Wednesday, December 31, 2014

Explaining Richard Tol and Bjorn Lomborg

Eli would like to help the bunnies understand economics.  James Boyce at Naked Capitalism explains it all at Naked Capitalism.  He points out that there are choices to be made about how to adapt to climate change and it won't be cheap.

A thought experiment illustrates the choices we face. Imagine that without major new investments in adaptation, climate change will cause world incomes to fall in the next two decades by 25% across the board, with everyone’s income going down, from the poorest farmworker in Bangladesh to the wealthiest real estate baron in Manhattan. 
Adaptation can cushion some but not all of these losses. What should be our priority: reduce losses for the farmworker or the baron? 
For the farmworker, and a billion others in the world who live on about $1 a day, this 25% income loss will be a disaster, perhaps the difference between life and death. Yet in dollars, the loss is just 25 cents a day. 
For the land baron and other “one-percenters” in the U.S. with average incomes of about $2,000 a day, the 25% income loss would be a matter of regret, not survival. He’ll find a way to get by on $1,500 a day. 
In human terms, the baron’s loss pales compared with that of the farmworker. But in dollar terms, it’s 2,000 times larger. 
Conventional economic models would prescribe spending more to protect the barons than the farmworkers of the world.
As Boyce points out what clearer explanation of how economists think than the Summers World Bank Memorandum
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.

3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate[sic] cancer is obviously going to be much higher in a country where people survive to get prostrate[sic] cancer than in a country where under 5 mortality is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.
Of course, when this was leaked Lawrence Summers claimed that it was just a joke.

33 comments:

Everett F Sargent said...

http://en.wikipedia.org/wiki/Voluntary_Human_Extinction_Movement

Pekka Pirilä said...

Few, if any, economists would admit thinking like that, but many use models built on such premises.

Distributional issues are often dismissed, although utility functions are also used very often as a partial correction.

I was once involved in the ExternE project that was an EU project aiming at determining the external costs of all forms of energy. Such an exercise reveals, how difficult it is to express damages to the environmental and health in monetary terms.

These difficulties and internal inconsistencies have the practical influence that Pigovian taxes are not a nearly perfect solution for the environmental concerns.

Many of the optimal solutions proposed by economic theories are optimal only in a homogenous world, where all people have the same values and purchase power parity does not deviate from currency exchange rate for any group of people.

William Connolley said...

> Imagine... climate change will cause world incomes to fall in the next two decades by 25%

This isn't realistic, as far as we know. But, OK, imagine.

> Conventional economic models would prescribe spending more to protect the barons than the farmworkers of the world

Would it? You offer no evidence for that. Your source, in discussing the 1992 memo, is actually talking about something else.

Pekka Pirilä said...

Boyce describes thought experiment. I don't think that he wants to imply that the case is realistic.

The text of Summers and Pritchett does discuss a related point. It proves in my interpretation that they were worried about the tendency of economic models to fail in taking properly into account distributional factors and external costs related to environmental effects.

What that text tells to me about Summers and Pritchett is the opposite of what Boyce and Eli appear to be telling or hinting. That's, how I interpret Eli's choice to use the word "claimed" in the last sentence of the post.

Hank Roberts said...

> spending more to protect the
> barons than the farmworkers

Maybe by "conventional economic models" Eli means the observed behavior of the major economies over time, as repeated during each economic fumble/contraction/creative destruction cycle? Keyword "austerity" finds it.

It's arguable that when you see a pattern of behavior repeated over and over again that there's some sort of mental model behind it.

Hank Roberts said...

> austerity

PS, while the NYT has paywalled it, you can read a bit about it at the notoriously far-left-wing site* here:
http://www.alternet.org/economy/paul-krugman-warns-severe-austerity-measures-are-pushing-countries-brink-fascism
___________
*If you agree, note where on that political axis you're standing to see it that way.

EliRabett said...


To an extent Summers benefits from implausible deniability. He, of course, is no longer President of Harvard because he tried trolling the faculty on why, just speculating, of course, women were under-represented in the professorial ranks.

As Pekka said earlier, he is obtuse enough that one cannot say with certainty whether he is trolling or for real, but there is little doubt that Summers is a creature of the big banks.

Fergus Brown said...

