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02/04/2007

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Paul

I am surprised that both Richard Posner and Gary Becker are so strongly convinced by the recent and preliminary Report. For one thing, there are highly credible critics (Lindzen at the top of the list) and, for another, it certainly sounds like group-think (the final report will be edited so that the individual reports conform to the overall conclusions). No one with a bit of memory can possibly forget "global cooling" or the widely accepted (in the scientific community) views most associated with Paul Erlich of massive famines, resource shortages and other disasters we were to experience in the 1980s.

I think great skepticism is quite rational under the circumstances. The publicity surrounding the Report sounds to me like the offers one receives ("act within the next 60 minutes...") or miss out on a golden once-in-a-lifetime opportunity.

Contrary to Posner, I don't see that it is at all like the business with cigarettes. Of course cigarettes are bad for health. Those who held contrarian views were clearly quacks or paid by special interests. Actually, it is the writers of the Report who resemble the paid pro-tobacco people.

However, what I would like to see much more fully developed is the economics of various alternative approaches to the problem -if it exists at all. Especially the problem of allocating effort between rich and poor nations.

CRiedel

There are many issues brought up by this discounting business. My first thought: Although a reasonable interest rate today might be 3%, this is the marginal rate. Say we wanted to tax the populace (who are currently reaping the benefits of emitting carbon) and put the money in a fund which will be dispersed later to abate the effects of global warming. Since we are talking about investing on the order of $1 trillion, and the world GDP is $44 trillion, is it not conceivable that this could seriously affect interest rates? Since the most profitable investments have already been made, the interest rates would decrease.
Is the world GDP the correct number to be using? Or is there a measure of available world capital? (Please excuse my ignorance)

Lawrence Indyk, University of Kansas School of Law

The question that the IPCC tends to avoid is what happens if China and India only "converge" to something like Annex I emissions and decide for their own political and economic reasons (and without being bound by Kyoto) to not "contract" (by about 65%!) following convergence to levels required to achieve stabilization of CO2 as safe levels. In that scenario, even the most ambitious reduction scenarios for Annex I countries get buried by the increase and safe stabilization is not achieved.

Is it realistic to think that if China simply decides that it is not in its interest to reduce its emissions that the rest of the world could or would exert enough pressure to change that policy?

It's worth seeing China's and India's per capita energy consumption in comparison to other nations. Here is how much electricity consumed (in Megawatt-Hours per person per year) for various countries:

Canada: 18.2
US: 14.1
France: 9.4
Japan: 8.9
UK: 6.6
Mexico: 2.2
China: 1.7
India: 0.6

If just China and India were to get up to 5, it would require raising total global electricity generation by 60%. So far, both these countries are fueling their expanding generation capacity primarily (over 75%) on carbon-intensive coal which implies that global electricity-related emissions would nearly double even with an Annex I reduction.

India has begun constructing the world's biggest coal-fired plant in Orissa state at 10 Gigawatts which will consume about a ton a second.

China will do that 20 times over in short order. Its 11th 5 year plan calls for an increase of 200 GW by 2012 (which would then be equal to US electrical output), almost all the increase through giant conventional coal plants fueled by a planned 40% increase in their annual coal output.

I think it is unrealistic to expect these still very poor countries to do anything but expand their energy consumption as quickly and cheaply as possible (which unfortunately means in a dirtier way than we might like) and even massive change in first-world emissions and technology (itself somewhat unlikely) simply cannot even begin to compensate for this Asian growth. Call me a pessimist but it's hard for me to see how the war on CO2 isn't lost unless some miracle occurs.

Jess Curtis

I too am a little disappointed to see Mssrs Becker and Posner, with whom I generally agree, so easily taken in by the global-warming-alarmism movement.

I believe I've made an honest and more than superficial review of this issue and I'm still left asking: where is the weighty and unambiguous proof that we should be alarmed?

As we're constantly reminded every time another record low temperature is being set (as for example is happening in many locales currently across the US) local weather patterns events don't reflect global climate change. Switch to the evidence that climate scientists present and all you see is a hodge-podge of, wait for it, local weather events and phenomena.

