Monday, June 20, 2011

Thesis = Submitted

Feels like a fat bloody gorilla climbing down off my back.

I'm exhausted after working very late over the last couple weeks to get everything done in time... And also slightly terrified to look over it again, just again in case I spot the obvious mistake that all my proof-reading missed.

[Side note.There must be a law along the lines of: The probability of spotting an error increases exponentially after the point of submission. If not, I'm claiming it.]

But, that's just being dramatic, really. Overall, pretty chuffed with how things went and hopefully round off my MSc with a good mark on the big one.

Walked out of the post-office (I had to mail three hard copies from here in addition to an electronic version) half an hour ago. Felt that June Lisbon sunshine on my face and realised that I've got eight weeks of holiday ahead of me. Let the good times roll.

Thursday, June 16, 2011

Cover Thursdays - Poncey Special edition

I'm in a world of thesis pain at the moment. My hand-in is just around the corner and I'm frantically making some revisions based on the last set of my supervisor's comments, fine tuning the writing, etc, etc. Boo hoo, I know.

Fear not, however, as I have secured the guest blogging services of regular music pundit, Poncey Malherber. Here he is and please direct all praise/criticism his way. (I'm too busy even to "edit vociferously"!)...


Stickman is using his 'thesis' as an excuse and informs me that he won't be writing a Cover Thursdays post for the second week running. I find both the situation and the excuse quite unacceptable.

I also note that he's had time for plenty of what I like to call his Ecos malarky which, according to stickmansdad, might be breaking ground in the fight against insomnia. But I'll put that down to market forces.

There's no better platform for blog bashing than here, but let's put that aside for this sneaky little Joni Mitchell cover which should be enough to start some sort of musical debate.

I only found it this morning so won't be able to comment on it's longevity. The original, however, is an all time classic. And coming from a guy who doesn't enjoy female vocalists as a rule -- is quite some endorsement.

I'll tell you what I'm blathering about, man.

Poncey Malherber


PS - Stickman rudely contacted me and told me that Thursday covers require TWO cover versions. No thank yous. No 'awesomes'. Just a 'send another one or else' type of vibe.

Two can play that game. Here's my second cover:

Seeing as this is my guest post I'll say that I reckon Eddie Vedder is one of the greatest voices and talents in musical history, but is well below average in the song writing department. Stickman disagrees (and will probably edit vociferously), but there it's out there.

Watch how he kills this Cat Stevens cover. EINA!


Thursday, June 9, 2011

Climate change & the balance of probabilities

Freeman leaves a comment under an older post, regarding my statement that "[...]there are uncertainties in climate science - as any climate scientist worth his salt will keep stressing - but the balance of probabilities at present are undoubtedly sided with the call to action rather than inaction[...]". Here he is in his own words:
As for the "balance of probabilities". let's do some basic maths. 
For us to act to 'do something' about climate change (whatever that means these days) we need to accept the following propositions. 
1. The climate is changing
2. The climate is changing in a warming direction.
3. This warming is of a magnitude never before seen
4. This warming is man made
5. This man-made warming costs the planet more than it benefits it and therefore should be reversed
6. This warming can viably and best be reversed by regulatory policy choices
7. This reversal will be enough to reinstate the 'before' state of climate
8. We can stop this reversal process at the 'before' state without it overshooting to an overly cool state and creating other negative costs. 
No[w] let's assume, and this is DEFINITELY NOT the case, but let's assume for the sake of the [thought] experiment that each of these propositions could be asserted with 90% confidence. By my simple reckoning that would mean that the decision to intervene by introducing all manner of policies and regulations would need to satisfy a probably criteria for success of 0.90^8 = 0.43. 
So even if we were totally (90%+) confident on each of these independent propositions, we still only arrive at roughly a 50/50 call AT BEST. Now, call Mr. Stuck in the Mud, but I would prefer to see a bit more debate on this one before talking about the 'balance of probabilities'. Moreover, I'm surprised you even want to talk about balance of probabilities, because on the numbers I've just run that balance looks rather skewed out of your favour...
Freeman's maths example is interesting and, to be honest, is something that I also considered when first getting involved in this climate debate. Unfortunately, simple probability (geometric) summing as he has done here is not the appropriate measure to use and can lead you to bad conclusions. Let me try to explain why:

If you think about it, you could construct a long enough daisy chain leading up to any trivial future event -- as Freeman did, applying equal importance to the probability of every sub-outcome -- to dissolve in a sea of indecision. Should I book that holiday in December when there's a chance that 1) I might get sick, 2) airfares could go down, 3) the plane could crash, 4) another destination might be better, 5) I might have important work to do, 6) I might not like my accommodation, etc, etc?

