Happenings

Given the inadvertent success of my previous post, I've decided to take the philosophical route for this next one: My fifteen minutes of quasi-blogosphere fame are almost certainly up and so it's time to resume normal services!

With that in mind, here are some mundane reflections on the last two weeks or so:

1) I wrote what should be my final ever (ever ever) sit down exam at the end of May. The subject was philosophy of science and, despite some frustrations, I enjoyed spending time on something that is outside of my normal field of expertise. I have now effectively completed my coursework requirements for the PhD -- both compulsory and elective credits -- and should be able to concentrate on the research side of things. Basically, I've got two years to finish the remaining two chapters in my dissertation and thus, thankfully, in a pretty good position at the moment.

2) My final article on natural gas and the environment was published at The Energy Collective. Having taken on short- and long-term carbon emissions, followed by demands placed on freshwater resources, this one looked at whether fracking can cause earthquakes? (Short answer: Yes, but you'll hardly notice them.) The issues surrounding natural gas and fracking are obviously very contentious. Important research is ongoing and I certainly don't expect everyone to be fully swayed by my articles and arguments. However, having spent a lot of time researching these matters -- giving primacy to the peer-reviewed scientific literature in the process -- the following paragraph provides an accurate summary of my overall impressions: "The takeaway is consistent with the overarching theme of my series. Yes, there are environmental trade-offs to securing the benefits of fracking and natural gas at large. Placed into the right context, however, these are relatively benign and often much better than the immediate alternative. Economics teaches us that there is no such thing as a free lunch, but fracking looks like a pretty good deal to me."

3) Not everyone was happy with the above article and I was involved in some amusing (not to mention ironic) Twitter spats. I'll summarise one of these for you:

@grant_mcdermott: "Does fracking case earthquakes? (link) Yes, but they're so small that you won't notice them."
@LoveCanal2020: "Whatevs! Shell sponsored that post. You're just a shill!"
@grant_mcdermott: "Ad hominem much? Actually, Shell have nothing to do with the content of my article. By all means though, don't address any facts."
@LoveCanal2020: "Meta-analysis Mumbo-jumbo! LOUD NOISES!"
@grant_mcdermott: "Yes. Science. As opposed to anecdotes, wild accusations and LIBERAL use of CAPITAL LETTERS."
@LoveCanal2020: "Criticize my creative use of capital letters, eh? Typical ad hominem!"
@grant_mcdermott: "Ad hominem?? I criticised your emotional outburst in lieu of actual facts."
@LoveCanal2020: "Still counts as ad hominem. #philosophy101"
@grant_mcdermott: "#philosophy101fail" 

etc

4) I'm spanning the genres for my latest song contributions to www.noondaytune.com: The Meters - "It Ain't No Use" and M83 (feat. Susanne Sundfør) - "Oblivion".

Review - Extreme Environment (Ivo Vegter)

Extreme Environment (hereafter EE) is a book written by South African journalist, Ivo Vegter. I have mentioned Vegter before on this blog and he generously arranged for me to be sent a free copy of EE after I offered to review it in an online discussion. Given this, and seeing as some of other reviews that I have read are disappointingly superficial, I decided to provide a chapter-by-chapter overview and criticism. I hope that you'll excuse the subsequent length of this post in exchange for some added thoroughness. (If not, a condensed version of this review can be found here.)

The major premise of EE is straightforward: Environmentalists are guilty of making grossly exaggerated claims and the green movement should in general be regarded with extreme scepticism. I fully endorse the more measured observation of the book jacket, which is that we should be just as cautious of the emotive rhetoric of environmentalists, as we are of corporate spin. EE expands on this dictum with varying degrees of success and some parts of the book are undoubtedly more convincing (and fairly presented) than others. It should be said that Vegter is not immune to moments of unfounded hyperbole himself, stating as early on as page 3 that the car could not have been invented in today's world, because it "would never have passed modern safety and environmental rules". (Talk about exaggeration!)

Review: Surviving Progress

Apologies for the lack of posting recently. Aside from research stuff, most of my "internet" time has been spent working on the RECONOMICS HUB.[*] We have now officially gone live and will hopefully see a consistent level of posting from the various contributors in the weeks and months to come. Please free to stop by and let us know what you think... or follow us on Twitter!

My latest contribution to the blog is a review of the film Surviving Progress (produced by Martin Scorsese). To summarize, the film is long on intent and activism, but often fails to make a convincing argument. A snippet:

In another segment, the film jumps from Ronald Wright’s idea of a “progress trap” — something which certainly has merit in of itself — to claim that modern technology is at complete odds with our primitive physiology. (Wright: “We are running 21st century software, our knowledge, on hardware that hasn't been upgraded for 50,000 years.”) The language is undeniably provocative but is it necessarily meaningful? After all, our knowledge and innovations didn't occur in a vacuum. It is certainly hard to believe that any technological development can persist without bringing at least some form of benefit to its progenitors. The very strong conclusions that the film draws don’t necessarily follow from the premises that it provides.

Surviving Progress relies on a number of interviews and some of these work better than others. I was particularly unimpressed by a clip involving "geneticist/activist" David Suzuki, who is unilaterally scathing about the economics profession. (He calls conventional economics "a form of brain damage").

So, according to Suzuki, “externalities” is a collective term that economists use to explain away pesky things like the ozone layer, topsoil and biodiversity. Hmmm… 

There’s no other way to put this, so I’ll simply come out and say that Suzuki has completely mangled the concept of economic externalities. I cannot think of a single economist who subscribes to anything approaching the definition that he gives. (I’d even be surprised if anyone that has followed an ECO101 class would define an externality in this way.) Suzuki could open any introductory economics textbook and discover that an “externality” is simply some spillover cost or benefit incurred by a third party, which is not accounted for in the market price.

