Global Warming and Discount Rates--Posner

The latest report of the Intergovernmental Panel on Climate Change, issued on Friday, confirms the scientific consensus that the emission of carbon dioxide and other greenhouse gases, as a result of the combustion of fossil fuels such as oil and gas, and other human activities (such as deforestation by burning), is having significant and on the whole negative effects by causing global temperatures and sea levels to rise. See http//ipcc-wg1.ucar.edu/wg1/docs/WG1AR4_SPM_PlenaryApproved.pdf. I discussed global warming in my book Catastrophe: Risk and Response (2004), I considered the evidence that global warming was a serious problem for which man-made emissions were the principal cause altogether convincing--and since then more evidence has accumulated and the voices of the dissenters are growing weaker. The global-warming skeptics are beginning to sound like the people who for so many years, in the face of compelling evidence, denied that cigarette smoking had serious adverse effects on health. What has changed since I wrote my book is that not only is the evidence that our activities (primarily the production of energy) are causing serious harm even more convincing, but also that the scientists are increasingly pessimistic. It is now thought likely that by the end of the century global temperatures will have risen by an average of 7 degrees Fahrenheit and that the sea level will have risen by almost 2 feet. Besides inundation of low-lying land areas, desertification of tropical farms, and migration of tropical diseases north, global warming is expected to produce ever more violent weather patterns--typhoons, cyclones, floods, and so forth. There is much uncertainty in climate science, and climate scientists concede that their predictions may be off--but they may be off in either direction. Far worse consequences are possible than those thought highly likely by the authors of the report, including a temperature increase of 12 rather than 7 degrees Fahrenheit, higher sea levels that could force the migration inland of tens of millions of people (or more), the deflection of the path of the Gulf Stream, causing Europe's climate to become Siberian, and abrupt, catastrophic sea-level rises due to the sliding of the Antarctic ice shelf into the ocean. Not only has the consensus among scientists concerning the harmful anthropogenic (human-caused) character of global warming grown, but the scientific consensus is increasingly pessimistic: recent evidence indicates that the global-warming problem is more serious than scientists thought just a few years ago. My own view, argued in the book, is that the risk of abrupt global warming--a catastrophe that could strike us at any time, with unknown though presumably low probability--is sufficiently costly in expected-cost terms (that is, multiplying the cost of the catastrophe by its probability) to warrant taking costly measures today to reduce emissions of carbon dioxide and other greenhouse gases. Both the scientists and the policymakers, however, are mainly focused on the long-term costs of global warming--costs that will unfold over the remainder of this century. That focus makes the choice of the discount rate important, and potentially decisive. A discount rate is an interest rate used to equate a future cost or value to a present cost or value. As a simple illustration (and ignoring complications such as risk aversion), if the interest rate is 5 percent, the present value of $1.05 to be received in a year is $1, because if you are given $1 today you can invest it and have $1.05 in a year. That is financial discounting. But discounting is important even when financial considerations are not the only ones involved in a choice. If you have a very strong preference for spending money now rather than a year from now, you might prefer $1 today to $1.50 a year from now. These approaches don't work well when the question is how much we should spend today to avert costs that global warming will impose in the year 2107. Suppose we estimated that those costs would be $1 trillion. Then at a discount rate of 5 percent, the present-value equivalent of the costs is only $7.6 billion, for that is the amount that, invested at 5 percent, would grow to $1 trillion in 100 years. At 10 percent, the present value shrinks to $73 million. So it is possible to argue that, rather than spending a substantial amount of money today to try to prevent losses from global warming in the future, we should be setting aside a modest amount of money every year--$73 million this year to deal with global warming in 2007, the same amount next year to deal with global warming in 2008, and so on. Of course we would also want to spend money to prevent the lesser losses from global warming that we anticipate in earlier years. For example, suppose we estimate that the loss in the year 2057 will be $100 billion. Then at the same 10 percent interest rate, we would want to spend $852 million this year. Thus two effects are being balanced in computing the present equivalent of future losses from global warming--the larger loss in the more distant future, and the greater shrinkage of the larger loss, because of its remoteness from today, by the operation of discounting. The latter effect will often dominate, as in the examples, but of course this depends critically on the choice of discount rate. At an interest rate of 3 percent, a $1 trillion loss in 2007 has a present value not of $73 million or $7.6 billion, but of $52 billion. However, when either of the latter two figures is added to figures representing the present value of losses in intermediate years, the sum will be formidable. A very high discount rate, implying that optimal current expenditures to avert the future consequences of global warming are slight, could be defended on the ground that the march of science is likely to deliver us from the consequences of global warming long before the end of the century. Clean fuels for automobiles as well as for electrical plants (where already there is a clean substitute for oil or coal--nuclear power, though it is more expensive) will be developed, or carbon dioxide emissions from electrical plants will be piped underground, or artificial bacteria will be developed that "eat" atmospheric carbon dioxide. These are not certainties but they are likely, and so they provide a good argument for using a high discount rate, such as 10 percent--and perhaps for considering no losses after 2107, on the theory that the problem of global warming is almost certain to be completely solved by then. Nevertheless there are at least three arguments for incurring hefty current expenditures on trying to reduce carbon dioxide emissions in the near term. The first is that global warming is already imposing costs, and these will probably increase steadily in the years ahead. Discounting does not much affect those costs. They may well be great enough to warrant remedial action now. The second argument for incurring heavy expenditures today to reduce global warming is that there is a small risk of abrupt, catastrophic global warming at any time, and a small risk of a huge catastrophe can compute as a very large expected cost. "Any time" could of course be well into the future, and so there is still a role for discounting, but it is minimized when the focus is on imminent dangers. The third argument is that reducing our consumption of energy by a heavy energy tax would confer national security benefits by reducing our dependence on imported oil. Our costly involvement in the Middle East is due in significant part to our economic interest in maintaining the flow of oil from there. It is true that because our own oil is costly to extract, a heavy energy tax would not cause much if any substitution of domestic for foreign oil. But that is fine; our oil would remain in the ground, available for consumption if we decide to take measures abroad, such as withdrawing from Iraq, that might reduce our oil imports. Heavy U.S. energy taxes would induce greater expenditures by industry on developing clean fuels and techniques for carbon sequestration; might persuade other big emitters like China and India to follow suit; and by reducing emissions of carbon dioxide slow the increase in the atmospheric concentration of the gas. Drastic reductions might actually reduce that concentration, because carbon dioxide does eventually leach out of the atmosphere, though at a slower rate than it is built up by emissions.

