Last Friday, economists Frank Ackerman and Elizabeth Stanton of the Global Development and Environment Institute at Tufts University released a report claiming that inaction on climate change will cost trillions of dollars per year by 2100. The report was discussed widely in such media outlets as Grist, People and Planet, andEnvironmental News Service. (Mainstream reporting was limited to Reuters.)
A short review of the Ackerman and Stanton report shows that they got their figures wrong and confused costs with benefits.
IS THE TUFTS REPORT AN INDEPENDENT ANALYSIS OR POLICY ADVOCACY?
The Global Development and Environment Institute is a university-based organization using the acronym GDAE (“gee-day”). Neither the report nor any of the news accounts of the report reveal who funded it. However, the report is subtitled as a deliverable to the environmental advocacy group Friends of the Earth England, Wales and Northern Ireland, a fact noted by 10 of 43 news accounts found in a Google news search.
Despite its university affiliation, GDAE clearly states that it is a policy advocacy organization with a strong environmentalist orientation:
GDAE researchers emphasize ecological health and the correlation between social and economic well-being. This requires expanding our theoretical understanding of economic systems, recognizing that they are embedded in the physical contexts of technology and the natural world, as well as in the social/psychological contexts of history, politics, ethics, culture, institutions, and human motivations…
Throughout all of its activities, theoretical advances at GDAE are informed by the Institute’s applied and policy work, while its practical applications of economics are enhanced by a growing theoretical understanding of what is required to promote socially and environmentally just and sustainable development (emphasis added).
Consistent with this policy advocacy mission, GDAE is supported by a roster of left-liberal foundations and its external advisory board has a universally left-liberal composition, including Brent Blackwelder, president of Friends of the Earth..
WHAT’S IN THE ACKERMAN & STANTON REPORT?
The report is a compilation of materials from mostly secondary sources presented in an advocacy style. Typical of advocacy documents, it was neither peer reviewed nor published in a scholarly journal.
Despite news accounts suggesting novelty, the report does not appear to contain any original research. The principal statistic in the report that has been amplified in news stories comes from the following text (emphasis added):
One estimate, from the World Integrated Assessment General Equilibrium Model (WIAGEM), operated by the German Institute for Economic Research (Deutsches Institut für Wirtschaftsforschung, DIW), is that if nothing is done to restrain greenhouse gas emissions, annual economic damages could reach US$20 trillion by 2100 (expressed in U.S. dollars at 2002 prices), or 6 to 8 percent of global economic output at that time (Kemfert 2005) (pp. 24-25).
The cited article by Claudia Kemfert was published in DIW Berlin Weekly Report, a publication of the German Institute for Economic Research. Like the Ackerman and Stanton report, the Kemfert article also summarizes materials from other sources. Unlike Ackerman and Stanton, it’s a summary of original research published in peer reviewed journals.
But when the Ackerman and Stanton text is compared with Kemfert, its purported source, discrepancies quickly appear. Kemfert’s worldwide damage estimate from global climate change absent intervention is $2 trillion in 2050 (Figure 6), not the $20 trillion in 2100 reported by Ackerman and Stanton. Kemfert cites a $10 trillion IPCC estimate for 2100 (footnote 17), but it’s an estimate of the cost of reducing CO2 emissions by 60 to 80%, not an estimate of damages caused by anthropogenic warming.
In short, the $20 trillion figure has no foundation — either as an estimate of the costs of inaction, or as an estimate of the costs of averting climate change.
Kemfert is transparent about her policy recommendations, at least in part. She argues for Europe, Russia, and the United States to commit to an emissions trading regime that would achieve the Kyoto targets during the 2008-2012 “obligatory period.” Based on her model, the practical consequence of such a deal would include $154 billion and $107 billion in costs to the US and Europe, respectively, with Russia securing a wealth transfer of about $20 billion (all $2002) (table 2). For that reason, Kemfert says “Russia is well advised to ratify the Kyoto Protocol.” The US can limit its costs to $17 billion by declining to participate, and that reduces Russia’s net income from Kyoto to $1.6 billion. Kemfert acknowledges that the US “would have little economic incentive to rejoin the climate agreement,” but “Russia will profit considerably from [Kyoto] ratification” (p. 48). She notes, without apparent irony, that Russia would benefit only because its economic collapse when the Soviet Union imploded enabled it to obtain a very favorable Kyoto emissions baseline. Kemfert is silent concerning the practical enforceability of any emissions trading regime than requires Russian transparency and adherence to the rule of law and the protection of private property. (In the 2006 Index of Economic Freedom, Russia is tied with 61 others for 81st place out of 158 nations with regard to its protection of private property rights. Only 18 countries are ranked worse.)