___
[*] Resources. Energy. Climate. Economics

Quick links (05/05/2012)

I'm about to go into a pre-exam blogging hibernation, but here are some links to keep you interested:

1) Ed Dolan gives a nice overview of the economic issues surrounding fracking and the environment. Summary: "As an economist, I see something still different [to fracking critics or industry supporters]: a familiar pattern of negative externalities and missing market signals, to which the appropriate response is unlikely to be either prohibition or laissez-faire."

2) Economic blog comment of the week goes to this guy: "This was not Netanyahu at the UN."

3) Bryan Caplan draws inspiration from Game of Thrones in writing up The Bettor's Oath (a la the Brothers of the Night's Watch).

4) Turning to sport, I enjoyed this column by David Moseley on the farce that Super Rugby has become. More specifically, the laughable tournament format cooked up by the SANZAR brains trust (a concept that needs to be employed in the loosest possible sense).

5) Ever wondered where or how bands got their names? Here's a list that's worth going through. Lots of cultural homage and sexual innuendo, as you'd expect. Some of the more interesting/unexpected ones for me were Procol Harem, Pulp, Spandau Ballet, and The Replacements. Speaking of which...

And that, ladies and gents, is what we call a stone cold classic.

6) UPDATE: Forgot to mention that I've signed this petition on GMO research. You should too, and show your support for science against mind-numbing Luddite prejudices.

Earth Hour: Sending the right message?

In the build up to this year's Earth Hour, humourless critics were once again up in arms about the fact that turning off the lights for one hour would have a negligible effect on energy consumption.

Yes, because symbolic acts should be seen as outright solutions, rather than symbolizing representing solidarity with some wider issue. You know, like Tommie Smith and John Carlos thought that the solution to racial discrimination would be for everyone to walk around with an upraised fist.

Sounds to me like a lot of people could use a course in symbology.



That said, there are reasons to be critical of Earth Hour and, indeed, question the symbolic message that it does send. In that light, one of the better "contrarian" takes that I've read lately comes from Robin Mills, who argues that good intentions are undermined by a misguided signals:

Of course, improved energy efficiency is vital. The confusion is between conservation -- doing less -- and efficiency -- doing more with less. 

[snip] 

Environmentalism should not be about less -- it is about more: energy that is more abundant, cleaner, cheaper, more secure; economies that grow faster with new technologies; more people escaping poverty. 

Darkness spreading across the planet should not be the aim of environmental campaigns -- it should be a symbol of what happens when energy and environmental policy fails.

Environmental organisations like the WWF (or any advocacy group for that matter) need to think hard about the broader associations that come with their campaign messages. Concern about the planet's well-being is clearly laudable, but they will lose this fight if their cause becomes associated with privation.

Climate mitigation as a secondary benefit

But keep it quiet.

I spent some time last week with the Dutch economist, Johannes Bollen, who was visiting my university to present his research on the "co-benefits" of climate and air pollution policies. His basic argument is that you can go a long way towards meeting (global) climate goals simply by tackling (local) air pollution. In fact, his most up-to-date model suggests that rigorously addressing air pollution -- finding the optimal balance between health improvements and increased energy costs -- will get us 75 percent of the way towards the "2°C target" of the Copenhagen Accord.

Those results bear repeating: No global carbon tax or binding international treaties required. Just individual countries focused on cleaning up their own air pollution and we have already solved three-quarters of the climate problem. It sounds too good to be true and, yet, there's a growing body of evidence that points towards similar conclusions.[*]

For instance, you might remember an AER paper by Muller et al. (2011) that I mentioned a few months back. Their study made a big splash because, among other things, it showed that the price of coal-fired electricity should be several times higher than it currently is, given the adverse effects that local air pollutants (small particulates, SO2, NOx) have on human health and productivity. Again, nothing to do with climate effects; just accounting for the local health damages caused by dirty air.

It almost goes without saying that this promises to be a very important research area. The climate change narrative -- despite many excellent scientists and economists producing meticulous research -- has become bogged down by its own press and politics. We're at such an impasse that I simply can't see the necessary political will (and public buy-in?) to move us forward in any meaningful way over the next decade.

Focusing on local pollution, however, allows us to abstract from the most problematic areas of climate change; whether that is the unjustified/misplaced skepticism about the underlying science, or the longer-term uncertainties that make cost-benefit analysis of climate change mitigation difficult. From a purely economic perspective, it also frees you from the inherent problems associated with a global commons; such as competing incentives, inter-temporal conflicts, lack of enforcement, and free-rider problems. Those kinds of issues are dramatically simplified when you move from the global scale to the national scale, and narrow your time horizon.

The thing is, and while it's obviously great to kill two birds with one stone, I actually think that we should be very careful about emphasizing the climate link. Rightly or wrongly, policy geared towards tackling climate change is an extremely touchy subject. Yes, it's absurd to think that there is some grand communist plot at hand whenever someone mentions "cap-and-trade" or "carbon tax". (Also ironic when you consider that accounting for environmental damages is about putting an end to the socialized benefits that polluters enjoy at the expense of everyone else.) However, we have to acknowledge and operate within the practical confines of our world... which, more often than not, means making allowances for the irrationalities, whims and idiocies of our fellow citizens. And, yes, I'm sure the feeling is mutual.

