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Comments on Dietz, Groom & Pizer: “Weighing the costs and benefits of climate change” March 13, 2015 Prof. C. D. Kolstad Stanford University 1 General structure of paper I. Climate change damages and mitigation costs II. Societal discounting over time III. Representations of social welfare functions IV. The role of population 2 The evaluation charge: ABCDE A. The paper is Accurate B. or at least Balanced C. The paper is not exactly Comprehensive. In some areas, there is far too much detail; other clearly connected issues are omitted. Also, the paper is an early draft -- reads like several papers stapled together. References are missing for much of the theory part of the paper. D. The paper presents little empirical evidence and thus the issue of Discriminating between weak vs. strong evidence is not particularly relevant. E. On the Everyone is a reader test, the paper regrettably fails. 1. 2. The first section (related to costs and benefits) is widely accessible or could be made so easily by an editor. The remainder of the paper is highly technical and not particularly related to children (though all intertemporal tradeoffs are ultimately related to children). It is not accessible to the average educated reader. 3 General Remarks • The topic of the paper is of central importance • The first section is accessible and ties the issues in the paper together nicely – carry it through the rest of the paper – Don’t overemphasize the credibility of the 2 degree target • The discounting discussion is largely a review and could benefit from simplification, perhaps referencing similar reviews (eg, IPCC) – Suggest adding tabulation of social rates of return on investments in other arenas which benefit children – eg education, infant health, vaccination programs, clean water, long-lived infrastructure • The different types of social welfare functions are incomplete. Discussion incomplete on implications – such as using welfare weights to aggregate the costs and benefits discussion in section I. • The population section is a nice addition (though perhaps not for the readers of the special issue). As the IPCC articulated, this is a thorny issue with scant economics literature. Suggest referencing The Ultimate Externality by Jon Harford. The implications for applied models of climate change (back to section I) are profound and could be underscored. 4 Mitigation costs from IPCC incomplete; feasibility of 2 degrees questionable Mitigation cost only – residual damage excluded 3o 2o 5 Recent estimates of CC Damage--Sparse 5.0 2.5 Tol 2002a Rehdanz and Maddison 2005 Fankhauser 1995 Tol 1995 Nordhaus and Yang 1996 Plamberk and Hope 1996 Mendelsohn et al. 2000a Mendelsohn et al. 2000a Nordhaus and Boyer 2000 Rehdanz and Maddison 2003 Hope 2006 Nordhaus 2006 Nordhaus 1994b Nordhaus 1994a Nordhaus 2007 Nordhaus 2007 Bosello et al. 2012 Maddison and Rehdanz 2011 2.3 0.9 0.0 -0.4 -0.5 0.1 -0.1 -1.5 -1.9 -2.5 %GDP -2.5 0.0 -0.9 -1.4 -1.7 -2.2 -1.3 -4.8 -5.0 -7.5 -10.0 -10.7 -11.5 -12.5 0.0 1.0 2.0 3.0 4.0 5.0 degree centigrade 6.0 7.0 6 1. Discounting: Positive or Normative Approach?—from IPCC review Real returns on financial assets: Australia France Japan United Kingdom USA Government Bills (maturity <1 year) 1900-2006 1971-2006 0.6% 2.5% -2.9% 1.2% -2.0% 0.4% 1.0% 1.9% 1.0% 1.3% Government Bonds (maturity =10 years) 1900-2006 1971-2006 1.3% 2.8% -0.3% 6.6% -1.3% 3.9% 1.3% 3.9% 1.9% 4.0% Equity 1900-2006 7.8% 3.7% 4.5% 5.6% 6.6% 1971-2006 6.3% 7.8% 5.0% 7.1% 6.6% • Some Problems using market rates – Market may not work with some agents unable to trade (future generations) – Markets driven by individuals trading their own consumption across time, not societies across generations – We do not observe safe assets with maturities similar to climate impacts Source: Chapter 3, WGIII, AR5, IPCC 7 Normative approach to Social Rate of Discount • Ramsey Rule—largely a tautology – Social Discount rate: ρt = δ + ηgt [and extended with Var(g)] – Where • δ is pure rate of time preference • g is growth rate of economy • η is measure of inequality aversion/curvature of social welfare function (Prioritarian η > 0) Author Cline (1992) IPCC (1996) Arrow (1999) UK: Green Book (HM Treasury, 2003) US UMB (2003)** France: Rapport Lebègue (2005) Stern (2007) Arrow (2007) Dasgupta (2007) Weitzman (2007a) Nordhaus (2008) Rate of pure preference for present 0% 0% 0% 1.5% 0% 0.1% 0.1% 2% 1% Inequality aversion Anticipated Growth rate Implied social discount rate 1.5 1.5-2 2 1 1% 1.6% - 8% 2% 2% 2 1 2-3 2-4 2 2 2% 1.3% 1.5% 2.4% - 16% 4% 3.5%* 3% - 7% 4%* 1.4% 2% 2% 6% 5% 8 Social Discount Rate Highly Dependent on Assumed Growth Rate (g) and Var(g) Country Discount rate Ramsey rule Extended Ramsey Equation 3.6.4 rule Equation 3.6.5 g σ (std dev g) 1.74% 2.11% 3.48% 3.35% OECD countries United Kingdom 1.86% 2.18% 3.72% 3.58% Japan 2.34% 2.61% 4.68% 4.48% China 7.60% 3.53% 15.20% 14.83% 3.34% 3.03% 6.68% 6.40% Russia 1.54% 5.59% 3.08% 2.14% Gabon 1.29% 9.63% 2.58% -0.20% Zaire (RDC) -2.76% 5.31% -5.52% -6.37% Zambia -0.69% 4.01% -1.38% -1.86% Zimbabwe -0.26% 6.50% -0.52% -1.79% United States Economies in India transition Africa Country-specific discount rate computed from the Ramsey rule using the historical mean g and standard deviation σ of growth rates of real GDP/cap 1969-2010, together with 𝛿 = 0, and 𝜂 = 2. Extended Ramsey Rule includes uncertainty. 9 Simple Illustration: Prioritarianism 10 2. Should CC CBA be using welfare weights? • Is compensation principle ethically justified? – Costs to a person can be offset by benefits to same person--just – Not true for costs to one person offset by benefits to another—may be unjust • Ethical justification of CBA depends on expression of social welfare – SWF • CBA can still be useful even if its findings are ethically ambiguous – Optimal growth can be viewed as simulating a market response • CBA could be weighted to have a prioritarian ethical foundation. – Suggestion that if income distribution optimal then unweighted CBA correct—generally wrong due to prioritarianism – Generally for CBA to yield ethical conclusions, need welfare weights— provided existence of social welfare function is assumed • How to determine welfare weight?—not easy – One approach is to use inverse of VSL – Assume one life of equal social value no matter where – Then weights used to equate VSL among countries 11 3. The significance of uncertainty to policy • Suppose climate sensitivity is uncertain – Median 3oC change from CO2 doubling – 15% probability change will exceed 4.5oC • Effect of distributional assumptions: • What if damage big in the tails? – Expected value of damages averted from mitigation may be dramatically different • Therefore the nature of uncertainty vital to understand the costs and benefits of carbon mitigation (and the social cost of carbon) Table source: Weitzman (2011): REEP 12