Economics

The second group of essays brings in the perspective of economics. Michael Toman (a long-time Senior Fellow at Resources for the Future who currently worked for the Environment Division at the Inter-American Development Bank) critically examines the use of cost-benefit analysis as the basis for identifying optimal climate change policies. Toman persuasively argues that economic concepts and methods can and should play a decisive role in designing policy instruments that achieve desired levels of emissions control at the lowest cost to society. Nonetheless, he is skeptical about using cost-benefit analysis to decide on the degree to which greenhouse gas emissions should be reduced relative to projected levels. On the one hand, he worries that cost-benefit analysis attaches insufficient weight to the interests and welfare of future generations. On the other hand is the issue of burden-sharing - how the costs of emissions reductions should be distributed between affluent and developing nations. Each of these issues embodies a moral component that is not easily addressed using cost-benefit analysis. In the final analysis, Toman recommends a two-tiered approach to policy evaluation in which: (a) decisions with relatively low stakes that play out over relatively short timescales should be based on standard cost-benefit criteria; and (b) decisions characterized by long time horizons that involve potentially catastrophic future impacts should aim to manage and mitigate the risks imposed on future generations. Since climate change is a high-stakes issue in which the potential for catastrophic costs looms large, Toman reasons that climate change policy must be based on decision makers' judgment regarding how much risk is acceptable to impose on future generations. This judgment, according to Toman, is explicitly moral in nature and cannot be reduced to the measures and calculations offered by formal policy analysis. Indeed, Toman's two-tiered approach explicitly calls for broad and open public discourse in the context of democratic political institutions.

Richard B. Howarth (Professor of Environmental Studies at Dartmouth College) echoes many of the themes raised by Toman. But, while Toman is concerned broadly with the normative dimensions of climate change policy, Howarth is concerned more narrowly with the controversies that surround the use of discounting techniques in cost-benefit analysis. In conventional cost-benefit analysis, the future benefits of greenhouse gas emissions abatement are discounted at a rate equal to the real (inflation-adjusted) return on corporate stocks, which averaged 6% per year during the 20th century. The logic for this approach holds that it would be socially inefficient to invest in environmental policies that yielded returns that were lower than those provided by typical market investments. As Howarth notes, however, a 6% discount rate implies that $1 of benefits obtained one century from the present attains a present value of less than 1 cent. Not surprisingly, conventional discounting techniques therefore imply that only modest steps toward greenhouse gas emissions are economically warranted. Howarth critiques this approach to discounting the future based on three distinct lines of reasoning. First, the use of high discount rates is inconsistent with classical utilitarianism, which holds that equal weight should be attached to the welfare of present and future generations. Second, the approach violates the principle of stewardship, which holds that it is morally unjust for present generations to engage in actions that impose uncompensated environmental costs on posterity. Third, the use of a 6% discount rate is appropriate in the analysis of public policies that have risk characteristics that are similar to those associated with corporate stocks. Economic theory, however, suggests that discount rates of 1% or less should be used to evaluate policies that reduce future risks. Since a main objective of climate change policies is to reduce the risks faced by future society, Howarth concludes that the use of high discount rates in the analysis of climate change policies is generally inappropriate.

P.R. Shukla (Professor at the Indian Institute of Management in Ah-medabad) examines the links between equity and efficiency in achieving international cooperation to achieve long-term reductions in greenhouse gas emissions. Based on his understanding of climate change science, Shukla takes it for granted that the world community will strive to stabilize greenhouse gas concentrations to reduce the risks faced by future generations. Against this backdrop, the question is how the costs of emissions abatement should be distributed between industrialized and developing countries. According to Shukla, most economic studies have focused narrowly on minimizing the total cost of emissions reductions. This criterion suggests that relatively large emissions reductions should take place in developing countries, which disproportionately rely on inefficient, high-emission technologies. Shukla, however, argues that equity demands that emissions abatement costs be borne primarily by industrialized nations under the principle of "common but differentiated responsibilities" set forth in the Framework Convention on Climate Change. This argument rests on the observation that, in historical terms, the industrialized nations have long generated the lion's share of greenhouse gas emissions. In addition, Shukla reasons that moral considerations imply that developing countries should not and politically cannot pursue policies that jeopardize the pursuit of material prosperity. Under this argument, it follows that industrialized nations should take the lead by providing technological and financial assistance to promote the adoption of clean technologies in the developing world.

All of these considerations must be weighed by anyone who wants to decide fairly what to do about global warming.

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