[Committee] Economics demands action on climate change

[Stephen Stretton]

might be of interest


    Economics demands action on climate change

"IT DOESN'T matter a damn what ethical assumptions you use," says 
Michael Grubb, an expert on climate change policy at the University of 
Cambridge, cold financial arguments are enough to decide what to do 
about global warming. Spend now and reap the benefits later.

As arguments over the science behind climate change have cooled 
<http://www.newscientist.com/channel/opinion/mg19225762.400-editorial-climate-change--we-have-been-warned.html>, 
the question of how much nations should be willing to pay has come to 
dominate the debate. Now Martin Weitzman of Harvard University has 
developed the first thorough method for including unlikely but extreme 
events, such as widespread crop failures, in cost-benefit analyses. When 
you take into account extreme temperature rises of more than around 6 
°C, he says, they dominate all other options and effectively demand that 
investment aimed at stopping them be made now. "This tells us that we 
should take the problem much more seriously that normal cost-benefit 
analyses suggest," says Weitzman, who has submitted his paper to /The 
Review of Economics and Statistics/.

“Extreme temperature rises of more than 6 °C demand investment aimed at 
stopping them be made now”

Economists have generally ignored extreme events when doing cost-benefit 
calculations. Such events are theoretically possible, they say, but are 
so unlikely and lie so far in the future that it is not cost-effective 
to spend money to prevent them. Computer models also suggest that using 
more renewable energy and reducing emissions in other ways would almost 
certainly avoid extreme temperature increases. But Weitzman's results 
are so dramatic that some economists, many of whom argued in favour of 
caution, are shifting their position.

Environment groups argue that the risk of extreme events justifies large 
investment now, but other groups, notably industry-orientated think 
tanks and many Republican politicians, have resisted such calls. "In the 
United States, cost-benefit analyses have been used to back up questions 
about whether [investment] is worth much now," says Grubb. "This throws 
a pretty fundamental spanner in the works."

Richard Tol of the Economic and Social Research Institute in Dublin, 
Ireland, is one economist who used to argue for investment levels that 
fall short of what green groups say is needed. Investment choices are 
often measured in the amount of money that should be spent on preventing 
the emission of one tonne of carbon dioxide. Before reading Weitzman's 
paper, *Tol had that figure at $5 - now he thinks it should be $50*. He 
is also developing a cost-benefit analysis for the US Environmental 
Protection Agency. "This work shows that we're simply doing it wrong," 
says Tol.

The new method also backs up the conclusions of the Stern Review on the 
Economics of Climate Change, albeit via different methods. Stern's 
cost-benefit analysis, which was published in October 2006, did not 
consider extreme events. Even so, he found that the benefit of investing 
now would be enormous: the world could save $2.5 trillion a year if the 
rise in CO_2 was halted at levels around 50 per cent greater than today. 
But when Stern put a price on the damages that rising temperatures could 
cause, he valued future costs in today's money. Many economists, 
including Weitzman, criticised that assumption, arguing that it ignores 
the fact that investments made now are expected to be worth more in the 
future.

The debate remains unresolved, as ethical arguments continue to rage 
about how to value future generations. But Weitzman's study shows that 
once extreme events are included, the argument becomes irrelevant. This 
is because the potential cost of extreme events is so great that they 
come to dominate the assessment of risk, whatever method is used to 
compare the value of present and future generations. "[Weitzman's work] 
would have received substantial attention in the Stern report. He would 
have used it as supporting evidence," says Grubb.

Weitzman could also create a headache for policy-makers 
<http://environment.newscientist.com/channel/earth/dn12088-exclusive-global-warming-poll-the-six-policy-options.html>. 
The analysis shows that traditional cost-benefit calculations are 
getting it wrong, but it does so only by proving that extreme events 
dominate the costs when included in the calculations. It cannot put a 
figure on how much should be spent now, unlike the old techniques. "The 
big picture is not as clear as economists had thought," says Weitzman. 
"This probably means we should spend more money now, but it doesn't tell 
us how much."

 From issue 2632 of New Scientist magazine, 01 December 2007, page 14
-------------- next part --------------
A non-text attachment was scrubbed...
Name: Weitzman2007UncertaintyCatastrophicCC.pdf
Type: application/pdf
Size: 221895 bytes
Desc: not available
Url : http://mail.zerocarbonnow.org/pipermail/committee_zerocarbonnow.org/attachments/20071208/4471b6b9/attachment-0001.pdf