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October 24, 2005

The Economics of Inaction on Climate Change: A Critique

Is it nobler to suffer the slings and arrows of outrageous climates or to take arm against a sea of troubles, and by preventing end them?

That was essentially, the question posed at The Fletcher School on October 6th by Tufts University’s Frank Ackerman and Ian Finlayson of the Massachusetts Department of Environmental Protection.

While economic models of climate change do take this question seriously, the “dismal science” would have us believe that “the optimal policy on climate change is to do almost nothing.” So, why do these models seem to support inaction?

Einstein once commented that God does not play dice with the universe. That may well be, but we mortals are playing DICE with climate change on planet Earth. In fact, the Dynamic Integrated model for Climate and Economy, or DICE, is considered the “de facto open-source standard for economic modeling of climate change policy,” according to Ackerman. Butin this model, every time we role the DICE, the results suggest that, “the optimal policy is to do so little that future temperature increases are barely affected.”

Unsatisfied with this outcome and convinced that gambling with the climate doesn’t pay off Ackerman and Finlayson make two plausible recommendations for smarter DICE results.

The first modification addresses discounting. A high discount rate implies that “extreme far-future outcomes don’t matter much to the present generation.” Ah, there’s the rub: “a benefit of $1 million, occurring 200 years from now, has a present value of about $2,700 at 3% discount rate, or just $1.33 at 7%.” This means, the short-run costs are simply too high relative to short-term benefits to warrant action.

Ackerman and Finlayson challenge the assumption that a high initial discount rate is appropriate. “It is not just the eventual decline in the discount rate that matters; much more important is how high it starts.”

Second, they tackle the assumption that subjective benefits from moderate warming far outweigh the expected costs associated with health and environmental damages. Ackerman and Finlayson suggest that the DICE being used selects evidence that leads to the conclusion that we desire a mean annual temperature of about 20 degrees Celsius. “This is roughly the temperature of Houston or New Orleans; it is well above the current global average temperature of about 14.5 degrees Celsius,” said Ackerman. Ackerman and Finlayson find the assumption of “intense public craving for heat” rather implausible. They argue that happiness is likely to increase only in a handful of the coldest, most Northern of countries as a result of moderate changes in climate. In contrast, the vast majority of the world’s population “will already be unhappy with climate trends in the near future, long before a 2.5 degrees Celsius increase occurs.”

Rolling the DICE with these twists, Ackerman and Finlayson conclude that “high and rising carbon taxes are the optimal policy, leading to some decades of sacrifice on behalf of much better future outcomes.”

In closing, Professor William Moomaw reminded attendees that most climate models do not actually factor in the two centuries of inertia driving the titanic changes in our climate. Swift and concerted action is thus of the essence if we are to avert a head on collision with increasingly unpredictable and costly climatic events. To consider the cost of inaction, Professor Moomaw challenged students to place a price on future category 6 and 7 hurricanes headed our way.

“To act or not to act?” Perhaps the right question ought to be the famous query posed by Hamlet: “To be, or not to be?”

Article by Patrick Meier, PhD Candidate

Posted by jessica at October 24, 2005 10:59 AM