The recommendations to combat climate change in the Stern Review stand uncomfortably alongside this principle of social justice. If income per person were to grow by 1 percent a year over the next two centuries, less than half the pace of growth of the last century, people in the year 2200 would be 6.3 times as rich as they are today. Why should the poorer people of the present scrimp and save in order to protect the environment for their richer descendants, who could afford more environmental investments than we can?
THE PRICE OF THE FUTURE
Even if we were to decide that we should invest present resources to save future people from the perils of a warmer planet, another crucial question remains: how much?
The bill could be fairly high. The Stern Review, published in 2006, put the price tag on the worldwide effort to combat climate change at about 1 percent of the entire globe’s economic output. That amounts to about $600 billion a year.
With this investment, Stern suggested, we could stabilize the concentration of greenhouse gases in the atmosphere at somewhere in the upper end of the range of 450 and 550 parts per million, compared with 430 ppm today, conserving energy and switching into more expensive nonfossil fuels. He said this should keep global temperatures from rising more than 2.5°C. It wouldn’t prevent all environmental damages, of course. Stern estimated that allowing 550 ppm of greenhouse gases in the atmosphere would cause losses amounting to about 1.1 percent of the world’s economic product. That’s the equivalent of losing Indonesia or Turkey.
And there is a fair chance that the bill to avoid catastrophic warming is even higher. Vulnerable countries like the Maldives, a small archipelago of low-lying islands that rise only a few feet above sea level, are suggesting even a lower cap on carbon concentrations in the atmosphere. A couple of years after his initial report, Stern suggested that concentrations of greenhouse gases should best be kept below 500 ppm, an endeavor that would cost 2 percent of the world’s gross domestic product.
That is a lot to spend. Stern’s conclusion that the investment is worthwhile is based on a proposition that is either obvious or radically controversial about the value of human life. Stern assumes that the welfare of a person hundreds of years from now is worth the same as the welfare of a person alive today. Not everybody agrees.
Stern allows two modest adjustments to this equality. He acknowledges that the value of money to people is inversely proportional to how much they have. An extra dollar is worth less to an investment banker in New York than to a subsistence farmer in Michoacán. What’s more, there is a minuscule chance that a meteorite will strike a devastating blow to the earth at some point in the future and kill everyone on it. In this case the welfare of humans beyond that point in time would fall to zero. We would have no justification to spend anything to enhance their welfare because by then humanity would be extinct. Those tweaks aside, the bedrock concept of the equal value of human welfare across time leads Stern to a straightforward rule of thumb: devoting a given share of the current generation’s income to forestall global warming is justified if it produces a benefit amounting to at least the same share of that future generation’s income no matter how many hundreds of years down the line.
This approach sounds reasonable when taken at face value. But it has a problem: it places too little value on the people of the present by making the future extremely expensive. That’s because there isn’t just one future generation to save at the present generation’s expense, but many. Say we were justified in protecting future people from the damages of warming as long as the benefits, as a share of their future incomes, were greater than our investment was, as a share of our incomes now. Adding up the bill for the rescue over a large number of future generations would justify humongous spending today.
This kind of counting allows the Stern Review to estimate that the future costs of climate change are equivalent to a fifth of the world’s income “now and forever.” He reaches this price tag by adding very small costs in the near future with larger and larger costs in faraway centuries.
IF WE WERE to apply the most common economic techniques to value the future, we would not accept this conclusion. Outside the debate over climate change, money today is worth more than the same amount of money tomorrow. That’s not just because of inflation : a businessman will make an investment only if it generates a higher return than putting the money in the bank to earn interest.
The return on corporate investments in the United States, before taxes, has averaged 6.6 percent per year over the past four decades. Government agencies are directed to use a “discount rate” of 7 percent to compare the expected future benefit of some programs with their up-front cost. This choice assumes that, excluding the effects of inflation, a dollar today—if applied productively—will be worth $1.07 next year, $1.145 the year after that, and $752,932 two centuries down the road. It means that to spare damages of $752,932 in two hundred years we should spend no more than $1 today.
One can transport this rationale to environmental issues. A forest in which 100 trees will produce 7 new ones next year has a 7 percent discount rate. Saving 100 trees from loggers this year has the same value as saving 107 trees next year.
Thinking in these terms, Stern’s approach amounts to using an extremely low discount rate. The idea that averting a dollar’s worth of damage in the future is worth spending a dollar today would amount to choosing a discount rate of zero. Stern chooses a slightly higher one, just a smidgen above the rate at which people’s income is growing.
William Nordhaus of Yale University, one of the most prominent American economists working on climate-change models, disagrees pretty radically with Stern. Like Stern, he argues we must reduce emissions of greenhouse gases to try to get a grip on climate change. But he puts a much higher bar on how much we should be willing to invest in the endeavor. He points out that more than half the damages forecast by the Stern Review are expected to occur after the year 2800. Why, he asks, should we sacrifice a substantial share of our current welfare to avert costs that are so far off in the future?
