Aaaaarrrrgh! Why is it that when the debate over discount rates and climate
change finally makes it into David
Leonhardt’s NYT column, he gets it completely wrong?
The Stern Review assumed that a dollar of economic damage prevented a century
from now (adjusted for inflation) is roughly as valuable as a dollar spent
reducing emissions today.
This is not true. This is wrong.
John Quiggin has an invaluable backgrounder
on all this, but basically Stern’s choice of discount rate (eta = 1) means that
he adjusts for income, not for inflation. Global income presently is
about $7,000 per person, and global income in 2100 will be about $100,000 per
person, according to Stern’s projections. Using his discount rate and other
assumptions, a dollar of economic damage prevented a century from now is roughly
as valuable as 7 cents spent reducing emissions today. (In fact, it’s
less than that, because Stern adds another discount rate, called delta, on top
Leonhardt says that "spending a dollar on carbon reduction today to avoid
a dollar’s worth of economic damage in 2107 doesn’t make sense"
– but this is a straw man, since Stern never comes close to saying that
we should do such a thing. Leonhardt also spends a lot of time on the academic
qualifications of Stern’s opponents, but neglects to mention that Stern himself,
a former chief economist of the World Bank, is actually a real expert on discount
rates, and understands them much better than most economists do.
Leonhardt says that Stern is "right for the wrong reasons", and says
that "technically, Sir Nicholas’s opponents win the debate."
The problem is that this is a very high-level and complex debate, which is not
at all easy to follow. Leonhardt, with his talk of inflation, has shown that
he is not up to following it. This is no great failing, since I’m not up to
following it either, and most economists I know also can’t follow it. But if
you can’t follow the argument, you certainly shouldn’t be declaring winners.