The Cost of Climate Change: It’s Not About Psychology
by Peter Dorman (originally published at Econospeak)
The Cost of Climate Change: It’s Not About Psychology
You know there are problems with economics when things that are perfectly reasonable in the context of economic theory are clearly absurd once you step out of it. Case in point: the claim in today’s New York Times piece by Neil Irwin that the economic cost of climate change vs the actions we’d need to mitigate it depends on “how, as a society, we count the value of time.”
In economics? Yes. The present value of climate and climate mitigation costs depends on the discount rate, the extent to which we devalue something a year from now because it’s a year away. That’s how you do a cost-benefit analysis. It really matters for climate policy because the costs tend to be upfront and the benefits decades or even centuries down the road. Economists wrack their brains over how to select exactly the “right” discount rate to perform these calculations.
But think about it for a moment. While there’s a “technical” aspect to time preference—investing today can result in measurable returns over time—the discount rate also depends on psychology: how present-oriented are we?
How much do we live in the here and now rather than looking down the road and preparing for tomorrow? We all occupy different places on this classic grasshopper-ant continuum, and we usually shift our position over the course of our life cycle. Yet how does this psychological characteristic, either individually or socially, affect the economic consequences of acting on climate change, or not? It certainly affects the kinds of choices we’re likely to make, but the consequences?
The whole point of Aesop’s grasshopper-ant fable is that there’s a real world that both insects inhabit, with consequences that don’t depend on their psychology at a moment in time. Grasshoppers are not better off because they follow the myopic dictates of their grasshopper brains. This was obvious 2500 years ago, and it’s obvious today. Economists’ obsession with identifying the “right” discount rate for cost-benefit calculations is a product of their own warped world (the logical and empirical craziness of welfare economics) and has nothing to do with rational decision-making about how to adapt to ecological constraints.
(Image source: smallkidshomework.com)
At any discount rate (other than zero), at some point the future becomes worthless today. Think about that. At some point in the future a preventable event could end humanity and it wouldn’t be worthwhile to spend any money, even a single USD, to avert the end.
Does that make any sense?
GregL: no that makes no sense. Any future event has a non-zero net present value with discount rate less than infinite. But sending a penny today to avoid calamity in 300 years may be less practical than spending $100 200 years from now.
The present value of a future USD approaches zero the further you go out. That asymptotic relationship occurs sooner the higher the discount rate, but it always approaches zero at some point.
The future is always worthless today if you go out far enough. Or at least that’s what NPV says.
Eric
i think you miss the point. Some things cannot be sanely measured by “money”. And “present value” makes sense as a way to compare money investments by assuming similar risks and similar returns, and “similar” beneficiaries, but it is grossly misused by people who think of it as “real.”
“i think you miss the point. Some things cannot be sanely measured by “money”. ”
I believe that was my point exactly.
GregL
yes. I was agreeing with you. it’s actually a little worse. because there is something called Present Value and because it’s easy to calculate, people calculate a number and think they have answered the problem.
even with simple money questions that is often too simple minded to be useful… except of course to get people to make a decision that may or may not turn out to be the right one.
but with climate change, apparently the simple minded think they have answered the question without even dealing with the fact that meanwhile the problem is getting worse and may reach a point where it is no longer solvable at all, let alone by the money you put in the magic Present Value bank…. oh, you didn’t actually put any money in the Present Value bank…?
If mitigating global warming or keeping it below any specified threshold which maintains a habitable environment for what we now refer to “as we know it” is about money, profit, loss, costs in present v future value thereof this globe is fucked.
By the time future generations figure that out they will blame our present generations for being the ultimate of selfish and having no idea what “future” value means in any metric.
Economics in fact is totally irrelevant. Economics cannot be used to justify costs incurred. This is simply because econoimics refers to the costs of global warming as an externality, still does, and always has… air & water are free to use as waste dumps, so economics has never considered the use of air and water as having any value .. it’s free and since it exists without borders or ability to “capture” it for sale and private uses, it’s an economic externality.