Comments

[Alex]

I suspect that scientists themselves are actually more worried by the risk of a catastrophe, but think there is more hope of persuading politicians on the basis of the things that they can predict will happen with high probability. Given the difficulty of convincing people of the existence of global warming itself, who can blame them?

[Chris N]

The cultivation and burning of fossil fuels for energy; and the attendant effects, are argued to be the primary cause of the phenemenon called global warming.

There is significant science supporting this analysis.

However, there are also many scientists who feel they would be abandoning their scientific training, which includes the cultivation of doubt and fealty to the methods (calculus-based physics, peer review) of their profession if they simply committed themselves to such a position. It is still a significant risk.

There is much science supporting global warming, but there are also many, many people who have a financial, political, and ideaological interest in this debate.

I suspect this is what has many scientists frightened.

[William Rhoads]

First, we should notify Greg Mankiw that Judge Posner has joined the Pigou Society.

Do I detect some confusion in Judge Posner's contribution between maximizing present value using an appropriate discount rate when probabilities are rather well known and their sigma is small, and what decision rule to use when there is a great deal of uncertainty about catastrophic losses, and we do not know what the probabilities are or they have a very large sigma?

If we are worried about a catastrophic outcome with an unknown probability, should we use the expected value decision rule at all? Wouldn't it be better to be pessimistic and use the decision rule that minimizes the maximum loss--"minimax", or use the decision rule that minimizes regret?

I would be willing to trade off a good deal of future economic growth against the expenditure now of large sums to minimize the possibilities of the maximum catastrophes in the future, and to avoid at all costs that future(last?) generations will be full of regret that we did not act now with a maximum response when catastrophe could have been avoided.

