One possible consequence of the collapse of the summer arctic ice cover is that storms like Sandy will become the new normal. There are reasons to think that the freak conditions that caused Sandy to become so destructive are related to the loss of arctic ice, and although the scientific understanding of the relationship between the arctic and northern hemisphere weather in general is not robust, there seems to be at least some confidence that the ice and weather around the Atlantic are related.
It’s worth noting that what is happening in the arctic this year is well in advance of scientific expectations. The 2007 Intergovernmental Panel on Climate Change (IPCC) report, for example, predicted an ice free arctic in about the year 2100. The cryosphere blogs, however, are running bets on about 2015 for “essentially ice free,” and no ice in 2020, as shown, for example, in this excellent post on ice cover prediction by Neven. Results presented by the IPCC are one of the main mechanisms by which governments make plans to manage climate change – in fact this was their intention – and one would think that events happening 80 years sooner than the IPCC predicts would make a big difference to the plans that governments need to consider.
One of the biggest efforts to make policy judgments based on current predictions of future effects of climate change was the Stern Review, published in 2006 and based on the best available scientific predictions in the previous couple of years. The key goal of the Stern Review was to assess the costs and benefits of different strategies for dealing with climate change, to answer the question of whether and when it was best to begin a response to climate change, and what that response should be.
The Stern Review received a lot of criticism from the anti-AGW crowd, and also from a certain brand of economists, partly because of the huge uncertainties involved in predicting such a wide range of events and outcomes so far in the future, and partly because of it particular assumptions. Of course, some people rejected it for being based on “alarmist” predictions from organizations like the IPCC, or rejected its fundamental assumption that climate change was happening. But one of the most persistent and effective criticisms of the Review was that it used the wrong discount rate, and thus it overemphasized the cost of rare events in the future compared to the cost of mitigation today.
I think Superstorm Sandy and the arctic ice renders that criticism invalid, and instead a better criticism of the Stern Review should now be that it significantly underestimates the cost of climate change, regardless of its choice of discount rate. Here I will attempt to explain why.
According to its critics, the Stern Review used a very low discount rate when it considered future costs. A discount rate is essentially a small percentage by which future costs are discounted relative to current costs, in order to reflect the preference humans have for getting stuff now. The classic, simplest discount rate simply applies an exponential reduction in costs over time with a very small rate (typically 2-5%), so that costs incurred 10 years from now are reduced by an amount exp(-10*rate). I use this kind of discounting in cost-effectiveness analysis, and a good rough approximation to its effects is to assume that, if costs are incurred constantly over a human’s lifetime, actually only about 40% of the total costs a person might be expected to incur will actually be counted now.
For example, if I am considering an intervention today that will save a life, and I assume that life will last 80 years, then from my perspective today that life is actually only really worth about 30 years. This reflects the fact that the community prefers to save years of life now, rather than in 70 years’ time, and also the fact that a year of life saved in 20 years time from an intervention enacted today is only a virtual year of life – the person I save tomorrow could be hit by a bus next week, and all those saved life years will be splattered over the pavement. The same kinds of assumptions can be applied to hurricane damage – if I want to invest $16 billion now on a storm surge barrier for New York, I can’t offset the cost by savings from a $50 billion storm in 50 years time, because $16 billion is worth more to people now than in 50 years’ time, even if we don’t consider inflation. I would love to have $16 billion now, but I probably wouldn’t put much stock on a promise of $16 billion in 50 years’ time, and wouldn’t change my behavior much in order to receive it[1]. Stern is accused of rejecting this form of discounting, and essentially using a discount rate of 0%, so that future events have the same value as current events.
There are arguments for using this type of discounting when discussing climate change, because climate change is an intergenerational issue and high discount rates (of e.g. 3%) fundamentally devalue future generations relative to our own. Standard discounting is probably a logic that should only be applied when considering decisions made by people about issues in their own lifetimes. This defense has been made (the wikipedia link lists some people who made it), and it’s worth noting that many of the conservative economists who criticized the Stern Review for its discounting choice implicitly use Stern’s type of discounting when they talk about government debt – they complain extensively about “saddling future generations” with “our” debt, when their preferred discounting method would basically render the cost to those generations of our debt at zero. This debate is perhaps another example of how economists are really just rhetoricists rather than philosophers. But for now, let’s assume that the Stern Review got its discounting wrong, and should have used a standard discounting process as described above.
