The Discounted Future

Note: The Carrots and Sticks Blog has been down for a bit, but we’re back now. Also let me apologize now for the long post.

I thought this was an interesting post by Brad Delong on the Costs and Benefits of climate action.

First a review Cass Sunstein and how he might begin to calculate when to act on climate change.

After all, if money depreciates at say, 3 percent a year, then spending $1 million today is the equivalent of spending only about $860,000 of today’s dollars five years from now. Over very long periods, like those involved in climate change, the discount rates that are applied to short-term problems like budgets build toward absurdity: using one common method, spending $1 million today to forestall climate change would be the equivalent of spending $2,300 in 2100. Calculations like this seem to argue against doing anything now. The problem, Sunstein says, is that we might do irreversible damage to the planet while blithely waiting for the price of action to drop just enough…. As an academic, Sunstein seemed to side with economists like William Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear what direction the risk of error cuts in,” he told me. “If we err, 7 percent could be bad,” he said, but “if we err, 1 percent could be bad also.” A low a discount rate might protect the environment by spurring us to sacrifice now — while damaging the economy, increasing poverty and putting more people out of work. The difficulty is that the experts are lined up “out the door and down the block on both sides of this issue,”

Brad Delong retorts:

Here we have yet another example of why law professors should simply not be allowed to practice law and economics or moral philosophy without a license–and of how Cass Sunstein has never bothered to do the work necessary to acquire a license to practice law and economics.

First, “irreversible damage”: we are doing irreversible damage to the environment every day in that every day human activity brings more species closer to extinction, and natural or artificial selection would never be able to resurrect them no matter how much money we would spend trying to do so. The question that must be asked: is how much we care–how damaging is the “irreversible damage,” and what other goods are we willing to forego in order to avoid it? What Sunstein implies–that “irreversible damage” is something that must be avoided and that trumps cost-benefit calculations–is simply incoherent, and does nothing other than perform the function of getting him onto Obama administration message without admitting that he does not understand why the cost-benefit analysis tools he loves so much are leading him to what is for an Obama administration official an off-message conclusion.

Delong goes on to suggest Sunstein is using the wrong type of discount rate since we’re discussing human lives and welfare. I don’t know why Sunstein thinks it’s “It’s not clear what direction the risk of error cuts in”.

Using either the pessimistic or optimistic scenarios at some point reach feedback loops where it’s either impossible or much more expensive stabilize the climate. Further the do something now approach proposed by the Obama Administration is really a do something over the next 30 years and probably longer approach and it’s back loaded towards doing more 2020-2040.

Pretty much all the scientific questions about energy research and development and ecology point towards some strategy, starting sooner then later. Economics doesn’t exist in bubble, if you’re positing we can wait and wait and wait you’re not looking at the whole picture.

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