How Economists Have Misjudged Global Warming.

AuthorAyres, Robert U.
PositionUnited States' attitudes towards the Kyoto Climate Treaty

The Bush administration's rejection of the Kyoto climate treaty is based on a fallacious economic theory. The proof that this theory is wrong lies in the real history of how technological progress drives economic growth.

A deep chasm has opened between scientists and economists over the issue of global warming. To some degree the chasm has always been there, because economists have never been able to achieve the predictive rigor of the hard sciences. But the rift was increased dramatically by the Bush administration's new energy policy, as presented in its Report of the National Energy Policy Development Group authored by Dick Cheney, Colin Powell, Paul O'Neill, Gale Norton, and others in April 2001.

The Cheney report was quickly put together and based on a virtually unquestioned assumption that the only way to keep the U.S. economy healthy is to greatly increase its supply--and consumption--of coal, oil, and natural gas. It simply side-steps the findings of the monumental Climate Change 2001: Third Assessment Report, by the Intergovernmental Panel on Climate Change (IPCC), which warns that we may be courting climatic catastrophe unless our burning of fossil fuels--and resulting production of carbon dioxide emissions--is sharply reduced. The IPCC Report is based on five years of intensive investigation by the leading climate scientists of more than a hundred countries. Curiously, the Bush team is on record as unwilling to trust the "uncertain science" of global warming. Yet it unhesitatingly puts its faith in the vastly more uncertain science--if that is the word--of long-term economic forecasting.

When the Bush energy policy was announced, environmentalists--and others who had expressed concerns about whether human industries are on a sustainable course--were deeply distressed. The Bush position seemed so utterly at odds with what the scientists have been saying--and saying with increasing urgency. But even more than distressed, they were perplexed. Why would such a globally resounding voice as that of the IPCC be shrugged off? Some critics averred that it was Bush's and Cheney's oil and coal industry connections, and their need to pay off industry political contributors (who contributed heavily to their election), which accounted for the anti-IPCC stance. Some said it was Bush's fear that voters would be angered by any short-term increases in gasoline prices, as would likely result from any serious cuts in carbon dioxide emissions. And both factors may well have carried some weight.

Recall, however, that the U.S. Senate rejected U.S. participation in anything resembling the Kyoto agreement long before Bush and Cheney came into office. Moreover, the National Energy Policy (NEP) report was never really offered to the public as a rebuttal to the IPCC report; because it never addressed most of the scientists' concerns. Whereas some 1,500 climate scientists had spent millions of research hours (and thousands of super-computer hours) tracking the role of industrially produced [CO.sub.2] in warming the planet, the NEP report allocated just five paragraphs to the subject, and did not even include the terms "carbon dioxide" or "greenhouse gases" in its glossary. Rather than being a scientific rebuttal, the government report was put forward as an alternative to science.

DISCOUNTING

In practice, the task of quantifying and comparing present costs and future benefits (or the converse) is often virtually impossible to accomplish with any confidence. I am particularly aware of this difficulty because I was small fly on the wallpaper at the scene of some of the early efforts to apply benefit-cost analysis to real-world issues. In those days (the late 1960s) a few environmental economists were concerned about excessive U.S. government investment in building dams on small rivers.

At that time, the U.S. Army Corps of engineers had become a dam-building agency. The Corps had become heavily involved in this activity during the construction of the giant Tennessee Valley Authority (WA) and Grand Coulee projects in the 1 930s. When those jobs were completed, the Army engineers needed new sources of employment. In their presentations to the U.S. Congress, they justified their proposals for more dams on the basis of optimistic estimates of future recreational and other benefits (i.e. the number of future visitors and how much they would spend) which they discounted at interest rates less than 3 percent, which was the lowest rate paid at the time on extant long-term government bonds issued back in the 1930s. By the same argument the apparent monetary costs of construction (bond interest payments) was understated using the same assumption. Environmental economists at Resources For the Future Inc. (RFF) tried to develop a methodology for yielding more realistic assessments.

