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:

  1. 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.
  2. 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.