The Age of Global Warming: A History (38 page)

Economics should be central to deciding what, if anything, to do about global warming. Yet only the US had conducted an economic appraisal ahead of the Rio Earth Summit. No official economic analysis had preceded the Kyoto Protocol – a conceptual disaster, according to Nordhaus, lacking political, economic, or environmental coherence.
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Instead, the policy debate was framed as a binary question:
Is global warming happening? Scientists tell us it is, so we must do something
. That ‘something’ – attempting to return the developed world to the emissions level at the beginning of the 1990s – was about symbolism, not economic rationality.  

Not until 2005 did any national body outside the US begin to consider the economic dimension. Early that year, the House of Lords Economic Affairs Select Committee held hearings on the economics of climate change. The committee included two former Conservative chancellors (Nigel Lawson and Norman Lamont), a former governor of the Bank of England (Robin Leigh-Pemberton) and economist and Labour peer Richard Layard.

When they cross-examined a senior Treasury official, it emerged that the Treasury had not conducted any appraisal of the economic costs and benefits of global warming to the British economy.
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Earlier, American economist Robert Mendelsohn had told the committee that global warming would be beneficial for regions such as the UK that were ‘too cold’.
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Neither had the Treasury conducted an economic appraisal of the costs of meeting the UK’s target for a sixty per cent cut in carbon dioxide emissions by 2050. ‘The target was quite consciously introduced over a very long period because we understand the costs of making these changes are much smaller if they are planned over substantial periods of time,’ Paul Johnson, the Treasury’s chief micro-economist, said.
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It had left the economic analysis to the IPCC, with some input from Defra. Lawson expressed astonishment. ‘In my time at the Treasury as Chancellor it would have been unthinkable for the Treasury not to spend quite a lot of time on a serious economic analysis of an issue as important as this.’
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The committee’s chairman Lord Wakeham, a former Conservative energy secretary, was determined to get a united report and restricted discussion on the science to avoid splitting the cross-party committee. Wakeham was dismayed by what he saw of the IPCC, a ‘magic circle’ creating certainties out of massive uncertainties. ‘Wickedly bad’ was his verdict on the IPCC’s process, an institution he thought intent on its self-perpetuation.
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It was evident to the committee that the IPCC was prone to deep-seated politicisation. In his evidence, environmental economist Richard Tol of the University of Hamburg said that, although he had been involved in the Third Assessment Report, he had not been nominated by the German government to work on the Fourth. German government policy meant only those with close connections to the Greens would be nominated to Working Groups II (on the impacts of climate change) and III (on policy responses). ‘Things have become more and more politicised,’ Tol observed.
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In its report published at the beginning of July 2005, the committee criticised the Blair government’s lack of candour. The costs of its decarbonisation policies were ‘unhelpfully vague’. Its claim that costs prior to 2020 were ‘negligible’ was ‘wildly optimistic’.
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It called on the Treasury to be ‘more active’, concluding that unless it was ‘we do not see how the Government can argue that it has adequately appraised its long-term climate targets in terms of likely costs and benefits’.
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*  It is not possible to verify whether the global temperature anomaly now is higher or lower than it was one hundredth of a second before. By contrast, the velocity of a moving object can be determined now, a concept that defeated the ancient Greeks but was solved by Galileo. 

25

Turning Up The Heat

If we don’t act, the overall costs and risks of climate change will be equivalent to losing at least five per cent of global GDP each year, now and forever.

Nicholas Stern
[1]

Forecasts tell you little about the future but a lot about the forecaster.

Warren Buffett

Be careful what you wish for.

Two weeks after the Lords committee reported, Chancellor Gordon Brown announced that Sir Nicholas Stern would lead a major review on the economics of climate change. 

Stern had been appointed to the Treasury to head the Government Economic Service in 2003. He had come to Treasury with very fixed ideas about taxation, but Brown wasn’t interested. He had enjoyed relatively short spells at his previous employers, the World Bank and the European Bank for Reconstruction and Development. He didn’t seem to have much else to offer and was shunted off to work on Tony Blair’s Africa Initiative. 