Leaving these details aside, Kemfert says the sums needed to achieve Kyoto targets are only a down payment to prevent climate change:
If climate change is to be reduced or prevented total emissions of greenhouse gases must be lowered drastically. Climate experts assume that a reduction of greenhouse gases by 60 to 80% will be needed by the year 2100. In view of the length of time greenhouse gases remain in the atmosphere the states responsible should start on these drastic reductions as soon as possible (footnotes omitted, emphasis added).
Kyoto is thus a pilot project to develop and implement institutions for a much more demanding future global regulatory regime.
In their report Ackerman and Stanton say that significant reductions in greenhouse gas emissions passes a conventional benefit-cost test. They attribute to Kemfert an analysis showing that $3 trillion per year spent on “climate protection” would prevent $12 trillion per year in damages, and implicitly endorse the adoption of policies that would lead to such expenditures:
The [Kemfert] study found that immediate adoption of active climate protection policies could limit the temperature increase to 2° and eliminate more than half of the damages; by 2100 this would avoid $12 trillion in annual damages by spending $3 trillion per year on climate protection. If, however, climate protection efforts do not begin until 2025, the same model estimates that it will be impossible to limit warming to 2° by 2100 – and climate protection in general will be more expensive, the later it starts (p. 25).
Kemfert does not mention any such analysis, however, much less endorse it. Kemfert reports in a footnote a different estimate that reducing greenhouse gas emissions by 60 to 80% would cost “up to 150 trillion US dollars worldwide by the year 2100,” which she attributes to the 2001 report of the Intergovernmental Panel on Climate Change (but does not provide a page reference). Kemfert is silent about what policies would be necessary to achieve such reductions, or whether she would endorse them. Taking at face value Kemfert’s control cost estimate of $150 trillion and Ackerman and Stanton’s avoided cost (i.e., implicit benefit) estimate of $20 trillion, both stated in $2002 and applied in 2100, climate change prevention has substantial negative net benefits.
Ackerman and Stanton say global climate change and increased climate variability are both demonstrably (and essentially entirely) due to anthropogenic greenhouse gas emissions. Their policy recommendations are succinct (“vigorous action now”) but vague:
Small adjustments to the amount of carbon released each year are insufficient to the task; the short-term targets of the Kyoto Protocol amount to only a gesture in the right direction. Waiting a while, in order to see if things really turn out as badly as predicted, will mean that we miss the last chance to ensure that our grandchildren, and their grandchildren, inherit a livable world.
Ackerman and Stanton clearly believe that achieving the Kyoto targets (the subject of the Kemfert paper they cite incorrectly) isn’t sufficient. But their policy advice is hard to translate into policy:
The world as a whole can, just barely, cope with the impacts of the first 2° of warming, but only if there are immediate, large-scale, and creative approaches to international equity and cooperation.
Hints are provided elsewhere in their report, however:
Because of its momentum, a supertanker has to turn off its engines 25 km before it comes to a stop. Likewise, we have to achieve a drastic reduction in carbon emissions several decades before we can bring climate change under control (p. 1).
Taking this metaphor seriously, Ackerman and Stanton would support laws and regulations mandating an immediate cessation in anthropogenic CO2 emissions.
THE HUMAN OPPORTUNITY COSTS OF CO2 REDUCTION
Ackerman and Stanton state several times that their estimates of the costs of inaction exclude such matters as ecosystem damages and human morbidity and mortality. Consistent with previous work Ackerman co-authored with Georgetown University law professor Lisa Heinzerling, Ackerman and Stanton characterize as unethical efforts by other economists to value avoided ecosystem damages and morbidity and premature mortality averted. They are particularly concerned about the prospect that lives in wealthy nations could be valued more highly than lives in developing countries,
That debate is worth having even if it is a settled matter among mainstream economists, whose primary research concern is not whether to value ecosystem protection and human lifesaving but how to do it properly. For now, three competing economic forces ought to be acknowledged and made transparent:
- If climate change has adverse effects on human health and longevity, policies that are effective in reducing these effects have value precisely because they prevent disease and premature mortality.
- Unless preventing climate change is free, resources devoted to that purpose reduce economic wealth and thereby increase the incidence of disease and premature mortality.