THOUGHT FOR THE DAY: Tackling local air pollution will bring about marked improvements in human health and economic welfare, both now and in the future. We also have good reason to believe that it will go a long way towards mitigating climate problems. Unfortunately, climate change is a subject that comes with a lot of baggage. I'd prefer to see the results without bringing up the baggage.

UPDATE: The British Medical Journal gets in on the action here.

[*] I haven't scrutinized Johannes' model in enough detail to proclaim his results as gospel truth. That being said, seeing his presentation and having talked through the underlying methodology certainly makes me confident that he has carefully covered his bases. I'll try to keep tabs on how his working paper develops or is revised over the coming months.

A very interesting paper...

From the latest American Economic Review:

Environmental Accounting for Pollution in the United States Economy

By Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus

ABSTRACT

This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

Unless you're on a university server, you'll probably find that the article is gated. [Update - The working paper version is accessible here.] Fortunately, there are a number of good summaries available on the net. Bottom line: We severely underpay for the goods and services provided by major industries, given the measurable effect that air pollution from these industries has on human health and productivity.

Crucially, the environmental damages that drive these results have nothing to do with any kind of long-term climate change effects. They are simply the local damages that result from compromised air quality and are happening right now.

Lest it be unclear, this most certainly isn't about turning our back on coal (or even agriculture, another industry with a surprisingly high un-costed air pollution damages figure). Or markets in general. It is simply about trying to account for full costs and thinking about the best ways in which we can do that. That's all that good economics is about.

Easter Island - History revisi(onis)ted?

I've just handed in a fat micro assignment and thus finally seen the back of a hellish two weeks. Twelve-hour days (plus) have become the new norm... and then working on weekends as well. Who said university life was lark? Still, I'm acutely aware that I need to keep the odd post going so that I don't lose my readership entirely. In that spirit, I recently came across a fascinating debate concerning Easter Island.

"What's so important about Easter Island?", you may find yourself asking. Well, in short, people have long used it as cautionary tale of the human risks associated with environmental degradation. A once-stable and relatively prosperous civilization suddenly imploded as the supporting systems of their natural environment began to fail. Worse still, these wounds were self-inflicted; it was the islanders that caused the very environmental damage that brought about their demise. This idea was perhaps most memorably outlined by Jared Diamond, in his 2005 book Collapse.

Earlier this month, however, the British environmentalist Mark Lynas (whom I've mentioned favourably before) wrote a blog post that sought to overturn this standard, "ecocide" account of Easter Island's downfall. Drawing on some new archaeological research, Lynas shaped to explain why many of the traditional ideas on the subject are completely wrong. Most importantly, he claimed that the Easter Islanders were actually good stewards of their environment and were thus largely blameless for the fate that befell them. Instead, the tipping point for environmental collapse came with the arrival of European settlers, who brought the disease and invasive species (most notably rats) that ultimately decimated the indigenous plant and animal life. As Lynas's post was one aimed at refuting the orthodoxy, it probably won't surprise to learn that Jared Diamond was the primary focus of much the criticism.

So what happened next?

Well, Diamond responded to this stinging critique by penning an excellent rebuttal, which describes in some depth why the revisionist view is highly implausible (to put it kindly), and why the traditional account continues to provide the most compelling thesis. Ever the scholar, Diamond's tone is never less than respectful and thoughtful, although the evidence he cites is rather damning. I was particularly struck by his concluding paragraph:

The islanders did inadvertently destroy the environmental underpinnings of their society. They did so, not because they were especially evil or deprived of foresight, but because they were ordinary people, living in a fragile environment, and subject to the usual human problems of clashes between group interests, clashes between individual and group interests, selfishness, and limited ability to predict the future. Does that remind you of any problems that we ourselves face today? That’s why we find Easter’s story so gripping, and why it may offer us lessons.

Sage words indeed.

PS - Kudos must also go to Lynas for publishing Diamond's reply. (I believe he is currently seeking a response from some of the researchers that he initially quoted. ) This is what scientific and, I daresay, moral progress looks like. No room for sacred cows... but no indulgence of second-rate science either.

Reconciling capitalism and environmentalism

Alternative subject line: Saving environmentalism from the environmentalists

My attention has been brought to a new book by the British environmentalist and author, Mark Lynas, called The God Species: How the Planet Can Survive the Age of Humans.

I guess that I should really be saving any praise until I read it myself, but -- from everything that I've heard about it so far -- I sense that I'll be finding myself in deep agreement with many of the themes that it touches upon. Here are two review from The Economist and The Guardian. To give you an idea, an excerpt from the former:

[There is a] somewhat inconsistent relationship that a lot of environmentalists have with science. When it comes to the hazards posed to the climate by greenhouse gases they see science as an ally scarcely to be questioned. But when it comes to the hazards posed by radiation from nuclear-power plants or by genes engineered into crops, greens often give equally compelling science a lot less credence—as, until recently, did Mr Lynas. 

A few years ago, though, seized by the magnitude of the threat of global warming, he started to look at nuclear power afresh, and decided it wasn’t so bad: without it there would be a couple of billion tonnes more carbon dioxide in the atmosphere. His openness of mind spread: online comments responding to an article he wrote made him realise, to his shame, that though he had read many scientific papers on global warming he had never read any on genetically modified crops. Now he sees biotechnology-based intensive farming as crucial to keeping farms from overrunning forests. And how, he asks, can opponents to the damage done by industrially produced nitrogen-based fertilisers object to the genetic engineering that might let crops produce their own fertilisers as blamelessly as clover does?