And no economists or any economic system, or any economic theory nor anybody else can put a value on air.. some value is placed on water, but only in the context of capture and delivery costs. But ocean water has no value in economic terms even though it is just as much as air a critical component of “life as we know it”.
It’s not that we don’t know how to place a value on air and water… bt it can’t be based on present supply/demand foundations or estimates of future supply/demand either. So the fundamental of “economics” has no present means to value air and water. We know how to place a vlue on it but we refuse to do so because it will upset the entire foundations for capitalism as an economic system… and that would be an admission that capitalism can’t work and in fact has never worked .. other than in selfish and dog-eat-dog modes of human behavior.
So why does anybody think, or keep trying to resolve the incongruence of economics and air? Maybe because humans really have little more intelligence than a single cell microbe?.
Since air and water are essential to life on planet Earth, and neither have borders nor can be made to have borders by an form of technology we can conjure up in our imaginations, then they are assets “owned by” all living inhabitants (plants and microbes and all other forms of life including human species of mammals).
Thus our present forms of human organization by “owning” property in the form of national boundaries is incongruent with ownership of air and water. BTW, this includes all fresh water since “fresh-water’s” source is the oceans.
The fact is that the CO2 / GHG’s balance with the other components of air must be put into perpetual equilibrium with those life forms that require CO2 for life and produce O2 as waste and those forms of life that require O2 and produce CO2 as waste. Humans have, by the use of selfish and inconsiderate means produced far more CO2 waste and reduced those life forms that consume it and produce 02 as waste.
This has upset the equilibrium requirement for life as we have known it on the planet to remain so, leading to the global warming effect of excess CO2 in the “air” which as we’ve known since the late 1800’s causes the heat reflectance to be constrained to escape back out of this planet’s atmospheric blanket (so to speak)… and thus perpetually increasing temperatures near earth’s surface.
So the question is how, in a human organizational system which is based on dog-eat-dog “ownership” by “nations” of humans and the necessary unbordered, unownable air and water assets all life forms on the planet require, not just human species, can this become congruent?
The answer is of course that ownership is incongruent with unbordered and unownable assets. They can’t be made congruent. The only way to create congruence is by eliminating private ownership and dog-eat-dog nations of humans. This is also known in it’s crude form as “communism” which is of course incompatible (incongruent) with “capitalism”.
Thus it seams to me that survival of the human species in “life as we’ve known it” forms requires the obliteration of nationalism’s dog-eat-dog boundary’s of humans organizational structures and measurement of human well-being by valuations of private property ownership based on supply/demand equilibriums..
I figure that this will eventually occur when the planet has warmed enough to decimate 3/4’s of the human species by starvation, natural disasters, war, & pestilence all of which will exceed human capacities to deal with. When the globe’s human population is reduced to 1/4 it’s current size the remaining “nations” will have no choice but to band together to form “one nation on earth” to continue to have any chance at survival… and while it won’t eliminate the human propensity for dog-eat-dog evolutionarily based forces it will reduce the emphasis to organize along those lines at least for several future generations thereafter…. perhaps even changing culture of human development to value common advantage over individual advantage… if humans are lucky.
Longtooth
no need to frighten the children. it is possible to have capitalism and clean air. but it takes a willingness to tell capitalists that there are some things they cannot do…. like starve workers or shoot competitors.
or poison the planet.
i mention this because most of the climate change deniers think “climate change” is a hoax to destroy capitalism and impose one world government. no need to play into their hands.
Be a realist Coberly… that’s what it will take .. you know it even if you don’t want to admit it to yourself. We can’t have it both ways… the planet and future generations with an Earth similar to the one we’ve come to know and love which requires total cooperation and loss of benefits, not the least of which will be those of the capital owners and their control of fiefdoms we call “nations”
Denial won’t change that .. the sooner we realize and come clear with the real options the sooner we can begin to do what needs to be done. So what if it causes global calamity it will be no globe otherwise.
An NPV calculation is highly dependent on the discount rate. And the discount rate is determined by risk, or uncertainty. And here we have a highly uncertain projection, after all the correlation between CO2 and climate is nil, and the models have failed. Not only that but you have to prove that a warmer climate is a worse climate.