I think the advanced countries now have a level of consumption that does not need to be increased, and that even with some redistribution, consumption levels in the world that do not yet meet standards can be increased without lowering the standard of living in advanced countries below a historically high level. To put it bluntly, I am nauseated at the level of conspicuous consumption I see all about me here in the U.S.

I am no scientist, but I would welcome a discussion by the mathematicians and management science experts about what decision rules are available for the highly uncertain situation we face with global warming, and what the advantages, disadvantages and current research expenditure and investment implications are of the various rules. I doubt that maximizing expected value, as Professor Becker and to some extent Judge Posner seem to be doing, is the decision rule we should be using.

[Eric Crampton]

If we're worried about protecting against the small risk of abrupt, catastrophic global warming that could happen at any time, there are a near infinite number of low probability, high cost events against which we might also need protect ourselves. How much are we spending to develop systems to protect us against rogue comets or meteorites? Perhaps slightly lower probability than an abrupt catastrophic climate change, but certainly potentially more catastrophic. That one, I'm actually slightly worried about. But, we can move further down the list of lower probability but higher cost events. How much should we be spending against the possibility of a Great Collapsing Hrung disaster? We can always envision costs so high that even very low probability events should be guarded against.

Do you really think that moral suasion would induce China to follow America's example in setting very high carbon tax rates? Consider an alternative option: set a very large, tax-funded, prize for any scientist developing workable alternative energy or carbon sequestration systems, then provide the technology for free to developing countries.

[Dennis Mangan]

Global warming would produce quite a few good things too, perhaps enough to more than offset the bad. Agriculture would be more productive and growing seasons much longer; vast areas of the earth that are now wastelands would be useful and habitable, such as northern Canada and Siberia; winter heating costs would drop; and most economic activities would be completely unaffected, because they don't depend on the climate. These need to be taken into account as well. Furthermore, the evidence for man-made global warming isn't as tight as Judge Posner would have it: the climate has always been changing, and many periods within human history have been warmer than now; humans were adding very little CO2 to the atmosphere then.

And finally, my suspicions of the motives behind those who support massive government intervention to "do something" about global warming are encapsulated in the remark of a previous commenter: "To put it bluntly, I am nauseated at the level of conspicuous consumption I see all about me here in the U.S." Socialists everywhere, like the commenter, will love the new global warming regime.

[Amanda]

Surely a fourth argument for using a lower discount rate (or a different approach altogether) is the potentially irreversible nature of the change; if I understand the scientists' warnings, in 2017 it may not be possible to achieve at any cost the climate stabilization that is still within reach -- though expensive -- today.

[joe]

Another factor is the point at which the runaway greenhouse effect is triggered. That is, at a certain point, the amount of warming is enough to substantially increase the amount of water vapor in the atmosphere--a far more effective greenhouse gas. This is to say that at some point, we won't be able to do anything and the atmosphere will "runaway" and we will look like the planet venus (crushing atmosphere, 900F at the surface, etc.).

Unfortunately, we don't know at what point the point of no return is for the runaway greenhouse effect. Obviously, this changes these cost calculations considerably. What should we spend now to avoid a point of no return that we can't yet scientifically predict when or under what conditions it is triggered? Obviously, if we're past that point, we might better spend our resources calculating and then preparing for when we need to be off this rock.

[robert]

Doesn't the "short horizon" of the political world, i.e., politicians thinking in terms of the next election as to opposed to the next hundred years, militate against long range responses to this purported problem?

[N.E.Hatfield]

It's -1 deg.F outside and the windchill is running at -15 below. Who says the world is warming up? :( It is well known that the planets temperatures have run higher in the past and colder as well. Perhaps what is going on is a natural warming cycle taking place, and being slightly accelerated by greenhouse gas emissions from human production.

The figuring out of discount rates is one method calculating future costs, but the efforts should be spent on optimizing the productive process. Such that, in any process; raw materials, utilities, energy, and labor are utilized in the process and on the other side out comes, wastes and product. Product has positive value, wastes negative value. Any business that wishes to maximize its profit, trys to minimize its waste streams by minimizing them or recycling them back into the process as raw materials, utilities, or energy. No waste, no negative values and increased profit. Green house gas emissions are just one such waste stream that affects the process's bottom line.

