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

[michael steigmann]

Judge, there is no scientific consensus that global warming has thus far had any net negative effects, or that it will (depending on the degree to which it occurs). You are doing a disservice to yourself and the community by making this false assertion.

[MistrX]

Considering the fact that humans contribute only 0.32% of all CO2, it is hard to believe that reducing our portion of CO2 to even 0.10% will have any effect.

[Drew]

The sun cause global warming.

There can be only one solution.

We have to nuke the sun.

Gotta nuke something..

[John F.]

Global warming has only recently entered the consciousness of the public at large. Yet a small scientific elite, operating under politicized sponsorship, has declared the matter settled and any dissenters on the take, stupid, or (with apologies to George Orwell) A Denier. So now we have an economist and a lawyer, who cite no evidence of having studied the matter themselves, telling me that any attempt to examine the evidence for myself is equivalent to denying that cigarettes cause cancer. Do I have to provide a notarized copy of my math PhD. to be able to raise my hand from the back of the class? The Internet never forgets, and if the Cassandras prove to be wrong, I hope those of us who prefer to think for ourselves make sure they don't either.

[The Raging Patriot]

I've been asking a question to those who believe that global warming is caused by human activity: What caused the several global warming events throughout earth's history?

I've yet to have anyone even attempt to answer it.

[Walter S.]

Dennis Mangan has it exactly right. Before even thinking about countermeasures we should have some reason for thinking that global warming is, net, a bad thing. Too many people, perhaps including our host, have skipped that step.

[Jacob]

"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."

Maybe we would want to spend 852 million this year, but ONLY if we were sure that it would achieve the desired result of reducing the loss in 2057 by 100 billion.
All "solutions" proposed by the greens - such as Kyoto, or a carbon tax - will solve nothing, and will achieve nothing. This is why we aren't willing to spend those 852 million (or such).

[InJapan]

My, it is certainly interested in seeing all the comments. I wonder how many of the comment writers have even read the IPCC report?

What those not trained in science often fail to appreciate is that both data and predictions come with errors associated but not necessarily mentioned in every paragraph or every chart of a scientific summary.

Then when the lay-reader does find out that there are exceptions to theories, and errors in data, the response is all to often to call into question the whole scientific undertaking.

I propose that is what we are seeing in several of the comments above mine. Too many dissenters want to throw the baby out with the bathwater just because there is still much (scientific) work to be done.

What Mr. Posner has written is about accepting that since we have limited knowledge we will have various, differing, opinions about what the discount rates (in this case wrt climate change and its anthropogenicity) ought to be, were we to try and monetize what climate change means to us.

Dealing with climate change is a classic low probability (for any given year), high risk problem. Being able to deal with that type of issue (versus a high probability, low risk) is critical in making sound policies.

[Rob]

might persuade other big emitters like China and India to follow suit

To me, this is the real problem. Out of control underground coal fires in China now emit as much CO2 as all the cars and trucks in the US.

What if we spend a lot of money and get OUR act cleaned up, but they don't? This is a variation of the Prisoner's Dilemma and we're playing with parners known to uncooperative.

I think we should spend largely on this problem, but not so large that it hurts our economy. Technology is going to be the answer here, whether it's alternative energy sources or better batteries or increased efficiency or whatever. We'll only have the money to develop that technology if our economy is strong enough to afford it.

My guess is that we WILL spend the money, but that it will be a pyrrhic victory because other countries (Mexico, China, etc) aren't going to be willing or able to do their part.

I think we should be concentrating more on how we're going to deal with a warmer world than fooling around with some stupid debate about who or what we can blame. Climate is going to change, no matter what. It always has. We need to learn to deal with it, not point fingers.

[happyfeet]

Richard, it's just not compelling argumentation when geezers in their last decade start making the case for "arguments for incurring hefty current expenditures." Pour yourself a scotch and watch some of that reality tv the kids have been talking about.