Nordhaus argues that in estimating future damages we should use a rate that reflects the productivity of long-term investments. He argues it would be dumb to use present-day money to undertake an investment to tackle warming if it produced a lower return. That’s because we could achieve a higher profit investing it in something else. We could use the returns of our investment to tackle warming in the future and we would still have money left over. “The discount rate is high to reflect the fact that investments in reducing future climate damages to corn and trees and other areas should compete with investments in better seed, improved rotation, and many other high-yield investments,” Nordhaus writes in his book A Question of Balance, about options to combat climate change.
Future generations will take advantage too of the fecundity of these investments. Millions of poor farmers on Bangladesh’s vast alluvial plains would surely welcome investments to stop the sea level from rising and swallowing their farms. But the Bangladeshis of the future, like those of the present, might be better served if the money were allocated instead to develop their economy so they could get a better job outside agriculture farther up the hill.
Using Nordhaus’s discount rate, which he estimates at 4 percent per year, leads to a radically different view from Stern’s about the merits of expensive interventions to save the future earth. Say we are deciding how much to spend to avoid a climate shock that would generate damages amounting to 13.8 percent of the world’s gross domestic product in the year 2200—which happens to be the estimate for that year in the Stern Review’s bad scenario. If economic growth over the next 190 years replicates the seventy-five-fold jump of the past 190 years, the damages would amount to about $640 trillion in today’s money. Using a discount rate of just above 1 percent, as Stern suggests, we would be justified to spend up to nearly $80 trillion to save the day 190 years down the road. But at a 4 percent discount rate, as Nordhaus uses, it would make sense to invest in this
effort only if we could do it for about $385 billion. If we couldn’t do it for that amount, we would be better off deploying the money on some other, more productive objective.
TORN BETWEEN TWO PRICES
If she is listening to economists, Dasgupta’s hypothetical voter is probably dizzy by now. President Harry Truman famously called for a one-armed economist to get around the profession’s penchant for analysis of the “on the one hand, on the other hand” variety. Nordhaus and Stern fit the bill—each offering up one clear choice. But they do have two hands between them. Stern’s analysis calls for a big immediate investment to combat climate change. He suggests that we start by setting a price of about seventy-five dollars per ton on emissions of carbon dioxide—sixty-eight cents per gallon of gas. He expects people and companies would dash to conserve energy, develop energy-efficient technologies, and switch into alternative, nonfossil fuels. As these technologies got cheaper, the levy on emissions could fall to about twenty-five dollars per ton of CO2 by the year 2050.
Using a similar set of climatic facts, Nordhaus advises us to address the problem more gradually. He proposes that the levy on CO2 today should start around $10 per ton and rise as the impact of carbon concentrations in the atmosphere increase, to about $200 at the end of this century. To the average American, who consumes 20 tons of CO2 annually, the bill would start at around $200 per year.
Nordhaus would tolerate more climate change than Stern. He would allow $17 trillion in climate-related damages to happen simply because he estimates we would need to spend more than that to eliminate them. By 2100, temperatures would be about 2.6 degrees Celsius hotter than in preindustrial times. But though we would suffer more damage, we would get value for money from our investments: avoid $5 trillion in damages at a cost of $2 trillion. In Nordhaus’s analysis, which does not contemplate the fast technological progress assumed by Stern, the cost of Stern’s strategy to cap warming at 1.5 degrees could balloon to nearly $30 trillion in present value, and prevent only $12.5 trillion worth of damages to the earth. And we’d still be left with $9 trillion worth of climate-related damage.
The European Climate Exchange, a market for companies to buy and sell permits to emit CO2, which was launched in 2005 as part of Europe’s efforts to reduce carbon emissions, suggests that investors believe the world’s policy makers are closer to adopting Nordhaus’s views than Stern’s. In the summer of 2010, the future contract for December priced one ton of CO2 at about €15 a ton—about $18.75.
What should our voter instruct her elected representatives to do? Dasgupta doesn’t quite know. And he is well versed in the economics of climate change. Perhaps, he suggests, cost-benefit considerations should be eschewed in favor of what is known as the precautionary principle, which would support large-scale spending to curb carbon emissions on the grounds that there is a chance, even if highly uncertain, of an Armageddon-like climatic catastrophe if we don’t.
He argues it might be more politically feasible than we think to mobilize resources to save future generations. If voters in rich countries saw ourselves as directly responsible for future generations’ plight, we might overcome our hostility toward foreign aid, which stems from the belief that the developing world’s poverty is, to some extent, the developing world’s fault.
Our voter could seek the high ethical ground by tweaking the parameters—maybe trimming Nordhaus’s 4 percent by a point or two. After all, even though it’s probably right to discount the value of money, environmental goods are likely to become more valuable as they become scarcer. So the monetary discount rate should be adjusted to take into account the rising value of environmental “goods.” Saving that forest with 107 trees next year will be worth more than saving the 100-tree forest today because though we will have more money next year there will be fewer forests to go around. So each surviving tree will be more valuable to us.
