European Tribune - Roasting our grand-children.

Roasting our grand-children.

by Colman
Fri Nov 3rd, 2006 at 05:59:07 AM EST

Since the release of the Stern report I've seen two types of attack on it in the UK press: picking at details, as per this FT story which I'll look at in a moment, and the claim that since the UK is only responsible for 2% of emissions there's nothing they can do to improve the situation. Climate change deniers seem to have gone from "don't be silly" to "there's no proof" to "it doesn't matter, there's nothing we can do". Was there ever a more self-fulfilling piece of prophecy? The concepts of providing leadership, setting an example, occupying the moral high ground or doing their bit are entirely foreign to them.

Now, on to the criticism in the FT by Max Wilkinson:

There are two curious omissions in Sir Nicholas Stern’s report on global warming. Both open it to flanking attacks from sceptics. The first is that nowhere in his 575-page tome does he reveal what discount rate he assumes to estimate the present value of future disasters. Second, the word “nuclear” has been omitted from the executive summary, conclusions and the points for action liberally scattered through the report. There is an important connection between these omissions, which suggests why Sir Nicholas was so coy.

He estimates the discount rate used as being between 2% and 3%, which he considers low.

This low figure reflects an ethical belief that we should not value the cost of disaster to our grandchildren at less than the costs of the same disaster to ourselves. A zero discount rate, favoured by some economists and campaigners such as Friends of the Earth, would make their distress the same as our distress in economic terms. So there is a huge incentive to spend now to avoid future global warming.

He argues that a higher discount rate, closer to what a commercial entity would apply, that would value future disaster that happens to our descendants as less awful than if it happened to us, isn't entirely callous since the increased wealth that would be available to them would compensate. This gives me visions of our great-grandchildren starving in golden halls and I'm not entirely sure what discount rate to apply to that.

The implications are disquieting. In the Stern world, big projects to combat global warming, including nuclear, are “cheap” on a 50-year view, but only governments and their economists may think so. Thus projects such as a nuclear programme may have to be heavily subsidised. Yet taxpayers are most unlikely to take the ethical view incorporated into a very low discount rate. This uncomfortable reality was tacitly recognised by Tony Blair, the UK prime minister, when he insisted recently that nuclear power must be left to the private sector.

Note the explicit and implicit assumptions here: taxpayers don't care about their offspring, government intervention is always bad and commercial logic is especially privileged over all other considerations. Is is really so unlikely that people can be persuaded to invest in their children's future?

His closing is wonderful:

So where do we stand? Lord Lawson, supported by distinguished economists such as Sir Ian Byatt and Lord Skidelsky, is right to be cautious about an extremely low discount rate that may shift the burden of adaptation too far from the market mechanisms to political intervention. Government foresight is notoriously poor and the future of the globe highly uncertain. Sensible precautions should be taken, of course, and generous aid will be needed. But a new economic framework based on a vision of Armageddon could turn out to be a big waste of money.

Market foresight is also remarkably poor and market mechanisms probably cannot move us to where we need to go fast enough: they solve problems not possible problems. This is simply another plea for massive transfers from government to the private sector.

Maybe he's right about people not caring about their children: he clearly doesn't.

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Roasting our grand-children. | 12 comments (12 topical, 0 editorial, 0 hidden)

Re: Roasting our grand-children. (4.00 / 2)

Always the same question: evil or not paying attention?

by Colman (colman at eurotrib.com) on Fri Nov 3rd, 2006 at 06:06:10 AM EST

Re: Roasting our grand-children. (none / 1)

A zero discount rate, favoured by some economists and campaigners such as Friends of the Earth, would make their distress the same as our distress in economic terms. So there is a huge incentive to spend now to avoid future global warming.

This about says it for me...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Fri Nov 3rd, 2006 at 06:12:15 AM EST

Re: Roasting our grand-children. (4.00 / 5)

The debate about the discount rate is at least a relevant one, as this is probably the single most important number to meaningfully compare the cost today to the impact of doing or not doing something in the future.

But using a commercial number is absurd, as precisely this is a matter of public policy, and at most the cost of borrowing of governments (1-2% above expected inflation, i.e. 3-4% today) should be used.

The underlying argument here is that governments have no proper role, even to tackle such economy-wide, or civilisation-wide issues. This is a fundamentally ideological position, a fundamentalist one, in fact.

This is the result of the past 30 years of anti-tax, anti-government propaganda. The governement is not good for anything (except that it is used anyway as an unending source of pork and of bigbrotherish invasions of privacy and individual rights)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Fri Nov 3rd, 2006 at 06:44:48 AM EST

Re: Roasting our grand-children. (none / 0)

If it is possible to invest directly in future energy production - and it is - then renewables can actually become more "affordable" than any other type of energy, simply because their "fuel" is free and they do not have unknown (but obviously massive) costs of decommissioning to fall on later generations.

Moreover, an "asset-based" energy pool model takes Government (and taxation) out of the equation, except maybe as "trustee"/ custodian of the assets.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Fri Nov 3rd, 2006 at 07:16:36 AM EST
[ Parent ]

Just for fun (4.00 / 3)

Lomborg in the WSJ Op-Ed pages
http://www.opinionjournal.com/extra/?id=110009182

To sum it up

nitpicking some numbers
it's pointless because China and India won't do their part anyway
the money would be better spent on fighting malaria and providing drinking water, if the goal is to save lives in the poorest parts of the world.