- Wealthy subpopulations can more easily weather the loss of wealth accompanying climate change abatement than can poor subpopulations, so expenditures on climate change abatement now are likely to have a more adverse effect on the poor than the rich.
Ackerman and Stanton acknowledge the first of these forces but not the others. This makes their economic — and ethical — analysis incomplete and seriously imbalanced.
Ackerman and Stanton also object to discounting future costs and benefits, a conventional, longstanding, and generally accepted practice in benefit-cost analysis. They are troubled by the mathematical fact that distant future effects seem trivial when any economically plausible discount rate is applied:
A high or moderate discount rate implies that even the most serious far-future outcomes don’t matter much to the present generation. At a 4 percent discount rate, often used in recent European Commission analyses, a benefit of $1.57million, occurring 200 years from now, has a present value of about $626.97 (p. 28).
The converse is also true, of course. Investing $626.97 at a 4% real interest rate yields about $1.57 million in 200 years. To object to one on ethical grounds requires objecting to both, which Ackerman and Stanton do not do. In any case, Ackerman and Stanton do not make explicit the nature of their ethical objection to long-term discounting. Instead, their objection appears to be founded on the fact that aggressive policies to avert climate change seem to consistently fail when confronted by the imperatives of discounting:
It is a well-known finding in climate economics that the choice of the discount rate dominates the results: with exactly the same facts and assumptions about present and future costs and benefits, a low discount rate implies a high SCC [social cost of carbon] and a strong rationale for active mitigation efforts – while a high discount rate implies a low SCC and almost seems to justify inaction. But the choice of the discount rate for long-run climate studies is not a matter of objective scientific analysis. Rather, it is an expression of concern (or lack thereof) about the welfare of the generations that will follow us (p. 29).
The intergenerational equity argument is a well known objection to long-term discounting. One of many problems with it, however, is that there isn’t a well-defined time horizon beyond which discounting is ethically suspect. The US Census Bureauestimates that there is a birth in America every 7 seconds, or 12,343 babies per day. Decisions made today necessarily reflect expressions of concern (or lack thereof) about their welfare. Thus, if the intergeneration equity argument is taken seriously, all discounting is subjective and subject to ethical challenge.
In their Appendix II, Ackerman and Stanton helpfully provide two alternative approaches to long-term discounting. Ironically, they use both to compound estimates of current damages from climate change, which of course makes future damagesmuch larger. They do not explain why it is ethically legitimate to compound current damages into the future but not to discount future benefits to the present.
The war against discounting has seen many battles, and typically these battles have had a religious component:
In every generation there seem to have been those who question the legitimacy of interest, and by extension, discounting. For more than 1,500 years, the Church of Rome and the civil authorities it commanded forbade the practice of lending at interest as a deadly sin and punished “usurers” as heretics, thieves, and murderers. No less than the church fathers, 28 councils, and 17 popes affirmed its evil. Lending was a capital crime, both spiritually and practically. The church denied lenders the sacraments, absolution in the hour of death, and Christian burial. Caught in the seamless web of ecclesiastical and civil power, lenders were denied the return of principal and the collection of interest, fined, imprisoned, and even subjected to the ordeal. Even after death, moneylenders were denied peace, their bodies dug from the grave, cast out, and dumped into the river (p. 780).
Among major world religions, only Islam has retained its longstanding prohibition on interest. In his book A Moment on the Earth, Greg Easterbook characterized modern environmentalism as a new religion he called “Earthianity,” a term that however descriptive has not caught on. In any case, environmentalist attitudes about interest and discounting continue to be conflicted. While environmentalists have consistently objected to the discounting of benefits and costs of environmental regulations, with equal consistency they have insisted that discounting be scrupulously applied to public works projects with environmental consequences:
The environmentalist love-hate relationship with discounting has now run full circle. Opponents of China’s Three Gorges Dam argue with unalloyed verve that the project has fewer benefits and greater costs than advertised, but implicitly endorse an independent analysis that uses a 12% discount rate on future benefits…
The fundamental problem here is not discounting, but rather intellectual inconsistency. One cannot legitimately revile discounting as the Devil’s tool one day and praise it as Holy Writ the next. The principle and honest practice of discounting projects and decisions with environmental consequences is either legitimate or perverse, but it cannot be both (p. 782).
Belzer RB, “Discounting Across Generations: Necessary, not Suspect,” Risk Analysis 20:6 (2000) pp. 779-792.
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