Thursday, January 13, 2011

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.

14 comments:

Rocco said...

Tol apparently claims so many things that there doesn't seem to be much value in listening to him :)

Anonymous said...

At this point, I would bet that the actual discount rate may be not just low, but negative -- in other words money spent now on mitigation and adaptation will be worth more now than later. Sort of like the ants and the grasshopper fable - the grasshopper's discount rate turned out to be negative.
L. Carey

John Mashey said...

See Ayres&Warr, Chapter 8 on Growth Forecasting.

If A&W are right, it is more likely to be negative.

David B. Benson said...

I agree that it is negative.

More warming leads to more drought which leads to less food which leads to ...

Anonymous said...
This comment has been removed by a blog administrator.
John Mashey said...

David:
This is only indirectly to do with food.

They do much analysis that shows that a big chunk of the GDP growth of the last ~100 years ~ work = energy * efficiency, where both have increased. My concern is that most models (including IPCC or Stern) use GDP growth rate assumptions (part of discount assumptions) based on past growth rates ... despite the fact that we're going to see peak oil, gas and eventually, coal, and in general, the EROEI has already gone done. Naturally, people use up the easy stuff first; no long can one just sick a straw into Texas and have big gushers, one has to go to much tougher places.

See Charlie Hall's balloon graph.

A+W's graphs simply show one must go all-out efficiency, and one must invest higher amounts of energy capital into infrastructure that produces energy income ... because if not, the energy
cliff comes and there may not be enough capital left to make the change without terrific pain if at all.

Similar effects have long been seen in Silicon Valley startups that party rather than investing current profits into enough R&D before the current products become obsolete.

a_ray_in_dilbert_space said...

Did you know, birdbrain, that humans have discovered how to organize words into coherent sentences that convey meaning? It's true.

Words: they're not just for salad anymore.

Rocco said...

Mr. Rabett sir, may I suggest you follow the example of the good gentlemen over at RC and set up your own Bore Hole (Rabbit Hole?) for comments that would otherwise disrupt sensible conversations?

Antiquated Tory said...

Eli, I see you've taken Rocco's suggestion. I applaud you. Perhaps, after some time, you could edit together the Rabbit Hole comments into some kind of beat poem?

EliRabett said...

Good advice is always welcome. Thanks to Rocco for the tag line:)

Richard Tol said...

@Eli
Fog's work is online. You can thus perform a search for "FUND" and discover that he does not discuss the model. Kelleher's claim is (a) not based on Fog and (b) not true. Fog does not claim that I said this, and I doubt that I did. It is easy to change the discount rate in FUND, and we do so routinely as you can see from the paper that Yohe sent you.

EliRabett said...

So is what Gary Yohe wrote correct and if it is why did you not insist on Lomborg strongly caveating his conclusions (Eli knows, that would be authoritarian, beating on someone who misuses your work is so. . .evil) or redo the calculation for him at the 3% rate. You could, obviously also have withdrawn your paper when it was, according to you and Yohe, abused. Ethics you know.

Rocco said...

Richard, for the last time, did you write this or not?

"# 65 Richard Tol Says:
September 1st, 2008 at 11:38 am

Kaare: Epidemiologists agree that the decline in winter deaths will be stronger than the increase in summer deaths, in the temperature zone, in the medium term.

On the discount rate: I do not know what the other papers used. We used a consistent discount rate — all calculations, and all reporting was done with the same discount rate. The models that we use would require extensive recalibration for a different discount rate."

Link

Richard Tol said...

@Eli
See http://ideas.repec.org/a/wsi/ccexxx/v01y2010i02p135-140.html