The second point is a real issue, but does not negate the need to do something, quite the opposite, it underlines the scale of the taks in front of us; the third point also has some sense to it, but it only shows that we need to spend more on both, not that we should do only one (which is an excuse to do nothing, like today).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Fri Nov 3rd, 2006 at 06:49:40 AM EST

Re: Roasting our grand-children. (none / 1)

What's the justification for using a discount rate in the first place?

Doesn't it assume that GDP will continue to grow - when it's more likely that beyond a certain point GDP will start to shrink dramatically? (Or am I missing something?)

Otherwise, this is just the usual free market posturing. Is the FT really delusional enough to believe that the markets can deal with this problem, when the net result of market influence to date has been all-but insignificant?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 3rd, 2006 at 08:37:27 AM EST

Re: Roasting our grand-children. (none / 0)

It's just how one values expenditures now that have benefits in the future. It is, as I understand it, trying to put a value on foregoing the use of the money for something else now - the comparison is normally with putting the money in a bank or something.

by Colman (colman at eurotrib.com) on Fri Nov 3rd, 2006 at 08:41:06 AM EST
[ Parent ]

Discount rate (none / 0)

the discount rate simply reflects the fact that having something now is slightly more valuable than having it later (including the risk of losing it altogether in the meantime).

In practice, this applies to having money now vs having it in one year's time; and the basic discount rate is the interest rate you can get in a risk-free (or as close to it as possible) investment, like a bank deposit or a government bond.

Then it is used to identify the cost of borrowing, i.e. spending money now to get something (what you really want) in the future.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Fri Nov 3rd, 2006 at 08:45:13 AM EST
[ Parent ]

Re: Discount rate (none / 0)

Okay - so is discounting the negative of interest, in the sense that you're spending money now to avoid much bigger losses in the future?

Otherwise - what exactly is it that you have now that's more valuable than having it later? And does that idea make sense between generations?

Surely the situation is that in real terms, ignoring ecological effects means that you're borrowing from future GDP today? And that cutting down that borrowing will lead to lower losses in the future?

Putting a figure on it and worrying about a few percentage points of difference seems academic in the context of potential flood, famine, drought, and a vastly different energy landscape.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 3rd, 2006 at 09:23:33 AM EST
[ Parent ]

Re: Discount rate (none / 0)

It's comparing what you have in your pocket today and what you'll have tomorrow.

Having 100 today is the same as having 104 in one year (with a 4% disocunt rate) - and that's what your 100 will become if you do 'nothing' with them, i.e. keep them in risk free government bonds.

So if you are told that if you do nothing, you'll have a loss of 104 from global climate change in one year's time, this is equivalent to a loss of 100 today, and if you can prevent that loss by spending less than 100 today, then you come out better than if you did nothing.

Same thing if you invest: if you spend 100 today, you want to get more than 104 out of the process in a year's time, or you might as well buy government bonds.

Then you need to incorporate concepts like inflation, the price of risk, and the cost of borrowing for you (and more items) to the picture, but essentially, the discount rate allows you to express value in the future in terms of today's money, and thus to compare outcomes in terms that are useful to decide (or not) to spend money today to change these outcomes.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Sat Nov 4th, 2006 at 11:06:47 AM EST
[ Parent ]

Re: Roasting our grand-children. (none / 0)

The debate about the discount rate is at least a relevant one, as this is probably the single most important number to meaningfully compare the cost today to the impact of doing or not doing something in the future.
But using a commercial number is absurd, as precisely this is a matter of public policy, and at most the cost of borrowing of governments (1-2% above expected inflation, i.e. 3-4% today) should be used.

Understanding the vast effect of the discount rate on capital intensive projects (and in effect the extremely important issue of government financing and loan guarantees for capital intensive public goods) is without question the most important thing I have learned by reading the ET.

Thanks Jerome!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Fri Nov 3rd, 2006 at 08:43:25 AM EST

Re: Roasting our grand-children. (none / 1)

Looking out for posterity doesn't have a good track record. The forces that want to make money now are always stronger than those who want to do things properly. The classic example is mining. Huge mines are dug and the tailings are left to form mountains in the surrounding area.

One of the most dramatic cases was Aberfan which just had an anniversary of the disaster. Rather than dispose of the tailings in some ecologically sound way they were dumped in piles where eventually one collapsed on the town.

You can see a similar effect right now in West Virginia where whole mountain tops are being sheared off and dumped into the streams below. There is no plan to restore the landscape when the mininig is complete.

Even plans which charge a fee to the mine operators to be used later for reclamation have a poor record. The mines go out of business, the amount collected is too small, or corruption eats up the funds before they serve their purpose.

If a charge is to incurred now for the benefit of those coming later it has to be combined with something that provides an immediate benefit as well. The percentage of people who are altruistic or think about the future is not large enough to overcome the majority who say "what's in it for me?"

Reagan summed it up from a politician's point of view: "posterity doesn't vote".

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Fri Nov 3rd, 2006 at 09:28:12 AM EST

Roasting our grand-children. | 12 comments (12 topical, 0 editorial, 0 hidden)

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