Comments on: The Stern Review on the Economics of Climate Change: A Comment by Richard Tol

By: winston

winston — Sat, 11 Nov 2006 07:03:56 +0000

Oh I’d definitely want to take the good things back from the present and also avoid the oldtime nasties like measles and outhouses if that’s OK. It’s the “natural environment” not technology or civilization that I preferred as it was back in those long gone halcyon days of Earth’s youth, in the 19th century say … transported back there I’d be keen to take plenty of the benefits of more recent human progress with me.

It’s not a zero sum game though is it – not that medicine and motorcars and aircon necessarily must cost us Earth’s natural beauty and life sustaining environment is it? Many advocates of free market capitalism seem to feel that if there’s one thing a high material standard of living can buy you it’s a quality environment; I’d like to think it’d be on the top of the xmas wish list for today’s smart plutocrat.

By: Roger Sweeny

Roger Sweeny — Fri, 10 Nov 2006 21:12:56 +0000

“In fact I think I really quite liked the natural environment of Earth the way it was about 150 years ago…

Wow. I didn’t know any people that old were still around.

Oh, you mean you like the idea of the way the earth was 150 years ago.

Would you go back? Outhouses, measles epidemics, no computers. How much would you be willing to give up for that “natural environment?”

By: winston

winston — Fri, 10 Nov 2006 00:55:55 +0000

When Mark writes “And it seems unlikely that it would take more than 1000 more years to colonize something outside this solar system. This is particularly true if we thought this solar system would not be habitable in a couple thousand years” he is certainly sounding more relaxed about the possibility of the solar system becoming uninhabitable than I am. His discount rate for investment to mitigate the risk would consequently be a lot higher than is mine. In fact I think I really quite liked the natural environment of Earth the way it was about 150 years ago, call me old fashioned I suppose.

By: Richard Tol

Richard Tol — Thu, 09 Nov 2006 22:08:38 +0000

To Mark Bahner:

In fact, I’m a great SciFi fan. However, space travel is too expensive and too slow to be lucrative.

Some people will go to quite some extremes to avoid imminent, virtually certain death (my kingdom for a horse), but their willingness to pay drops rapidly if the risks is smaller or more distant. And if death is deemed inevitable, some would rather throw their last big party.

I would not be able to give a number, but it would not be big, indeed.

By: Richard Tol

Richard Tol — Thu, 09 Nov 2006 17:00:11 +0000

To KFog:

Discounting is complex. I would suggest that you read Robert Lind’s excellent book before we continue this discussion.

Discounting is related to the opportunity cost of capital, and it is related to impatience. Both are lower for society than for an individual, because an individual is more constained and has less risk to pool (capital) and an individual has a greater probability of dying without kids (impatience).

So, the social discount rate should be lower than an individual discount rate.

Lower does not imply zero though.

By: Mark Bahner

Mark Bahner — Thu, 09 Nov 2006 16:38:43 +0000

Richard Tol writes, “There are arguments for using a declining discount rate. The best one is intuitive. With a constant discount rate, the relative weights of year 10 and year 11 are equal to the relative weights of year 100 and 101. With an appropriately declining discount rate, the relative weights of year 10 and 11 are equal to the relative weights of year 100 and 110.”

Do you agree that there are two assumptions in the argument that a declining discount rate is appropriate:

1) Per-capita economic growth is not accelerating, and

2) There will not be any future time at which money itself is no longer relevant?

If you agree that those are assumptions in the argument for using a declining discount rate, do you think they’re valid assumptions for the entire 21st century (let alone the 22nd or 23rd)?

“On asteriods and expanding stars: In a policy analysis, they only things that matter are those things we can do something about. Whatever discount rate we’d use, the sun will expand and Earth will be vaporised.”

Well, geez, Richard…you must not read much science fiction! Way back in 1950, Robert Heinlein was expecting us to colonize (Jupiter’s moon) Ganymede by 2050:

http://members.iglou.com/jtmajor/Farmer.htm

We don’t look like we’ll make that target date, but it seems like in even a hundred years or so, colonizing Ganymede ought to be possible. (In my opinion, development of fusion power is absolutely necessary before such ventures can even be contemplated.) And it seems unlikely that it would take more than 1000 more years to colonize something outside this solar system. This is particularly true if we thought this solar system would not be habitable in a couple thousand years.

“Asteriods are different. With a high discount rate, we might ignore this. With a low discount rate, we might invest in technology to divert the asteriod from its collision course. But there are surely limits on how much we would like to spend on such technology.”

Suppose we have a situation that we absolutely know that a 100 km diameter asteroid will strike the earth in the year 2250, without intervention. (Note: Such an asteroid is 10 times larger than the asteroid that’s thought to have wiped out the dinosaurs at the end of the Cretaceous.)