So given that it is not unreasonable that the average person is willing to invest very little in today’s dollars to prevent a highly unlikely future outcome. Only a moron would.
“And the discount rate is determined by risk, or uncertainty”
Ah, no. The discount rate is determined by the cost of funding. For the US government, that is the risk-free rate that Treasuries enjoy. Society will make the decision to prevent carbon pollution or mitigate the effects and the discount rate for collective action is the rate government pays.
GregL,
The treasury rate is the “risk free” rate. As the risk rises from the risk free rate, the expected return also rises. After all, wouldn’t you expect a higher return from investing in a start up restaurant than buying Treasury bonds?
Longtooth
i’d love to be a realist, but i don’t think i understand what you are saying.
Certainly it is not realistic to expect the capitalists to give up capitalism, and since it is not necessary that they should, it makes sense to me to try to point out that the problem is not capitalism, but lying down and letting the capitalists have their way with you and the planet.
not all capitalists are stupid. but the ones currently running the government are.
Sammy,
the things you believe about global warming are simply not true.but there is nothing to be gained by arguing with you.
and, i really don’t know what the “experts” think they mean about Present Value, but it is clear to me at least that some experts don’t understand what they are talking about… so again, it’s not worth arguing about.
The discount rate is an assumed number, one that reflects what you think is the return on investments with a similar risk. as such PV provides a useful starting place to talk about investments where people agree about both risk and probable rate of return. or even where they disagree, but their disagreement forms part of the basis of their bargaining position. in the case of SS, the discount rate used is the projected rate of interest on the bonds that Treasury sells to the TF… and it is not “one rate” (as I think Krasting claimed) but a rate that varies according to the prevailing interest rate at the time the bonds are issued. this leads to an interesting result in calculations of PV on SS projected “deficit” and on “generational equity” which you could read about in the 2016 report, but no one does because the the loudly proclaimed generational inequity of a few years ago disappeared when the projected interest rates changed.
what this has to do with climate change is that it is utter nonsense to use PV to say anything at all about climate change. there are no comparable risks and no meaningful discount rate. it is, as usual, a complete misuse of a concept to fool the foolable.
Coberly, I’ll leave it up to you to figure out how congruence can exist between capitalism’s dependence on private ownership of assets and resources and property for profits and rebalancing the production and consumption of CO2 at levels which sustain life as we know it.
Of course I don’t expect capital owners to give up capitalism, What on earth gave you the impression I expected that at all. I didn’t say or imply I did. So you’re making up things because you either didn’t read what I actually said, or because you can’t imagine how capitalism will cease to exist (perhaps you’re putting your own conditions and qualifiers on what I said without realizing that’s what you’ve done).
Capitalism will cease to exist or life as we know it will. I just happen to believe that when push comes to shove (and it will) capitalism will become history because humans will ultimately decide to survive rather than continue to maintain a system which insures they (humans) cannot. I’m not saying this is in he near future at all.. it will occur when it’s obvious that human survival is at stake. There will be billions of human deaths before that occurs , imo.
The facts are simple enough. It’s not physically, much less politically, possible to own air and water. Therefore no person, gov’t, nation, can own it and thus it’s “owned” by everybody on the planet simultaneously at all times from one generation to the next. Since capitalism is an individual property rights system then air and water can’t be subject to the foundations upon which a capitalist system exists.
Therefore fouling the air with excess CO2 is congruent with capitalism’s foundations simply because the waste of capitalism’s resource consumption in pursuit of profit produces CO2 in excess of that required to re-establish the equilibrium of CO2 production and it’s consumption which produces O2.
However the congruence of capitalism with CO2 waste product in excess of required allowances is incongruent with the planet’s ability to sustain life as we know it via the GHG atmospheric (air) effects it has on energy retention…. energy wavelengths in the range which produce what we refer to as “heat”.