Everyone pretty much agrees that global mean temperature *has* risen by about 1 degree F in the last 100 years. And if you look at the velocity of a 30 MA of global temps, guess what? we're on track to experience another 1or maybe 2 degree F rise this century. Color me unimpressed.

But Wait! the scientists exclaim. we have uber-super-duper computers that show we're about to go non-linear. The system has destabilizing feedback cycles ... we're about to hit a knee in the curve.

Well, as someone with a PhD in system stability theory, and no novice to coding up systems of pdes and analyzing them ... I call BS. MIT prof Richard Lindzen has an excellent powerpoint presentation debunking these models -- suffice it to say that we are still very ignorant of both the nature and magnitude of the feedback mechanisms. Even worse we're totally in the dark about the magnitude of one of the major inputs to global climate -- aerosols! These models are unfit to predict future climate (just ask the grad-students that coded them) as even their authors attest. Yet ultimately this bunch of C-code, with just best guesses for some of the major inputs and with very rudimentary knowledge of the system dynamics, this simulation stands as really the evidence for Climate-change-alarmism?!?

I'm ready to adapt my lifestyle to avert global catastrophy, but do me the credit of showing my some solid evidence first.

cripes

If you really want to take risk and discounting seriously, why not view the discount rate issue through the lens of the Capital Asset Prciing Model? If you do this, the strong claim that the discount rate is not zero may not hold up.

The CAPM asserts that in competitive financial markets, risky assets pay an expected return in proportion to their covariance with the return on the risky market portfolio (some aggregate portfolio of assets that proxies for the value of the economy). This expected return is the appropriate discount rate to use to discount dividends and capital gains on the stock to obtain a measure of its value.

Assets or liabilities whose payoffs have a positive association with the market's return pay an expected return in excess of the risk free rate (typically t-bill rates). For assets with a negative association they will pay a return that is less than the risk free rate (yes, Dorothy, less). The discount rate could even be negative. A classic example of an asset with a negative discount rate is some sort of catastrophic insurance: the current price exceeds the expected future loss.

Environmental liabilities most likely fall into negatively correlated category (at short run frequencies, the correlation may well be positive, but we're really talk about long run liabilities here). How negative is anyone's guess. But this means we can't rule out a zero discount rate. And this is before we get into the private vs social discount rate issues.

Despite 50 years of advances in capital market theory, I'm really surprised that public policy types are so reluctant to accept discount rates other than those drawn out of thin (albeit toxic) air

Matt Canavan

Gary aren't you confusing the discount rate with the rate of pure time preference? It is the latter that the Stern report has concluded should be set near 0 (precisely 0.1). The discount rate is then formulated in conjunction with the marginal elasticity of consumption in your utility function and the estimate of consumption growth. Stern thus acutally uses a discount rate of around 1.5 to 2 per cent.

Petter

The comparisson of welfare-from-mitigation and welfare-from-capital-investment is theoretically sound, but a poor reflection of the real-world trade-off. There is an inter-generational distribution issue here that is politically much more tractable if it is framed as "mitigating our environmental damage to future generations" rather than saving in capital assets. The temptation for politicians to realize those assets to finance their election promises simply gets to big (as now seems to be threatening even that great exception, the Norwegian petroleum fund).

I would love to see a politician convincing his electorate of something like: "We are spoiling the environment for our children and their children, but our economic analyses show that many mitigation messures are not good investments. Therefore, rather than undertaking those mitigation efforts, we will cut public spending. We expect you to accept this reduced return on your tax money, because the surplus we run will compensate future generations for the reduced welfare they have from their environment."

Me, I'd rather be communicating: "When you mess something up, you don't put the burden on your children but you fix it. That's what we're going to do."

Jeffrey Miller

One never likes to make the argument "it's different this time" because very often it's not. But humanity's collective impact on the environment has become so enormous and pervasive, and the serious consequences of this impact - climate change, and the mass extinction of species - so increasingly likely that we really do seem to
be confronting a challenge that is qualitatively new. Environments have been degraded in the past but the effects were local. The difference is that now the entire biosphere is being seriously degraded.