William,
If Piketty is right, wealth = capital, and the result of a loss of wealth is almost inevitably going to entail a protection of capital; by inference, the 'Barons'. One can see an inversion of the 'trickle down effect' in the event of recession - the losses are passed down the line as rapidly as possible - so, no surprise, the poor suffer disproportionately in the same way the rich gain in the event of a financial upturn.

Fernando Leanme said...

I agree with William. The "imagine" part leads to a disconnect from reality. The Summer quote doesn't mesh. As you know by now I've spent most of my life in "undeveloped" countries, dealing with real life as they face. And the biggest problem they face isn't global warming. It's government idiocy and corruption.

Today I read about the ongoing financial mess faced by Petrobras due to a huge corruption case that has unfolded over the last few months. I read about the arrest of artist Tania Bruguera by cuban dictatorship agents in Havana; and I saw on TV the Ebola epidemic is doing just fine in Sierra Leone. It's government stupidity abd corruption, everything else is a minor issue.

TheTracker said...

One of the all-time great reactionary fallacies is "This isn't the worst problem we face, therefore we shouldn't fix it until (insert impossible-to-resolve problem here) is no longer a problem.

For examples see the dismissal of plight of the Palestinians vs Middle Eastern dictatorships, apartheid South Africa vs poverty in Africa, animal abuse vs child abuse.

It's a fallacy because people can work on more than one problem at a time.

The idiocy is frequently compounded, as in this case, by trying to change the subject from a problem we are primarily responsible for (greenhouse gas pollution) to one which, regardless of its relative importance, we have little responsibility for or control over (corruption in Third World governments.)

Russell Seitz said...

To summarize :
1) The measurements of the costs of wealth impairing regulation depends on the foregone earnings from increased insolvency and bankruptcy. From this point of view a given amount of wealth impairing regulation should be done in the country with the least today, which will be the country with the lowest wages. I think the economic logic behind dumping shiploads of America’s surplus regulators on Kim Jun Il is impeccable and we should face up to that.

2) The costs of regulation are likely to be non-linear as the initial increments of regulation probably have very low cost. I've always thought that under-populated countries in Africa are vastly UNDER-regulated, their intensity of regulation is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much regulation is imposed on non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade being driven by regulating regulation.

3) Demands for a free environment for aesthetic and health reasons are likely to have very high income elasticity. The concern over a regulation that causes a one in a million change in the odds of business survival is obviously going to be much higher in a country where businesses survive to create wealth than in a country with under 5 startups per annum per thousand population. Also, while sponsorship of regulatory pollution by regulatory lawyers generates kultursmog in abundance, many of these discharges have very little environmental impact.

4) Clearly, export of regulators promulgating aesthetic or turf building pollution concerns could be welfare enhancing. While mobile, production of petty regulation is not tradable because nobody lives long enough to read the Federal Register.

While few hereabouts want Larry back as President, UNESCO has failed to adduce an underdeveloped nation willing to take in the faculty hires made since his departure.

Fernando Leanme said...

The Tracker, calling me "reactionary" in such a reactionary fashion is a bit funny. Please focus on the broader landscape. Nothing can be done to solve the problem as you wish unless government corruption and stupidity are reduced. Resources are getting a bit scarce for a growing population.

I consider myself a revolutionary who works hard to overthrow a 56 year old dictatorship which engages in serious human rights abuses. In other words, the tags revolutionary and reactionary are bs.

Gingerbaker said...

"there are choices to be made about how to adapt to climate change and it won't be cheap. "

He's wrong - it will be cheap, because renewables will cost a hell of a lot less than fossil fuels, in the long run.

Best available evidence is by Jacobson and Delucci, who say it will cost $1.0 trillion to convert California to 100% renewable energy. Multiply by 10, say, for the rest of the country. That's $10.0 trillion. Ten trillion for a whole new fossil-free infrastructure that will last many decades before it needs to be replaced.

In 2011 alone, the U.S. was spending $1.5 trillion per year for fossil fuels. Do the math.

Richard S J Tol said...

Boyce' concerns are readily corrected through so-called equity weights.

Equity weights were introduced in the climate literature by Azar & Sterner and by Fankhauser, Pearce & Tol; and further developed by Anthoff, Hepburn & Tol and Anthoff & Tol.