The Stern Review also made judgments about the effects of climate change, largely along the lines of the published literature and especially on the material made available to the world through previous rounds of IPCC reports. For example, if you actually access the Stern Review, you will note that a lot of the assumptions it makes about the effects of climate change are essentially related to the temperature trend. That is, it lists the effects of a 2C increase in temperature, and then applies them in its model at the point that the temperature crosses 2C. For example, from page 15 of Part II, chapter 5 (the figure), we have this statement:
If storm intensity increases by 6%, as predicted by several climate models for a doubling of carbon dioxide or a 3°C rise in temperature, this could increase insurers’ capital requirements by over 90% for US hurricanes and 80% for Japanese typhoons – an additional $76 billion in today’s prices.
The methods in the Stern Review are unclear, but this seems to be suggesting that the damage due to climate change is delayed in the analysis until temperature rises by 3C[2] – which will happen many years from now, in most climate models.
The assumptions in the Stern Review seem to be that the worst effects of climate change will begin many years from now, perhaps after 2020, and many (such as increased storm damage) will have to wait until the temperature passes 2C. There seems to be an assumption of a linear increase in storm damage, for example, which loads most storm damage into the far future.
This loading of storm and drought damage into the far future is the reason the discount issue became so important. If the storm damage is in the far future, then it needs to be heavily discounted, and the argument becomes that we should wait until much closer to the time to begin mitigating climate change. This argument is flawed for other reasons (you can’t stop climate change overnight, you have to act now because it’s the carbon budget, not the rate of emissions, that is most important to future damage), but it is valid as it applies to the debate about whether we should be acting to prevent climate change or prepare for climate change.
However, recent events have shown that this is irrelevant. Severe storm damage and droughts are happening now, and at least in the Atlantic rim these events are probably related to the collapse of the arctic ice load, and reductions in snow albedo across the far north. Stern’s analysis was based on most of these events happening in the far future, not now, and as a result his analysis has two huge flaws:
- It underestimates the total damage due to climate change. Most economic analyses of this kind are conducted over a fixed time frame (e.g. 100 years), but for any fixed time frame, a model that assumes a gradual increase in damage over time is going to underestimate the total amount of damage that occurs over the period relative to a model that assumes that the damage begins now. Stern couldn’t assume the damage begins now, because those kinds of things weren’t known in 2006. But it has begun now – we need to accept that the IPCC was wrong in its core predictions. That means that the total damage occurring in the next 100 years is not going to be $X per year between 2050 and 2100, but $X per year between 2010 and 2100 – nearly twice as much damage.
- The discount rate becomes irrelevant. Discount rates affect events far in the future, and have minimal effect now. If Stern had used a standard discount rate of 3%, then from his perspective in 2006 the current estimates of storm damage in the USA due to Sandy ($50 billion) would be about $42 billion. Also, all the damage in the USA due to Sandy is excess damage, because without the collapse of the arctic ice fields, Sandy would probably have headed out to sea, and done 0 damage. The estimated cost of the storm surge barrier mentioned above was $16 billion, so assuming that this cost is correct (unlikely) and it could have been built by now (impossible), that investment alone would have been worthwhile. Whereas if we assume a storm like Sandy won’t happen until 2050, the cost of the storm from Stern’s perspective is $14 billion, and we shouldn’t bother building the barrier now.
This means that the main conservative criticism of the Stern Review is now irrelevant – all that arcane debate about whether it’s more moral to value our future generations equally with now (Amartya Sen[3]) or whether we should focus on building wealth now and let our kids deal with the fallout (National Review Online) becomes irrelevant, because the damage has started now, and is very real to us, not to our potential grandchildren.