I am therefore skeptical that a simple extrapolition of the past few hundred years (when our impact was much less) during which per capita wealth grew rather steadily will hold for the next few hundred. Technology and knowledge will continue to advance, but the environmental problems will also grow ever larger unless significant steps are taken now. And although the exintinction of species doesn't enter into the standard calculations of wealth, I think most would agree that our descendents will be much poorer if we end up destroying a good fraction of the earth's ecosystems and species as we are now in the process of doing.

Ray DeGennaro

Help me out here; I'm not good at intergenerational utility transfers. I read a lot about "leaving a burden for future generations," often written by the same people who advocate wealth transfers from the comparatively wealthy to the comparatively poor. Usually the writer defends the latter either on grounds of fairness ("why should one person be so much better off...") or on grounds of diminishing marginal utility of wealth (which, I know, makes a statement about individual utility functions). But future generations stand to be much wealthier than the current generation. If, say, they are 25% wealthier, then why should the current generation feel guilty about extracting a couple of percent from that generation to live better today? The future generations will still be much better off than we are. If you are the type to make fairness arguments, wouldn't you have a tough time making the case that the current generation is being irresponsible? After all, the current generation is simply transferring wealth from the comparatively rich to the comparatively poor...

Lawrence Indyk, University of Kansas School of Law

How much carbon is actually left to burn? There is something else about what the IPCC does not have in its report that is worth noting. In almost all of the scenarios the possibility of an eventual scarcity of economically extractable fossil fuel is not entertained.

Without clearly explaining by what magic such gigantic new reserves will be discovered that have evaded the best of our present technology one is left to question the credibility of some of the more extreme projections.

Combining proven reserves data from BP's statistical review and the IEA with the EIA's carbon coefficients one finds that there are "only" 2,680 Billion metric tons of carbon dioxide left to be emitted. With an average airborne fraction ratio of 14 GT per ppm CO2 increase and current CO2 levels at 385ppm, one finds that the maximum level achievable for all time is 575ppm. This is a far cry from the never ending exponential curves frequently seen in the reports and predictions of over 800ppm by 2100 in some "Business As Usual" scenarios. 65% more economical fossil fuel than is presently known to exist would have to be proven to make it 700pm, and 120% more for 800.

Even those truly phenomenal levels of discovery would have to be more cost effective in the far future compared with forms of alternative energy which are likely to become increasing competitive over time, and it is not unlikely that whatever carbon resources remained would simply be too costly to extract and would be voluntarily abandoned.

On the other hand, if those huge new discoveries are not made, carbon fuels production will peak far before 2100 and by their scarcity become so expensive that they too could be voluntarily abandoned in favor of alternative or renewable energy sources. I'm not saying that 575ppm is safe or acceptable, but it does put a far lower cap on the estimation of total disaster than is being promulgated by most anti-emission advocates.

roseroberta

For some reason the paragraph breaks are not showing, so I have made some by capitalizing the first word of the paragraphs, since putting in spaces did not work either.....best I could do.....

ONE might not think so, but there is a relationship, between trans fat, global warming and the drunk driving issue. Unfortunately, I think that the solution has to do with education. These days in school, we are so afraid to step on someone's toes, so we avoid teaching morals in school, and why should we? Are you shocked? Read further.


IT has always seemed quite interesting to me that no one can come up with a simple means to start teaching community, integrity, self responsibility and the like to young children from their very first textbooks. I don't see that the word God has to be in there or not in order to do that. All great religions teach a core of values that cross borders. There are values that are there in the constitution and the creation of America. By the way, a constitution created by people (whether or not you want to call it a democracy or a republic)that were escaping religious oppression and freedom from excessive taxation. Anyone remember the Boston tea party? I would say that looking at the U.S at present, teaching values of how to live is just as important as being able to do the math. In fact, maybe if Johnny were taught some values and had some good examples that those values would be upheld in the world he was about to enter into, he would want to do the math or is he supposed to learn all of that from parents who are working all day and taking care of younger siblings, TV advertisements and his set?


