Nordhaus on Stern

Via Prometheus, I find a review of Stern by Nordhaus. First an aside: N is the first mainstream commentator I’ve seen to point out that the Great War on Terror was undertaken “with no discernible economic analysis”… as I’ve pointed out, both Lomborgs “Consensus” and Pielkes recent re-run have shied away from considering the economics of said War.

N points out what others have: that Sterns results are dramatically different from earlier economic models that use the same basic data and analytical structure. N does what S should have done: point out why this difference exists.

N appears to take the science in Stern at face value: There is little new science or economics here, but it provides many new syntheses of the extensive and rapidly growing literature. While not as balanced and ponderously reviewed as the reports of the Intergovernmental Panel on Climate Change (IPCC), it is much more current than the latest IPCC report, published in 2001.9 For those seriously interested in global warming, it is worth a few days’ study. I would take exception to this: the science appears somewhat questionable (Stoat and JEB passim) and is not obviously an improvement on the TAR. In fact N notices this later: “If we look inside the impact boxes, we find some strange things. The damage estimates are much higher than the standard estimates in the impact literature. This probably occurs because of assumptions that tilt up the damage curve: rapid economic growth forever, high economic damage estimates, high climatic impacts of GHG accumulation, catastrophic risks, adverse health impacts, yet higher sensitivity of the climate system, and an adjustment for inequality across countries.”

But N’s conclusion is that S using a social discount rate that is essentially zero (as Tim Worstall pointed out). And that The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today’s market place.

Which I think brings me back to my conclusion: that Stern won’t survive as a weapon to beat “skeptics” with. Or indeed anyone prepared to analyse it properly. So… what was the point? Just Politics? Perhaps.

[Update: from the comments, it looks like the issue of the discount rate is the one people want to talk about.

Eli R has something to say and points out that Stern "did not hide" his use of a low discount rate. I'm not saying he did. But what he doesn't do is what N has done: point out what a huge difference this makes, and that it explains why he gets such a different answer. At the moment, without haveing gone through the details, I'm on Nordhaus's side.

But perhaps rather more is: if Stern is going to do anyone any good, its going to have to convince the US and China and... so on. In which case a vigorous discussion of why GW should have very low discount rates is going to be needed. I don't see that in the public sphere - W]

Refs

* A very clever way of proving Lord Stern wrong – Timmy at the ASI; using very-long-lease tersm to ty to measure the true discount rate people apply.

Comments

  1. #1 JK
    2006/11/22

    Is it really too much to ask that you spell out words and names instead of using initials all over the place? Initials are confusing and really reduce the intelligibility of your writing.

    [Probably. TAR=IPCC 2001. N=Nordhaus; S=Stern. JEB=James Annan. Are there more? -W]

  2. #2 Roger Pielke, Jr.
    2006/11/22

    William- To be absolutely clear, the class exercise that we did in my seminar indeed did not consider the economics of war. This was not my decision, but that of the students (which probably rsults from the fact that they are environmental studies students, and not international politics students). I certainly think such an issue is important and by any metric the Iraq War has been a fiasco, which is why I have opposed it since before it started. For instance:

    http://www.colorado.edu/news/releases/2003/427.html

    [Hi Roger, thanks for the comment. It still seems very odd to me that TWOT is ignored in these assessments: if I were running such a course, I'd ask my students just why they chose to ignore such a major event - it seems a peculiar kind of blindness. Lomborg, I'm sure, ignored it because it would have been too politically embarassing - W]

  3. #3 guthrie
    2006/11/22

    From my cynical viewpoint, it seems to be that Blair is casting around for some legacies to leave behind when he goes, climate change stuff ebing one area he thinks might be good. JUst dont mention the war…

  4. #4 Eli Rabett
    2006/11/22

    If you read the second chapter of Stern, he explains pretty much exactly what he did, and why he did it. Some of this is eco speak so it was hard to get through (at least for me) which is the principal value of Nordhaus’ letter.

    “…The social discount rate is a parameter that measures the importance of the welfare of future generations relative to the present. It is calculated in percent per year, like an interest rate, but refers to the discount in future “utility” or welfare, not future goods or dollars. A zero social discount rate means that future generations into the indefinite future are treated equally with present
    generations; a positive social discount rate means that the welfares of future generations are reduced or “discounted” compared to nearer generations.”

    Philosophers and economists have conducted vigorous debates about how to apply social discount rates in areas as diverse as economic growth, climate change, energy policy, nuclear waste, major infrastructure programs such as levees, and reparations for slavery.”

    Stern EXPLICITLY states in several places that it would be unethical to value future generations more than the current one. Nordhaus points out that this is not a slam bang case in the literature, but a source of contention (what has the future ever done for me?)

    Note that this is NOT the discount rate for goods and services although it echos through them.

    [Um. I've never read that bit of Stern. *However* even though he says this, what he doesn't appear to do - as Stern does - is to point out excactly why he is getting different answers - W]

  5. #5 Rather not say
    2006/11/22

    > what has the future ever done for me?

    Ask yourself — if you knew the world would end at the end of your lifespan, how would you behave differently?