[TallDave]

Before we start recklessly taking action to lower the temperature of the Earth, we should stop and consider that the KNOWN consequences of global cooling are far, far more devastating than even the most lurid fantasies spun by GW alarmists.

Even if fast global cooling is a relatively low risk, the consequences (the massive crop failures and loss of arable land to glaciation alone would almost immediately end modern civilization and reduce human population to mere millions) are so severe we might well be best served to warm the globe as much as possible, especially given that we know that without human intervention the Earth will eventually enter another ice age.

[happyfeet]

TallDave has just illustrated how you can make a cogent, compelling argument without coarsening public discourse.

[apb]

There is a large glacier-covered island called Greenland that's part of the North American continent. Anyone care to guess why it's called "Greenland?"

It seems that the herd of brilliant scientists that favor human-caused climate change are completely ignoring the Medieval warm period. You know, when Leif Eriksson and Erik the Red melted the glaciers by driving their SUV's over from Iceland to go off-roading....

[mrsizer]

People are idiots. We will spend a ton of money on this - all in the wrong way.

For example: Anyone who thinks that New Orleans should (continue to) be rebuilt obviously doesn't believe the global warming reports.

The solution isn't to "fix" global warming - even if we could (I'm in the "it's getting warmer but people have very little to do with it" crowd) without unintended consequences. The solution is to adapt to it - then it doesn't matter what is causing it.

[M. Simon]

Current estimates are that sea levels are rising at the astounding rate of 3.3 mm a year. Almost 50% higher than the last estimate.

At that rate if it continues sea levels will rise about 1 foot in 100 years.

We are doomed.

I wonder if Dr. Becker has run the numbers? Or looked at geological history. Or inspected the models (you can't, the codes are private and unreleased - nothing like science done in the open to give a feller confidence).

As some one elsewhere pointed out: suppose there are 100 multaplicative factors in the climate equation each known to 99% accuracy. The chances of a right answer is about 1 in 3. Now repeat the multiplications using your last answer. How long does it take to get pure garbage? Not very long.

If the accuracy of the inputs and factors is 98% then the worst case first iteration gives about 5% chance of the right answer.

Now some of the factors will offset each other and other things will help. But there are other problems. For instance is the effect of water vapor positive, negative, or neutral? And if positive or negative by how much?

The sun is a variable star. Is that variation included in the models? How anout orbital and inclination variations of the Earth? Milankovitch Cycles anyone?

[pragma]

The scientists and "good well-meaning people of the world" have not been able to solve famine and hunger, genocide, disease and AIDS, cancer, utopian equality or the generally unpredictable harshness of mother nature herself. Thus, they won't be able to solve this problem either, man made or not. Yet, we will misspend hundreds of trillions of dollars over the next 50 years trying to do so. Nature will take her course, and humans need to accept the harsh realities of that, as did the dinosaurs. The greatest human weakness is to believe that we are somehow above and immune to the random catastrophies that the great universe can dish out.

Btw, how much did it cost to determine that Pluto is no longer a planet? Please.

[apb]

My snark aside, TallDave is probably on to something.

What if the "climate change" that evereyone is pushing turns out to be mere moderation? Aside from projection of a degree C increase, is the increase only in the cold areas of the planet? Wouldn't this then reduce the volatility between cold and hot, actually moderating the weather?

As we saw from the hurricane bust of 2006, the atlantic ocean had actually cooled - is that a side effect of melting glacial ice?

[bristlecone]

"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."

For the Love of God, that's not the way supply and demand works. A heavy energy tax, by reducing demand, would lower the clearing cost of energy. Because the low-cost producer is Saudi Arabia, a heavy carbon tax would actually INCREASE our dependence of foreign oil.

If Posner does not understand what happens when the demand curve shifts left, how credible is he on understanding time value of money?

[Orson]

Overblown,

That's how to summarize the ICPPs Summary for POlictmakers, just released. I say that because it reuses the Mann, Bradly, et, al., Hockey Stick - which the NAS head of statistics Edward Wegman called "unscientific" last summer.

