Summers and Oswald on the economics of climate change


Summers weighs in on the climate

change discount rate issue in the Martin Wolf forum:

A corollary of Stern’s assumption that marginal utility declines only slowly

with income is that risk aversion is not that great.

Question for John Quiggin or maybe Brad DeLong: Did Stern assume that

marginal utility declines only slowly with income? In the very next comment,

Paul Seabright has his own take on Stern’s discount rates:

The Stern report’s analytical centrepiece is a model of growth in which utility

is the logarithm of consumption, and the pure rate of time discount is only

0.1 per cent.

The logarithmic form means that if our descendants are ten times as rich as

we are, it will take an extra ten units of their consumption to justify the

sacrifice of one unit of consumption today – which looks rather egalitarian

at first sight. But there will be so many of these descendants, discounted

by so little, that they overwhelm the egalitarian reasoning by sheer weight

of numbers: transferring consumption one-for-one from us to them is justified

so long as there are eleven or more generations to benefit.

Meanwhile, Mark

Thoma picks up on Andrew Oswald’s contribution in the same forum:

It is necessary somehow to design a way of bringing the future, with their

cheque books, to the negotiating table.

Here is a suggestion.

We print a government bond called a Global Warming Bond. These have stamped

on them: "I pay out 1000 indexed pounds in every year – beginning in

the year 2050 and going on forever". These bonds would be given out,

as a subsidy, to those people and organizations who reduce emissions today.

Think of them as step-up perpetual bonds, which are issued to finance activities

which reduce carbon emissions. Thoma’s commenters don’t like the idea, and I

have to say I’m not so impressed by it either, especially not by the choice

of 2050 as the year when the bonds start paying out. There’s a set of people,

today, making the decision whether or not to issue these bonds – and the

2050 date seems designed to kick in just as those people stop paying taxes and

don’t need to worry about where the money is going to come from.

On the other hand, Oswald’s bonds are in fact distantly related to Gordon Brown’s

beloved International Financing Facility, which I think is a very good way of

forcing governments to keep their promises and front-loading needed action on

poverty reduction. So maybe a little tweak would make Oswald’s idea more palatable:

wait until governments promise to spend x% of GDP on climate-change mitigation

at some point in the future. Then securitize those future expenditures.

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