Economics and the ethics of climate change policies

How much are we willing to pay today to reduce the ill effects of climate change in the future? University of Cambridge economics Professor Partha Dasgupta tackled that question in a recent lecture, part of the Economics of Climate Policy Workshop Series, hosted by APS, ASU's Global Institute of Sustainability, and the W. P. Carey School of Business. Dasgupta framed his analysis in the context of three seminal books on the economics of climate change; he initially assumed that divergence in the authors' conclusions would arise from their unique assumptions about the facts associated with climate change. He was wrong. "The difference between the three had nothing to do with science and everything to do with ethics," he said.

"Global warming," a middle-aged man says as he steps onto the train tracks. "Some say irreversible consequences are thirty years away," he says, as a train barrels toward him. "Thirty years?" he asks as he steps off the tracks. "That won't affect me." Then we see her, a small child left on the tracks. The train continues barreling forward as the screen goes black. Then the words: "There's still time. fightglobalwarming.com" That's an ad produced by environmental group Environmental Defense.

Some may say that it poses the climate change debate in unnecessarily scary terms. Others say its tone matches the environmental crisis we face. In either case, the ad raises an important question: how are we going to balance our interests today with the interests of future generations? In other words, how much are we willing to pay today to reduce the ill effects of climate change in the future?

How much are we willing to pay to save the little girl on the train tracks?

Economist Partha Dasgupta tackled that question in a recent lecture, part of the Economics of Climate Policy Workshop Series, hosted by APS, ASU's Global Institute of Sustainability, and the W. P. Carey School of Business. Sir Dasgupta is the Frank Ramsey Professor of Economics and fellow of Kings College at the University of Oxford.

Dasgupta framed his analysis of the issue in the context of three seminal books on the economics of climate change: "Managing the Global Commons: The Economics of Climate Change," written in 1994 by William Nordhaus; "The Economics of Global Warming," written in 1992 by William Cline; and "The Stern Review of the Economics of Climate Change," written in 2006 by Sir Nicholas Stern.

In each book, the author makes a policy recommendation on how we should approach climate change issues. Cline and Stern come to similar conclusions, that we should take immediate, strong global action to combat climate change. The most recent of the two — the Stern report — suggests that under the worst-case climate scenario, global GDP would fall by 20 percent per person. (Even extreme weather could reduce global GDP by up to 1 percent, Stern concluded.)

To prevent such an outcome, Stern suggests that we stabilize emissions in the next 20 years and reduce them between 1 percent and 3 percent after that — at a cost of about 1 percent of global GDP. Nordhaus, on the other hand, doesn't sound the emergency bell.

According to Dasgupta, Nordhaus' conclusion is that "despite the threats climate change poses to the global economy, it would be more equitable and efficient to invest in reproducible and human capital now so as to build up the productive base of economies — including, especially, poor countries — and to put into effect controls on carbon in an increasing, but gradual manner, starting several decades from now."

Dasgupta set out to analyze how Nordhaus — whom Dasgupta calls the "father of climate change economics" — arrived at such a different conclusion than Cline and Stern. Dasgupta will publish the results of his search in an article "Discounting Climate Change," forthcoming in the Review of Environmental Economics and Policy.

It's not the science — it's the ethics

Dasgupta assumed that the divergence between Cline and Stern's work and Nordhaus' work would arise from the authors' unique assumptions about the facts associated with climate change. He was wrong. "The difference between the three had nothing to do with science and everything to do with ethics," he said.

"Disagreements over the worth of alternative public policies arise when people don't agree on facts (e.g., the economic effects of a doubling of carbon concentration in the atmosphere) or when they don't agree on values (e.g., the way our well-being ought to be balanced against the well-being of all those future people)," Dasgupta writes.

One of the principle difficulties associated with analyzing the economics of climate change is that costs are borne today, while benefits are reaped later. "The impacts of climate change are not evenly distributed — the poorest countries and people will suffer earliest and most. And if and when the damages appear it will be too late to reverse the process. Thus we are forced to look a long way ahead," writes Stern.

How we value our well-being today in relation to that of future generations is at the heart of the decision about what to do to curb carbon concentration. In economics, well-being — or utility — is defined as a function of our consumption. We can maximize our well-being today — ignoring the well-being of future generations — and spend all of our money on enjoying ourselves, but then we're essentially leaving any climate problems we cause to future generations to deal with.

On the other hand, we could maximize the well-being of future generations without regard to our own well-being, spend all of our money on mitigating the ill effects of climate change, but then we're living miserably to save our kids and grandkids. How to balance the two is the question.

For that, Dasgupta turned to the namesake for his Chair at Cambridge — Frank Ramsey's classic model, outlined in his 1928 paper in the Economic Journal, "A Mathematical Theory of Saving." Ramsey's model judges collective policies (like those governing climate change) by weighing the policies' effects on current and future generations. Ramsey's model, Dasgupta said, is not the only way to look at the problem of intergenerational justice, but it is the most common way.

Ramsey's model is utilitarian — designed to maximize the well-being of all generations. The policy that produces the highest level of total well-being across all generations wins. But which policy is best — which level of current spending to reduce carbon concentrations, for example — depends on what Dasgupta calls "fundamental ethical parameters."

One of these fundamental ethical parameters is the social discount rate. It reflects the level to which we discount the value of future generations' well-being in relation to our own. A social discount rate of 0, for example, means we value future generations' well-being equally to our own. "There may be two reasons to discount the future," Dasgupta said. "One, because the future is far-off and abstract; and two, because future generations may be richer."

Cline and Stern — the authors who call for immediate action against climate change — use a low social discount rate in their models, meaning that they place the value of future generations' well-being close to our own. Nordhaus — who called for a gradual ramping-up of action in coming decades — in contrast used a much higher social discount rate, meaning that he placed a higher value on our well-being compared to that of future generations.

The implications of Dasgupta's realization — that diverse values led the authors to dramatically different policy recommendations — are important because they highlight the distinction between fact-based and value-based determinants for climate change policies; and they stress the important effects that values have on policy decisions.

As for an answer to how much we should spend today to mitigate problems associated with climate change for the future, Dasgupta doesn't have one. "I don't know for certain what we should do about climate change," he said. "But the model suggests a larger investment in combating carbon concentrations." To make that investment, we'll have to gather the collective will to sacrifice today for benefits that will accrue tomorrow.

Bottom Line:

• Dasgupta framed his analysis of the economics of climate change in the context of three seminal books on that topic. Cline and Stern's books urge us to take strong, immediate action to combat climate change. Nordhaus' book suggests that we gradually increase carbon controls starting several decades from now.
• It's not the facts behind Cline, Stern, or Nordhaus' assumptions that lead them to different conclusions — it's the ethics. Cline and Stern value future generations' well-being close to our own; Nordhaus values future generations' well-being less than ours.
• The authors' different valuations of our generation's well-being in relation to that of future generations lead to dramatically different policy recommendations; Cline and Stern sounding the emergency bell, Nordhaus not.
• In order to decide the appropriate amount to spend on combating carbon concentrations we will have to decide together how much we value future generations' well-being in relation to our own.