In the event this hypothetical situation were to occur, what is your opinion about how much we should be spending right now to avoid that event (which would wipe out all human civilization, if it hit in 2020)? In my opinion, the answer is “Probably a factor of 10 LESS than the 1 percent of GDP that the Stern Review recommends we spend on climate change.”

By: KFog

KFog — Thu, 09 Nov 2006 09:38:30 +0000

Discount rates again
I posted a letter about discount rates on this site, because I guess that it is visited by a number of experts on this issue. I hoped that I could make these experts discuss the issue a bit more thoroughly than up to now, and that a clarification would be possible as to what can be agreed upon, and what cannot be agreed upon.
There have come some comments – thanks. But there is still a long way to go to approach this clarification. I know that the subject is complicated and tricky, but that is no reason not to discuss it.
In my first letter, I used the word “primitive”. I still think it is primitive to cut off discussion simply by saying that what is beyond 70 years from now, is not worth considering. Come on, Mark Bahner, if you aspire for the Nobel Prize, you must be able to say something more sophisticated than that! Maybe one should say that the variation through some time course of the rate of discount should reflect the time span of our influence today on future events. Information on this time span should probably come from disciplines other than economy, e.g. oceanography (the time of circulation of ocean water from the surface to the bottom and up again is about 1,000 years, so what we are doing to the surface water today will still be felt, to some (slight?) extent up to 1,000 years from now; so maybe the economic calculations should be made to fit these time scales impressed upon us from outside).
In his comment, Prof. Tol laid out some threads which, I think, should be taken up. There is a difference between the “social discount rate” and the implicit discount rate of private people who consider alternative investments of their money. How do we explain this difference? Is it true, in this connection, as I suggest, that the question of what returns I can get from my investments is a private issue, whereas how much I choose to re-invest is a social issue? Can we consider re-investment as a kind of action which may benefit society in a greater sense, including the next generations, whereas investment is something private which benefits just me, provided that I take the returns and use them for private consumption? Would it be sensible to say that re-investment deals with the possibility for future growth of the total economy, and thus is directed towards the future, and that what we are discussing here – the future environment on the globe – is also directed towards the future? If so, it might be proper to use a discount rate which parallels the rate of re-investment in the society. Would such a principle bring some clarification as to what rates should be applied ?
KFog

By: Richard Tol

Richard Tol — Wed, 08 Nov 2006 20:00:24 +0000

To Anders Valland:

Water management in the Netherlands still causes subsidence. Therefore, the dikes have to be raised periodically to keep flood safety at a constant level. Besides, they’re still building in the flood plain.

Sea level rise and higher river run-off in winter and spring exacerbate this problem.

By: Anders Valland

Anders Valland — Wed, 08 Nov 2006 07:41:29 +0000

To Richard Tol:

You are right, of course, on the reclamation issue. The dutch always call it “reclamation”, at least when they write english. Thus noone is trying to say that this part of the earth was never above or below the sea.

The point of my post was that we ceratinly do have the knowledge to make sure areas such as the Eurpoean lowlands and Bangladesh can be made prosperous even though they face challenges posed by their rivers.

The main threat to the Netherlands today is from its rivers, as they will do the greatest damage in case of flooding. The sea can pose threats such as storm surges, but those are fairly short lived compared to possible flooding from the rivers.

The same goes for Bangladesh and other areas such as New Orleans. If you use the Dutch knowledge these areas can be made safe for generations to come.

You try to say that the Dutch have only warded off the sea for the current generation. What is this based on?

By: Richard Tol

Richard Tol — Wed, 08 Nov 2006 06:50:46 +0000

On declining discount rates:
There are arguments for using a declining discount rate. The best one is intuitive. With a constant discount rate, the relative weights of year 10 and year 11 are equal to the relative weights of year 100 and 101. With an appropriately declining discount rate, the relative weights of year 10 and 11 are equal to the relative weights of year 100 and 110.

A declining discount rate is not the same as a low constant discount rate, though.

On asteriods and expanding stars:
In a policy analysis, they only things that matter are those things we can do something about. Whatever discount rate we’d use, the sun will expand and Earth will be vaporised.

Asteriods are different. With a high discount rate, we might ignore this. With a low discount rate, we might invest in technology to divert the asteriod from its collision course. But there are surely limits on how much we would like to spend on such technology.

On social discount rates:
One may argue that the government is there to solve the collective problems that cannot be solved by individuals and markets. This implies that government behaviour should deviate from the individual behaviour. This also goes for discounting. The future is a public good, and therefore underprovided by the market.

At the same time, government behaviour should reflect the will of the people. If everybody is impatient, then the government should be impatient too.