IF one takes notice, no matter what political party one subscribes to, we have become more territorial and gang like. This gang like mentality is reflected in our youth. How so you say? Let's start with who gets elected. How many smear campaigns do we have to get have for our youth to understand the message of how to win? How many companies do we have to have concerned about pleasing their stockholders to the detriment of their employees for Americans and young people to get the message that people don't count and for them to receive the winner takes all message?


HOW many Americans are now walking around with the idea that their job can be gone tomorrow, if someone can think of a way to replace them? So they sit with their mouths shut at work not trying to make waves and give up in apathy about any significant issues or become one of the territory swatters, because they are even afraid of the basics of their life being removed from them and sent overseas to another country, where the people are being paid the slave wages that immigrants of my grandparents time were paid and which this country once stood up against--wanna tax someone and make money for health insurance?


SO you have people who feel overwhelmed, can't trust the integrity of their employer or their fellow worker trying to get ahead by what means? Denial of issues teaches us to lie, cover the facts and not look at consequences.


SO Jim and Nancy come home from work, after being exposed to a long run of episodes that have taught them not to take anything seriously or think to much about anything, and whip up dinner to the tune of quick, easy and getting the kids taken care of and off to bed.


THEY turn on the TV and, in this mood of just wanting to escape into the world of not thinking about anything, they are flooded with advertisements of foods that have absolutely no discretion about the consequences of how they effect one's body in chorus.


YOU put the food in your mouth, because 30 years of advertising with no responsibility to the consequences of eating a product or these products in combination, teaches you not to look at the consequences--society of people being dumbed down not to look at long range consequences. Food in mouth and the result ten years down the road is not there. And, you are certainly not thinking about the resulting health issues and cost to insurance companies or to your family, children and friends. Obesity is an issue of being taught not to look at consequences and to grab for immediate gratification.


YOU go to take another drink, because you want some relief and you are not thinking about the consequences to yourself, those driving with you and those on the road--let alone how your behavior may or may not become. And, if you are young following your set, your drug of choice is very likely not just alcohol. Why not? You’re a fool if you think about consequences, because it is so crazy out there that, we probably are never going to see it to the end anyway, so pass over those potato chips and that beer.


Now you want a society taught incessantly not to look at the consequences to think about global warming....not going to happen. Could you follow the dots. I hope so. To top this off on a personal note, after my parents coming here fleeing the Nazis, I am now expected to see the light and know that (even though more people in the world believe in reincarnation than not) that if I believe in the ONLY divine savior (who has had how many battles fought in his name already), I will be forgiven. Now, the idea of Grace has its virtues, but when a book that was written originally in poetic language and translated how many times suddenly has one view of what is said about the end of the world and is mixed with politics, then no one has to worry about the consequences of their actions at the end of their day, do they? My personal proclivity leans towards Buddhism, but there is one thing that I always liked about the Jewish religion; a man's deeds were more important than whatever he thought God might or might not be. But, they are still being blamed for the Roman tradition of putting people up on a cross. This whole society tends to keep putting people on the cross day after day after day. Can anyone do that that feels responsible for the consequences of their own actions? It is an excuse for one’s own irrational behavior.


Having a connection between one's actions and the consequences is supposedly what keeps us civilized? How can you care about global warming, health insurance or anything else, if you don't think many of us will be here much longer or you are only interested in the biggest slice of pie, because then the evil with the d for domination in front of it has become your ally.


NOW, if you look at this from another point of view, that we are living in community with each other and need to learn the lessons of being in community--so that each individual can learn to rise to the occasion-- things take on a different view no matter what your God is, but if your God is money and power then there is only the moment. We all have Gods that we worship, and, unfortunately, some of the present Gods are no better then those of the pagans. Now, I can just hear the voices shouting and hands flying in the air (Well, hands flew in the air during the last major war also, and we fought against that.), but, if you bother to put the pieces of what I have written in context and as it was intended, you will NOT get a picture of attacking anyone’s religion, but how we practice, for what ends, what are we aligned with and with what consequences?
www.poetsandstoriesforpeace.blogspot.com