If no nation can own air and water but most nations rely on capitalism to satisfy their ability to remain in power — predominantly via capitalism’s production of CO2 waste product in use of energy to supply humans with what they want, then most nations cannot stop capitalism from continuing without also stopping their own governing control of “nation” from existing (remaining in power).
So sooner or later the planet warms to the level at which humans will not tolerate the effects and then humans will force the changes to reverse (if it’s even then still remotely possible) the excess CO2 production via capitalism’s property ownership fundamental foundation. That’s when capitalism will cease.
Whether or not it ceases before warming is irreversible or not is the only question.
My bet is that it won’t cease until at least 1/4 of the global human population ceases to exist … as I said, via starvation, wars (international, revolutions, and civil), pestilence or natural disasters due to the effects of warming. I only hope that this occurs before the effects of CO2 are irreversible to remain within the realm of life as we know it.
More directly stated.. air and water can’t be owned. Capitalism only exists with ownership. Therefore they are incongruent. The evidence of that is already staring you in the face.. since the industrial revolution capitalism has created the excess CO2 waste and upended the equilibrium balance of CO2 production and it’s consumption to produce O2 as waste. Capitalism was only able to do this because nobody owns air and water rights therefore capital owners used it as their own property because nobody stopped them.. aided and abetted in doing so by capitalism’s gov’ts.
Don’t make the mistake that because capitalism is incongruent with human survival on a planet with life as we’ve known it that I’m a leftist communist type nut. Communist gov’ts have done the same because they also rely on energy consumption to retain power. The only difference is in whether humans under communism are more amenable to recognizing the global communal ownership of air and water and thus more able to decide to restore the CO2 production and consumption balance before capitalism has become an historic artifact of human institutions.
I’m not at all hopeful in any event however. Can the global community of humans put their artificial differences of privilege aside voluntarily to do what is necessary? So far history of humans tells us categorically that we are not able to do so. The Paris Accords, even had the US remained a participant were not even close to doing what was necessary… but it was a beginning of what would have to continue to expand on much greater levels of commitment and actions and it at least established a global forum on the problem. Whether it could succeed in ultimately becoming a force to enforce the changes necessary or even decide they were necessary, is imo, purely utopian, but at least it’s in the right direction.
However, as we have now seen, what would normally also be fully expected is that some nations will decide they cannot continue to remain in control and also take the actions or commit to take the actions necessary to reverse the imbalance and retain the required CO2 equilibrium. it’s still a dog-eat-dog human species.
Coberly,
It may be more easily recognized and understood by using an entity much, much smaller than the globe as a anecdotal example of the difficulty of deciding to do what is necessary, or even agree on what’s necessary.
The U.S is composed of different regional and economic groups. We have never been able to agree on almost anything without either civil war, or threats from the outside to our nationhood. We still don’t agree on nearly every issue pertaining to human well being. We are divided in regional interests, economic interests, priorities of spending, priorities of taxation and levels, educational content for our youth, religious rights, human rights, racial rights sexual rights, etc.
And this is within just one nation over the last nearly 250 years having a common cultural heritage. The only way anything changes is by changes in gov’ts… we change governments and priorities back and forth, never agreeing, but just accepting the changes and reprioritizations as more preferable than the alternatives which are either civil war, police state, or dissolution (secessions).
We remain minimally unified as a nation only because we are taught that our nation is the best form and best benefits of what we value most. We have no real idea of whether this is true or not because we are immersed in our own system and in no others, and humans love familiar things, among which are language, institutions, habitat. They perpetuate themselves.
Now consider that the globe is made up of many nations… some of which are large and powerful or have resources everybody else needs. Each of these other nations have similar differences within their own borders and each have their own self-perpetuating familiarities that they want to keep that way; When enough people in a nation want major changes and they are opposed by others in their nation then a change in gov’t occurs… either by physical force, military coups, assassinations of present leaders, even by voting sometimes (though with major changes voting isn’t the norm), or external nations over-throw / invade and make the changes.
How long do you think it takes to get most nations or even just the most powerful ones to agree on any major changes if within even a single nation major changes take decades or even centuries to occur? The norm is that they don’t agree. but simply agree to disagree and carve out agreeable regional spheres of control (temporary though they always are) based on power leverage — e.g. might-makes-right equilibrium (for awhile at least).