Of course, we "sense" that there's something wrong with type of logic. So, what's missing?

Basically, you have to weight your propositions according to their relative significance AND then multiply each outcome by their associated costs/benefits. What really matters is the magnitude of the potential risk to society, not simply the risk/probability in of itself. Further, you need to compare the benefits of each potential outcome, rather than the probability of any single outcome by itself. That, after all, is exactly how we deal with standard uncertainty problems in economics.

You could think about it as being the same type of logic that underpins any insurance decision. People don't pay an exorbitant amount for travel insurance, health insurance and car insurance because they think that there is a 90% chance that they will a) get mugged in a foreign city, b) become gravely ill, or c) crash their car in any given month. Rather, we want to insure against these (low probability) risks, because they entail dramatic costs. For the Nassim Taleb fans out there, just think Black Swan events... Thus, even using Freeman's figure of 50/50 should easily be strong enough for most people to spend lots of money in trying to avoid potentially disastrous outcomes.

In the climate change literature, this "fat-tailed" risk (low probability, high impact) has been the specific focus of eminent work by Martin Weitzman, Christian Gollier and others. Actually, on a coincidental note, here's a article that describes Weitzman's work in more depth as a response to flawed criticism by Jim Manzi (who, if you recall, was the subject of my original post under which Freeman was commenting). Warning: It is a bit of tirade against Manzi, who I feel deserves more respect, as indicated by my original post. However, on this issue, I think that he is precisely wrong for the reasons that the author (Joe Romm) points out. Rather than reading the whole article, I'd recommend that you scroll down towards the bottom part, where Romm explains that it is the damages function along the probability distribution function that matters, not the probability distribution (of warming) itself.[*]

Two last points:

Another essential piece that this kind of (static) analysis is missing is that it doesn't consider the likelihood that we will be able to scale up/back our efforts in the instance that we are wrong in our current predictions.[**] According to an overwhelming majority of our best (relevant) scientific experts, it will be considerably easier to prevent a runaway Greenhouse Effect the sooner we begin to do so, due to long-lived nature of CO2, etc. Basically, it is far easier to repeal unnecessary environmental regulations than reverse the forces that drive climate change. (I am happy to debate anyone who argues to the contrary... Any elected official that proposes to keep carbon legislation after it has been disproven as the source of global warming would be committing political suicide.)

Finally, I would also say that I don't fully agree with the sequence (and composition) of Freeman's propositions, nor the probabilities that he ascribes to them. For example: Propositions 1 and 2 (and even 8) are 100% or very close to it, while Proposition 3 is not particularly relevant (since what matters is the experience of modern humans, not dinosaurs). Actually, the leading scientific research on the subject indicates that Propositions 1 through 4 are true with 90% certainty taken together... and not 90^4. So you're already looking at much higher overall probability. Further, Proposition 7 is incorrect since the focus is not necessarily on "no" warming, but rather on what marginal level of warming will bring the greatest net benefit... This, of course, the seminal debate of climate change economics.

Anyway, that last paragraph is really just nit-picking. I know that Freeman presented these propositions as something of a thought exercise more than an absolute set. Nevertheless, I believe that this simple approach is incorrect for the reasons stated above.

[*] Start where it says: "Now I and many others have long argued that traditional cost-benefit analysis doesn’t capture risk posed by the worst-case scenarios. The economist who has most clearly delineated this in Harvard Martin Weitzman[...]"
[**] You could, of course, look to incorporate these by using effective weights...