Global warming was Stern’s lucky number. Other economists had thought longer and harder about the economics of global warming; none would rival Stern’s public impact or attain his status as a global warming guru. Stern’s academic background was in development economics. His advocacy of more aid flows and central planning brought him into conflict with the free-market economist Peter Bauer. ‘Preoccupation with the analysis of market failure and the theory of corrective intervention is a notable feature of development economics,’ Bauer wrote in a 1984 riposte to Stern.
[2]

To these was added certainty about the science of global warming. Asked in 2009 about the possibility that ‘the science’ might be wrong – ten years into a period of no statistical rise in observed global temperatures – Stern answered, ‘It’s very, very remote.’ Less than one in a hundred? ‘Oh, much, much less.’
[3]

Nonetheless Stern’s grasp of the science was poor. In the same interview, Stern stated that the greenhouse effect could be observed experimentally in greenhouses – ‘and most people have observed the greenhouse effect themselves in greenhouses. Yes?’
[4]
No. In a greenhouse, rising warm air is prevented by glass from escaping – a convection effect. The physics of the atmospheric (so-called) greenhouse effect are entirely different: the absorption by water and carbon dioxide molecules of long-wave radiation from the Earth’s surface – a radiation effect.
*

In arguing that humans could not adapt to a warmer world, Stern asserted that the risk was of a rise in temperature greater than any since the end of the last ice age ‘ten or twelve million years ago’.
[5]
In fact, the last glaciation ended, and the current inter-glacial began, around eleven thousand, five hundred years ago. (The oldest Palaeolithic cave paintings in central and southern France are thought to date back twenty-three thousand years ago.)
*

Science – or ‘The Science’ – was the occasion of Stern’s first skirmish with fellow economists. Henderson assembled a team that included two members of the Lords Economic Affairs Committee (Nigel Lawson and Robert Skidelsky), McKitrick and five other economists. Stern had made a ‘premature and injudicious choice’ in basing the review on ‘an unbalanced and technically defective account of ‘the science’, they wrote.
[6]
His use of the Hockey Stick created a misleading impression of a dramatic departure from a stable thousand-year norm. ‘By taking as given hypotheses that remain uncertain, assertions that are debatable or mistaken, and processes of inquiry that are at fault, the Review has put itself on a path that can lead to no useful outcome,’ Henderson and his colleagues argued.
[7]

In a swift rebuttal, Stern gave no quarter. ‘This is not a theory that is fraying at the edges,’ he wrote.
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Falling into Professor Tinbergen’s trap, Stern argued that unless the role of anthropogenic greenhouse gas emissions was recognised the temperature increase of the previous forty or fifty years ‘cannot convincingly be explained’ by climate models.
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‘In fact, the latest science suggests that the risks could be substantially greater than previously seen,’ a claim that was not based on any real world evidence.
[10]

The Stern Review was published in October 2006. For the first time outside the US, public debate about global warming shifted to its economic consequences – in apocalyptic terms. Failure to act could create economic and social disruption on a scale associated with the First and Second World Wars and the Great Depression of the 1930s.
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The costs and risks of climate change would be equivalent to losing at least five per cent of global GDP every year ‘now and forever’. If a wider range of risks and impacts was taken into account, ‘The estimate of damage could rise to twenty per cent of GDP or more.’
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These were eye-popping numbers.  

How had he done it?

As with other cost-benefit analyses of global warming, the Stern Review used a model to integrate physical impacts and a range of economic scenarios and variables to derive a social cost of carbon dioxide. The PAGE integrated assessment model used by Stern and his team had been developed by Chris Hope, a Cambridge academic. Although the details differed, it shared the economic and utilitarian principles of the other two widely cited models, Nordhaus’s DICE and Tol’s FUND models. 