Hmmm... Now where have I heard that kind of stuff before? Here's yours truly back in April:

There is a tremendous inconsistency in the way that people[...] approach the respective issues of climate change and GM food.[...] Being concerned about the environment and human health doesn't mean that you can have it both ways, choosing to invoke scientific evidence when and where it is congenial to your position. Those of us who think that climate change is a real issue deserving meaningful action rightly point towards the peer-reviewed science as a first stop for informing our opinions. We would do well to do the same for other contentious issues, such as genetically modified food.

Good boy, Stickman! <Rolls over. Eats biscuit. Barks.>

In a similar vein, an earlier article from The Guardian provides something of a prelude to Lynas's book, asking some important questions along the way. Here's the blurb:

Has the green movement lost its way? 

Anti-nuclear, anti-capitalist, anti-flying: the green movement may have alienated more people than it has won over, and there are now calls for a new kind of environmentalism.

Rather than quoting liberally from the article, I'll simply recommend reading the whole thing.  It's short and, to pique your interest, I'll only highlight the following money quote: "I want an environmental movement that is happy with capitalism[...] and is rigorous about the way it treats science." Going through the above article(s), I hope you'll recognise some of the issues that I've discussed previously on this blog, such as scientific consistency (c.f. GM foods), full and objective cost accounting, as well as the role of market mechanisms and economic valuation in improving environmental outcomes. However, it is the notion that there is some kind of ideological incompatibility between environmentalism and capitalism that bothers me most. How did we arrive at a place where these two goals are somehow viewed as mutually exclusive? Why does having environmental interests somehow imply that you must be a technological atavist, intent on repealing all our material advances and dragging society back to the Stone Age?[*]

Unfortunately, it's late and I'm too tired to solve the world's problems now. (Otherwise...) But I wanted to highlight some of these issues again. Reconciling economic growth and environmental stewardship isn't always straight forward. I know some very smart and open-minded people that will baulk at Lynas's assertion that nuclear is a pretty benign technology in the scheme of things, or even that it is something of a necessary evil to avoid climate chaos... But at least these opinions are formed on the basis of careful analysis rather than knee-jerk reactions.

THOUGHT FOR THE DAY: Economic progress can -- and should -- be good for the environment too. The environmental movement would be better off for embracing this fact, and by co-opting the characteristics that make markets work so well elsewhere in the economy.

[*] Yes, unfortunately, there's no denying that there are groups out there that loosely fit that description... And I wish more greens would come around to the fact there are tough compromises to be made... And that the explosion in living standards since the industrial revolution is on the whole a pretty awesome thing... And that nostalgia isn't what it used to be. At the same time, the rabid opposition to certain environmental causes or regulation (cf. the carbon tax furore in Australia) betrays a fundamental misunderstanding of what these interventions are meant to achieve. Moving towards fully internalised costs is something to be celebrated, as it helps us make better economic decisions in our day-to-day lives.

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.

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. 

Avoiding hypocrisy on the big issues

Think of an important environmental issue. Now imagine that there is a large body of scientific research, underpinned by peer-reviewed literature, which has arrived at a broad consensus regarding the relative risks that this issue poses to both the natural ecosystem and human well-being. Standing against this majority scientific position is a stark group of contrarians. They do not have much (if anything) in the way of peer-reviewed science to support their arguments, but instead point to controversial studies by partisan think-tanks and fringe researchers. Further, they invoke a number of conspiracy theories to explain why their position has been marginalised to a scientific minority and yet, ironically, they enjoy significant public support of an almost religious zeal. To be sure, the contrarians certainly aren't adverse to appealing to people's religious sensitivities as way of convincing others of their arguments...

"Yes, OKAY", you're telling yourself, "I know all about climate change scepticism. Get to the point." Except I'm not talking about climate change. I'm talking about genetically modified organisms (GMOs).

Genetically enhanced?

The climate debate and the GMO debate have eerie parallels. Certainly, both are highly polarising issues, which present a myriad of conflicting "facts" to anyone wishing to form an educated opinion on the subject(s). You can spend weeks... months... lost in the dark recesses of the internet trying to disentangle fact from fiction, whole truths from verisimilitude, and legitimate concern from moonbeam conspiracy theory.

When it comes to potentially confusing subjects like these, I believe that we should always make it our first priority to consult the relevant scientific literature. What better way to start addressing a topic than by referring to the qualified experts who have studied these matters in depth, subject to rigorous cross-examination by their peers? This is how we truly weed out the good ideas from bad. In its best form, peer review doesn't appeal to a priori beliefs or care for ideological predispositions. What matters is that you can design and carry out a study (or present a theory) according to accepted scientific standards, in a manner that can be replicated and/or tested by others. The strongest theories survive, while the weak are discarded. Indeed, that's the beauty of peer review; it acts as self-correcting and self-regulating mechanism.

But here's the rub: There is a tremendous inconsistency in the way that people use peer review to approach the respective issues of climate change and GMOs. Since my post here is directed at "environmentalists" as much as anyone else, let me use them as an example.

An environmentalist will happily cite the leading scientific journals, the IPCC and other major scientific bodies in defending his/her position on climate change -- presumably that it is i) happening, ii) driven by human activity, and iii) will bring negative consequences in the absence of strong mitigating action. To all this, I say, "rightly so". However, change the subject to genetically engineered crops, and suddenly those rules go out the window. The selfsame environmental organisations that invoke the most respected scientific bodies to confront climate sceptics, all but ignore what these organisations have to say about GMOs. If that sounds like an unsubstantiated generalisation, have a look for yourself: Greenpeace, Friends of the Earth, etc... are all remarkably consistent in their inconsistency. To be honest, it's disappointing to see just how few exceptions there are to this trend. I realise that people tend to seal themselves off to evidence that isn't congenial to their world view, but we owe it to ourselves to face facts. Speaking of which, let's consider some of the common charges laid against genetically engineered food...