Wednesday, June 8, 2011

Putting a price on nature (II)

Yesterday, I wrote a post in response to George Monbiot's recent column, "The true value of nature is not a number with a pound sign in front", which laments the UK Government's attempts to put an economic value on the environment. My aim there was to introduce the approaches used by economists for evaluating the environment: What are the tools and how much merit do they have? While imperfect, I think that so-called "non-market valuation" is still a worthy pursuit, which -- contrary to George's fears -- will bring more benefit to the environment than harm.

As a follow-up today, however, I want to put myself in closer agreement with a point that he touches on. It relates to something that I've been thinking about for a little while and George effectively hints at it too. I say "hints at", because he doesn't spell it out quite the same way that I'm going to, even though I still think it forms part of his most compelling argument. I refer to the last paragraph of the article that I quoted yesterday, which can be summarised: "The second problem is that it delivers the natural world into the hands of those who would destroy it.[...] Cost-benefit analysis is systematically rigged in favour of business."

Consider, if you will, a pristine piece of forest land for sale. Assume that there are two potential buyers: Eco Eric and Industrialist Ian. Assume further that Eric and Ian presently have the same store of saved-up cash available for purchase. Eco Eric wants to preserve the beautiful site as far as possible; he hopes to make some money by developing a guest house and generate some small-scale tourism, but not much beyond that. Ian, on the other hand, has entirely more ambitious plans. He wants to begin a mining operation to extract the valuable diamonds, which he believes lie beneath the surface. For this, he will have to dig up the trees (though this may be a profitable side venture in the short-run) and begin constructing an open-pit mine. More importantly, the possibility of large future cash flows, suddenly gives Ian an unassailable (financial) advantage: It now becomes profitable for him to borrow a lot more additional money, while still preserving the profitability of his venture. Consequently, he is able to up his bidding price to a level that Eric simply cannot match. Ergo, the sale goes to Ian and he builds his mine.

Okay, so you may be thinking that you could pretty much have skipped my little story if you saw Avatar. However, there are some important distinctions between the two (3-D cinematography notwithstanding). Not least of all, this isn't about one group of people forcibly taking land away from its current owners. It is about a peaceful, run-of-the-mill market transaction of property rights.

"OMG. Have you SEEN the market valuation on this place??"
"Totally. My NPVs are telling me: 'BUY'!"

It seems to me that the only thing stopping the land going to Ian, is if the owner suddenly weighs in with a clause that prevents him from developing the land in the way that he proposes. (Just to cover bases, we'll assume there are no negative externalities associated with neighbouring plots.) However, there are legitimate reasons to doubt that the seller would be. For instance, if the owner really doesn't want to see the land developed, why would he be putting it on the market in the first place? You could even say that he may, by no rights, have any idea what the relevant plans of Eric and Ian were. He'd certainly have to care a great deal to make it a central part of his selling decision (i.e. finding out what plans were afoot for the property after he sells). Again, however, I don't think that  characterises the selling habits of most people. We don't become overly sentimental about items that we sell, even those that we have invested significant emotional time into. Do people really care about what buyer of their old house plans to do with it? My anecdotal experience tells me that concerns over the extent to which renovations might turn people's family kitchens and living rooms into something unrecognisable, run secondary to the number of zeros at the bottom of the cheque. At the least then, I think that a "neutral" seller, is an entirely reasonable assumption to make.

In a sense, I'm saying that the problem with a lot of economic theorising is that it simply captures willingness-to-pay (WTP), but not ability-to-pay (ATP). As such, it disadvantages anyone who wishes to preserve the environment in something close to its natural form when it comes down to the possibility of purchasing property.

The reality is that the market and property regime is systematically gamed in favour of those who can make a plot of land the most profitable. In other words, if something is up for sale, it will inevitably favour people that can make the most money from it and, moreover, that can do so in a relatively short time.[*] That means exploitation and development. Another point is that increasing scarcity -- while it acts as a mechanism for innovation -- also prolongs the project life and viability of industrial enterprises. A rising oil price will mean more tar-sand operations and deep-sea drilling; not less.

