Remember Climate Change?

Mariano Torras Complexity, Environment/Sustainability, Future, General, Politics, Public policy/Wellbeing, Reflections, Science Leave a Comment

January 31, 2021

I’ve starred in a lot of science fiction movies and, let me tell you something, climate change is not science fiction. This is a battle in the real world, it is impacting us right now.” (Arnold Schwarzenegger)

The current pandemic has made us mostly, at least temporarily, forget climate change. Climate change will be with us for a long time to come, so keeping it newsworthy was challenging even before Covid-19 hit us. But it is important not to forget about it. Not the least because future pandemics, even if not this one, are sure to be a consequence of a warming planet. While in today’s hyper-polarized environment it is difficult to obtain a fair or moderate assessment, I do my best to provide one in what follows.

What we know, what we don’t, and what we can’t

Fifteen or twenty years ago, one might have had a case, however flimsy, that climate change was not real. Or, more plausibly, that its risks were overstated. But today such a claim could never withstand scrutiny. The evidence in incontrovertible.

But there are things we do not know, such as how serious a crisis it is. Make no mistake: Climate change is an urgent problem. But recognizing it does not tell us how serious it is. As much as we might want to ignore it, policy aimed at counteracting climate change is expensive. In addressing it, we want to know how much damage or how many deaths we could expect to avoid for the money spent. I’ll have much more to say in what follows.

There is an even bigger problem. Even if we somehow knew the exact effects of our chosen policy, there would be no way to objectively determine their monetary value. And such decisions involve tradeoffs. How can we know much importance to place on people alive today relative to the yet unborn? Such issues frustrate serious attempts by economists to analyze climate change with one of their favorite tools, social cost-benefit analysis.

Uncertainty about Uncertainty

Even matters as important as climate change come down to costs and benefits. If the presumed total damages to humanity from climate change were smaller than the cost of undertaking preventive policy, one could conclude that it would be better merely to let climate change “run its course.” Many economists have arrived at somewhat more nuanced versions of this conclusion, the implications of which would alarm activists, much of the general public, and even some policymakers. My objective today is not to refute conclusion itself (though I strongly disagree with it) but to point out flaws in the social cost-benefit analysis method employed to arrive at it.

I’ll begin by summarizing the problem in mathematical notation and then explaining. If you find it confusing you can skip this section. What should be done about climate change comes down to whether the net benefit of the policy is positive or negative:

The expression  ∫t=1 Bt  represents the sum over indefinite time (that is, from years 1 to infinity) of the benefits of climate change policy. The benefit is itself a function of diminution in climate change φt and technological advance τt. These depend on the money spent on carbon emissions mitigation (μt) and climate change adaptation (αt). Notice that since the net benefit is the same as the benefit minus the cost, we subtract the costs μt and αt from Bt in the numerator. I’ll explain the denominator shortly.

Now, there is great uncertainty about φt and τt, and there would be even if we had accurate information about μt and αt. The global climate is simply too complex. Does this stop us? Of course not. Economists, it seems, enjoy special license to translate uncertainty into risk, in order to be able to “do the math.” In other words, we take something completely nebulous and imprecise and put numbers on it. Here is a simply hypothetical example:

Table 1. Possible Climate Change Scenarios

Climate ScenarioProbability
Net positive3%
Low damage27%
Medium damage55%
High damage15%

Economists might utilize scenarios from climate models to obtain probabilities such as the above. Although we do not claim to know what will happen, we simplify matters by presuming to know everything about what could happen, as well as the probability of each outcome. Can we actually know the probabilities for each of the scenarios? And does our Table exhaust all the possible scenarios? Of course not. But in economics, there is almost always a premium on quantitative precision, even if at the cost of seriously misleading measurement or estimation error. We use scenarios such as these to estimate potential benefits of climate change policy.