1) GMO crops are dangerous to our health
Um, no. Since their formal approval and introduction into the American marketplace in 1996 and elsewhere, GMO products have been consumed by hundreds of millions of people. To date, not a single substantiated case of human illness or harm has been documented. Nada... not one. Consistent with this, numerous scientific articles published in leading medical journals have have upheld the notion that authorised GMO crops are safe for human consumption. Claims to the contrary have been rejected by reputable journals precisely because they fail to live up to scientific scrutiny.[*] And, of course, there's a functional benefit specific to genetically engineered crops that somehow keeps getting overlooked in this debate: They can be made to produce additional vitamins and nutrients, which are otherwise lacking in certain staples, and thus improve human health. (E.g. The so-called "Golden Rice", which has been biofortified with provitamin A and thus helps to ward off a deficiency in this important vitamin. Another example, virtually all insulin used to treat diabetes nowadays is produced using GMO processes.)

2) GMO crops are bad for the environment
Again, the evidence suggests quite the opposite. The introduction of GMO crops has generally enabled farmers to reduce their reliance on pesticides and herbicides, or allowed them to use less harmful chemicals (e.g. glyphosate). Using herbicide-tolerant crops has also meant that farmers have had to rely less on tilling the soil as a means of controlling weeds. "No-till farming" is good for the environment in the sense that it helps to prevent soil erosion and rainwater runoff. This not only reduces the loss of important nutrients in the soil, but also means that water quality is improved since less chemicals ultimately end up in the waterway.

3) GMO crops have reduced yields and they are more expensive
Despite the claims of many anti-GMO campaigners, this too remains an unproven accusation. Indeed, according to some of the most extensive studies on the matter, GMO crops have been shown to have lower production costs relative to conventional methods, as well as higher output and other extra conveniences. More importantly, these benefits have generally outweighed the higher costs of the engineered seeds in places like the United States.

Before concluding, let me attempt to pre-empt criticism of this post with two caveats:

First, I am by no means suggesting that peer review or our leading scientific bodies are infallible. Certainly, there are well understood problems associated with group-think (or even article suppression and qualification masturbation), which may undermine the process. Just as a majority position does not necessarily constitute an unassailable truth, so we should not -- to channel Richard Horton -- confuse scientific "acceptability" with "validity". However, while peer review is subject to occasional bouts of subversion, it remains far superior to the alternatives. (A blogosphere free for all? No thanks...) Again, I refer to the self-regulating nature of scientific review. Call it the market economist in me, but I find it incredulous that an unsound scientific theory could persist at the expense of a better alternative for very long. In any case, if you chide people for not following the scientific consensus on one topic, it behooves you stick to these same principles on others.

Second, beyond the issues of human and environmental health that I focus on here, there may be other legitimate reasons to oppose the dissemination of GMO crops. I like organic products as much as the next relatively well-to-do Westerner, while I've had my say about animal cruelty before. Further, potential control of food chains by a small number of multinationals through patented crop biotechnology seems to me to be a reasonable concern, deserving the standard anti-trust treatment. I also believe that it's crucial not to collapse the feed-the-world movement into some purely technological debate. As Amartya Sen eloquently argued three decades ago in Poverty and Famines, access to food is much more a complex mix of economics, social and political factors than simply a matter of food production and availability. Indeed, hunger continues to persist in many regions that have bountiful harvests. Agricultural innovation is a wonderful thing (read Norman Borlaug), but technological solutions are not necessarily a panacea for problems of socio-economic origin. Still... These are distinct issues from the scientific aspects that I have discussed above (i.e. human health and environmental safety). If opponents of GM want to preserve their credibility, then they need to separate legitimate concerns from the unsubstantiated, discarding the latter in the absence of credible evidence.

THOUGHT FOR THE DAY: What's good for the goose, is good for the gander. Being concerned about the environment and human health doesn't mean that you can have it both ways, choosing to invoke scientific evidence when and where it is congenial to your position. Those of us who think that climate change is a real issue deserving meaningful action rightly point towards the peer-reviewed science as a first stop for informing our opinions. We would do well to do the same for other contentious issues, such as GMOs.

[*] The most  famous example being the highly-charged Puszstai Affair, in which a controversial study by the eponymous researcher was first published and repudiated by the medical journal, The Lancet. That people may feel (justifiably?) dismayed at Pusztai and his co-author's subsequent treatment by the scientific establishment does not detract from the very real flaws in his study. For instance, his strange decision to use a non-commercially available GMO crop to pass negative judgement on GMO crops in general. Just to be clear, he created a potato crop (expressing a protein toxin derived from a toxic plant), which had never been approved for human consumption by any government agency. He then fed this to rats and made an assessment of how much damage it caused to their stomachs (as compared to normal potatoes where the same toxin was independently added). As Sir Robert May sardonically observed: "If you mix cyanide with vermouth in a cocktail and find that it is not good for you, I don't draw sweeping conclusions that you should ban all mixed drinks."


For those looking for references, some suggestions for further reading are under the fold:

Tort law is no panacea for the environment

Looking over the comments section of an old post, I realised that I had yet to make good on a promise to "flesh out my scepticism regarding the ability of tort law to meaningfully contribute to climate change action" (or, alternatively, expose it as a sham). Essentially, a friend of mine with strong anarcho-capitalist leanings had suggested that the climate impasse could - and should - be resolved through the private courts rather than any type of government regulation that seeks to create, for example, a carbon price via cap-and-trade or carbon taxes. I have just left my response underneath his comment as to why I regard this stance to be wholly unworkable in practice. I invite you to look over my points and see whether you agree or not. (The summary version: Non-representation of future claimants, and the complete impracticability of claimants to adequately and fairly engage separate carbon producers from all over the world; and vice versa).