PAGE used a time horizon stretching out to 2200 – a compromise between natural scientists who wanted to go out to 2400 or 2500, and economists who, as Hope put it, were unhappy to go beyond 2050, knowing that economic models were lucky to hold up much beyond five to ten years. But if the modelling stopped before 2050, it would be too early to show benefits from capping greenhouse gas emissions.
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The review team was especially attracted to PAGE’s ability to handle uncertainty, using a variant of Monte Carlo probability analysis, with ten thousand to one hundred thousand model runs to derive a single result. The model incorporated the possibility of catastrophic climatic events, such as the melting of the West Antarctic ice sheet occurring
before
2200 based on some work by Hans Joachim Schellnhuber and Stefan Rahmstorf of the Potsdam Institute. In Hope’s words, these were ‘just slightly more than illustrative’ – the evidence base for them being ‘very thin’.
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The single largest impact on estimating a value for the social cost of carbon is the climate sensitivity of carbon dioxide.
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The Review took a triangular distribution ranging from 1.5
o
C to 4.5
o
C, with 2.5
o
C as the most likely value. The Review also ran a ‘high climate’ scenario to demonstrate a sizeable probability that the climate sensitivity of carbon dioxide was higher than previously thought.
[16]

The second most important input was the pure time preference rate; in layman’s terms, the cost of time. Stern rejected the approach used by economists such as Nordhaus to derive the cost of time from market data, such as from bond yields, returns on investment and the amount people saved from their incomes. For Stern, it wasn’t a question of what the pure time preference rate
is
, but what it
ought
to be. ‘We take a simple approach in this Review: if a future generation will be present, we suppose that it has the same claim on our ethical attention as the current one.’
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The distinction has profound implications for what the Review was about. Was it about economics or was it, above all, about ethics? ‘If you care little about future generations you will care little about climate change,’ Stern argued, a position which did not have ‘much foundation in ethics and which many would find unacceptable.’
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By the same token, it could be said; if you care little about the present, you will care a lot about climate change. There is a way of balancing the two. The discount rate, embodying the cost of time, is the mathematical bridge linking the present and the future.

At the heart of the Stern Review is an ethical argument, one that Stern articulated in almost identical terms as Boulding had suggested – but rejected – forty years earlier. Stern quoted Frank Ramsey, the brilliant young Cambridge mathematician and philosopher who, in the 1920s, described pure time discounting as ‘ethically indefensible’ and Oxford economist Roy Harrod, who called it a ‘human infirmity’ and ‘a polite expression for rapacity and the conquest of reason by passion’.
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These views neglect mortality as the most certain fact of an individual’s existence. Stern did recognise the relationship between an individual’s mortality and the cost of time. ‘The allocation an individual makes in her own lifetime may well reflect the possibility of her death and the probability that she will survive a hundred years may indeed be very small,’ Stern conceded.
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Individuals’ preferences had ‘only limited relevance for the long-run ethical question associated with climate change’, Stern argued.
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The Review was thus couched firmly within a collectivist perspective – what matters is the welfare of the anthill, not the individual ant. In his modelling, Stern used a pure rate of time preference of 0.1 per cent a year to reflect the possibility of humanity being wiped out, implying an almost ten per cent chance of the extinction of
homo sapiens
before 2100.
[22]

There was a downside to Stern’s ethics – his treatment of the world’s poor and the transfer of wealth from them to the richer generations of tomorrow. Sir Partha Dasgupta, Frank Ramsey Professor of Economics at Cambridge, criticised Stern for taking a very inegalitarian attitude to the distribution of wellbeing when futurity was not at issue. The ethical parameter Stern had adopted to reflect inequality and risk in human wellbeing was, Dasgupta wrote, ‘deeply unsatisfactory’.
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Overall, Stern’s assumptions would require the current generation to save 97.5 cents of every dollar it produced – ‘so patently absurd that we must reject it out of hand’.
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Economists had taken the threat of climate change seriously, Dasgupta concluded, ‘but the cause is not served when parameter values are so chosen that they yield desired answers’.
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For Stern, it was all about the future. It was difficult to assess the impacts over a very long time period because future generations ‘are not fully represented in current discussions’.
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Who should then represent them and who knows what they will think? 

