Climate Measures Bad Investments? Hardly
The group of experts ranked a total of 17 projects. At least three of the top four are uncontroversial: Two focus on fighting disease (HIV/AIDS and malaria), and one is a measure to fight malnutrition. Trade liberalization, which was also ranked in the top four, might be more controversial, but will not be discussed here. We will concentrate on the bottom of the list where we find three different strategies for addressing climate change, all of which were described as “bad projects.”
Our main objection is that it is very difficult, if not impossible, to compare such different measures as fighting AIDS and fighting climate change. The level of precision in the estimates of how much climate change will cost is far lower than that for calculating what it will cost to fight AIDS because the knowledge bases for the two issues are so different. The problems are also of very different character. The economic consequences of climate change can, in a worst-case scenario, be dramatic, and by the time we realize that human-induced climate changes have unacceptable consequences, it is too late to combat them. The concentrations of greenhouse gases in the atmosphere will remain high for several hundred years after we have shut off the taps.
It is very interesting to take a closer look at the background material Lomborg’s economists had to work from. A background article was written for each area, and this article was to be used as a basis for the group’s discussions. There are also responses from two opponents -- followed by a response to the opponents by the author of the background document. The background document for the climate change problem is written by William R. Cline at the Institute for International Economics, Washington DC, one of the pioneers in the use of economic analyses of climate issues. He looks at three policy strategies: an optimal carbon taxation, the Kyoto Protocol, and a “value at risk” carbon tax, which aims to avoid “maximum” damage. “Maximum damage” is defined as the damage level from global warming at which we are 95% sure it would not be worse (95th-percentile bad outcome). Cline argues in favor of quick and meaningful measures. One important reason he found a quick response to be economically beneficial is his arguments for and use of a low discount rate for calculating the present value of damages and gains that will occur in the future. Since climate damages will largely take place many years from now, the discount rate makes a big difference in estimating the benefit of specific policies. According to Cline, the optimal carbon tax in 2010 will be as much as 150 dollars per metric ton of carbon (about 41 dollars per ton of CO2 equivalent).
One of the opponents, Robert Mendelsohn, professor of economics at Harvard University, has a very different view. In the first place, he disagrees with Cline’s arguments for the use of a low discount rate. He also believes that Cline uses too high an estimate of climate damages and does not sufficiently take into account the positive effects of climate change. He believes the positive effects will counteract the negative until the global temperature increase has reached 2.5 oC. He thus proposes a carbon tax of about 2 dollars per ton of carbon from 2010, increasing to 10 dollars in 2050.
The Economist writes that there was widespread agreement within group in Copenhagen to place climate measures at the bottom of the list. They clearly have a completely different view than Cline does about how to address future events with possible dire consequences but also a high degree of uncertainty about when they will take place -- if they even take place at all. They prefer Mendelsohn’s cautious strategy, which Cline believes is completely inadequate. Cline claims it is irresponsible to do nothing now and leave action to future generations. The reason, he says, is that warming cannot be stopped on a dime. Today’s emissions will have consequences for a long time in the future. Power plants and other major sources of greenhouse gas emissions under construction today will not be replaced for several decades. Moreover, negotiating a climate agreement is a time-consuming process. Cline also looks at how other sectors treat events with great consequences but low probability: He writes, “… there is something fundamentally disturbing in the fact that society values its money highly enough to take out insurance against the 95th-percentile bad outcome in the financial sphere, but is unprepared to do the same when it comes to policies affecting the environment and future generations.”
Attempts to perform cost-benefit analyses in connection with climate change measures have undoubtedly a role to play, but a number of caveats are necessary. Economists never seem to agree on which discount rate should be used. As mentioned above, Cline and Mendelsohn also disagree about the extent of damages. This is not surprising; it is very uncertain how great the damages will be as a result of human influence on the atmosphere. It is very difficult to place a value on some potential impacts —for example, more rapid disappearance of species. The costs of the different strategies are also associated with great uncertainty. It can be worth reiterating that the costs of reducing emissions of SO2 to the air turned out to be far lower than expected at least in the U.S.
Under certain conditions, we should not put too much faith in expert opinion. The Copenhagen Consensus project was dominated by economists; no other disciplines were represented in Copenhagen, and the authors of the background material were also mostly economists. Even though economists can undoubtedly contribute to a debate on which measures should be prioritized, greater interdisciplinary cooperation and a more thorough discussion would have given the project greater credibility.
Another objection to the Copenhagen Consensus project is that the panel was asked to rank the projects in answer the question, “What would be the best ways of advancing global welfare, and particularly the welfare of developing countries, supposing that an additional $50 billion of resources were at governments’ disposal?” The money should be spent over 5 years. In this particular context, this is very little; the annual amount is only about 2% of the U.S. annual military budget, or 0.03% of the total income of the industrialized countries. We should be able to afford to address several of the world’s problems at the same time, but this will cost more than a few hundredths of a percent of the annual income of the industrialized countries.
It is also a question whether the point of departure for the Copenhagen Consensus project is simply fundamentally wrong. Why rank just these projects? Here, climate strategies are compared with measures to address problems that everyone agrees are crucial. But climate strategies should also be compared with other goals that society spends (or wastes) money on. One relevant example is to ask what can be delayed with the least harm: climate measures or exploration of Saturn’s rings? Or what about ranking climate measures in relation to spending tens of millions of dollars a year developing new kinds of nuclear weapons, as the Bush administration seems prepared to do?
Pål Prestrud is director of the Center for International Climate and Environmental Research (CICERO). Hans Seip is a researcher at CICERO. He is also a professor at the Department of Chemistry, University of Oslo.
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