Clearing More Things Up

While sweeping the cobwebs out of the Rabett Run attic in preparation for new stuff, Eli came across a correspondence with Prof. Gary Yohe, which, perhaps, only perhaps mind you, casts some light on the recent controversies involving Richard Tol, Bjorn Lomborg and a cast of bunnies.

Eli wrote:

Sent: Friday, December 26, 2008 10:41 AM
To: Yohe, Gary
Subject: Copenhagen position paper

Dear Prof. Yohe,

In your position paper on the costs and benefits of climate change, written with Richard Tol for the second Copenhagen Consensus meeting, you use a 5%, declining to 4% discount rate. Would you tell me whether this rate was chosen by you and Tol independently or whether this was asked for or discussed with the organizers. Since different rates (3 and 6%) were used for all the other proposed actions and damage from climate change grows with time if there is no amelioration while the costs of other proposed actions are more evenly distributed in time this makes comparisons opaque. Moreover, the values used for the final ranking of issues appears to have relied on the 3% projections, meaning that climate change was itself discounted relative to the others.

Please note that this does not question your choice of a 5/4% scenario. As someone said, if we had examples of the future, we would have no need of models.

If you participated in the deliberations did this question arise and if so how was it dealt with?

Thank you for your consideration

To which Gary Yohe replied:

Mon, December 29, 2008 6:02:51 PM
Copenhagen position paper

Dear Eli:

We chose 5% falling to 4% because it ran between the 3% and 6% choices that the rules offered. Neither made sense for climate change, and Cline was criticized in 2004 because he chose a low discount rate. We thought that we would give it a try, and were surprised that be got a B-C ratio above 2.5 for mitigation, adaptation and R&D. Our choice, by the way, roughly coincides with Ramsey discounting with a pure rate of time preference equal to 3% and endogenous growth in per capita consumption.

You need not worry about being critical. Indeed, go ahead. Richard and I have, as you might know, been as critical of Stern for using one discount rate as we and others have been of his using a low one - so fair play is fair play. I attach a draft of a paper that explores the sensitivity of the SCC to distributions of pure rate of time preference and relative risk aversion that can be supported by empirical work. We get almost 2-thirds of the way to Stern!

Anyway, hope this helps,

Gary

Precedents can be found at Deltoid, Big City, Village Magazine, Irish Economy, and Think or Swim. Kåre Fog started this by noticing that his bete noire, Lomborg had compared the Yohe/Tol estimates for the cost/benefit of climate change and with estimates for other useful stuff using a 3% rate. Fog makes other, more important criticisms of Tol's FUND model, but the discount rate issue is the simplest to understand and has dominated outside criticisms. Tol apparently claimed that the FUND model could not be rewritten to use the 3% rate (although it has been used with other discount rates).

So this comes down to who stole the cheese or whether the rate was chosen independently or whether this was asked for or discussed with the organizers.