Anyway, moving beyond the specific case of climate change, this is leads me to the consideration of tort law as a means of addressing environmental ills, generally. Indeed, I would say it is very much related to something that's central to my specialisation: The role of markets (underpinned by legal institutions like tort law) versus the role of governmental regulation in dealing with environmental problems. Before continuing, let me first say that my usual position on economic matters is fairly uncontroversial in that I regard markets as vastly superior to any supervening government force. Freedom to choose, responsibility for our own actions, etc, etc...

However, as an environmental and resource economist, I am constantly brought up against cases where markets don't work particularly well, or, alternatively, no market exists to deal with the provision of certain goods. That is the nature of our specialisation; we have to consider externalities, fuzzy property rights, environmental public goods, and other market "failures". Even with these imperfections, I am inclined to heed the words of one of my university professors who said something to the effect of: "Always consider other options before getting involved in environmental policy, because outside actions have the potential to stuff things up proper make matters even worse".

Having said that, there are still undoubtedly many cases where government intervention and regulation has led to improvements in environmental outcomes and natural resource management. Further, it's no coincidence that such instances often invoke market mechanisms, thereby simulating artificial scarcity and conferring property rights. This ultimately creates the right set of incentives for people to act in a profitable way to address environmental issues.[*] I can name many, many examples... From the rejuvenation of previously endangered fisheries, to the reduction of acid rain.

Even if we ignore such successes, I find it curious that certain libertarians continue to hold an unshakeable belief in the efficiency of tort law to resolve all environmental ills in an otherwise unregulated market. Regulation, on the other hand, is seen as nothing more than unworkable nonsense cobbled up by a lumbering coalition of bureaucratic imbeciles and self-serving politicians. This position seems to not only understate the transaction costs and asymmetries of information and financial power in a real-world market system, but also thoroughly oversells the efficiency of our legal systems. So, in addition to the points that I tried to highlight specifically with regards to climate change, here are some additional factors that I believe limit the effectiveness of tort law when it comes to addressing environmental problems on a more general scale:

First and foremost, litigation takes a very long time and can be hideously expensive... especially when there is money and power involved. It's easy to cite a number of high-profile environmental and health incidents that illustrate this. Exxon took 20 years to pay out after the Valdez oil spill off Prince William Sound. Officials from Union Carbide were still embroiled in criminal proceedings upon the 25th anniversary of the Bhopal Gas Disaster in India (although the company had made an out-of court settlement in 1989). More recently, Chevron has vowed to overturn a landmark $8.6bn fine imposed by a court in Ecuador in a case that has already been running for 18 years. Because of these factors, there is an inherent bias towards groups with money and legal clout. Legal disputes are hardly ever a fair fight between equals; it's about who brings the best lawyers to the party and who can confidently front the costs for the entire (possible) duration of a trial.

These are pretty fair indications of how inefficient legal systems can be, with endless recourse to stalling and appeals. Indeed, (good) regulation is often aimed at circumventing inefficient and protracted tort processes such as the ones that I have highlighted. In other words, it helps to reduce transaction costs to a minimum.[**]

To be sure, unchecked government meddling in production and industrial processes can have - and has had - very damaging consequences to both human beings and our environment. For instance, the Indian Government had a heavy hand in the Bhopal Plant and may be as liable as anybody for the tragedy that ensued. However, I don't see that as particularly relevant to the sheer length of the subsequent court case. Moreover, if regulation is dangerous because it affords power to supposedly disinterested third parties, would judges and juries not be susceptible to this influence too? Or, more simply, could they not also be subject to making the same bad decisions that stand to affect both current and future outcomes through the rule of legal precedent?

This leads me to another weakness underpinning our legal system: It lacks the very mechanism that makes markets work so efficiently. That is, there is no comparable profit-loss mechanism that leads self-interested parties to drive a continual improvement of the system. This idea was succinctly captured in a recent paper by Nobel Laureate James Buchanan: The Limits of Market Efficiency. As a pioneering figure in public choice theory, Buchanan did as much as anyone to highlight the fallibility of government authorities in being effective regulators. In this paper, however, he sets to balance the scales by showing that a) markets "work" only under certain legislative frameworks, and b) these frameworks are themselves devoid of forces that would make them inherently optimal. Here's a snippet:

Consider[...] the differences between the spontaneous emergence of a body of law, a set of rules, and the allocation of valued resources in the market process. In the latter, [...]opportunities for securing differential private rents and avoiding differential negative rents are open and available to prospective entrepreneurs-arbitrageurs, whose behavior, in itself, becomes part of the correction that efficiency conditions require. Contrast this process with application to law. Suppose that a law, rule, or convention emerges and exists, one that is recognized, even if by all participants, to be less enhancing to their well-being than a readily imagined alternative. The opportunity cannot, however, be exploited by single entrepreneurs-artibrageurs because of the nonpartitionability of law, as such. There is nothing comparable to the profit-loss dynamic of the market that will insure any continuing thrust toward more desirable outcomes. 

