Wednesday, November 22, 2006

Ethics, climate, Stern and Nordhaus

William Nordhaus has published a wonderful comment on the Stern report. Eli greatly admires what Nordhaus has done, because it makes clear exactly what Stern was about

"...The social discount rate is a parameter that measures the importance of the welfare of future generations relative to the present. It is calculated in percent per year, like an interest rate, but refers to the discount in future "utility" or welfare, not future goods or dollars. A zero social discount rate means that future generations into the indefinite future are treated equally with present generations; a positive social discount rate means that the welfares of future generations are reduced or "discounted" compared to nearer generations."

Philosophers and economists have conducted vigorous debates about how to apply social discount rates in areas as diverse as economic growth, climate change, energy policy, nuclear waste, major infrastructure programs such as levees, and reparations for slavery."

Stern EXPLICITLY states in several places that it would be unethical to value future generations more than the current one. Indeed, the second chapter is entitled Economics, Ethics and Climate Change and there is a technical annex which discusses how this effects the social discount rate.

Reading Nordhaus on this issue is a delight that Eli will not take from you. RTFR, but we will close with the relevant part of Stern's Ch. 2. summary

The breadth, magnitude and nature of impacts imply that several ethical perspectives, such as those focusing on welfare, equity and justice, freedoms and rights, are relevant. Most of these perspectives imply that the outcomes of climate-change policy are to be understood in terms of impacts on consumption, health, education and the environment over time but different ethical perspectives may point to different policy recommendations.

Questions of intra- and inter-generational equity are central. Climate change will have serious impacts within the lifetime of most of those alive today. Future generations will be even more strongly affected, yet they lack representation in present-day decisions.

Standard externality and cost-benefit approaches have their usefulness for analysing climate change, but, as they are methods focused on evaluating marginal changes, and generally abstract from dynamics and risk, they can only be starting points for further work.

Standard treatments of discounting are valuable for analysing marginal projects but are inappropriate for non-marginal comparisons of paths; the approach to discounting must meet the challenge of assessing and comparing paths that have very different trajectories and involve very long-term and large inter-generational impacts. We must go back to the first principles from which the standard marginal results are derived.
This was not hidden.

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