The bigger criticism that needs to be put is that Stern and the IPCC got climate change wrong. The world is looking at potentially serious food shortages next year, and in the last two years New York has experienced two major storm events (remember Irene’s storm surge was only 30cm below the level required to achieve the flooding we saw this week). Sandy occurred because of a freak coincidence of three events that are all connected in some way to global warming. We need to stop saying “it’s just weather” and start recognizing that we have entered the era of extreme events. Instead of writing reviews about what this generation needs to do to protect the environment for its children, we need to be writing reviews about what this generation can do to protect itself. Or better still, stop writing reviews and start acting.
—
fn1: This is a problem that has beset the organized religions for millenia. An eternity in heaven is actually not equivalent to many years on earth, if you discount it at 3% a year.
fn2: Incidentally, I’m pretty sure I was taught in physics that the use of the degree symbol in representing temperatures is incorrect. Stern uses the degree symbol. Economists!!! Sheesh!
fn3: Incidentally, I think in his published work, Sen uses the standard discounting method.
Compromise and Conceit 
November 3, 2012 at 6:49 pm
I admire your courage. You know you are now being watched, and your site will soon be inundated with comments claiming that it isn’t happening, it won’t hurt, and Al Gore is fat?
November 4, 2012 at 4:48 pm
I read the Stern report shortly after it came out in 2006 and have been taking a professional interest in the emissions trading policies of each of the major Australian parties and the legislation that was enacted this year.
My take on Stern (and this is a 6 year old memory) was:
1. He was open to a number of heat curves. That is he wasn’t saying a certain concentration of CO2-equivalence in the atmosphere would lead to a specif increase in average temperatures, he saw a range.
2. He wasn’t specific about the cost associated with a rise in average temperatures of +2C’ or +4C’ but gave descriptions of possible badness, rather than costings.
3. He didn’t use discounting in a sense of “no skin off my nose if the grandkids get washed away/tropical disease/overrun by famine refugees”. Rather he was counting of the cost of abatement coming down as time and technology advanced.
Despite his us of discounts he was calling for change Right! Now! the discounts were only to be used in quantifying the amount of immediate change.
faustusnotes raises a good point. Stern was looking at bad stuff happening in the future, progressively getting worse if human behaviour didn’t change. But what does it mean with events like Hurricane Sandy – caused by rising temperatures or more likely exacerbated by rising temperatures – occuring Right! Now! How do we discount that?
We can’t. We need to deal with that damage now; not leave it to the grandkids.
But there will be more Sandys, and worse Sandys, going into the future. We can put the breaks on our current CO2 emissions and go severely backwards in our emission rates and bear the costs. Or we can look at discounts and adopt a more gradual curve of reduced emissions.
If the impacts of current carbon levels and current temperatures are higher than we thought then abatement comes at a higher price. Emission reduction curves ought to be steeper. But economics and discounting haven’t changed; only the parameters to which they’re applied.
November 5, 2012 at 6:42 pm
”I think Superstorm Sandy and the arctic ice renders that criticism invalid”
No, the correct criticism is that the science the Stern report was based on vastly underestimated the speed of change. The discount factor is still wrong.
To use a maths analogy, what you’re suggesting is that instead of doing a complicated statistical regression to establish if there is a correlation between observed events we could just flip a coin. Then as long as the events observation was badly recorded and the coin toss came back with a result that supported the real data we could say that coin tosses can replace statistical analysis.
The point is lucky guesses don’t trump good logic. If your shoddy data input in to the shoddy economic model makes your wild guess correct then its shoddy.
”and instead a better criticism of the Stern Review should now be that it significantly underestimates the cost of climate change, regardless of its choice of discount rate.”
This is a criticism of climate modelling in the Stern report. It is valid (assuming you can back it up with a new climate model).
”There are arguments for using this type of discounting when discussing climate change, because climate change is an intergenerational issue and high discount rates (of e.g. 3%) fundamentally devalue future generations relative to our own.”
The other issue is that refusing to discount future costs fails to allow the possibility for future people being smarter or my technologically adept than you. If this discount factor was used in 1798, then the logical conclusion is that Malthus was right and stern steps should be taken to support a global famine occurring in the near future of the 1800s.