To conclude, I think that scepticism of government is absolutely justified in many cases, as I have tried to indicate at the beginning of this post and in a number of my previous posts. If there are market imperfections, it doesn't necessarily follow that government involvement will adequately address them. Indeed, it could exacerbate the situation and, frankly, it’s ridiculous to pretend otherwise. Where possible, I absolutely support community/individual management of resources above that of the State, just I support individual responsibility in many economic aspects. I also think that tort law can play an important role in controlling for localised environmental externalities. However, as per my reasons above, I disagree that regulations are inherently inefficient in comparison to a purely market-based system underpinned by tort law. Again, the danger is in applying blanket rules to complex situations that require evaluation on an individual basis.

THOUGHT FOR THE DAY: There is no silver bullet solution to solving our many, and often complex, environmental problems. Those that see tort law as some kind of panacea overlook the very real inefficiencies present in such a system. Consequently, torts remain very useful tools alongside regulatory measures for addressing environmental issues, but I don't believe that they can succeed by, or in of, themselves.

UPDATE: I completely forgot to talk about something that I'd originally meant to include in this discussion; the role that risk plays in limiting the effectiveness of pure market transactions. In particular, how different risk premiums are exacerbated by asymmetries of information, and how this can make it preferable to have some unilateral rule in place that guarantees us a minimum standard of protection from risk, which we cannot otherwise control for. This is very important in the context of justice administered ex post versus ex ante. As I wrote here:

[...] I much prefer driving in a country where standardised driver licenses and road-worthiness tests for vehicles offers me some insurance against risk-prone drivers. There's no way I control for who shares a highway with me, but at least I am reassured that their cars (say nothing of the drivers themselves) are expected to meet certain minimum standards. 

And, of course, I would suggest that "justice" administered ex post is, in many cases, a straggling third best; especially when it comes to more dramatic outcomes like severe injury and death. Don't get me wrong; there's plenty bad regulation out there... But I'd prefer (regulatory?) prevention than (courtroom?) "cure" when the latter involves putting a monetary value on matters that are inherently beyond valuation.

UPDATE 2: In an older blog post, Tyler Cowen points to an AER paper by Susan Rose-Ackerman, Regulation and the Law of Torts, which strongly supports the basic arguments I have made above. Speaking of Marginal Revolution bloggers, Alex Tabarrok co-authored this book a few years ago on the inefficiencies prevalent in the US tort system.

UPDATE 3: A follow-up, of sorts, here.
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[*] Daniel Kuehn has a really good series of posts in this regard, under the collective heading of calculation verses incentive problems.
[**] Two points additional bear mentioning. First, in all of the above cases claimants were afforded a fraction of the recompense that they were initially promised due, in large part, to the principles of corporate limited liability. In this matter, I am in essentially in agreement with the proponents of tort law that a system of limited liability encourages unduly risky behaviour. To get an idea of my views on limited versus strict liability, please see here. Second, I have seen tort proponents argue that transaction costs are subsidised by government in the case of regulation and therefore of equal weight to transaction costs incurred when markets are left to their own devices. This is a non sequitur. To use a simple example, if government bans the use of lead in petrol unilaterally then transaction costs have essentially been reduced to a minimum. Alternatively, think about how impossible it would be to track down the former owner of each and every plastic bag that happens to blow into your property versus government simply adding a tax to each bag that makes people utilise them in a far more effective and environmentally friendly way.

"Our climate isn't the only green concern"

UPDATE: The forest sell-off has been shelved following a massive public outcry.

That's the title of a short article by Michael McCarthy, the environmental editor of The Independent, in which he discusses the apparent flip-flopping of the new UK government on the sale of public forests. In of itself, this is a very interesting issue because it highlights some the practical problems of privatising "public" land. Being of a market persuasion myself, I have nothing much in principal against private ownership of these resources. Indeed, the success of private game parks all over the world gives us an indication of how well that kind of model can work, often in conjunction (and competition) with state-owned parks, to better preserve our natural heritage.

Of course, the UK's forests are perceived quite differently to game parks. They are, I would argue, probably much closer to, say, beaches in the public mindset. For various reasons, public beaches have become institutionalised as places that we like to enjoy in commons. Perhaps people even like the illusion of them being free to everyone regardless of the fact that tax money is what ultimately supports their maintenance. Having said that, there reasons why this system isn't an inherently inefficient; most notably transaction costs and the problems of exclusion. (E.g. It could be much easier for us to make a single payment to one authority that manages these assets on our behalf than to pay a new owner every time you enter a new park or beach. Further, in the absence of unsightly fencing, it is problematic to police who comes in and out, and who has paid for entrance in the first place). At any rate, I think it's fair to say that many public beaches are both well-run and well-policed.

The major point of McCarthy's article that I want to get to, however, is imbedded in his subject line. He gets down to it in the last two paragraphs:

[T]his Government has conflated "the environment" with climate change; the rest is forgotten (at least at the highest level). It was actually in the specific context of global warming policy that Mr Cameron made his "greenest ever" pledge. He saw, rightly, that saving the climate is of overwhelming importance; but he failed to see that there are other green issues, such as the care of the natural world, which are also immensely important and which the public may deem crucial. 

To be fair, being blinded to everything else by climate change is not the fault of this Government only; some of the traditional green pressure groups have followed suit, and Jonathon Porritt, doyen of green activists, pointed out in an angry blog last week how little most of them have done to combat the attack on nature conservation. But the Government will have to wake up to its mistake, or its pledge to be the greenest ever will turn out to be the biggest hostage to fortune of its time in office.

I wholeheartedly agree with this position. As I've written previously:

"I do worry that important non-climate-related research is being sidelined by this overwhelming debate on AGW [Anthropogenic Global Warming]. Clearly, there are some very important scientific and environmental questions unrelated to climate change that deserve research funding as well. Moreover, its really frustrating to see people trying to lump everything under the climate umbrella or ascribe strong climate causation when there isn't any."