Hank Roberts said...

http://www.sciencedirect.com/science/article/pii/S0967070X14002030
The economic impact of greenhouse gas abatement through a meta-analysis: Valuation, consequences and implications in terms of transport policy

http://gdrights.org/Calculator-about/
http://www.gdrights.org/calculator/
The Climate Equity Reference Calculator, and ... Scorecard, allow users to define their preferred approach ... and then to explore the implications.
Hat tip to: http://www.ecoequity.org/

http://www.thenation.com/article/192601/save-planet-we-need-leave-fossil-fuels-ground-oil-companies-have-other-plans

Russell Seitz said...

Fernando, why don't you make Ortega Y Gasset more broadly available on Cuban and Venezeuelan websites?

Everett F Sargent said...

Gingerbaker,

Glad you brought up Jacobson and Delucci, which appears to be a highly contentious subject at the moment in the energy and energy policy literature.

So let's completely take nuclear and fracking and oil and coal and conventional natural gas off the table.

While we're at it, let's assume astronomically high costs to all FF (just in case we can't make FF's magically disappear) and similar astronomically low costs to a 100% renewbles strategy.

And let's value hypothetical lower mortality rates at astronomically high numbers (sans, that in the long term, these people will all eventually die anyways).

Whew, that was so easy!

Seriously, this needs to be taken to another level, something besides wishing upon a Star, say an NRC/NAS/NAE study (or studies) and an actual boots-on-the-ground prototype pilot project.

You see, leaps of faith, just don't cut it in the real world.

EliRabett said...

Future generations and the social rate of discount
C A Nash
Received 26 June 1973

Abstract. This paper reexamines the case for discounting for time in public investment appraisal where long-term or irreversible effects on future generations are involved. It is concluded that—while, in the short-term, considerations of equity reinforce the commonly advocated case for discounting for time—in evaluating long-term or irreversible effects, current discounting procedures require the doubtful assumption of perpetual exponential growth of real income. However, it discounting were abandoned, use of the standard cost - benefit-analysis framework would require the forecasting of shadow prices for all future dates, unless arbitrary time horizon is adopted. Thus cost - benefit analysis does not appear to be a satisfactory method for evaluating effects on future generations.

Also see David Pearce from 1995 pg 17

Pekka Pirilä said...

What Pierce writes in the book seems to be related to work he did with Tol at that time

http://www.mi.uni-hamburg.de/fileadmin/fnu-files/publication/tol/ereaggregation.pdf

Russell Seitz said...

Eli, does this mean we can settle our carbon taxes with Confederate money and Manchurian railroad bond cupons, or must we pay in kind?

Equal fuel mass sequestration at point of combustion has its attractions: - fuel stockpiling simultaneously puts paid to fuel shocks and calms the energy arbs.

Gingerbaker said...

Everett Sargent

I don't know what qualifications you hold, but Jacobson is professor of civil and environmental engineering at Stanford University and director of its Atmosphere and Energy Program.

Dr. Mark A. Delucchi is a research scientist at the Institute of Transportation Studies at UC Davis, specializing in economic, environmental, engineering, and planning analyses of current and future transportation systems. He is a member of the Alternative Fuels Committee and the Energy Committee of the Transportation Research Board.

I would propose that they just may know a tad about the subject, perhaps, even, as much as you?

Everett F Sargent said...

Gingerbaker,

Ah, the (in)formal logical fallacy of appeal to authority.

A is an authority on a particular topic
A says something about that topic
A is probably correct

Good one. Got me. Or maybe, just maybe, you stepped into a #hitstorm

Or maybe, just maybe, you are not a "true septic" but a "fake septic" or a Denier even.

BTW, I'm pretty sure I know them all, Deniers, err "fake septics", and all forms of formal/informal logical fallacies.

Gingerbaker said...

@Everett Sargeant

There is no logical fallacy here - you presented no argument against J&D except derision. Why should I accept derision from someone with unknown expertise?

Then you called me a denier after:

a) not giving your qualifications
b) ironically grousing about logical fallacies

That's all very impressive! You must win a lot of arguments around here.

EliRabett said...

Pekka, note the date. FWIW, Tol got his doctorate in 1997. The date on the David W Pearce paper was 1995 and at the time Pearce was professor @ UCL.

Pekka Pirilä said...

Eli,
I know. I have a paper copy of his thesis (don't remember how I got it). From the references of the papers we can see that Tol got involved rather early.

Everett F Sargent said...

Sardonic,

We don't need any of your "intuition" mumbo jumbo. We need quantitative data!