Maybe our hypothetical voter should just follow her belly. Ultimately, Dasgupta argues, “it is a ‘gut feeling’ about the awful things that could occur if the global mean temperature were to rise another 5 degrees that should make us very scared.” And there’s no parameter to tell us precisely how to price this fear.
SALVATION ON THE CHEAP
Or maybe she could cross her fingers and hope we will devise some clever technology to stop us from colliding head-on with the limits of the planet. Some scientists have been toying with the idea that geo-engineering might save the day from climate change: putting mirrors in orbit to reflect part of the sun’s energy away from the earth, or pumping sulfur dioxide into the stratosphere. This would replicate the effects of the 1991 eruption of Mount Pinatubo in the Philippines—which sent up so much stuff into the air it blocked the sun and reduced surface temperatures by half a degree Celsius over the next two years.
Unfortunately, some studies suggest this strategy could trigger catastrophic drought in parts of the world. Still, it has the advantage that if it works, it would work fast. Moreover, it is cheap: a few billion at the most. This approach would fit what we have done, at least since Malthus’s day. Every time we have faced physical constraints, we have deployed technology to squeeze more out of the finite resources of the planet.
Only forty years ago, as concern over population growth and environmental degradation was shaping into an environmental movement, the economist Julian Simon decided to challenge the prevailing concern about the state of the earth and dared the Stanford ecologist Paul R. Ehrlich, a noted prophet of doom, to a bet.
Ehrlich had built his reputation dusting off Malthus’s expectation of impending environmental collapse. “In the 1970s the world will undergo famines—hundreds of millions of people are going to starve to death,” he wrote in The Population Bomb in 1968. In The End of Affluence, published in 1974, he forecast “a genuine age of scarcity” by 1985. Simon would have none of it. In 1980 he challenged Ehrlich to choose any natural resource he wanted—from coal to copper to corn. If these commodities were to become scarce as the world’s population grew, their price would naturally rise. Simon bet that the price of whatever Ehrlich chose would, instead, decline over the next decade.
Ehrlich bet $1,000 on a basket of five metals—chromium, copper, nickel, tin, and tungsten. He scoffed that explaining to an economist the inevitability of rising commodity prices was like “attempting to explain odd-day-even-day gas distribution to a cranberry.” But Simon won. The world’s population grew by 800 million people over the decade. But phone companies abandoned copper wire for fiber optics. Tin cans were displaced by aluminum. And the price of every one of the metals in Ehrlich’s chosen basket fell, after accounting for inflation. Tin and tungsten plummeted 71 percent.
Ehrlich sent Simon his winnings: a check for $576.07—which amounted to the extent of the fall in the basket’s price. Ever since, the wager has provided a victorious narrative for the school of thought that we can ride global warming out without enormous sacrifices. Opponents of efforts to reduce emissions of carbon into the atmosphere wield Simon’s wager as a weapon. After his death in 1998, the Competitive Enterprise Institute in Washington, which spends much of its time and resources in denying climate change, created the Julian L. Simon Memorial Award to bestow upon fellow skeptics.
IT SEEMS RISKY to trust our ingenuity at this stage. Around the world, the planet is showing signs of stress to sustain 7 billion humans living on it.
It was barely over two years ago, in the spring and summer of 2008, just before banks across the rich world started buckling under the weight of bad mortgages, that the price of corn, wheat, and soybeans shot to unprecedented heights on the board of the Chicago Mercantile Exchange. There were food riots in Egypt and Bangladesh. In Haiti’s sprawling slum of Cité Soleil, mud cookies—a mixture of dirt, salt, and vegetable shortening—became the food of choice as the price of rice soared out of most Haitians’ reach. Prices of iron and steel jumped too. On July 3, Brent crude oil from the North Sea peaked at $143.95 a barrel—94 percent higher than its price just twelve month
s before.
We were momentarily saved from this catastrophe by a global recession of which we had not seen the like since the 1930s. But as soon as the world started growing again, we started hitting some of the same constraints. Oil prices, which dropped to a trough of $33.73 a barrel after Christmas in 2008, were back above $80 in April of 2010. In August, on fears of a global shortage, the Food and Agriculture Organization’s food price index surged to its highest level since September 2008. Martin Wolf, the usually serene economic columnist for the Financial Times, wrote that limits to economic growth could topple civilization. A world that over the past two hundred years had grown itself out of many of its problems could easily slip back to a zero-sum reality in which one group’s gain would result in another’s loss, in which the only chance to get ahead would be to steal, repress, and plunder. Democracy and peace work in a world of increasing opportunities where people can invest and trade their way to prosperity. If there are limits to growth, Wolf warned, “The political underpinning of our world falls apart.”
And if there is any doubt that resources in the future will be more expensive than they were in the past, one need go no further than Ehrlich’s basket. Between 1990 and 2008 the basket roughly doubled in price, after inflation. The price of tungsten zoomed up 150 percent. The price of chromium jumped 138 percent. Simon got lucky in his choice of decade. But it would seem foolhardy for us to trust that our luck will hold forever.
The Price of Everything Page 23