Saturday, November 13, 2021

Generational Carbon Pricing: Professor Nordhaus and the Activists

If you were into this stuff when Sir Nicholas (now Lord) Stern put together his eponymous review you know it all comes down to discount rates: How should we discount the future?

TL;dr on Nordhaus' work: He arrives at a temperature increase of 3.5°C as the point where the costs for future generations outweigh the proposed costs that the current generation is exhorted to assume. This is considerably above the 2°C target* agreed at Paris, much less the current 1.5°C proposal

From VoxEU via Berfrois, November 10, 2010:

Economists Have Needlessly Produced a Climate War

Economics has a longstanding identity crisis when it comes to positive versus normative analysis. The positive camp views the field as properly devoid of moral sentiment. The normative camp thinks maximising social welfare is the discipline’s mission. The ‘positives’ endorse only reforms delivering Pareto gains – winners without losers. The ‘normatives’ choose sides, using economics to do most ‘good’ at least harm.

Nowhere is the conflict between the value-free science of economics and the moral mission of political economy, the discipline’s original name, clearer today than in the economics of climate change. Nordhaus’ seminal, Nobel Prize-winning work identified anthropogenic planetary heating as the world’s most dangerous externality and carbon mitigation as the proper response (Nordhaus 1979, 2017). He also raised a host of issues that now occupy a small army of climate scientists and economists. The list includes the linkage between carbon emissions and atmospheric concentration; the impact of carbon concentration on global mean temperature; the dependence of regional on global temperature; the sources, sizes, measurement, and geographic distribution of damages; the potential for tipping points; global policy coordination; uncertainty; the role of green investment; the Green Paradox; and, last, but really first, the optimal carbon tax.

Yet, for all its value added, Nordhaus’ invocation of a social planner whose intergenerational preferences dictate ‘optimal’ climate policy inextricably conflated questions of economics and morality. The 700-page Stern climate report (Stern 2007), commissioned by the UK government, adopted Nordhaus’ approach. However, Stern summoned forth a social planner who cared far more for posterity, and therefore calculated a far higher ‘optimal’ carbon tax. In questioning the ethics of Nordhaus’ social planner, who had reigned supreme for years, Stern opened the flood gates. In short order, a bevy of economists, including six current or future Nobel laureates,1 were hotly debating ‘the’ social planner’s ethically correct time preference rate – the rate at which to discount, as in make less of, the welfare of the unborn.

Economists cherish scientific objectivity, or at least the appearance of scientific objectivity. Hence, when joined, the social planner approach was quickly re-packaged in positive terms. The trick was to assume intergenerationally altruistic agents, each of whom cared for their offspring but, sadly, no one else’s. The role of carbon policy was to keep these ‘single agents’ from free-riding on one another. Doing so involved maximising the representative single agent’s utility, which, low and behold, devolved to Nordhaus’ selfsame social planner problem. However, the time preference rate could now be viewed as an objective component of household preferences, not a matter of religious creed. Stated differently, any given single-agent model’s weighting of the welfare of the unborn was suddenly rationalised as a matter of professional judgement about an objective quantity, not an ethical declaration.

This ex-post rationale might hold water were we to live in a world of intergenerational altruists. We do not. Most people conduct their economic lives with little or no regard for the economic welfare of their immediate, let alone future descendants. This is plain as day in cohort and household data.2

Greta Thunberg got all this right in her 2019 United Nations address:

“You are failing us. But the young people are starting to understand your betrayal. The eyes of all future generations are upon you. And if you choose to fail us, I say: We will never forgive you.” 3

Unfortunately, Greta missed a golden opportunity to cut a deal with her nemeses. Imagine Greta continuing her speech with these words:

“Since we cannot count on you to act morally, let me propose bribing you to save the planet. Adopt a high global carbon tax. However, cut other taxes so, on balance, you are better off. My and future generations will pay higher taxes to service the deficits you run. And if you insist on helping yourself to the same degree as you help us, cut your other taxes by enough to make that happen.”

Can today’s and tomorrow’s world uniformly gain from carbon taxation?

The ability to share the gains from taxing emissions, and not just across generations, but across regions,4 is inherent in the positive economics of externalities. We demonstrate this well-established, critically important, but routinely ignored point in three recent papers (Kotlikoff et al. 2021a, 2021b, 2021c). The papers feature life-cycle models populated by unashamedly selfish agents who do what comes naturally – burn fossil fuels to their pocketbook’s content with no regard to its future damage...

 
Here are a couple of our older looks at climate economics (there are dozens, if not hundreds):
August 2007
The Costs and Benefits of Climate Change Mitigation
September 2007
THE SOCIAL COST OF CARBON: TRENDS, OUTLIERS AND CATASTROPHES