Monday, April 22, 2013

Does it make economic sense to decarbonise the global economy?

I have been debating on Judith Curry's blog with one Peter Lang who is very keen to discuss damage function – the net benefit or damage per degree of warming.

There are 59 references to damage function in this thread, but not a lot of development of the concept.

I personally feel it is premature to deal with the economics of climate change at this stage, since it is more logical to progress from

1 Equilibrium Climate Sensitivity (ECS) which gives us an idea of what kind of temperature changes we can expect
2 An assessment of whether the climatic changes we are observing in real time are just freak events or part of significant statistical trends.
3 If the answer to (2) is positive, the question of attribution of current weather events to AGW
4 Assessments of what kind of weather changes we can expect at 1, 2, 3 and 4 degrees Celsius of warming 5 estimates of the e conomic damage these degrees of warming will cause to world GDP
6 Comparison of damage in 5 above to the cost of avoiding and defending against such damage.

 So in my view we are about 5 steps away from being ready to consider economic matters, but I have given way to temptation.

 Peter refers to Nordhaus who shows a graph on  his computer model (and I emphasise that Nordhaus is using a model. Some sceptics apply a blanket ban on use of models in climatology. Just saying.)
His graph shows 1% damage to global GDP at 2C warming, and 2% damage at 2.5C warming, as shown by his 2007 model. That does not seem too severe, and Nordhaus has been cited by Monckton and others as saying that the cost of climate mitigation work outweighs its benefits.

However, Nordhaus himself says he has been misinterpreted by the sceptics. It is worth reading the whole essay, but the main point is in Section 6, where he says: “The authors (i.e. a number of sceptics who have cited his work in support of their position) cite the “benefit-to-cost ratio” to support their argument. Elementary cost-benefit and business economics teach that this is an incorrect criterion for selecting investments or policies. The appropriate criterion for decisions in this context is net benefits (that is, the difference between, and not the ratio of, benefits and costs).”

 He goes on to say ”the authors summarize my results incorrectly. My research shows that there are indeed substantial net benefits from acting now rather than waiting fifty years. ” Going back now to the Damage Function graph, the key point in allocating costs to future events is in the Social Discount Rate, which includes an applied Pure Time Preference rate – the relative valuation placed on a good at an earlier date compared with its valuation at a later date. Stern used a low PTP rate of 0.1%, whereas Nordhaus uses a 3% rate. At 3%, the cost of environmental damage happening 25 years later is approximately halved, compared to the cost if it occurred today. Nordhaus gets smaller costs than Stern, but even so, he finds that there are “substantial net benefits from acting now rather than waiting fifty years. ”

It is in setting the social discount rate that the economics of dealing with climate change is totally and inevitably dependent on major value judgments. If our grandchildren live in a more hostile, less supportive environment than ourselves as a result of choices that we make today in how we meet our energy needs, does it matter to us?
How much does it matter?
Does it make a difference if we have no grandchildren?
Should it make a difference?
Should we respond to all the inevitable uncertainties by adopting the Precautionary Principle?
Is it really the end of the world if we set about decarbonising the economy now, or might that not be rather a good thing, irrespective of any impact it will have on climate change?

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