There are, of course, some important exceptions to the pattern that I describe here, such as tourism. However, I suspect that there are sharp diminishing returns to these cases and, taken as a whole, the system inherently disadvantages people who find value in the in situ (i.e. natural) state of nature, or something close to it. Other reasons to be optimistic strike me as more plausible. For instance, the trend towards improved environmental quality in many industrialised nations -- the proverbial environmental Kuznets Curve, although the empirical record on this topic is not without controversy. It would also be remiss, in some sense, not to mention Julian Simon here. However, Simon's work is not directly relevant to the topic at hand, since he focused on countering Neo-Malthusian notions about resource shortages (etc) in the context of a developing society. In other words, his was a stance on nature meeting the material needs of society; not the fact that people ascribe an objective value to nature in of itself.

The best reason that I can come up with for not being too glum about this situation then, is probably the most arbitrary. The world that we have been bequeathed is surprisingly large and bountiful. Despite the undoubted impact that  human beings have had on the earth, there is still a swathe of unspoilt (and protected) nature out there. We may not get our wish to preserve as much of it as we would like, but I imagine that future generations will still get to enjoy a large portion of... especially given that we seem to care about preservation in the present day.

THOUGHT FOR THE DAY: Trying to summarise both yesterday and today's posts... It may be impossible to put a precise figure on value of nature, but there are still legitimate reasons to try. Unfortunately for those that derive intrinsic value just from the environment in its natural state, market transactions will still tend to favour development over preservation in most cases. Such is life in a world of opportunity costs and limited few free lunches.

[*] For one thing, the net-present values (NPVs) run on an entirely different scale... What is the lifetime of most capital projects? 10, 20 years? You can maybe get up to 30 or 50 in the case of huge undertakings like oil fields. In contrast, the "NPV" of nature runs over millennia. Unfortunately, our relative short-terminism only cuts one way.

Tuesday, June 7, 2011

Putting a price on nature (I)

As usual, George Monbiot has produced a thought-provoking column this week. However, rather than continuing to raise the ire of fellow greens -- i.e. by proposing that nuclear power is actually relatively environmentally friendly -- his latest effort decries the UK Government's "well-intentioned" attempts to put a price on its natural heritage:
The true value of nature is not a number with a pound sign in front 
Last week, the Department for Environment, Food and Rural Affairs announced the results of its national ecosystem assessment, a massive exercise involving 500 experts. The assessment, it tells us, establishes "the true value of nature … for the very first time". If you thought the true value of nature was the wonder and delight it invoked, you're wrong. It turns out that it's a figure with a pound sign on the front. 
The exercise is well-intentioned[...] But there are two big problems. 
The first is that this assessment is total nonsense, pure reductionist gobbledegook, dressed up in the language of objectivity and reason, but ascribing prices to emotional responses: prices, which, for all the high-falutin' language it uses, can only be arbitrary.[...]
The second problem is that it delivers the natural world into the hands of those who would destroy it. Picture, for example, a planning enquiry for an opencast coalmine. The public benefits arising from the forests and meadows it will destroy have been costed at £1m per year. The income from opening the mine will be £10m per year. No further argument needs to be made. The coalmine's barrister, presenting these figures to the inquiry, has an indefeasible case: public objections have already been addressed by the pricing exercise; there is nothing more to be discussed.[...] Cost-benefit analysis is systematically rigged in favour of business.
Given that a large part of any environmental economist's job is about trying to "put a number" on nature, I obviously have some skin in this game. I'd therefore like to make a few comments that hopefully add context to the discussion. In particular, I hope to partly assuage George's fears and counter some mistaken views that he has regarding economic valuations of the environment.

All right. Let's have a look at the rationale and methodology that underpins environmental assessments from an economic perspective:

The area under discussion here is known as non-market valuation. It forms one of the more ambitious arms of environmental and resource economics, as it tries to understand the additional value of natural goods and services (i.e. beyond what is indicated by the explicit market price). While inherently difficult, the profession has developed a range of methods and tools that make things more tractable and, ultimately, realistic. This includes hedonic pricing, contingent valuation, shadow price estimates, etcetera. Each method has its own particular short-comings (and strengths), but together they offer a reasonable framework towards understanding the value of nature in economic terms. Further, I should say that the purpose is to gain a sense of nature's value in terms of its direct contribution to our productive activities, as well as in situ (i.e. its natural state). The important thing that I'm trying to convey here is that the methods used by environmental economists cater for both objective and subjective forms of valuation, and across multiple dimensions. Here are two documents that provide a good breakdown of the methods of non-market valuation, as well as the broader implications in terms of interpretation: Harris, 1996 (specifically section 4.2) and Stavins, 2004.

