Calculus or Conscience? A Critique Of The Ethics And Hidden Assumptions Of Cost-Benefit Analysis Applied To

Climate Change

Judith M. McNeilljmcneill@une.edu.au

University of New EnglandArmidale, NSW, Australia

Jeremy B. Williams

jeremy.williams@griffith.edu.au Griffith University

Brisbane, QLD, Australia

Reclaiming the Societal Dimension: New Perspectives on Society and Business

IABS, Sydney, Australia, 19-22 June 2014

@TheGreenMBA@jmcneill375@APCSE

#IABS2014

slideshare.net/jembwilliams

This paper argues that …

1) Economists have befuddled the climate change debate

2) Computer models of the economy have been used in a way they were not designed for

3) The true extent of climate risk is not being adequately debated

Cost-benefit analysis (CBA) method for organising information to aid decisions about the allocation of resources over a given time period

$$

Jules Dupuit (1844) On the Measure of the Utility of Public Works

• CBA has been around for a long time• Objective: to determine net change in social

welfare① Calculation of benefits and costs (direct/indirect)

② Sensitivity analysis – how likely? scale of uncertainty?

③ Discount the future value benefit/ cost today > value benefit/ cost next year

④ Comparison of benefits-costs net social rate of return

⑤ Comparison of net rate of return between projects

• CBA applied effectively in big public sector projects

• Not always without controversy …

• Shortcomings of CBA:– Attitudes to risk– Distributional consequences– Valuing non-market goods– Valuing human life

The shortcomings of CBA have become more apparent

when the technique went from bridges to climate

change policy

Dr. Malte Meinshausen

The modelling conducted for the 2013 study produced larger budgets than indicated by the modelling of Meinshausen et al (2009) in 2011 Carbon Tracker work. That approach produced a range of 565 – 886GtCO2 to give 80% - 50% probabilities of limiting warming to a two degree scenario (2DS)

<20C Ian DunlopChair, Australian Coal Association (1987-88); CEO of the AICD (1997-2001)

?

“The 20C target is too high. It is now the boundary between dangerous andextremely dangerous climate change”

IPCC Fifth Assessment Report (AR5)

The One Percent doctrine

‘If there's a 1% chance that Pakistani scientists are helping al-Qaeda build or develop a nuclear weapon, we have to treat it as a certainty in terms of our response. It's not about our analysis ... It's about our response.’

Dick Cheney, 2001

William Nordhaus:

The Integrated Assessment Modeling Consortium (IAMC)

Pyndyck (2013)

• Using IAMs economists have frequently suggested that the ‘optimal’ policy is to go slowly and to do relatively little in the near term to reduce GHG emissions

• We trace this finding to the limitations and hidden assumptions of IAMs

The crux of the problem

Stated limitations of IAMs• The systems modelled are large, complex, and chaotic

• It is difficult to capture the complexity of natural and social systems

• The full consequences of policies may not be known for decades (and beyond)

• Over this time period, many unforeseen events can occur

• Scientific knowledge may be incomplete (or absent) in certain areas

• The values of human, animal, and plant life, health, and diversity are difficult to quantify.

Center for International Earth Science Information Network (CIESIN) (1995)

Hidden assumptions of IAMs:① All impacts can be monetised

“violation of compatibility” (Spash 2007: 711) … how does death and destruction get translated into (harmless sounding) decline in GDP?

• In early studies, future impacts of climate change were discounted at relatively high rates

• This is fine for bridges but its extension to intergenerational environmental issues is problematic

Hidden assumptions of IAMs:② It is fair and reasonable to discount the future

The two reasons used to justify the application of a discount rate …

(i) The future always counts for less in the present

(ii) People in the future will be better off because of economic growth

• The future for future generations, will be their present!

• This could be a valid reason, but can we be sure that they are going to be?

Stern (2006) attracted a lot criticism for using a low discount rate

…

Conclusion of the article was that finding the parameters for the equation was a very difficult question

Scientism?

“In my experiences, the problem here is that many neoclassical environmental economists are more eager to save their theories and methods than to improve the chances of human survival on this planet”

Soderbaum (1990: 491)

The power of the paradigm?‘… Stern deserves a measure of discredit for giving readers an authoritative-looking impression that seemingly objective best- available-practice professional economic analysis robustly supports its conclusions, instead of more openly disclosing the full extent to which the Review’s radical policy recommendations depend upon controversial extreme assumptions and unconventional discount rates that most mainstream economists would consider much too low.’

Weitzman (2007: 724)

‘When we add in the prospects for environmental degradation, Australians in 2011 can’t be quite so sure as earlier Australians might have been that future generations will be better off than themselves.’

Garnaut (2011: 21)

‘The problem is framed as one of profitable returns on an investment not precaution to avoid a disaster.’

Spash (2007: 713)

“…planning for adaptation to a Four Degree World within established state structures seems an indulgence of fantasy”

Garnaut (2014)

‘Even just acknowledging more openly the incredible magnitude of the deep structural uncertainties that are involved in climate-change analysis …

Weitzman (2009)

… and explaining better to policy makers that the artificial crispness conveyed by conventional IAM-based CBAs here is especially and unusually misleading compared with more-ordinary non-climate-change CBA situations …

… might elevate the level of public discourse concerning what to do about global warming.’

• Policy decisions should be based on a judgment about the maximum tolerable increase in temperature /CO2 levels given scientific understanding

• The appropriate role for economists would then be to determine the least-cost global strategy to achieve that target

Conclusion

http://www.smh.com.au/environment/climate-change/models-grossly-underestimate-costs-of-global-warming-nicholas-stern-says-20140616-zs8tr.html

The revised model by Dr Dietz and Professor Stern takes into account the likelihood that the ability to generate new wealth would be affected by extreme weather and other impacts from climate change

Thankyou for listening