    The difference is the exact measure of what the future does for you.

  6. #6 Eli Rabett
    2006/11/22

    Rather not, believe me, for a lot of reasons I am the wrong guy to ask that question. Wm. I’ve put up a post with some of the information you asked for.

  7. #7 Steve Bloom
    2006/11/22

    Nordhaus’ paper is filled with statements like this: “The Review’s unambiguous conclusions about the need for
    extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today’s market place.” The difference between him and Stern, as I see it, is that Stern has concluded that global warming represents a problem that is different in kind than those for which modern econmomics was developed and therefore requires a different approach.

    I find myself in complete agreement with John Quiggin’s analysis.

  8. #8 Eli Rabett
    2006/11/22

    Steve, I think it is a bit different. Stern insists that using Nordhaus’ preferred method explicitly values people who are alive today against those who will be born in the future. How much do you love your grandchildren? Mine?

  9. #9 Steve Bloom
    2006/11/23

    Eli, maybe I’m not getting your point, but isn’t that just a restatement of the issue in personal terms? I was a little obscure in how I put it, but I was trying to say that modern economics, such as it is, seems to require the application of a substantial discount rate since it is assumed that such an approach will necessarily produce a preferable outcome for subsequent generations. That may have been true for Western civilization for some hundreds of years now, but expecting it to remain so seems like cargo cult thinking to me.

    And of course I do try to care about your grandchildren (as part of the set of all grandchildren).

  10. #10 Kooiti Masuda
    2006/11/23

    I have not read Stern report, but just Nordhaus’ discussion paper. And personally I feel aligned with Stern as he is criticized. It does not mean that I always agree with Stern.

    The point in Nordhaus’ paper where I felt the most problematic is the assumption “societies become richer in the coming decades”. It is just a wishful thinking. I wish so too, if being rich does not accompany bad side effects. But it is not certain and should not be presupposed. One of his logic, “a Rawlsian perspective that societies should maximize the economic well-being of the poorest generation” promotes current (rather than future) consumption, is not valid without this wishful thinking.

    But perhaps this problem is shared by Stern if Nordhaus is right that Stern assumed “rapid economic growth forever”.

    And the core of the criticism is the almost intractable issue of discount rate! (Recently –on 16 Nov. 2006– I mentioned my crude understanding about the issue in “globalchange group” in the thread ‘Is “growth” good?’.)

    Maybe Nordhaus is right that we should go “Limiting climate change directly” rather than making economic discourse which perhaps inevitably involves the questionable parameter.

    I do not know the economic theory which is the basis of Nordhaus’ remark “the social discount rate and the curvature parameter [also mentioned as "the elasticity of the marginal utility of consumption"] cannot be chosen independently”. But I think it noteworthy that this remark is qualified by “In calibrating a growth model” and “if the model is designed to match observable variables”. The first phrase reminds me of the wishful thinking I mentioned above. But that may be just a matter of naming.

    The second qualification seems to be more serious. Nordhaus’ suggestion sounds like something obvious in natural science: We should use models confirmed by observations. But in this case, I think of another possibility: maybe, in order to avoid dangerous climate change, we need to change the empirical function in the real world, rather than just in analyst’s mind or computer, between the discount rate and the parameter regulating consumption.

    Nordhaus’ criticism suggests that Stern has become a skeptic against the consensus of mainstream economists. And I think that we need more skeptics! I do not encourage so-called skeptics against consensus in climate science, and I think my position is consistent. But I need to be careful not to make a logic defeating myself.

  11. #11 Carl Christensen
    2006/11/23

    As someone who has worked in this field for a short time (4 yrs) it cracks me up that all sorts of pseudo-intellectual types from 100 fields think they can pontificate on global warming — from third-rate Canadian economists & “mineral consultants” through lawyers through paid-off “scientists” like Pat Michaels & Tim Ball. Yet if we turn a tiny fraction of this attention to “the war on terror” all of a sudden that’s off bounds and “unscientific” and “unpatriotic” and “we don’t have enough domain knowledge” etc. Perhaps Amnesty & Greenpeace & the Quakers should just pay $100K “endowments” for scientists to take apart & examine Republican blood-lust & born-again-Christian hypocrisy; as the skeptics do for global warming?

  12. #12 Matt
    2006/11/23

    Hello fellow Green Blogger,

    Over at http://www.environmentdebate.blogspot.com we have a poll running that we would like you to take part in if you wish.

    The question runs; ‘What do you think is the best way to tackle climate change?

    Hope you have time to give your views on this very important issue.

    :-)

  13. #13 outeast
    2006/11/23

    WMC, re. Acronymns and initialisms

    You do seem addicted to acronymism! Since that’s the case, why not make a file containing all the acronyms you use and link to it in each post? I’m certainly not the only one who gets confuces, but equall I can see that you don’t want to hammer out the same names and references explicitly in every post… Just a suggestion!