Even though we do not know φt and τt, we have laid out some precise possibilities. Yet even given the possibilities and the corresponding probabilities we cannot know the policy benefit Bt. It is a simple enough matter, however, to “approximate” the net benefit of each scenario by whatever method we choose. As an example, the hypothetical figures in Table 2 produce an expected economic loss from climate change that amounts to just over $40 trillion.[1]

Table 2. Net Benefit of Possible Climate Change Scenarios

Climate ScenarioProbabilityNet Economic Value
Net positive3%+$600 billion
Low damage27%-$4 trillion
Medium damage55%-$30 trillion
High damage15%-$150 trillion
Valuation and Discounting

There is a reason I placed the word approximate inside quotation marks. Coming up with true reliable numbers is a fool’s errand. How might we, for instance, put a dollar value on averted species extinctions? Or increased water availability? Or, most intractable, what can we do about the value of human life?

Many bristle at the mere idea of cheapening human life by estimating its worth. I accept economists’ justification for doing so, on grounds that we implicitly value human life all the time anyway. For example, by undertaking major construction or public works projects that we know will, in all likelihood, result in human fatalities, we are effectively assigning some finite value to human life (else we would not go forward with the project). You don’t need to accept my justification; but concede me the point and see how social cost-benefit analysis unravels regardless.

Even if a human life, to pick a number at the high end of the range of estimates, were worth $10 million, the number would not inform us about the cost of catastrophic climate change damage. In the language of economics, the total cost of wiping out the human race is far greater than the marginal cost (that is, the estimated $10 million) multiplied by the number of people on Earth. And not only far greater: I do not think I’d be exaggerating if I said that the value of the entire human race (well, to us at least) is infinite. The problem, then, becomes this: We must be willing to spend an infinite amount to avert any non-zero probability of a climate event that extinguished all of humanity.

The implication is, of course, highly impractical. If we are spending all our money (and then some) on averting climate change, there is nothing left for, say, keeping economies running. Economists avoid this trap by choosing models depicting a few hypothetical scenarios, none of which is catastrophic. We justify doing so on grounds that catastrophe is almost impossible. Be that as it may, infinity multiplied by even a vanishingly small probability is still infinity.

Let’s even allow, however unrealistically, that catastrophic climate risk is actually impossible. In this case, the expected net benefit is some finite amount, such as -$40 trillion as in the earlier example. Now we get to the denominator of our equation. Even allowing for the aforesaid caveats making the net benefit more tangible, the problem remains of to what the variable ‘d’ refers. It stands for what we call the social discount rate. In brief, it informs the ethical problem of how much importance or “weight” to put on costs and benefits to future unborn people vis-à-vis ourselves.

In the same way that a private investor would prefer $1 million today rather than 10 years from now, as policymakers we tend to value more highly a given social outcome (benefit or cost) today than in the future. And the further into the future, the less we value it. Again, I won’t try to convince you about why this might be justified, since there is not enough space. But here is a superb exposition on the subject.

If we accept the idea, the question remains, how much less should we value the future? Economists use the social discount rate to make social benefits and costs comparable over time. The higher the social discount rate (d), the less we care about the future and unborn humans. And regardless of d, we care less about future costs and benefits the farther into the future (t) they occur. I will not clutter the text with a detailed explanation,[2] but the following Table illustrates how it would work.

Table 3. The Future Value of $1 Billion

                                            Social Discount Rate

Years into the future1%5%10%
10$905 million$613 million$386 million
50  608 million    87 million 8.5 million
100  370 million   7.6 million72,565
200  136 million 57,8285.27

Notice that a $1 billion benefit is discounted to $386 million after ten years if we use a discount rate of 10 percent, much less than if we used a rate of 1 or even 5 percent. And while the benefit at 10 percent is still worth a sizable amount (at least for most of us), the value drops precipitously over time. One billion dollars is only worth $5.27 if received in two hundred years’ time! The punchline, of course, is that if we look far enough into the future, we will tend not to care what happens, whether it be good or bad. Both positive and negative values approach zero asymptotically.

