Stern, Sachs, and Stiglitz on the Economics of Climate Change

If you read my entry from last night, you’ll know I went to a discussion on climate change at Columbia yesterday, which was kicked off with a presentation from the man himself, Sir Nicholas Stern of the Stern Review on the Economics of Climate Change.

I managed to ask Stern the question I’ve been wanting to ask him for a couple months now — and, what’s more, I got great answers from both Joseph Stiglitz and Jeffrey Sachs as well. My question was much the same one as that implicit in Charles Kenny’s recent paper. If you look at Stern’s worst-case scenarios, most of them put the population of the future on a much higher standard of living than the population of the present. So the $400 billion we’re (hypothetically) spending today on reducing carbon emissions is being spent so that future generations can be even richer still — the whole thing feels a bit like taking from the poor (us, now) and giving to the rich (our great-grandchildren).

Stern replied first by noting that the $400 billion / 1% of GDP cost is only an estimate. It’s entirely possible that the cost could actually be negative, he said: “a Schumpeterian tech-driven burst of growth is possible and even likely from zero-carbon sources of electricity”. On the other hand, Sachs noted that the 1% of GDP cost is predicated on our developing a workable and scalable method of capturing and sequestering the carbon output from the coal-fired power stations which are certainly going to be built in huge numbers in India and China. If we don’t get the CCS (carbon capture and sequestration) right, then the cost of reducing carbon emissions could easily double, or more. So let’s split the difference and say that the 1% of GDP cost is realistic, to be borne mainly but not entirely in the form of higher energy prices.

Stern then said that it’s also entirely possible that if we do nothing at all, and carbon emissions continue to rise, then in the next century “we could end up a lot poorer than we are now”. His models show a 50% chance of global temperatures rising by more than 5 degrees Celsius in the business-as-usual case; when global temperatures were 5 degrees lower than they are now, we were in the last Ice Age and most of Europe was under a mile of ice. That sort of temperature change would be catastrophic on many levels and would transform the planet in very, very negative ways. But Stern did agree that under his models, “most of the time we’re better off”. So, he says, “you discount for that”. An expenditure today is only worthwhile, under his model, if it causes a disproportionate increase in future wealth.

And then came the barrage of very good reasons why it makes sense to spend money today for the benefit of future generations.

First, from Stern: climate change is a stock-and-flow problem. We need to decrease the flow of carbon into the atmosphere now, in order to reduce the stock of carbon in the atmosphere in future. Once it’s there, you can’t take it out — in any case, it would be utter foolishness to assume that we might be able to do so at some point in the future. So climate change is irreversible. Once coral reefs die, glaciers melt, and cities drown, they’re gone forever, and no amount of future wealth can make up for that.

He put this idea in economic terms a few minutes later: think of the world as being made up of two types of capital — physical capital and environmental capital. Since the Industrial Revolution, we’ve been growing our physical capital at the expense of running down our environmental capital. As a result, what you might consider the “exchange rate” between physical capital and environmental capital has already gone up: we value our environment much more highly now, in real dollar terms, than we did a couple of generations ago. If we continue to grow our physical capital at the expense of our environmental capital, that exchange rate will continue to rise — and even if we’re wealthier in money terms in future, we’ll find that the cost of that wealth, in terms of spent environmental capital, will be seen to have been excessive. Environmental capital might be expensive now, but it will also never again be cheaper than it is today — so we have an imperative to start using physical capital to invest in it.

Sachs had another take. There’s no reason, he said, that spending $400 billion now means that we should reduce our consumption by $400 billion. Economically speaking, you can get exactly the same effect if you reduce your savings by $400 billion. Savings, of course, are the capital that we pass on to future generations in order to help them grow their wealth. “The future would rather have abatement capital than non-abatement capital,” he said, adding that you can finance expenditure out of savings rather than consumption through the application of fiscal policy. (I think that this means we just borrow the money.)

“We are stewards of the future,” said Sachs — future generations aren’t around to speak to us, so we have to act on their behalf. “And they want less capital and a better climate.”

Then Stiglitz stepped in, to introduce the distinction between social return and financial return. Not everything, he said, could be measured with GDP-per-capita figures.

And finally, my own answer to my own question, which is that the $400 billion cost will not be borne by all present citizens equally — it will be borne much more by the rich, who are the major consumers of energy. If you compare the wealth of the rich today to the wealth of future generations in general tomorrow, then the increase looks much smaller.

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3 Responses to Stern, Sachs, and Stiglitz on the Economics of Climate Change

  1. dWj says:

    Sachs’s answer is my answer; I spend my days thinking about arbitrages like that, though.

    In a world of certainty, I’d object to using a discount rate different from risk-free interest rates; this, of course, is not remotely one of certainty, which is where the Ramsey equation and the discounting controversy came from.

  2. Bernard Guerrero says:

    Once it’s there, you can’t take it out — in any case, it would be utter foolishness to assume that we might be able to do so at some point in the future. So climate change is irreversible.

    Mmm? I thought that was what trees and algae did. If his statement were strictly true, you wouldn’t be breathing at the moment.

  3. dave p says:

    Thanks for putting this in language that the rest of us can understand. If only other informed commentators were so thoughtful.

    Anyway, my take is whether it’s O, 1 or 2%, what are we waiting for? That’s probably less than the unnoticed annual variation of my beer intake as a (decently low, I hasten to add) proportion of net income.

    I don’t envy future generations even at 100x my income: I think we’ve done enough damage. Time to start cleaning up the mess.

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