In an AP story, NCARs Kevin Trenberth (in Boulder) warned of eventually one millions deaths - preusmable per year. But we leave two million to dies from malaria each year, and it's largely preventable with DDT. But are we exorcised about THIS tragedy? No, only if Gaia is sacraficed (ie, changed! Somethign humans have always done.

Thus, the anthropogenic climate warming hysteria is about religion of saving the earth - not bettering people. In fact, the only thing CGMs (climate modelling) have gotten empirically right is increased high latitude warming. Not the lower troposhpere uncoupling, not the non-warming satellites show in the southern hempisphere.

I'm repelled by the phony alarmism. Big Science is corrupt!

[Bernie]

Can someone point me in the direction of any "science" that explains global warming? I have a technical background and would like to learn something. All I can find is most scientists agree that... I would like to see what they are basing the conclusions on. Without looking at anything it seems to me that global warming is a simple energy balance. We are taking stored chemical energy and converting it to heat. I would like to see if the global warming science takes that into account. My initial thought is that global warming is caused by producing more heat, not CO2, but that has to be too simple.

[Cliff]

The point made about Mars is certainly an obvious one. There is an positive correlation coefficient for Earth temperatures and solar activity, but not one for man made greenhouse gasses and Earth temperatures. Man made global warming is an elaborate theory without statistics to back it up. The models when backcast are worse than random numbers. Anyone out there that can tell me the weather for Chicago 10 days from now? Nope, absolutely no one.

As for cigarettes, you can clearly state that smoking is linked to several diseases, but you can't say they cause those diseases. While the statistics are overwhelming that smoking is bad for you, and a rational person attempting to maximize health would not smoke, a mechanism needs to be defined to use the word "cause". The mechanism has never been discovered. That is the historic argument between tobacco companies and public health officials/ politicians/trial attorneys. Statistics, while valuable, alone don't constitute science. Historic statistics suggest the stock market will go up this year based on the results of the Super Bowl. This is due to an anomoly, not any underlying mechanism.

For a very entertaining lecture on adjusting single variables to complex systems please see http://www.michaelcrichton.com/speeches/complexity/complexity.html

[Haris]

"The scientists and "good well-meaning people of the world" have not been able to solve famine and hunger, genocide, disease and AIDS, cancer, utopian equality or the generally unpredictable harshness of mother nature herself."

I'm pretty sure we could solve plenty of problems if we listened to the right people. Solutions are out there, usually prevented by small and powerful interest groups. Scientists have created plenty of good things, and they may be right about this. We can debate about the report all we want [although I doubt we're qualified to] but let's not label scientists as inept and incapable.

[Jason]

"Btw, how much did it cost to determine that Pluto is no longer a planet? Please."

Surprisingly little. In the grand scheme of things, the total budget for Astronomy, and especially Astronomical Conferences of the type that reclassified Pluto, is miniscule. The results, on the other hand, are about as useful as those of the IPCC.

[Jack]

Bernie: Since you are a technical person I'd agree that "looking at something" would be a good idea as the longest journey, does indeed, begin with that first tentative step. As for your initial, intuitive? concern of the heat put into the system from the use of heat producing technology, I think you'll find it negligible, and would suggest your first step might be that of typing "earth green house effect" into google or yahoo. Oh! and seeing Gore's film could add quite a bit for a short evening's effort. Good luck! Jack

"Without looking at anything it seems to me that global warming is a simple energy balance. We are taking stored chemical energy and converting it to heat."

[apb]

Bernie -

Here's an interesting site I stumbled across - a handy chart shows temperature variation vs. CO2 levels over the past 600 million years. The temp is most interesting - we're at a minimum right now, and the minimums seem to spike neatly in a 145 million-year cycle; the 600-million year history shows relatively quick transitions from max->min->max, with minimum and maximum boundaries at 12C and 22C respectively...