The changes necessary to restore and maintain CO2 equilibrium are the most major of all changes ever on this small sphere. Is it any wonder therefore that the citizens within a single nation can’t agree on the changes necessary, much less getting agreement among multiple nations?
And in the meantime, while agreement is not achieved, it’s business as usual (in case you haven’t noticed) with minor politically expedient relatively non-disruptive changes occurring for appearances sake only… propaganda purposes. The shit hasn’t even begun to hit the fan. Imagine what happens when it does.
Longtooth
no, you did not say you expected capitalists to give up capitalism. but what you said sounded to me, and i would expect it to sound to them, like you were calling for an end to capitalism because of global warming.
all i said is that that kind of argument falls into the hands of those who think “global warming” is a hoax intended to destroy “our capitalist way of life” and bring about “one world government.” which is a good way to be sure they fight you tooth and nail.
my point was that you can have capitalism as long as you also have some regulation. regulation no more onerous than the basic laws against committing murder for profit.
the kind of “capitalism” preached by the Republicans asserts that ANY restrictions on “free enterprise” is communism and will prevent capitalists from “creating jobs.” apparently they believe capitalists are not smart enough or brave enough to apply free enterprise within the constraints of human necessity.
the whole point of capitalism is that it sees “new” needs and adapts to them out of the profit motive which is supposedly more efficient than government mandate… but this is altogether a stupid argument on both sides. we can meet new needs with free enterprise without giving “capitalists” a mandate to do whatever they want whatever the cost to everybody else. there are inherent tendencies in capitalism toward imbalance of power and hence injustice, but perhaps no worse than in total government controlled systems. these can be addressed without lurching from one thing to the other.
Coberly,
Thank you for acknowledging that I didn’t say I expected Capitalists to give up Capitalism.
And I won’t disagree with you that by describing the facts and reaiities of the incongruence of capitalism with common ownership of air and water on Earth and of private property ownership’s incongruence with air and water’s common and equal ownership be every living thing on this Earth that it won’t win over any of those who think or say they think to be more accurate, global warming is a hoax designed to destroy “our capitalist way of life” and bring about “one world government.”
When confronted with an enemy or adversary in anything at any time I never expect them to like me .. and if anybody thinks that those who say they believe in tooth fairies actually do then your either dealing with a 5-7 year old child whose parents have intentionally lied to their child (to make losing a tooth not something to fear), or an intentional liar.
It’s the same with those who say Global Warming is a hoax … their either of the intelligence of a 5-7 year old child who believe the lies somebody else with ulterior motives tells them , or they are intentiionally lying.
In either event I can’t say I should lay off the truth to appease nit-wits or intentional liars. You are certainly entitled to do so however it suits your fancy… but then you’ll also be lying if you don’t tell the truth.. two lies never equal the truth.
On the other hand if making decisions is only about what people want to believe or making up fictions to give people false information and the ends justify the means then by all means you may be right…. I shouldn’t tell the truth but lead the liars and those who’ve been lied to believe some other fiction.
The only problem I have with that is that a) it’s intentionally dishonest, thus condones dishonesty and lying, and b) I have no clue about how it might persuade anybody of the fact that they shouldn’t intentionally lie to others .. which is what those who believe in the “hoax” are doing .. they’re telling you they believe in the tooth fairy when every body knows they really don’t… of course there are those that are too dim-witted to realize there’s no tooth fairy or have mental development akin to 5-7 year olds, but if they’ve believe their “parents’.. those they trust how tell them it’s a “hoax” then why would they believe somebody they didn’t trust telling them another lie.
The logic of lying to counter liars makes no sense.
Just btw, I consider all intentional liars my and everybody else’s mortal enemy and at the very least an adversary with ulterior motives..
Coberly,
Sometime in my distant youth I figured out, probably the hard way, though I can’t quite recall the moment, that telling the truth was always my best offense and best defense so I’ve never had to equivocate.
