Academic economists will undoubtedly spend some time on the more technical aspects of the first update paper of the Garnaut review and the accompanying commissioned technical report. The discussion comes down to two main points: how do you value the welfare of future generations against today’s, and how do you value the risk of “unknown unknowns” or “Black Swan events”?
Unsurprisingly, Garnaut concludes that the economic case for mitigation has only gotten stronger; the basic modelling was sound, the development of climate science is pushing up the expected costs of climate change, and the development of new technology is pushing the cost of mitigation down. This shouldn’t come as any shock to anybody.
Given the politics has come down to “electricity bills! Scary!” I can’t see this part of the update having a huge political impact, useful though it is. But there’s one fascinating little sidebar to the discussion surrounding the inter-generational equity of mitigation.
Essentially, some of the economic literature that suggests we should not take any action now rests on two premises: 1) that our descendents will be much richer than we are, and 2) that, on equity grounds, rich people taking a big hit to their welfare (for instance, by spending far more on late mitigation) is fairer than (relatively) poor people taking a small hit. The extent to which point 2) is true is quantified in a parameter of the social discount rate, which we’ll refer to as r for the purposes of this blog post. As the commissioned companion paper puts it:
Thought experiments are useful for making the choices of different values of r transparent. Stern (2008:15) discusses Okun’s (1975) ‘leaky bucket’ experiments to make the implications of different choices for r more concrete. If person A is five times richer than person B, r equal to one implies a unit of consumption is worth five times as much to B than to A, so a transfer from A to B improves social welfare even if 80 per cent of the transfer was lost along the way. With r equal to two, consumption is worth 25 times more to B and the transfer is worthwhile when up to 96 per cent is lost. Judgements about whether society accepts this trade-off or not can provide information about a value for in social policy contexts.
Some of the work critical of Stern and Garnaut has used values for r of two, or even higher.
Where it gets really interesting is when you compare it to what presently happens in the real world. As the technical report says:
When inferring preferences for climate policy evaluation, the last two of these conditions in particular pose challenges for inferring values from behaviour. Given that the aim is to infer ethical judgements for use in climate policy evaluation, preferences should be derived in a context that has at least some appropriate mapping to a global, long-term, risky and uncertain environmental problem with potentially catastrophic impacts. Economists adopting a normative approach to discounting have taken guidance from values of inferred from tax and transfer systems, as they provide information about social preferences for the distribution of consumption within generations. Such empirical work has given a range of values for r including numbers less than one (Stern 2008:16). Cowell and Gardiner (1999:24-5) infer from the United Kingdom personal income tax system, obtaining estimates of around 1.3 and 1.4 depending on the scope of taxes and transfers included. Evans (2005) investigates tax systems in 20 OECD countries, estimating r as 1.4, with a 95 per cent confidence interval of [1.2, 1.5].
In other words, to make an argument against mitigation work in terms of inter-generational equity, you have to plug numbers into the model that imply a preference for radically more egalitarian redistribution of income than our present taxation and social welfare systems.
I wonder what the likes of Gina Rinehart and Clive Palmer think of that.
Elsewhere: John Quiggin comments on a proposal by Sinclair Davidson over at Catallaxy to finance greenhouse action with long-term bonds. I’ll leave the technical discussion to actual economists, but note that Davidson is factoring in climate skepticism into his arguments. The analyses discussed here accept mainstream climate science (or, at least, most of it) but argue against mitigation anyway.
Here’s a quote from the Smith work:
Oh, and if we want a bit of good ole blog wars with Catalepsy, Quiggin has started the ball rolling: http://johnquiggin.com/index.php/archives/2011/02/06/catallaxy-doesnt-like-bond-markets/
Noted wilful.
Davidson is also throwing in climate skepticism as well as complaints about the discount rate.
Perhaps Garnaut should explain why he is supporting the carbon price alternative even though it results in a much higher price increase per tonne emission reduction compared with alternatives that do not depend on artificially increasing the price of dirty? The alternatives would move his “utility cross-over” much closer to the present.
Fwiw, CBA actually made reaching an agreement on acid rain pricing in the US more difficult. The economists who made the greatest political impact (in terms of shaping the Clean Air Act) actually avoided it. Two of those economists, Hahn and Stavins, actually put out a paper in 1992 condemning economists for being too obsessed with mathematical models, and called on them to get their hands dirty in the real world
Australia a “Climate drag”: http://www.theage.com.au/environment/we-are-a-climate-drag-garnaut-20110207-1ak5w.html
There was reporting also at ABC’s PM and Time Magazine. Giles Parkinson’s Crikey piece originally came from Climate Spectator. He has a useful summary on the other 7 remaining updates. I look forward to No 5, where he is going to tell us that the IPCC has underestimated the global impacts of climate change. I wonder whether he will say anything about targets.
parkinson now has another piece on the international implications of Australia’s policies.
I’m still frustrated with Garnaut’s treatment of an approach to risk and uncertainty in the costing of climate change elucidated by Martin Weitzman several years ago. This was available to Garnaut in his original review. He knew about it but simply set it aside.