The only way to make decisions is to pull numbers out of the air, call them "assumptions," and calculate the net present value.

Of course, you have to use the right social discount rate, otherwise it's meaningless.

Pekka Pirilä said...

Of course, you have to use the right social discount rate, otherwise it's meaningless.

But does "the right social discount rate" exist?

Theories of economics tend to stop working without a positive discount rate, but I'm not convinced that we can conclude from that that a non-zero social discount rate is needed. There are other arguments that can be used to justify a gradual cutoff that affects the theories in a rather similar way than an externally given social discount rate.

The main basic idea that I have in mind is that any change that we introduce now will result in consequences whose (equity weighted) expectation value will change in time. My view is that adaptation will always be a diminishing factor in that. That has an effect similar to that of a positive discount rate, which may, however, vary over time.

But that's not all. Some influences may also grow in time, and I cannot see reasons that would convince me that adaptation is always the stronger effect. Therefore it is possible that Weitzman's Dismal Theorem will be reborn. If not exactly as he proposed, then somewhat differently. Perhaps an infinity is not produced from that, when strictly infinite time periods are excluded, but an extremely high effect cannot be excluded on general grounds.

Richard S J Tol said...

@Pekka, Josh
Fankhauser, Pearce and I started working on equity weights in 1995. The first sketch appeared in the 1996 IPCC report (co-authored with RK Pachauri and others). The full version appeared in 1997 in Environmental and Resource Economics and more detail was added in the 1998 in Environment and Development Economics.

These papers just applied the equity weights as defined in the 1970s. I worked on this while I was working on my PhD, but it was not part on my thesis.

The work with David Anthoff, published in Ecological Economics and Journal of Environmental Economics and Management, goes beyond that.

The first paper was Anthoff's master's thesis. The second is part of his PhD.

Josh seems a bit confused about dissertations in economics: Exceptional master's thesis are indeed published in journals. (John Nash even got a Nobel Prize for his.) PhD theses are expected to be publishable. I had 9 journal publications before I got my PhD, which is rare but not exceptional.

Everett F Sargent said...

Pekka,

http://dilbert.com/strips/comic/1993-02-11/

Dogbert would say "Go away."

Seriously though, I think only a post hoc analysis would give you the right social discount rate. D'oh! But I could be wrong.

My rather limited understanding of economic analysis, is coming up on being four decades old, Engineering Economics.

I also have these extremely bizarre thoughts for not assigning any value to any living organisms (including humans).

When Eli mentioned social discount rate, I went looking for a formula that had both a numerator and a denominator that could both be set to zero. Because zero divided by zero is, you know, undefined. And found that Dilbert comic.

As to, what to do about Africa, I really don't like what appears to be a false dichotomy as Eli has presented it here. I'm of the mindset that it is mostly Africans who should decide what to do about Africa. But maybe, that's just me being me.

Aaron said...

The farmer has a skill set that the baron does not have. If the poor farmer dies, then the baron starves, and both lose everything.

Much of our textile technology is near sea level. A sudden sea level rise and we would lose much of our textile production capital.

I asked many hand knitters, weavers, and spinners if they had the skills to produce functional textiles from raw product. They all said, "Yes!" However, when asked to actually produce such items, they did not have the skill. (Try asking a hand spinner if they will spin you 250,000 yd of 22,400 ypp thread so you can have a bolt of shirt cloth woven!)

We have lost many traditional skills. Without a large industrial base (run by cheap labor), we have no way to produce many of the objects that we take for granted, such as food, clothing, plastics, fertilizer, pesticides, and electronics. These days farmers need electronics, fertilizer, and pesticides to produce their large crops of soybeans, corn, wheat, dairy, and rice.

The countries with better health have higher productivity. Cleaning up air pollution increases global productivity. Trading does not increase productivity. Where we implemented waste minimization/ pollution prevention (driven by RCRA) productivity went way up.

Without cheap labor running the industrial complex, the rich and the poor will starve and freeze. The baron does not know how to make the gray plastic essential to all microprocessors - essential to the entire modern industrial complex.

They do not call it the dismal science for nothing.

Richard S J Tol said...

the mystery of the disappearing comments

EliRabett said...

There are majic words @ RR

EliRabett said...

Although Eli will admit that to a gremlins infestation, the whole thing with your advisor Pearce and you and the IPCC SAR is fascinating. Given your recent performances it is useful to speculate about institutional amnesia.