The broader point is that, as much as they want to, environmentalists can't simply play the "nature is beyond valuation" card at their leisure. This only serves to seal off the debate and, whether we like or not, it is vital to understand what the monetary worth of something might be... Even if that does not capture all of the value at stake. Indeed, I would say that economic valuation of the environment isn't meant to be the final word on the subject and one certainly shouldn't make that claim.[*]

An analogy: It may be scant comfort for a widow that she receives a life insurance policy in the event of her husband's death. She would, presumably, trade them instantly if she could. However, at least she does not have to want for material necessities or comforts in his absence.

To be sure then, monetary valuation is an imperfect way of evaluating environmental trade-offs, but an important one nonetheless, as it at least offers the possibility for comparison in some common unit of measurement. Rather than the be-all-and-end-all, I would therefore suggest that economists' estimates regarding the monetary value of nature are merely meant to act as guides that may help to inform public (and private) opinion. Equally important, is that these estimates provide a figure for economic agents -- whether firms or individuals -- to benchmark against when it does come to paying for certain environmental goods. As an example, I have argued numerous times on this blog that water needs to be priced better (i.e. according to market forces) if we are going to use it more responsibly. Understanding how much a litre of water is "worth" to a power firm in producing a unit of electricity (because of cooling purposes), or a textile mill that produces cloth (for cleaning and spinning), provides the crucial foundation from which either of these can set about defining their subjective marginal values. And that is the first step towards establishing a price level that will ensure sustainable usage.

A final point on this issue -- where I think George is missing something very important -- is that valuation should not be static or linear. In particular, it's not the case that (using George's own example) all forests and all coal mines will be valued at a ratio of 1:12... Or, even that the specific meadow/mine that he imagines will continually be valued as such. It all depends on what happens to the other forests and coal mines around the country. For instance, if some forests are cut down for whatever purpose (farming, mining, what have you), then the value of our particular forest would be expected to rise. This is the beauty of the price mechanism: it adjusts with increasing scarcity. As I have written previously, accounting for this change in the relative prices of environmental goods is, I believe, one of the strongest economic arguments for decisive action against climate change.

That is not to say, however, that relative prices will necessarily adjust in such a way as to reflect the true intrinsic value of an environmental good. In this light, my next post will try to flesh out a lingering concern that I have with conventional market transactions as applied to the environment.

UPDATE: Part II is here.

[*] Having read through some of the UKNEA report, I think that it does err on the correct side of this divide. So, while it is introduced as showing "the true value of nature[...] for the very first time", this seems to me a more clumsy (though convenient) soundbite summary than anything else. It is tempered by the context provided in the actual research of the report. 

Wednesday, June 1, 2011

Should pregnant women be banned from smoking?

In several recent posts, Dan Kuehn advanced the notion that "the future" is, in some sense, an autarkic regime... Basically, that people in the future simply aren't able to trade/negotiate with us in a way that materially affects our decisions today. Future generations are thus unable to provide the normal market signals and incentives, which would impact our behaviour on matters that stand to directly impact them. (E.g. "We'll compensate you for investing in this technology today, as we'll desparately need it fifty years from now"; "Stop this activity as soon as possible, or we'll sue you for ruining our habitat"; etc).

This sparked off an interesting back-and-forth on, not only whether "autarky" was the correct term to use in this case, but also on whether characterising things in this manner significantly alters the way that we already think about making provisions for / sacrifices on behalf of future generations. For the record, I tend to agree with Bob Murphy that "autarky" isn't technically the right term to use, because it is simply the laws of physics that prevent the future from being able to trade with us. (Contrast, say, the autarkic regime of North Korea, which is physically able to trade with other nations, but has embarked upon a bizarre policy of self-sufficiency because of political and institutional settings.) However, I do think that Daniel's framing was useful because it serves to emphasise the remorseless, uni-directional march of time and how this should inform our policy decisions.