  14. #14 Eli Rabett
    2006/11/23

    Wm, WMC is Wm. Hi, outeast, forgive Wm, he is writing for the small community that drops in here for coffee. As with most toenails (you know, the kind of ingrown place where you walk in, the music stops and everyone looks at you), sit down, order a beer and slowly our depths (or lack of it) will be revealed. [last sentence removed per user rethink... -W]

  15. #15 Eli Rabett
    2006/11/23

    Apologies to Lubos, that was harsh. Wm, will you please kill the last sentence.

  16. #16 mador
    2006/11/23

    The “Deutsche Institut für Wirtschaftsforschung” (German Institute for Economic Research) says that climate change will cost up to 200 Trillion US$ to 2050.
    See here: http://www.diw.de/deutsch/produkte/publikationen/vierteljahrshefte/docs/paypapers/diw_vjh_05-2-1.pdf
    (I will search for an englisch version)
    So why do you think that the Stern Review exaggerates the costs of global warming?

    (sorry that my englisch isnt perfect)

    [I think that Stern gets much higher numbers than everyone else. I don't think thats controversial - even Stern says it. AS to why this happens... mostly low discount rates, coulpled with high-end scenarios -W]

  17. #17 Eli Rabett
    2006/11/23

    I’ve put up a bunch of links to Stern stuff and discount rates, but I have also found the source for his arguments on discount rates.

  18. #18 garhane
    2006/12/01

    Just who is Stern trying to convince. The general pop.? No way. Russia and China? That seems pretty unlikely. They have their own scientists and some of them will actually read this 700 page tome, but science does not drive China, and the Russians are just as bad about nationalism as the Americans. Maybe the report is aimed at the people who commissioned it, the British Government. In that case, which seems likely, that government now has a great door stop against deniers.
    Stern takes the science as a given and works the economics.For those who follow climate science that is a real problem since orthodox economics is like a badly over loaded 18 wheel highway truck that is so over burdened by ideology you cannot even legally take it out on many highways these days. A field that is dominated by measures or projections of the likely future, clilmate science, is one of those roads that is decidedly unsafe.
    I believe there is (or was) a big set up in the basement of the London School of Economics that had a bunch of vessels and pipes and coloured water that could be dumped in at the top end. It would distribute water by gravity to all the marked vessels, eventually coming to rest at General Equilibrium. That ain’t climate science is it? But that is what the economic system does, in the abstract, according to the economists. Do you think this dynamic roaring nightmare looks anything like that? Is not our system unsafe at any speed and certainly at the present one. Does anyone you know think otherwise except those in the pay of vested interests (as they say).

    [I've seen the pipes etc; its in the science museum now - W]

    Then too, Stern does say with absolute clarity that he has used a zero discount rate and wny he does so. So what is your complaint? That you would prefer some other philosophical base?

    [Using a zero discount rate seems dubious if inerest rates are higher than inflation. No-one in their real lives would use it; so Stern requires special pleading to make sense of it; but I'm not convinced his pleading works -W]

    Of course it makes a big difference, that is why he used it. If the choice of base is legitimate, you pays your money and you takes your choice. He still does not exaggerate his call to action un- reasonably, and one has to conclude that the Government of the UK desired to have such a call to action in its hands.

    What economic scenarios could you project in the Summer of 1929? What can you project now. Some experts talked as though the economic world was doing just fine and that it would continue, back then. Some claim there is no global warming and if there is it is a small thing to be dealt with piece meal, and in small bits. Yet you say the science properly considered leads to different liklely scenarios. Is that not the conclusion to take from your fussing about the discount rate? Why are you suddenly jumping into the sack with the likes of RP Jr. who has placed all his marbles with the denial crowd, despite his lets-pretend hops into other camps briefly, to attract readers.
    We are moving from science into action in the next few years, and if you are going to be useful, you will need to get with the program and recommend, strongly to do this or not do that. You can’t have a private war. Of course there is always Australia,northern Australia.

  19. #19 garhane
    2006/12/07

    Say it is the Summer of 1938, shortly after Munich and just a few days after the first direction, issued in near panic mode by the central government has been published to produce Spitfires fast. We are reading a letter from an Air Marshal (top Airforce bureaucrat, UK) to a colleague. He opines there is much excitement over the new plant which he feels is not needed, as Ministry “schedules provide for the orderly accretion of planes over the next few years” . He says all this fear mongering is greatly exaggerated, especially in view of recent political developments, and it will take the Germans years to catch up in airframe design; the politicians really need the steadying hand of the military; and popular hysteria must be avoided…..and so on.

    The only reason that I know of for people generally to be up in arms about AGW, which many are, is due to the dawning belief that the scientists who have been waving a red flag are right and it really is time to push the panic button. I read these guys, like Tol and Nordhaus, and they sound comfortable. They airily dismiss, with some amusement, and completely unecessary scorn, what the Stern report says. Yet the decisions to be taken and soon are not to be based on consumer choice calculations derived from vague thoughts about a Viennese burger standing outside a confectionary shop and deciding whether he will have one pastry or two (marginal price theory). Do we build a big plant to push out Spits fast, like yesterday, or not? Hint: do not decide this one on anything you ever heard an economist say.

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