For the record, history demonstrates that Malthus was an alarmist. It turns out that farmers and agricultural scientists were smarter than he was.
”when their preferred discounting method would basically render the cost to those generations of our debt at zero”
Here you commit a climate skeptic error by ignoring that there are cut offs that render discounting incorrect (i.e. total climate collapse, a Chinese kid buying your country with their pocket money, etc). This doesn’t mean that discounting is wrong, it just means that when you hit the disaster scenario the model doesn’t apply after that point.
What this means is the Stern reports discounting model is wrong. But if the climate collapse is going to happen in 10 years then who cares, cause the error in the climate model is more important.
”This debate is perhaps another example of how economists are really just rhetoricists rather than philosophers.”
Ricardian Comparative Advantage. Nash Equilibriums.
This isn’t to say it’s not a social science, but some of the ideas out of it are very cool, subtle and important.
”we need to accept that the IPCC was wrong in its core predictions. That means that the total damage occurring in the next 100 years is not going to be $X per year between 2050 and 2100, but $X per year between 2010 and 2100 – nearly twice as much damage.”
See here you state an important and valid criticism. You’ll also note that if you take your proposed cost model and implement a reasonable discount factor into it then it’ll still spit out a big cost as acceptable for preventing climate change, cause a 3% discount on Sandy occurring next year is what’s referred to as a “rounding error” in economics forecasting[1].
@Syd Webb
”How do we discount that?”
That’s dead easy to answer. You don’t discount the present, that’s not what the concept is used for. Hence my continuing disagreement with the Stern report’s process and attempt to shift the blame back to where it belongs, not on the economist but on the climate scientist.
NB: This is not me saying climate change is not happening, it’s me saying that using sensible economics models leads to sensible debate. The fact that the climate model was potentially vastly optimistic is what we should be crapping ourselves over.
”If the impacts of current carbon levels and current temperatures are higher than we thought then abatement comes at a higher price. Emission reduction curves ought to be steeper.”
Agreed.
[1] The accounting term is that the difference is “non-material” which I love as it’s so much more professional than “yeah, but no one gives a shit”.
November 5, 2012 at 9:05 pm
Paul
Couple of points:
A discount rate assumes that the issue is amenable to solutions that are not welfare-reducing, or that the issue itself will not progressively reduce welfare. There is no assurance that either is the case with climate change.
Malthus correctly pointed out that the mismatch between fertility and increases in food production were amenable either to reductions in fertility, or to increases in production. His point was that the latter is not open-ended, which leaves only the former as a way out in the longer term. And on this he is right. Climate scientists point out that the major established bases of civilisation are closely adapted to a relatively invariant climate, and there is a mismatch between the possible speed of adaptation and the speed of climate change. The speed of adaptation is not open-ended, but the speed of climate change potentially is (right up to a Venusian climate).
There is no single climate model, nor a single climate model output. The output depends crucially on what we do – so there are various scenarios for different levels of CO2 emission. But the climate scientists have always noted the inability of current models to forecast regional trends, that many feedback effects are poorly understood, and – critically – that uncertainty is not our friend, in that the potential for a worse or faster outcomes is much more worrying than the potential for better or slower outcomes. Stern followed the conservative median forecast, which assumed, for lack of better knowledge, that feedbacks would be neutral. It now appears that the majority are positive.
November 5, 2012 at 9:46 pm
Peter T, I think the number of comments here should serve as evidence of the extent to which I am being watched from certain quarters – i.e. not really at all. So that’s a win.
Paul, yes, your first point is correct. That sentence should say “Superstorm Sandy and the arctic ice renders that criticism irrelevant.” Obviously correct modeling is preferable to incorrect modeling, but if all the problems begin now, arguments about how we are discounting costs 40 years from now lose their relevance (and thus, in the hyper-rhetorical context of the AGW debate, their sting).
ssshh! Don’t tell everyone the inner secrets of the statistician’s trade!!
Yes indeed, and again it’s irrelevant if the problem is happening now rather than then – the smartness and technological skills of our progeny will be largely irrelevant if the major industrial centres are washed away before they are born …
I said economists, not economics!
