|Wrong about "Copenhagen Consensus"
Start of "Copenhagen Consensus" theme
What discounting means for the climate issue
The most negative effects of climate change will appear in a very distant future, and our evaluation of the costs is therefore heavily dependent on which discount rate is applied. As we have seen, the choice of either a low or a high discount rate may reverse the order of priority of competing projects.
Some of the attempts to evaluate the costs and benefits of abating climate change use a time horizon of 300 years, i.e. up to the year 2300. With complicated computer models, attempts are made to find the best way of applying carbon taxes ("green" taxes aiming at reducing the total world output of CO2). These models find an "optimal abatement path", i.e. a time schedule for when to raise or lower carbon taxes in order to optimise economic growth and at the same time minimise damage from climate change. It should be no surprise that the answers obtained depend heavily on what discount rate is fed into the model.
Indeed, it turns out that the optimal strategies for abating climate change are profitable with low discount rates, but not with high discount rates. With an optimal carbon tax to regulate CO2 emissions, assessed over a time span of 300 years, the benefits of such a tax outweigh the costs as long as the discount rate is 1.5 % or less. With discount rates of 3 % or 4.5 %, on the other hand, costs are larger than benefits.
It is crucial, therefore, to decide on the correct discount rate. That decision is not simple. Opinions differ, but the reader, having been presented with the arguments here, may be willing to accept the following statement: although there are arguments for setting a relatively high discount rate - say 5 % or more - when dealing with issues on a short time scale, the use of such a high rate cannot be justified when considering time scales of over 30 years. If the present rate of economic growth in the rich part of the world continues, then one could argue for a long-term discount rate of 1 to 1.5 % for these countries. As the present rate of economic growth is higher in the developing countries than in the rich part of the world, there will be a scope for a somewhat higher rate - about twice the above values - in the medium term. But there are reasons to believe that in the long term (a hundred years or more), economic growth in the world as a whole may be expected to slow down, and on such long time scales, a proper discount rate for the whole world should probably be as low as 1 to 1.5 %, or even lower.
Thus, when discount rates are set at a proper level - up to 1.5% - it pays to combat climate change. But when discount rates are set higher, it doesn't. In any case, as the choice of discount rate above or below 1.5 % is in practice subjective, everyone is free to decide whether or not to pay to combat climate change.
Where we are dealing with climate issues, with time horizons of several hundred years, it is fair to say that a discount rate as high as 5% is simply wrong. As we have seen, the use of a 5% rate over such time scales produces absurd results - for instance, by giving all real estate in Denmark in 500 years from now a present value of about $6. No wonder that calculations using this discount rate demonstrate that it is not worthwhile to combat climate change. Why should we discuss eventual negative effects of climate change in Denmark, when it does not pay to preserve the nation at all? A method of calculation that yields such absurd results is obviously not workable.
The point is, however, that the panel of economists at Copenhagen Consensus used just this rate - 5% - as the discount rate. By doing this they could be sure to "demonstrate" that combating climate change could never pay. The conclusion was decided in advance.
The choice of experts
The set-up of Copenhagen Consensus was that each of a number of experts - among them W. R. Cline - would plead for a certain global project. After one round of critique and defense, the matter would be settled by a panel of experts. The composition of this panel was therefore crucial. On this subject, commentator John Quiggin writes (6):
"With four Nobel prize winners, it was certainly an eminent body. But the members weren´t notable for a focus on the problems of Third World economic development. They included experimentalist Vernon Smith, econometrician James Heckman (who later withdrew), and economic historians Robert Fogel and Douglass North.
Fogel has done important research on population and nutrition, but the other Nobel prizewinners, and most other members of the panel, were not experts in the main fields under discussion. As Jeffrey Sachs (who headed the Commission on Macroeconomics and Health) observed, the timeline was far too short for the panel to gain requisite expertise, lasting only a few months in total; the background papers circulated for a few weeks, and in the final discussions, the panel had 5 days to review 32 proposals.
The point can be sharpened by looking at some of the Nobel prizewinners who would have seemed like obvious choices for such a panel, including Kenneth Arrow, Joseph Stiglitz, Robert Solow and Amartya Sen, all of whom have made extensive contributions to the debate on economic growth and development.
Comparing the two lists, the omissions are, broadly speaking, towards the left of the economics profession and those who have commented on climate change have supported policy initiatives such as Kyoto. Conversely, the members of the Copenhagen panel were generally towards the right and, to the extent that they had stated views, to be opponents of Kyoto. Indeed, Lomborg´s argument that spending to mitigate climate change would be better directed to aid projects was first put forward by Thomas Schelling, one of the Copenhagen panellists.
The same lack of balance was evident in the selection of `opponents´. For Robert Cline´s paper on climate change, Lomborg picked vigorous opponents of Kyoto, Robert Mendelsohn and Alan Manne, and the result was an acrimonious debate. "
Costs or revenue?
Whenever Lomborg discusses the combating of climate change, he claims that the Kyoto protocol will cost society 150 billion dollars per year. And he adds that just half of this amount would suffice to meet all great challenges in the developing world - clean drinking water, sanitation, health care and education. So he gives the impression that combating climate change is not only inefficient - it also prevents the spending of money on other projects which really matter.
This, however, is a piece of misinformation. The amount of 150 billion dollars per year is the revenue of carbon taxes set high enough to cut CO2 emissions in the rich countries to the desired level. The figure results from calculations where it is assumed that this revenue is then recycled into the economy in a "lump-sum fashion" whereby general reductions of all taxes e.g. on industries or private households are reduced with corresponding amounts. In other words, the money does not disappear - it is recycled back into the economy, and is therefore not a cost. On average, households and industry will still have the same amount of money available, but the money will be redistributed away from those households and industry sectors that have a high output of CO2.
An interesting possibility is that the revenue could also be used to "meet all great challenges in the developing world". As stated by Lomborg, the sum is so large that even half of it would suffice to meet all challenges. This would be a double dividend - we would reduce climate change and at the same time meet all the great challenges in the developing world. So Lomborg´s main point - that we have to set priorities - is false. It is false that there is a conflict between mitigating climate change and helping the Third World.
As stated by W. R. Cline in his reply paper for the Copenhagen Consensus (7): "When it comes to dilemmas for choosing between the environment and today´s poor, moreover, it seems to me the debate has missed a key consideration. A carbon tax would raise revenue, and the lack of revenue is a key obstacle to achieving many social goals. Global revenue from my optimal carbon tax . . . would raise $1.1 trillion. That can buy a lot of schooling and medicine. So rather than coming at the expense of social spending, in practice it is quite possible that carbon abatement could facilitate social spending. Because of revenue realities, action in the climate change part of the Copenhagen Consensus agenda can perhaps more realistically be seen as complementary to, and enabling of, action in the other issue areas, rather than competitive with them."
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Detailed explanations on discount rates and what they mean on this page.