So, if we cynically wanted to use our analytical tools to discourage interventionist climate change policy, what would be the best way? One approach would be to use predictive models that ignore catastrophic damage as one of the possible scenarios. If we allowed only for finite future damage estimates and then discounted them at a sufficiently high rate, the near-term cost of preventive policy would likely overshadow the long-term benefit. Even if we allowed for the possibility of catastrophic losses, damages could be made finite by assigning a dollar value to each human life. Discounted at a sufficiently high rate and for enough years, the benefit of averting climate change can be made quite small. For example, assuming a 1 percent chance of human extinction in 300 years, a $10m value per human life, and a discount rate of 10 percent, it would not be worth preventing our extinction if it cost more than $306 today! Of course, it is an absurd example. But it does illustrate the power of discounting.

Fiddling While Rome Burns

I do not mean to suggest that deliberate deception mostly explains our disinclination to do anything about climate change. We have grown so accustomed to relying on quantitative data instead of judgments to make policy decisions. It is therefore understandable the policymakers require some numbers to allow us to compare costs and benefits over different years. The problem is that economic analysts are seldom forthcoming about the inescapable ethical choices behind the numbers. As objective as a number like “$10 million” might appear in valuing a human life, there is no concealing the fact that it is a value judgment. And there is no way to objectively determine the “proper” social discount rate. It is an inescapably ethical problem.

Social cost benefit analysis is fraught, at least when it comes to problems characterized by great uncertainty, high stakes, and an extended time interval. The take home message is that we should seldom take numbers at face value. Especially numbers that are based on simplifying assumptions, ethical judgments, or other subjective factors. One hopes that a problem as complex as climate change will be addressed by policy that holds critical reasoning and qualitative judgment at a premium. Failure to muster up the courage to direct future policy that does not fetishize numbers would be akin to “fiddling” while the world burns.

Post-Normal Science and the Precautionary Principle

Climate change belongs in what a number of scientists and researchers call “post-normal science”. In a nutshell, it is an approach to science that views the physical world as an organic whole about which much knowledge is lost when studied by examining its separate parts. But there is more. Not only is the world complex, but it is also increasingly so. Uncertainty, therefore, grows even as we discover new things. And contrary to traditional science, objectivity does not exist. There is no clear line between “facts” and “values,” and our knowledge is very much historically contingent.

These are not new ideas, and they are also not without controversy. The reason that post-normal science has been garnering so much attention recently is that the stakes of a number of today’s challenges are huge – some would say existential. One hopes that we might be approaching at a critical juncture at which the so-called precautionary principle is no longer just theory. In the future, there might be more pressure put on “developers” (one of my favorite misnomers) to demonstrate the safety of their projects or designs to society and the planet before being authorized to go forward.

For too long it has been opponents of, say, a new gas pipeline installation who shoulder the burden of proof that it would be harmful. As we grow increasingly aware of the unforeseen and unintended consequences of private, especially corporate, investment projects, I believe there are grounds for optimism that future policy will exercise judgment that is less blinded by numbers. I realize that I am sounding hopelessly romantic, anti-science, and even reactionary. Other than categorically deny being such things (well, maybe not always the first), I will leave you to mull over the seeming contradiction. But it is worth emphasizing that climate change anyway makes a mockery of any “left-right” distinctions. The physical world cares not about politics, because it subsumes politics. It is time politics cared more about the physical world and its climate.

I’m out of space for now. More later.

[1]The calculation is a simple average of the net present values weighted by the probabilities, so (counting in trillions):  .03(0.6) – .27(4) – .55(30) – .15(150) =  – 40.062.

[2]Private investors do the same calculation using a private discount rate, which is roughly based on the prevailing interest rate. For example, if $100 invested for five years at a rate of 3 percent yielded $115.93, it would be fair to say that $115.93 received in five years would be worth only $100 today. Following the same logic, if we assume a social discount rate of 5 percent, we should be willing to spend about $43.6 million to prevent some climate change damage of $100 million 17 years from now [$100m/(1.05)17].

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