Perhaps business will wise up and understand that Process R&D does have a place in its Business Plan. Until then, as the public, all we can do is hope for the best for ourselves and our future generations. Not too mention, solving global warming.

[Fen]

Static solutions like Carbon Credits won't do anything but line the pockets of corrupt UN eurocrats [recall the Oil for Food scandal].

If the science is accurate [which I don't beleive] the solution is nuclear energy and green-tech investement that encourages India & China to sign on

[Political umpire]

I'm not so sure about fossel fuels being the primary culprit here. There are 1.3 billion cows on this planet, and every year each cow produces about 90kg of methane. Methane is about 24 times worse than CO2 in sealing the heat in the air. According to a recent report by the UN's Food and Agriculture Organisation, agriculture produces 18 per cent of the world's greenhouse gases, as measured in CO2 equivalent - more than is produced by the entire human transport industry.

Then there is power production, responsible for about 24 per cent of global emissions. Perhaps the state should be contriving measures to ensure houses are properly insulated, or developing more nuclear energy, which seems to be less damaging in terms of emissions than various alternatives (though there remains the question of disposing of nuclear waste).

Alternatively, the developed world could do something to stop Third World countries from burning the forests, which produces 18 per cent of CO2.

I can't help feeling that we're missing the point by ascribing the whole phenomena to CO2 emissions, which are but a minor part of the equation.

[Mark Buehner]

"It is now thought likely that by the end of the century global temperatures will have risen by an average of 7 degrees Fahrenheit and that the sea level will have risen by almost 2 feet."

This is so badly mis-stated as to be outright misleading. The _worst case_ scenarios proposed by the IPCC are 7 degrees F with a 17in rise in sea levels.. this is down from the 2001 IPCC worst case estimate of 10.5 degrees F and 36in rise in sea levels.

THOSE ARE WORST CASE ESTIMATES. It is simply false to portray the worst case estimates as that which is 'likely'. One would assume the median of the estimate would be the most likely.

[Kevin Murphy]

You may want to check your dates; a number of them read 200x when 210x seems intended.

[Andrew Berman]

Whenever I look at a politicized debate, I try to measure the credibility of both sides. My main measure is the accuracy of predictions. By that measure, the people who claimed there was no global warming seem less credible than those who claim there is global warming. But the people who claim that the proximate cause of global warming is human activity are not, at this point, as credible to me. I'd just like to see some predictions borne out that separate human causes from 'end of little-ice-age' causes.

[Mark Buehner]

1/3rd of US emmissions are caused by petroleum fueled power plants. We could convert those entirely to nuclear in 10-15 years easily and cut our emmissions by an order of magnitude more than Kyoto calls for. I judge anyone's seriousness on global warming by how staunching they are demanding nuclear power. If global warming is indeed the global crisis to the human race that the activists claim, the comparatively minor risks of nuclear power are laughable.

[John H. Costello]

As much as I respect your views and opinions within your own field, you are dead wrong on the level of general acceptence of anthropogenic global warming within the scientific community. The 'consensus' is a fraud based on Naomi Oreskes very flawed 2004 'Science' article (Google [Oreskes Peiser] for the details. The basic science is wrong: the data points for temperature are derived from the changing widths of bristlecone pine tree rings, which are not so much temperature dependent as moisture dependent. Mann et al.'s 'hockey stick' totally misrepresents the world climate from 1000 AD onward (Caesar's era was warm enough to grow wine grapes in Britain; around 200 AD the climate cooled below present temperatures and the Huns had to flee their homeland, heading west, and took out the weakened Roman empire; around 650 AD the world warmed up again by 2 or more4 degrees centigrade, the Normans were growing wine grapes in the York area after 1066; six weeks after Easter in 1315 the world cold down about 4 degrees and the Little Ice Age began. We started coming out of the little ice age in the 19th century. If a 'science' cannot postdict a well known history, it is garbage.

'Global Warming' is more a religion than a science. If we have anything to worry about, I suspect it is global cooling caused by a decline in sun spot activity, something that is worrying the solar physicists. The Russian scientfic community, which went through Stalin's purges and has less tolerance for bandwaggonism and faddism, fears we will be dropping back into the little ice age by the end of this decade. I recommend the blogs climateaudit.org and motls.blogspot.com and worldclimatereport.com for detailed information.