roseroberta

For some reason the paragraph breaks are not showing, so I have made some by capitalizing the first word of the paragraphs and putting in some spaces.....best I could do ONE might not think so, but there is a relationship, between trans fat, global warming and the drunk driving issue. Unfortunately, I think that the solution has to do with education. These days in school, we are so afraid to step on someone's toes, so we avoid teaching morals in school, and why should we? Are you shocked? Read further. IT has always seemed quite interesting to me that no one can come up with a simple means to start teaching community, integrity, self responsibility and the like to young children from their very first textbooks. I don't see that the word God has to be in there or not in order to do that. All great religions teach a core of values that cross borders. There are values that are there in the constitution and the creation of America. By the way, a constitution created by people (whether or not you want to call it a democracy or a republic)that were escaping religious oppression and freedom from excessive taxation. Anyone remember the Boston tea party? I would say that looking at the U.S at present, teaching values of how to live is just as important as being able to do the math. In fact, maybe if Johnny were taught some values and had some good examples that those values would be upheld in the world he was about to enter into, he would want to do the math or is he supposed to learn all of that from parents who are working all day and taking care of younger siblings, TV advertisements and his set? IF one takes notice, no matter what political party one subscribes to, we have become more territorial and gang like. This gang like mentality is reflected in our youth. How so you say? Let's start with who gets elected. How many smear campaigns do we have to get have for our youth to understand the message of how to win? How many companies do we have to have concerned about pleasing their stockholders to the detriment of their employees for Americans and young people to get the message that people don't count and for them to receive the winner takes all message? HOW many Americans are now walking around with the idea that their job can be gone tomorrow, if someone can think of a way to replace them? So they sit with their mouths shut at work not trying to make waves and give up in apathy about any significant issues or become one of the territory swatters, because they are even afraid of the basics of their life being removed from them and sent overseas to another country, where the people are being paid the slave wages that immigrants of my grandparents time were paid and which this country once stood up against--wanna tax someone and make money for health insurance? SO you have people who feel overwhelmed, can't trust the integrity of their employer or their fellow worker trying to get ahead by what means? Denial of issues teaches us to lie, cover the facts and not look at consequences. SO Jim and Nancy come home from work, after being exposed to a long run of episodes that have taught them not to take anything seriously or think to much about anything, and whip up dinner to the tune of quick, easy and getting the kids taken care of and off to bed. THEY turn on the TV and, in this mood of just wanting to escape into the world of not thinking about anything, they are flooded with advertisements of foods that have absolutely no discretion about the consequences of how they effect one's body in chorus. YOU put the food in your mouth, because 30 years of advertising with no responsibility to the consequences of eating a product or these products in combination, teaches you not to look at the consequences--society of people being dumbed down not to look at long range consequences. Food in mouth and the result ten years down the road is not there. And, you are certainly not thinking about the resulting health issues and cost to insurance companies or to your family, children and friends. Obesity is an issue of being taught not to look at consequences and to grab for immediate gratification. YOU go to take another drink, because you want some relief and you are not thinking about the consequences to yourself, those driving with you and those on the road--let alone how your behavior may or may not become. And, if you are young following your set, your drug of choice is very likely not just alcohol. Why not? You’re a fool if you think about consequences, because it is so crazy out there that, we probably are never going to see it to the end anyway, so pass over those potato chips and that beer. Now you want a society taught incessantly not to look at the consequences to think about global warming....not going to happen. Could you follow the dots. I hope so. To top this off on a personal note, after my parents coming here fleeing the Nazis, I am now expected to see the light and know that (even though more people in the world believe in reincarnation than not) that if I believe in the ONLY divine savior (who has had how many battles fought in his name already), I will be forgiven. Now, the idea of Grace has its virtues, but when a book that was written originally in poetic language and translated how many times suddenly has one view of what is said about the end of the world and is mixed with politics, then no one has to worry about the consequences of their actions at the end of their day, do they? My personal proclivity leans towards Buddhism, but there is one thing that I always liked about the Jewish religion; a man's deeds were more important than whatever he thought God might or might not be. But, they are still being blamed for the Roman tradition of putting people up on a cross. This whole society tends to keep putting people on the cross day after day after day. Can anyone do that that feels responsible for the consequences of their own actions? It is an excuse for one’s own irrational behavior. Having a connection between one's actions and the consequences is supposedly what keeps us civilized? How can you care about global warming, health insurance or anything else, if you don't think many of us will be here much longer or you are only interested in the biggest slice of pie, because then the evil with the d for domination in front of it has become your ally. NOW, if you look at this from another point of view, that we are living in community with each other and need to learn the lessons of being in community--so that each individual can learn to rise to the occasion-- things take on a different view no matter what your God is, but if your God is money and power then there is only the moment. We all have Gods that we worship, and, unfortunately, some of the present Gods are no better then those of the pagans. Now, I can just hear the voices shouting and hands flying in the air (Well, hands flew in the air during the last major war also, and we fought against that.), but, if you bother to put the pieces of what I have written in context and as it was intended, you will NOT get a picture of attacking anyone’s religion, but how we practice, for what ends, what are we aligned with and with what consequences? www.poetsandstoriesforpeace.blogspot.com

