However, the case for intervention to keep carbon dioxide levels within bounds (say, aiming to stabilize them at about 550 ppm) is sufficiently strong to be insensitive to this dispute. Consider some numbers from the Stern Review concerning the future benefits of preventing greenhouse gas concentrations from exceeding 550 ppm, as well as the costs of accomplishing this. The benefits are the avoided damages, including both market damages and non-market damages that account for health and ecological impacts.
Following a "business as usual" policy, by 2200, the losses in GNP have an expected value of 13.8 percent, but with a degree of uncertainty that makes the expected loss equivalent to a certain loss of about 20 percent. Since the base rate of economic growth (before calculating the climate change effect) was taken to be 1.3 percent per year, a loss of 20 percent in the year 2200 amounts to reducing the annual growth rate to 1.2 percent. In other words, the benefit of mitigating greenhouse gas emissions can be represented as the increase in the annual growth rate from today to 2200 from 1.2 percent to 1.3 percent.
As for the cost of stabilization, estimates in the Stern Review range from 3.4 percent of GNP to -3.9 percent (since saving energy reduces energy costs, the latter estimate is not as startling as it appears). Let's assume that costs to prevent additional accumulation of carbon dioxide (and equivalents) come to 1 percent of GNP every year forever, and, in accordance with a fair amount of empirical evidence, that the component of the discount rate attributable to the declining marginal utility of consumption is equal to twice the rate of growth of consumption.
A straightforward calculation shows that mitigation is better than business as usual -- that is, the present value of the benefits exceeds the present value of the costs -- for any social rate of time preference less than 8.5 percent. No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5 percent.
These calculations indicate that, even with higher discounting, the Stern Review estimates of future benefits and costs imply that mitigation makes economic sense. These calculations rely on the report's projected time profiles for benefits and its estimate of annual costs, about which there is much disagreement. Still, I believe there can be little serious argument about the importance of a policy aimed at avoiding major further increases in carbon dioxide emissions.
Kenneth Arrow, a Nobel laureate in economics, is professor of economics emeritus and professor of management science and engineering emeritus at Stanford University.
Copyright: Project Syndicate/ The Economists' Voice
RSS