[Joe Halbach,Sr]

Judge Posner: I respectfully suggest; there are none so blind as those who won't see. And in that vein ask; Who have you read/studied and when, that are not believers as you are in AGW and its apocalypse?

Seriously (as above), if you would like the names and citations to some highly respected, highly qualified scientists who do not hold your views (entirely) I'd be delighted to send them.

I enjoy your site/posts, especially because they are so lucid - a potential brought to your legal training no doubt.

[PD Quig]

So Posner is convinced? Many are not--including some rather significant names in climatology. The recent IPCC summary was (once again) a tendentious, highly politicized document that does not accurately reflect the science it purports to synopsize. It's also worth recalling that prior to Copernicus the overwhelming consensus was that the sun revolved around the earth.

[bubarooni]

"The global-warming skeptics are beginning to sound like the people who for so many years,"...

who doubts global-warming? or cooling for that matter.

it is anthropogenic warming and co2's role in it that people want to question. when i see people say 'global-warming skeptics' i know they are people who seek to squlech the discussion.

they are like temple priests screaming 'heretic'.

[watchman]

When you tell me how many cars, power plants and cows there are on Mars (where the polar ice caps are melting), I will believe that we can stop global warming. Until then, the current craze seems to be merely a cover for various and sundry people to remove still more of our freedom. I have come to expect much more thorough analysis than this from Judge Posner.

[Dr. Ellen]

If we are going to do something, I want to be assured I am not merely being forced to don a hairshirt for the enjoyment of the scolding classes.

[MarkD]

I remain unconvinced that there is anything more than the normal climate cycle at work here. Efforts to supress debate make me even more convinced that this is far from settled.

What we have is bad data, cherry picked, to support a theory. Evidence proving the earth was warmer in the past, pre Industrial age, is ignored. Evidence that non-anthropogenic causes are responsible for part/most of the current warming are dismissed. Skeptics are branded as heretics. Aspersions are cast on the honesty of non-believers, but those who claim there is a problem that will require trillions of dollars to fix (if it is not already too late) are pure as the driven snow.

[C.gray]

"The benefits of such an approach are concrete and realizable, while at this stage, the benefits of deindustrialization are speculative and likely unattainable."

It's even worse than that. Many commentators who worry loudly about the potentially catastrophic consequences of climate change seem completely oblivious to the fairly obvious and almost inevitable catastrophes that would result from a global economic slowdown, such as revolution, civil war and genocidal levels of violences across the developing world. And anyone who thinks the world's "advanced" societies can avoid severe political and social turmoil in the face of arbitrarily frozen or even declining standards of living are kidding themselves.

And barring the development of cost-competitive alternative energy technology, serious efforts to curtail CO2 emission WILL trigger a major global recession, while simultaneously raising the price of every single manufactured good and agricultural product...i.e....the very things on which poor people spend the bulk of their incomes. Good luck with that approach, but I think its going to prove extremely difficult to explain to an Indonesian or Mexican mother that she has to forgo purchasing food, school textbooks or clean drinking water so that we can keep global see levels from rising 2cm/annum instead of 1.4cm/annum.

But then, it's human nature to be more frightened by exotic things that can hurt us a lot, such as shark attacks or catastrophic climate change, than about the familiar things most likely to do us harm, such as automobile accidents and political instability.

[Fen]

"Whenever I look at a politicized debate, I try to measure the credibility of both sides"

Agreed. Thats why I distrust the Global Warming crowd:

1) Hyperbole and exageration.

2) Omitting key data [little Ice Age] and using disaprate data sets [as in the hockey stick]

3) Argument by assertion [ie "the debate is closed"]

4) Appeals to Conformity ["all SMART people believe x"].

Seriously, if their cause is just, then why must they deceive?

[Pixelkiller]

If chicken Little is indeed correct and the sky is falling, then there is only one long term solution: We gotta kill off about 90% of the human beings on this planet and enforce some sort of cheat-proof population control. Every other "solution" is short-term and merely postpones the inevitable catastrophe.
As for myself, I think we should be looking around for the Fox.