I did a post on Weitzman way back then. Unfortunately it hasn’t yet followed us to our present home, but I refer you to Peter Wood’s submission to the Garnaut Review. Peter, being a mathematician, is a bit more technical than I could ever be.
Let me put it this way. Back in 2006 in the Stern Review we were told that 450ppm as a stabilisation target was effectively unattainable, 550ppm was preferred. But we were also told that at 450ppm we had about a 1 in 20 chance that the 2100 temperature would reach 4C. That’s the level usually associated with the end of civilisation as we know it.
And that is based on climate sensitivity which only takes into account short term “Charney” feedbacks, not the longer term feedbacks Hansen talks about.
At 450ppm the full uncertainty range goes off the end of the scale which ceases at 6C.
What Weitzman is saying, I think, is that if avoiding catastrophe is the name of the game, then the discount rate argument is actually irrelevant.
So is the argument about adaptation as an option instead of mitigation.
Garnaut in section 4.2 of the update appears to grasp the nettle and then in 4.3 lets it go again and gets back to the idle chatter about discount rates.
It’s about as relevant as discussing how many angels can dance on the head of a pin IMHO.
And in Garnaut’s terms Weitzman’s argument merely “strengthens” the argument for mitigation, it doesn’t install it as an overwhelming and inescapable priority.
Brian, for what it’s worth the technical report and Garnaut’s update spends considerable time discussing “Black Swan” events, and making the point that these are pretty compelling reasons for mitigation.
I suppose I was taking that the argument for mitigation is a given, for many, many reasons. Perhaps it’s the scientist in me who sees this as a settled issue and wants to move on.
I was just picking apart – for my own amusement, as much as anything – the logical consequences of some of the arguments made against mitigation.
Thanks, Robert. I’m time poor at the moment and didn’t have time to look at the technical paper.
I still think Garnaut could have embraced the implications of Weitzman’s approach more strongly in his update.
The real immediate problem is the complete silence coming from government. Labour are using a tactic of implying compliance then hiding behind “we will get to that” no comment wall. No communication equals no information. The less information , the less scope for comment, negative or positive. This is very much a Gillard technique which usually canveys the notion that a matter is in hand and being addressed diligently.
Only in this case it isn’t.
Part of the problem is that economists do not understand a logarithmic response requirement to address an escalating problem. Hence their inability to quantify the cost of an “unknown unknown”. When an economic system goes critical economists withdraw and wait till the destruction ends, then step back in to “assess” the status and continue their process of marginal management, as if it never happened. Economists expect that all problems are cyclical.
Neither do Lawyers understand a logarithmic responce. In their world when things go pear shaped, you get a good nights sleep, attend to the mess the next day, and then send the bill with the supreme confidence that if the bill is not paid all of the power is in their hands.
Medicos have a better appreciation for proportional responses. But in their world when the treatment has been effective the patient heals in real time. Crises are relatively short. And when it all goes wrong the patient dies, but everything else carries on as normal.
The situation that WE all are in is that the biosphere has cancer, which is in the immediate process of going from benign to malignant. We, the human race, are the virus that caused the cancer. And in that perspective, when the patient dies we all die with it.
Maybe this is the only way that Gillard is going to “get it”. by putting Global Warming in terms that a Labour government can understand ie health education employment.
We have to start talking about our “sick” atmosphere, educate the public about cancer of the biosphere and renewable preventative therapies, and how all employment ultimately ends when this type of biospheric cancer progresses towards terminal.
Garnaut (briefly) provides an indirect non-technical/political response to the issue of appropriate targets here in response to the last question from the floor (Simon Spratt).
To put it in my words, he’s a ‘realo’ not a ‘fundie’. Though the science suggests that realos are in fact fundies and fundies are realos.
BilB, I think the frustration of Garnaut towards the government, a man who’s used to being listened to, and who’s devoted quite a lot of time and all of his credibility to this issue, is quite palpable.
(One thing from those questions – that is the most intelligent, least gibberish question I have ever heard from a CEC member (which is not to say it was a good question)).
Oh dear… this link.
http://www.garnautreview.org.au/update-2011/events-speeches/reflections-australian-climate-change-discussion-transcript.html
Bill: the key question is what’s going on in the negotiations between Labor, the Greens, and the independents.
I don’t actually mind that much that they’re conducting those quietly (and all sides are keeping it quiet, not just Labor). Quiet negotiations tend to indicate that there’s a serious effort to strike a deal going on.
I’d like to think that is the case, Robert, but with the history of government handling of Global Warming Action, It could very well mean quite the opposite. At a time when certainty of response is demanded, we get quiet negotiations?
I know that I have had a gut full of Australian Government back room deals.
Economist Ross Gittins gets it right of the scandalous level of handouts to fossil-fuel:
http://www.theage.com.au/opinion/politics/carbon-price-is-no-fixall-20110208-1alk4.html?rand=1297167701078
Bill, as a matter of practical politics, getting a carbon price through the Parliament as it will be constituted as of July 2011 requires the agreement of Labor, the Greens, Andrew Wilkie, Rob Oakeshott, and Tony Windsor.
It’s not unreasonable to expect that they might thrash out their differences in private, at least until they have something in draft form acceptable to all.
Here’s hoping!