THOUGHT FOR THE DAY: Climate change is a hugely important issue for anyone concerned about the environment, say nothing of human welfare. But shoehorning any and every environmental problem into a climate change story does nobody favours. It distracts focus from other genuine environmental issues and only serves to undermine the legitimacy of the climate change movement in the process.

Discount rates, relative prices and climate economics

Yesterday I wrote a bit about the "relative prices" argument for swift and decisive action against climate change. Some additional comments to provide context:

For economists engaged in the climate change debate, one of the most important – yet difficult – things to find agreement on is a suitable discount rate. This may seem a strange issue to fixate on from the perspective of non-economists, but the point here is that climate change is an intergenerational problem that will potentially affect many people over time. The question then is how to measure future costs and benefits against those of the present?

As with any investment which involves cost-benefit analysis over time, the favoured approach in climate change economics is to use a discount rate.[*] This allows us to assess things in present value (PV) terms. Thus, and while it may seem somewhat trivial against the wider scientific uncertainties of climate change, the discount rate actually proves a critical factor in determining the economically efficient level of abatement. Here's a simple example to illustrate the importance of choosing a particular rate of discount:

If we discount \$100 a hundred years from now at a rate of 1 percent, we obtain a present value of around \$37. However, if we feel slightly more impatient and raise the discount rate to 3 percent, then the present value falls to only \$5!

Importantly, the effect of compound interest means means that we see an exponential impact from the difference in discount rates, as well as the length of time that we are discounting. In other words, we're dealing with a distinctly non-linear process.The central message to take away is that – when it comes to estimating economic costs and benefits of the future – seemingly innocuous changes in your a priori assumptions over the discount rate can lead to substantial differences in cumulative terms. (Use this calculator to see for yourself.)

So, the choice of discount rate has a potentially massive impact on the perceived efficiency and timing of climate policy. Again, it is worth emphasising the intergenerational nature of climate change, where present (and future) sacrifices will have to be made in order to protect future incomes and utilities. The corollary of this is that acting too slowly may harm future generations in the form of rising climate costs, whilst acting too quickly may be equally as harmful by unnecessarily limiting economic growth.

Against this background, it probably won't be surprising to hear that the chief criticisms for the much-feted Stern Review –  from an economics perspective at least –  were reserved for his choice of discount rate. By drawing on the famous Ramsey Equation[**], Stern used largely ethical arguments in deriving a final discount rate of 1.4%. This, his critics argued, was much too low in comparison with observed market rates, which are closer to 3-4%. Moreover, since Stern's major findings hang on a "low" discount rate, the same critics say that his central policy recommendation of "act fast, act now" does not hold. (Indeed, a belief in higher discount rates is what underpins a lot of economic rationalisation on the benefits of delayed action against climate change; e.g. focus on growing our economies as fast as possible now so that we will be in a better, wealthier position to deal with the effects of climate change in the future.)

At the same time, however, numerous other economists have come out strongly in support of Stern, while he also has vigorously defended his methodology in the period since. In the interest of keeping this post as short as possible, I won't go into much further detail on this debate between supporters of Stern and their opponents (or those in between). I highly encourage you to look over the Sterner and Persson paper that I recommended previously for a very readable summary of the various elements involved in determining the discount rate, as well as the different schools of thought on what the appropriate level really is.

What I did want to get to today was this: One of the most interesting insights of the "relative prices" argument from my perspective is that strong, early emissions reductions can be economically justified even in the presence of high discount rates. Prior to this, opponents to early abatement paths such as those proposed by Stern have argued that such plans can only be sustained in the presence of what they perceive to be unacceptably/unrealistically low discount rates. And yet, we now see compelling economic reasons to follow an aggressive emissions path even when using high rates of interest.[***]

In other words, the relative price argument allows us to partly abstract from the intrinsic subjectivity of the discount debate, which currently clouds the timing of climate policy. It does this by demonstrating the extent to which a loss in natural assets (clean water, predictable seasons, etc) could affect our ability to generate, or even enjoy, man-made assets (such as cars, computers, restaurants and so on) in the future. In this way, we are able to formalise the intuitive concerns that many people have regarding the destabilisation of natural systems that we are intimately dependent on.

THOUGHT FOR THE DAY: The choice of discount rate is crucial to determining an "economically efficient" response to climate change. Unfortunately, there is widespread disagreement among economists as to what the correct discount rate is. However, by incorporating the impact of relative prices into our analysis, we can still conclude that it is better to act sooner, rather than later... even if we assume a discount rate that is relatively high. And that is a critical first step to reach agreement on.

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[*] There are people who question the validity of even using the "standard" cost-benefit analysis (CBA) approach to climate change, but that remains another subject for another day.

[**] The Ramsey Rule is: r = δ + η * g 

        Which says that the discount rate (r), is equal to the sum of the pure rate of time preference (δ) and the product of the elasticity of the marginal utility for money (η) and the per capita growth rate of the economy (g). To simplify, we interpret the first component of the equation, δ, as the tendency to discount future utility simply because it is in the future. The second component, η * g, implies that we value future consumption less than consumption today, because our wealth should increase over time as the result of economic growth. This latter notion rests on the assumption that a rich person gains less welfare than a poor person for a given quantity of money.

[***] This is a bit of a simplification. The choice of discount rate will always have an impact on how aggressively we approach the issue of climate change. However, we are left with a central message that – regardless of differing opinions on what the discount rate should be – it is still in humanity’s best interest to decisively cut emissions sooner rather than later.