Wednesday, August 01, 2007

John Quiggin on the costs of climate change

JQ says:
"And even a 10 per cent reduction in income, by 2050, would not actually be noticeable against the background noise of macroeconomic and individual income fluctuations."

10% reduction in income by 2050, or equivalently 20% by 2100, is of course the far (lunatic?) extreme of the worst case that Stern could put together, not a realistic estimate.

Before JQ has a sense of humour failure, I'd better point out to that the above quote was addressing the costs of mitigation, not the projected losses due to climate change. But of course in economic terms, 10% is 10%. What's more, a figure an order of magnitude lower (for both mitigation costs, and climate change damage) would probably be more realistic. And note that the question isn't even about changing the net economic growth rate over this period by as much as by 0.2% pa (realistically, 0.02% pa) but rather where to draw the balance between mitigation and adaptation so as to minimise the total sum of these costs, which (assuming one believes the models at all) is very unlikely to be zero or less.

What no-one has yet explained to me is why I should be bothered about whether 3 generations down the line are "only" 8 times richer than me, rather than 10 (or more realistically, "only" 9.8 times rather than 10). By all means let's hear the arguments for and against various policy decision, but don't dress it up in in the spuriously authoritative language of economic argument with the facts carefuly concealed under claims of AGW-caused "global recession" on the side of the alarmists (including our recently departed Dear Leader Blair through the Stern report) opposed by equivalent comments on mitigation costs on the other side. A plague o' both your houses!


John Quiggin said...

A few responses. First, I've already expressed some reservations about the cost numbers in Stern, pointing out that they are a rather second-best response to structural uncertainty. Marty Weitzman has done a much better job on this point than I could.

That said, if you look at the Stern numbers they come mainly from three sources
(i) Low probability high-cost events
(ii)Disastrous impacts on poor people
(iii) Species extinction (as he follows Nordhaus, this category is grossly undervalued).

I know you'll want to dispute the analysis leading to (i), but I don't think your attempt to turn my argument around works in any of these cases.

Michael Tobis said...

They are the same house, just different wings. They are agreed that they are asking a reasonable question. It is striking that even on econometric terms they come up with such divergent answers. As you know, I am convinced it's the wrong question.

I had lunch with a couple of economists this week. They were very interested in our work on 'quantifying uncertainty in climate models', by which I think they meant 'models are quantifiably uncertain, therefore the sensitivity is zero'. One of them closed the conversation by urging me to seriously consider the work of Friis-Christensen.

It was interesting to watch the response to my claim that while the second order uncertainties in climate were of great practical importance, the field is sufficiently mature that we have negligible grounds for doubt about the broad brush first-order picture.

I think the economists found my taking this position to be so obviously arrogant and rude as to be not worthy of consideration. Apparently the idea of models with some actual utility is foreign to them. I wonder, therefore, what actual contribution they provide.

C W Magee said...

Don't we just need a carbon tax/ licencing scheme that raises enough money to cover all adaption and compensation costs?

James Annan said...

With regard to JQ's point 2, Sterns seems to believe that a 12% change in the income of a moderately poor person 100 years from now has greater impact on present net human utility than a 10% change in the income of a seriously poor person today. That seems at best highly contentious. As for what he has done wrong with species extinction, I'm all ears, but make sure that you distinguish between actual costs and hurt feelings.

John Quiggin said...

On your first point, James, Stern's assumption means that a tax policy that that took $10000 from someone on $100 000 a year, dissipated $9000 in admin and compliance costs, and gave the remaining $1000 to a person on $10 000 a year would be just neutral. Your position implies that the benefit to the poorer person could be less than $1000 and the transfer would still be justified. Would you like to nominate a number, and we can work out the implications for the discount rate?

On species extinction you say "make sure that you distinguish between actual costs and hurt feelings." The only way I can interpret this is as a claim that there is a meaningful economic distinction between reduced consumption of goods and services ("real costs") and reduced subjective welfare due to species extinction per se ("hurt feelings"). If that's your claim, it's just plain wrong - about as wrong as the contributions to climate science of my economist colleague Ross McKitrick. If you mean something else, please accept my apologies and explicate a bit further.

On a more general note, you seem to have taken a set against Stern on the basis of silly comments by Tony Blair at the time the report was launched, and to have entrenched your position since then on the basis of a fairly limited understanding of economics. Again, I don't see that this differs much from the reaction of some of my economist colleagues to climate science.aenr

James Annan said...


Your $10,000 v $1,000 example seems to address Stern's logarithmic utility function rather than discount..the latter implies that it does not matter whether the poor person gets his $1,000 now or 100 years from now (inflation-adjusted to 10% of his grand-child's income). I would be surprised if there is any set of parameters that is free from any apparently illogical gotcha, but making the time delay literally irrelevant seems greatly at odds with reality and if widely adopted as a guiding principle would have far-reaching implications. I admit I am no great expert in economics and I enjoy reading your exchanges with Richard Tol especially: it is far from clear to me that you come out on top!

The bottom line is that you yourself clearly stated that 10% of GDP in 50 years (which we both agree is a gross exaggeration of all plausible outcomes, probably by an order of magnitude) is essentially negligible. In economic terms, it seems the debate is so vitriolic precisely because it does not matter.