Incidentally I hope it’s clear to everyone that I’m not arguing that this- or that- discounting method is wrong, just that the thorny issue of which discounting method to choose for a major report about the future of the planet becomes considerably less relevant when the climate model part is wrong. And I think the people who argued Stern’s discounting process was wrong were also likely to argue that his climate assumptions were unnecessarily alarmist. Now we find he was unnecessarily conservative with climate, and the bias his climate assumptions induced in the report was so great that it swamps the effect of any particular choice of discounting.
Syd Webb, I think Stern did do some quite detailed modeling, he didn’t just lay out broad scenarios – hence the importance of discounting.
I think Peter T’s point about the limits of discounting is important. But, if Stern’s climate assumptions were as wrong as I think they were, then again – largely irrelevant. Back when the review was written there was a lot of debate about this, and it does open up a secondary interesting policy issue: how do you commission economists to give you balanced, trustworthy judgments of the relative value of different (major) policy decisions when the field itself can’t come to agreement on the best way to handle the uncertainty of future benefits? Almost all policy decisions are about balancing uncertain future benefits, but once the Stern review was released we discovered that economists have difficulty agreeing on the fundamental principles of the problem. How much weight can we give them, then? That someone can write a 700 page review with complex technical content, and then at the end of it all we find that economists can’t agree on whether the basic, most fundamental part of his accounting process was right or wrong, well … that doesn’t seem like a very useful field of endeavour. Interesting, maybe, but useful?
(Which isn’t to say that this is a problem just for economics – epidemiologists are still debating how to measure health!)
November 6, 2012 at 7:52 pm
@Peter T:
”A discount rate assumes that the issue is amenable to solutions that are not welfare-reducing, or that the issue itself will not progressively reduce welfare.”
I’m not familiar with the principle you’re describing here. If you have any links to reading to explain or expand it I’m all ears. By default, I have to support the call for a better considered discount rate, otherwise I suspect that proper prioritisation of spending becomes impossible in light of catastrophic events.
I’ll confess that my understanding of Malthus is Wikipedia-deep, but “Malthus correctly pointed out that the mismatch between fertility and increases in food production were amenable either to reductions in fertility, or to increases in production.” doesn’t appear as the primary focus of: http://en.wikipedia.org/wiki/Thomas_Robert_Malthus#An_Essay_on_the_Principle_of_Population for me
What that summary reflects is:
1. Malthus regards life as trending towards a stable and disagreeable state driven by population expansion consuming increases in production.
2. Malthus focused on decreasing the population pressure, with no mention of production increases being able to address or improve the situation sustainably for 2 centuries.
Both of these points are refuted by the last 200 years of recorded history with an ongoing trend towards absolute poverty being reduced.
In fact, if we wanted to phrase to improve on Malthus’s argument, we’d toss away the information that is readily available on it and replace it with “Stuff always trends towards getting better, but it’s hard to predict what the driver of the improvement will be.”
”His point was that the latter is not open-ended, which leaves only the former as a way out in the longer term.”
This is reflected in the Wikipedia entry, but the quoted example that a carnation can’t be bigger than a cabbage seems foolish to me in light of what we know about genetic engineering now. I can’t imagine I’d want such a carnation, but I’d bet it’s possible to get one bigger than what he regards as a cabbage’s size [1]. In the same way, I do believe that there are limits to expansion, but I’ll also bet that neither you nor I can correctly guess them.
The fact of the matter remains he was wrong for 200 years. That’s a pretty long period to be wrong for. If you want to say an axiom like “There’s always some limit” then don’t expect to be treated as a prophet when you can’t even guess which millennia the problem is going to occur in.
”Climate scientists point out that the major established bases of civilisation are closely adapted to a relatively invariant climate, and there is a mismatch between the possible speed of adaptation and the speed of climate change.”
I’m not sure if this comment and the following ones were directed at me or just general. I wasn’t disagreeing with the importance or impact of climate change here. I was saying that applying a poorly constructed economic model to an incorrect climate model did not make criticism of the economic model invalid, the error is in the climate model.