The dog never ate my late term paper or homework. If it was late the reason was always simple: I didn’t get it done or hadn’t done it yet. I accepted the consequence.. it was my fault; I was lazy or prioritized chasing girls instead.
I value my integrity over almost everything else.
Longtooth
telling the truth when you are wrong is problematic.
you are mostly right about the intelligence of seven year olds, though i think the actual age of ordinary human thought (outside of one’s specialty) is about that of a sixth grader. unfortunately that is the same whether you are “right” or left.
you should try to understand that they think they are right too. and uphold the truth of what they believe in, just like you.
To heck with capitalism. Consider what a benign world socialist central planner would do to decide between competing policies regarding climate change. These diffferent policies have complicated different time paths of outcomes, not neat “cost today benefit tomorrow, ugh,” much more complicated.
I noted in comment on Sandwichman’s post that Frank Ramsey said that we should use a zero discount rate for moral reasons, 300 years from now has as much moral standing as today so should be counted equally. This leads in cases with an infinite time horizon to the problem that beneift/cost ratios blow to infinity. So we arbitrarily cut them short.
As it is as a practical matter, most detailed analyses of climate change cut it off at 300 years. The Stern Report in fact followed Ramsey, almost, using a slightly above zero discount rate to allow for the possibility of the human species going extinct. But others criticized them for that, saying higher rates were more appropriate. All of this remains relevant in a world without capitalism.
Coberly,
Not to belabor the point, but there are “beliefs” and “facts”. They’re not equitable. They may or may not line up but that’s only by random chance.
Barkely,
Most science papers use a cut offs between 500 and 1000 years hence. Reason is that temperature hangs on for at least a millennium with very little reduction even after human created CO2 emissions are put to zero.
And since they will not be “0” then in reality the temperatures stay higher for even longer… actually if CO2 emissions remain above zero by any magnitude they just add to the accumulation of CO2 in atmosphere, increasing temperatures.
Ref: Old 2008 paper but still relevant wrt temp over time after reducing CO2 emissions to zero. There are many others since then with the same and even more dire results (Methane feedbacks, limitt of Ocean aborbtion of CO2, etc).
https://pdfs.semanticscholar.org/a1e8/6e903eff380d14bd5ab33c0c63408f8ca742.pdf
It’s not a dollars issue no matter how much people might want to think it is. It’s whether we want to retain life (including humans) on planet earth as we’ve come to know it or not. We’ve been dallying and arguing while Rome burns.
Coberly,
You said “telling the truth when you are wrong is problematic.”
Logical error!
“Truth” is not what you believe, but rather it’s fact or the best science at the time can understand as fact.
“Wrong” is when you believe something other than the fact…e.g. truth.
If you don’t know the truth because you’re ignorant of it.. don’t read, don’t learn, don’t become informed of fact, then you’re “wrong” by saying something that isn’t fact or truth, but rather just an uninformed belief or an opinion.
I fully realize it’s difficult to become fully informed… it’s time consuming and for many beyond their capacity to even understand what they’re informed of. That’s reality. But then is being ill- or misinformed an excuse for being “wrong”? Or is it a mis-statement to say “wrong” when you don’t know because you are mis- or ill informed?
If you’re mis- or illinformed then you can give an “opinion” (based on what you do know, and acknowledge up front that the opinion is not based on being fully informed or having sound foundations to support the opinion). If then somebody else who is better informed or not mis-informed counters your opinion with more / better information, then one can say the ill- misinformed opinion was “wrong” because it wasn’t based on sufficient information to make an informed opinion.
If the “wrong” opinion is not retracted, but remains as being a “correct” opinion, then it’s no longer an opinion, but a belief without foundation to support it. .
Nobody is mentioning the clear moral problem here. The values used are the values to people living NOW. But the consequences affect mostly people not yet born. The issue is not how to make the decision, but WHO is making the decision.
“Nobody is mentioning the clear moral problem here.”
Every decision that may effect the future carries that problem; yet every such decision must be made. There is nothing special about climate change in that regard.
At least with NPV, there is an attempt to address the future component explicitly.