The implication is Stern and like-minded successors, in a dynasty of economic Pharaohs, presiding over the global economy for decades and centuries ahead. In a 2007 critique, Nordhaus wrote of Stern, stoking the dying embers of the British Empire, to apply colonial-style Government House utilitarianism from ‘the lofty vantage point of world social planner’.
[27]

Nordhaus also solved the puzzle of how Stern had derived his numbers. By using his DICE model, he could convert a one per cent reduction in output over the next century to a 14.4 per cent reduction ‘now and forever’. On Stern’s methodology, more than half the estimated damages ‘now and forever’ occur after 2800. ‘The large damages from global warming reflect large and speculative damages in the far-distant future magnified into a large current value by a near-zero time discount rate,’ Nordhaus wrote.
[28]

Having answered the ‘How?’ what of the ‘Why?’ 

Just as with the British government’s assessment of weapons of mass destruction, Nordhaus suggested the Stern Review should be read primarily as ‘a document that is political in nature and has advocacy as its purpose’.
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Was this overly harsh? An answer can be found in the Review. ‘Much of public policy is actually about changing attitudes,’ Stern wrote, in an authentic expression of the Blair-era style of governance as PR.
[30]

Thus there is nothing in the Review that might put a question mark over whether Kyoto was a good deal for Britain or for the world. Despite mounting evidence to the contrary, Stern argued that countries would meet their Kyoto obligations. ‘Governments make and respect international obligations because they are in line with perceptions of responsible and collaborative behaviour,’ Stern wrote, ‘and because domestic public opinion supports both the objectives and mechanisms for achieving them’ – a finding contradicted by Scott Barrett’s authoritative analysis.
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Neither did Stern examine what the costs and benefits of global warming might be for Britain. If a warmer climate benefited Britain, then cutting emissions is a lose-lose proposition.

Stern was dismissive of adaptation. ‘An inherent difficulty for long-term adaptation decisions is uncertainty, due to limitations in our scientific knowledge of a highly complex climate system,’ Stern wrote.
[32]
While uncertainty was an impediment to adaptation, the same lack of knowledge wasn’t a barrier to governments. ‘There speaks the true bureaucrat’ was Nigel Lawson’s stinging comment on Stern’s presumption of the superiority of government wisdom.
[33]

By presenting an ethical argument – that future generations should have as much weight as the present – in the garb of an economic cost-benefit analysis, the Stern Review was mis-sold by its author and by its sponsoring government. ‘Tackling climate change is the pro-growth strategy,’ the review claimed.
[34]
‘In broad brush terms,’ the review stated, ‘spending somewhere in the region of one per cent of gross world product forever could prevent the world losing the equivalent of five to twenty per cent of gross world product forever.’
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There’s something morally suspect about a proposition couched in terms of making you better off financially and morally. Ethics come into play when following financial self-interest leads to a morally bad outcome. On the other hand, ethics are cheapened when used in support of someone’s supposed material self-interest. If Stern had had the courage of his (moral) convictions, he should have made the case that taking action against global warming is costly and would hurt financially, but that the current generation had a moral duty to later generations.

How long would the pain last? Deep in the Review are two charts showing the costs of stabilising emissions at Stern’s target of 550 ppm of carbon dioxide equivalent. On the assumption that this would cost one per cent of Gross World Product (GWP), the chart showed a break-even point around 2080; if the cost was four percent of GWP, the benefits would not exceed the costs until around 2120.
[36]
The midpoint of the two implies there being no net benefit during the twenty-first century. A young person’s great-grandchildren might conceivably benefit, but not their children or grandchildren.

For countries committed to cap their emissions, the break-even point – assuming there is one – would be pushed into the twenty-second century and probably beyond. Stern reckoned that non-Annex I parties were likely to be responsible for over three quarters of the rise in energy related carbon dioxide emissions.
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Agriculture and changes in land use alone accounted for forty-one per cent of emissions, with Indonesia and Brazil accounting for half these.
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