Jack

The health sector of our economy is pretty environmentally friendly, pays decent wages, can't be easily off-shored, produces useful and exportable technologies and medicines, underwrites universities and private research institutions and gives foreigners reason to travel here. And, oh yes, makes us more comfortable.

So why do people cite as a problem the fact that healthcare constitutes 30% of our GDP? Should we spend it on vodka, offshore gambling, video games or watching Saw III? We like spending our money on gold plated healthcare and, given the foregoing attributes, is that a bad way to spend money?

(This is obviously not addressed to the smaller more easily resolved problem of un-affordibility of basic healthcare to our poorer citizens. I only mean to question why having this sector of our economy constitute 30% of our GDP is a bad thing.)

Anonymous


Veal calf guy:

(I guess the other thread was, again (sigh....) rudely closed to new posts w/o notice?)

"So why do people cite as a problem the fact that healthcare constitutes 30% of our GDP? Should we spend it on vodka, offshore gambling, video games or watching Saw III? We like spending our money on gold plated healthcare and, given the foregoing attributes, is that a bad way to spend money?"

......... Is this a real question? First, as mentioned here, the number is more like 16-18%, though perhaps that omits the associated costs of litigation, taxpayer supported court buildings and admin et al. But, though it is a bit disappointing, we've not yet arrived at an economic level where the remaining 80-85% covers a decent living standard for most of our people. Even if you might be among those who can "easily?" afford to chuck in 18% of your gross income for health care, wouldn't it be a bit more fun to chuck in the 8-12% as do the citizens of the more advanced nations?

Also, what do you think "feel??" about the growing number of 45,000 left out of health care coverage?? Even as we chuck in/waste half again more than does the next most costly nation?

Lastly, as our aging, fat and flabby nation, "considers???" engaging more efficient nations in global "competition" what do you think the effect might be as we spend double the percentage of GDP as others, but have to sell our goods at the same worldwide bazaar? (It may help to note that our trade deficit was 800 Billion this past year and appears to be increasing at more than 10% per year. To most businessmen this is a fair hint that we're being stomped, and is yet another arena where the term "unsustainable" tumbles quickly from the lips of our most understated of official economists.)

BTW..... would it also be something of a yawner if other sectors began gobbling double digit percentages of your wallet? As long as they were relatively "clean?" Jack

The health sector of our economy is pretty environmentally friendly, pays decent wages, can't be easily off-shored, produces useful and exportable technologies and medicines, underwrites universities and private research institutions and gives foreigners reason to travel here. And, oh yes, makes us more comfortable.

So why do people cite as a problem the fact that healthcare constitutes 30% of our GDP? Should we spend it on vodka, offshore gambling, video games or watching Saw III? We like spending our money on gold plated healthcare and, given the foregoing attributes, is that a bad way to spend money?

(This is obviously not addressed to the smaller more easily resolved problem of un-affordibility of basic healthcare to our poorer citizens. I only mean to question why having this sector of our economy constitute 30% of our GDP is a bad thing.)

