointless disputes could have better been used in a constructive attempt to improve things.

Where does the Stern report come out on all this? Pretty much right in my view. Key quote

efforts are under way to improve the provision of PPP data. The International Comparison Programme (ICP), launched by the World Bank when Nicholas Stern was Chief Economist, is the world’s largest statistical initiative, involving 107 countries and collaboration with the OECD, Eurostat and National Statistical Offices. It produces internationally comparable price levels, economic aggregates in real terms, and Purchasing Power Parity (PPP) estimates that inform users about the relative sizes of markets, the size and structure of economies, and the relative purchasing power of currencies.

In the IPCC SRES scenarios that use MER conversions, it is not clear that the use of MERs biases upwards the projected rates of emissions growth, as the SRES calibration of the past relationship between emissions per head and GDP per head also used GDPs converted at MERs as the metric for economic activity (Holtsmark and Alfsen (2003)). Hence the scenarios are based on a lower estimate of the elasticity of emissions growth per head with respect to (the incorrectly measured) GDP growth per head. As Nakicenovic et al (2003) have argued, the use of MERs in many of the IPCC SRES scenarios is unlikely to have distorted the emissions trajectories much.

I should point out that the World Bank ICP is a successor to the earlier ICP work of Heston and Summers who initiated the idea of systematic PPP comparisons and produced the well-known Penn World Tables. Still, as the quote makes clear, Stern can speak with authority on this topic.

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The Stern review -first impressions

John Quiggin26 Comments

The Stern review report is big, and I haven’t had time to digest more than a little bit so far. One point to make is that the apocalyptic numbers that have dominated early reporting represent the worst-case outcomes for 2100 under business-as-usual policies. But even looking at the less dramatic cases, the same basic messages emerge.

  • We can stabilise CO2 levels over the next fifty years at very low costs of around 1 per cent of GDP.
  • The costs of doing nothing are large and unpredictable
  • The costs of stabilisation will be greater the longer we delay
  • Poor countries will be worst affected

More on all these points soon.

Stern report previewed

John Quiggin65 Comments

With the major issues in the scientific debate over climate change having been resolved, attention has now turned to the economics of stabilising the climate and to the costs of doing nothing. Following the House of Lords economic committee inquiry last year, which spent most of its time promoting denialist attacks on climate science, and had little of value to say on the economic issues, the UK government commissioned Sir Nicholas Stern, former chief economist of the World Bank to look at the issue properly.

His report is about to be issued in the UK today, and previews have given the major conclusion – it’s much more costly to do nothing than to do something. According to the reports, the estimated cost of stabilising CO2 emissions is 1 per cent of GDP by 2050. This is at the low end of the range of estimates I’ve obtained from back-of-the-envelope exercises.

The striking feature of the reported findings relates to the potential costs of doing nothing, from 5 per cent to 20 per cent of GDP. I assume the latter estimate is based on worst-case scenarios, which have relatively low probability but are nonetheless important in working out an expected cost of doing nothing.

The credibility of the report has been enhanced by the first critical responses noted in the press. One is from Exxon shill Steven Milloy, who repeats the discredited attacks on climate science he’s been pushing for years, with a few new variations. He even drags out cosmic rays. The Guardian mentions his affiliation with the Cato Institute, apparently unaware that they dumped him a year ago over his unethical behavior.

Even more interesting is the reference to “a group of nine rightwing economists”, including the former chancellor Nigel Lawson, who criticised Stern’s discussion papers in January. What’s not noted here is that it was Lawson who launched the House of Lords exercise, rigged the process to ensure that most of the witnesses were denialists and drafted the carefully ambiguous discussion of the scientific issues which, on the one hand, correctly disclaimed any relevant expertise on the part of the committee, and on the other hand, dishonestly promoted the denialist view that the debate is still wide open. Now that this exercise has turned out to be a massive own goal for Lawson and his allies, they are naturally upset.

More tomorrow (or maybe later today) when the report is released. In the meantime, responses to Stern’s earlier discussion paper, including mine, are here

Format

John Quiggin9 Comments

I just upgraded WordPress and, as usual, I’m a bit slow about restoring my formatting. I’ll try to get the essentials like recent comments back soon. In the meantime, feel free to make suggestions.

Bookplug

John Quiggin16 Comments

My former ANU colleague and occasional co-author Bruce Chapman is well-known as the progenitor of the HECS scheme, and as a proponent of income-related loans more generally. He and I along with Arie Freiburg and David Tait worked on a proposal for income-related fines for criminal offences a while back.

Both schemes and others are discussed in Bruce’s new book, to be launched next week. It should be well worth reading.

Hecsbooklaunchoct272006

Weekend reflections

John Quiggin38 Comments

Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.

European Russia

John Quiggin4 Comments

My knowledge on this topic is limited, so perhaps others won’t be surprised as I was, by the information in this Washington Post story that Russia, as a member of the Council of Europe, is subject to the European Court of Justice Human Rights, and that

Russians now file more complaints with the court — 10,583 in 2005 — than people from any of the 46 countries that make up the Council of Europe, according to court statistics

Among other stats, the Court has issued 362 rulings on Russia, all but 10 going against the government.

This and other things point to the fact Russia’s primary strategic relationship nowadays is not with the US, where things are still viewed through the prism of residual Cold War rivalry, but with Europe. And this relationship is full of ambiguities, starting with the old question of whether Russia is part of Europe, part of Asia, or belongs in a special category of its own.

This is a big problem on both sides, but it’s hard to see any positive alternative to the logic of gradual integration implied by membership of a growing range of European institutions, and ultimately of the EU itself. Europe could try to draw permanent lines that excluded Russia (and maybe also Belarus), rather than deal with the problems of integration, but that seems unlikely, even with the recent backlash against expansion. More plausibly, Russia could turn in on itself, perhaps repudiating bothersome institutions like the Court of Human Rights. That would be bad for (nearly) all concerned, but clearly there are powerful forces in Russia pushing in that direction.

As I said, lots of people here understand more than me about all of this, so I’d be interested in comments, pointers to further reading and so on.

Less than zero

John Quiggin53 Comments

There’s been a bit of publicity about a recent study of the effects of the Australian gun buyback. The central finding of the authors was that, while gun homicides declined after the buyback this was merely a continuation of a pre-existing trend.

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I’m dubious about the whole approach. In the absence of a well-founded explanation for the trend, there’s no reason to treat maintenance of the trend, rather than the level, as the null hypothesis. The rate of gun homicides has clearly fallen (the authors find the same for suicides), so the data supports the policy, contrary to the claims.

And eyeballing the data, I’m doubtful that it’s even sufficient to establish the existence of a declining trend for the period up to and including 1996. It might be argued that the Port Arthur massacre in 1996 should be excluded and that a downward trend would then emerge, but, given that this was the even that precipitated the buyback, this seems like begging the question to me.

In any case, Andrew Leigh has the ultimate knockdown objection. If you look at the confidence intervals, the only way the gun buyback could have been shown to work, on the authors’ tests is if gun homicides fell below zero by 2004. Clearly, even if you buy the declining trend story, a linear trend is just wrong.

Mark Bahnisch has more, though quite a few commenters don’t seem to appreciate how conclusive Leigh’s refutation has been.