And again, to say it really clearly: The climate model being incorrect doesn’t mean AGW isn’t happening, it doesn’t mean climate scientists are liars, it doesn’t mean we shouldn’t do anything, it doesn’t mean any of the climate skeptic things that you may want to assume that I am saying. [2]
@Faust:
”Paul, yes, your first point is correct. That sentence should say “Superstorm Sandy and the arctic ice renders that criticism irrelevant.””
And
”just that the thorny issue of which discounting method to choose for a major report about the future of the planet becomes considerably less relevant when the climate model part is wrong”
OK, then I think we’re back on the same page. Drat, I’ll have to trawl back through your post and see if I can find something else to troll over.
I suspect that the next logical point to fight over would require me building a climate model to assess your theory, and bugger that for a game of soldiers.
”I said economists, not economics!”
Ricardo and Nash were both economists. I don’t think this leads anywhere interesting other than realising that generalising about lecturers in a subject is the sort of thing that lecturers in another subject do because they want to get the offices held by the former subject lecturers, presumably because they’re a little bit nicer.
Not that you’d know anything about university political games 😛
[1] I’d also bet that cabbages can be bigger than he can imagine too.
[2] Sorry if that seems strong, I just wanted to be clear that I’m not saying “The fault is all in climate science therefore we should do nothing based on a dodgy economic model and climate model” I mean to say “That economic model was poor, now lets discuss whether the climate model can be improved and if it suggests a course of action.”
November 6, 2012 at 10:36 pm
wasn’t Malthus also some kind of dodgy arsehole with extremely regressive (even for his time!) views about the poor and how they should be treated?
I’ve just put up a post that I hope shows the limits of discount rates as a guide to policy-making …
November 7, 2012 at 7:09 am
The Wikipedia entry makes some reference to how his view was the poor laws (which sound like modern welfare laws) create and sustain a poor underclass.
This theory wouldn’t be out of place anywhere [1] in the modern political debate.
[1] I have some memories that even ALP members occasionally debate perverse incentives of some welfare policies. [2] Yes, of course it’s more common on the right.
[2] Personally I’m pretty sure that the Australian unemployment benefit is way too low to provide a perverse incentive in anything except the most edge cases. But that doesn’t mean that the entire structure shouldn’t be discussed with an eye towards minimising effective marginal tax rates and total welfare expenditure.
November 7, 2012 at 12:28 pm
I was disentangling Malthus’ core insight from his religious viewpoint (that sexual restraint was impossible, that contraception was immoral and that the lower orders lacked self-discipline – so he saw the long run as dominated by misery). But his argument stands – without restrictions on fertility long run growth in welfare is impossible. Luckily, restrictions on fertility seem to be much more common and more easily obtained than Malthus supposed (Malthus may have been a git, but he was one of the major early thinkers on political economy – up there with Say and Ricardo).
As for 200 years of refutation – there’s a great deal of good history over much longer periods that broadly supports Malthus (and the exceptions tend to support his case too – like Japan C17-C18, where restrictions on fertility were an essential part of relieving pressure on sensitive ecosystems, so allowing growth in production, or ditto rural France early C19-C20). For opposite cases see C18 Ireland, Cambodia late Angkor and many others.
Point on discount rates is simple – a dollar now is worth more than a dollar later if I expect to be richer later – it will be a smaller marginal increment (and there will be some risk that it will not arrive in full). But if I expect to be poorer later, then a dollar later will be a larger marginal increment. People forego some part of their earnings in their peak period to put by for later – when they expect the deferred income to be more valuable. If we expect climate change to have severe effects on welfare, we should invest heavily now – the same investment later will cut more into our then lower income.
As for “stuff is always getting better”, depends on what stuff you are measuring. Roughly 90% reduction in marine resources? Loss of roughly 50% of topsoil in major breadbasket regions over less than 100 years? Much of the “getting better” of the last 50 years or so has been mining, not harvesting – and we are, in many areas, quite visibly near the bottom of the barrel. On oil, for instance, we are spending $50 a barrel to frack wells that last less than a decade. We have not yet found a way to grow food without soil (or oil).