Now, I'm pretty interested in the intemporal trade-offs, as some of you might have guessed from my numerous posts on climate change and, more recently, sustainability. In that light, I left a comment under one of DK's "the-future-is-autarkic" posts... Effectively, the discussion reminded me of an Amartya Sen article that he wrote in support of smoking bans. The position that Sen took was interesting, because he partly appealed to the ethical distinction between a smoker's past and present self, and the inability of these two to negotiate with each other:
Unrestrained smoking is a libertarian half-way house[*]
[H]ow should we see the demands of freedom when habit-forming behaviour today restricts the freedom of the same person in the future? Once acquired, the habit of smoking is hard to kick, and it can be asked, with some plausibility, whether youthful smokers have an unqualified right to place their future selves in such bondage.
Thus, Sen was making a normative argument based on the idea that we aren't always equally "free" to make decisions when it comes to smoking. It's much easier to start the habit than it is to stop and I doubt that any plausible arguments could be made to the contrary. In the Wordsworthian sense, the young smoker is the father of the man that follows him... and yet the latter is far more constrained in his choices than the former. While certainly interesting, this is not what I want to discuss today, however -- not least because there are some very murky waters to tread when it comes to putting boundaries on personal freedom.

Here's another poser for you then: Instead of focusing on an individual smoker's freedom to do to unto themselves as they wish (consequences be damned), should pregnant women be allowed to smoke?

I ask this question after reading about a new British mother who smoked an astonishing 3,500 cigarettes during her pregnancy. This special individual not only exposed her baby to (apparently) six times the safe level of carbon monoxide, but -- surprise! -- successfully ensured that her child was borne underweight and premature. God only knows what medical surprises await this kid as the years roll by... However, I'll offer even money to anyone willing to bet on the mother's own professional prognosis:
I think it was my right and I don’t believe it was hurting Lilly. It’s making the baby use its heart on its own in the first place, so that when it comes out, it’s going to be able to do them things by itself. Where’s the proof that it’s so bad to smoke? - Charlie Wilcox, M.D. (not) and candidate for new mother of the year.

Heedless: Charlie Wilcox smoked throughout her pregnancy despite midwives warning her it could harm her baby
"I'm, like, making the baby's lungs stronger and stuff, innit."

(Source: Daily Mail via 2oceansvibe)

Is this not the most clear-cut case of a negative externality that you can imagine? Why do we -- for the most part anyway -- endorse smoking bans in public places and yet permit such direct offences to persist in the case of mother and child? Surely there is no logical consistency?

Of course, you could probably extend this argument to parent-offspring relationships in general. If secondary smoke is harmful to strangers in public places, why is it fine for parents to smoke in front of their kids in private homes? Again, there is a strong inconsistency from a purely logical perspective.

I'm interested to hear the libertarian take on this. Is the simple libertarian answer that the child would sue her mother for health ailments, emotional suffering, etc once she reaches the requisite age? [Side note: Does anyone know of such a case?] More plausibly, perhaps children are expected to negotiate with their parents about where and when they smoke in each other's company? (I say "plausible", but that still leaves the uncomfortable period when the toddler or young child is powerless to negotiate on anything resembling equal terms.)

Two caveats before any comments:
  1. This is meant to be a thought exercise more than anything else. I'm not making any claims on the practicalities of policing the smoking activities of pregnant women. I'm simply interested in normative ethics at present.
  2. Yes, I am discussing a particularly reckless type of parent here. I know that most people are inestimably more responsible than dear Ms Wilcox above. However, I've seen enough pregnant women smoking to know that it happens... Say nothing of smoking in the direct presence of toddlers, which is far more widespread. The point here isn't to examine what most sensible and loving parents would likely do, but to think about how we can best protect kids that are marginalised by the stupid behaviour of their parents. 

[*] Those of you who can't access the original Financial Times article, can read (most of) Sen's text of here.