One of the rules of thumb that came out of that experience was that, to avoid foolish capital investments, future benefits should be substantially discounted--preferably by at least 8 percent. Now, ironically, it is the high discount rates attached by economists to the future benefits of avoiding greenhouse warming that make those benefits seem hard to justify in benefit-cost terms. In retrospect, what makes this bit of economic history particularly ironic is that in those days, environmental damages--such as the destruction of wetlands or disruption of fish spawning patterns--were not even counted among the costs. The avoidance of those costs, of course, would make the uncounted future benefits even larger. To be accepted so easily by the entire Republican leadership, and a few Democrats as well, it had to be not just a politically persuasive argument, but a declaration based on a fundamental belief system--an economic ideology founded on certain assumptions not even subject to challenge.

In a recent piece for the New York Review of Books, the environmental author Bill McKibben writes that these two documents "offer competing blueprints for the twenty-first century," and that "it would not be hyperbole to say they outline the first great choice of the new millennium, a choice that may well affect the planet throughout the thousand years to come." If that is so, then the arena in which the battle .for the planet's future will be played out is not primarily in the evaluation of the IPCC's atmospheric science at all, but in the evaluation of those rarely questioned assumptions on which the conservative economic ideology is founded.

If McKibben is right, environmentalists who continue to argue defensively about the soundness of IPCC climate models, or even about the moral failures of a policy that ignores future generations, are barking up the wrong trees. True, someone who argues on such grounds may eventually be vindicated, if catastrophic damage to the U.S. coasts or crops, or the drowning of a Pacific island nation, proves the Bush-Cheney policies to have been tragically misconceived. But such vindication would come too late to be of much help, less consolation. To change the policy before the damage is done, it is necessary to challenge--and expose for the fallacies they are--the hidden assumptions that lie behind these otherwise incomprehensible positions.

To be more specific, the administration's position on the Kyoto climate treaty, as we have heard from countless government spokespersons and TV talking heads, is that any major government intervention to reduce [CO.sub.2] and other greenhouse gas emissions would "harm the U.S. economy." In effect, it is argued that the costs of any government-inspired actions aimed at reducing greenhouse emissions will greatly exceed the discounted present value of the future benefits. The term "discounted present value" is an economist's jargon for the idea that costs are greater if paid now than if paid later (see box at left). That's because if we spend the money now we can't be earning interest on it later; and besides, society will presumably be richer later so it will be easier for our descendants to pay than it is for us. By the same argument, benefits to be received in the distant future are worth less to us now than they will be worth to our (richer) children who get to enjoy them.

The assertion that measures to reduce emissions will be very costly causes many business people to react negatively, in part, because it seems--at first--so obvious. Moreover, this assertion is almost never challenged by anyone with business or academic credentials. It is accepted as revealed truth by the most presumably objective and knowledgeable of the economically savvy news media, such as The Economist. One might easily say, of course it will be costly. After all, we are implicitly talking about fundamentally restructuring the energy supply and distribution system of the world, not just building more of the same things, as the Bush team wants to do. (But the Bush program of building lots more coal-fired and nuclear power plants would be costly too.)

In reality, however, accessing costs is not that simple. To begin with, costs (think of them as investments) are not very meaningful unless paired with their associated profits or benefits. It cost a lot to launch the auto industry at the end of the 19th century. But that launch also created jobs, generated revenues for all kinds of old and new businesses, brought astronomical profits to (some) investors, and provided new services to consumers--on a scale that the manufacturers of horse-drawn carriages could hardly have imagined. Unfortunately, the "it-will-cost" argument often gets hung up on the highly political question of who will pay and who will enjoy the future benefits--or in this case, the avoided damages. Will the benefits be enjoyed by those who must immediately pay higher taxes or higher fuel prices? In other words, what can we offer in the near term to satisfy skeptical investors who would otherwise prefer to stay with business-as-usual and simply hope that the...

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