Mark Shahinian

It seems to me that Becker's otherwise valid argument about importance of investing for the long term so that future generaltions can be richer fails on the following point:

If we can't be sure that that capital will be there to serve those future generations, it's a wasted investment. If physical capital is going to be destroyed by weather events and rising sea levels, and human capital is going to be destroyed by disease outbreaks or resulting armed conflict, there's a big risk future generations won't benefit from these investments. It's like building a house in a flood zone or investing in General Motors bonds, or investing in a developing country -- a risky investment. Risky investments demand higher discount rates -- so, as society decides where to put its investment dollars, investing in standard capital investments (like education or fossil power plants) may demand a much higher payoff to be attractive going forward, whereas invesing in technologies or programs to abate global warming may face only the low 3 percent discount rate.

Jack

I end up with Mark in rejecting Becker's equation as many of the actions taken to reduce greenhouse gases have other benefits. Lowering our per capita consumption of fossil fuels comes quickly to mind. Also, once we learn of the pitfalls of "living in a flood plain" it's wiser to change our habits and construction methods than to simply set aside a sinking fund for rebuilding.

Looking back, there were certainly costs imposed by California's stricter emission standards but what would have been the costs in terms of health and perhaps abandoning CA's major cities had the response been "left to the market" or otherwise delayed?

Today, it's a small premium to build homes with 6 inch walls instead of 4", equip it with low-E windows and higher SEER rated HVAC. Such a house will pay back all of those investments in less than ten years (at today's energy prices) and 50 years from now not suffer from built-in obsolescence and will most likely offer high dividends as energy continues to become more scarce and higher priced. Its greenhouse footprint will also be much less for all of those years. While much of the HVAC may be replaced as the original wears out, retro-fitting 2" of added wall insulation or installing all new windows costs high multiples of doing it right in the first place.

What's "the market's" take? Sales of energy upgrades are typically dismissed out of hand if the payback period is longer than the buyer's anticipated ownership --- an average of six years. And! we've built 20 million of these dinosaurs in the last decade. What "discount rate" shall we apply to passing on such a pile of predictably obsolescent homes with a tear-down or retrofit bill attached? Shall we keep "building in the flood plains" and "hoping?" Jack

2slugbaits

Prof. Beck,

There are several things that distinquish social discounting from the typical discounting used by private agents.

First, there will inevitably be more agents in the future, so that alone suggests that the the benefits to future generations ought to count more than the benefits to current agents. In your example parents setting aside $40K for each child in order to realize an education benefit of $80K, the obvious point is that if those parents had 3 children then they would have to set aside three times a much for each child if they were to value the welfare of each child as much as they valued their own.

Second, if future generations are wealthier overall, and if a greener environment is a normal good, then wouldn't we expect future generations to place more value on a green environment than we do today? Tastes change with income. Wealthy Americans are more concerned about greenhouse gases than poor workers in Bangladesh. And this really leads to the third difference.

Following a line of argument advanced by Andrew Caplin and John Leahy in their paper "The Social Discount Rate," if you recognize that the present carries more weight than the future, then consistency requires that the present also carry more weight than past consumption/investment decisions. In other words, we need to account for a retrospective regret function. If preferences of future generations change over time, then the social discount rate should account for regret. The bottom line is that using the current generation as a representative agent for determining a social discount rate is a kind of dictatorship of the present. To make this more concrete, suppose the current generation saves 3% per year and invests in projects that future generations regard as misguided. For example, suppose the generation in 1950 had been farsighted and saw a coming energy crisis in the 21st century. And suppose they invested heavily in nuclear power. Are the benefits of nuclear power as clear and unambiguous today as they appeared to be in 1950? Even if you are a supporter of nuclear energy the answer is still probably "no." That's not an argument against nuclear energy, but it is an argument that perspectives change over time. For that matter, nuclear energy is probably viewed more favorably today than it was 25 years ago. This shows that social discount rates need to account for a kind of temporal inconsistency that traditional private representative agent models do not have to account for.

Anonymous

Excuse the typo....address line should of course be Prof Becker. Oops.

Anonymous

stand together to protect our globe , our common house, no matter what we will pay out.

Anonymous

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Anonymous

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