Utility as the informational basis of climate change strategies, and some alternatives Simon Dietz, LSE

Utility as the informational basis of climate change strategies, and some alternatives

Simon Dietz, LSE

SSCW, MoscowJuly 2010

This paper The question:

What role should economics play in evaluating climate change strategies?

Main points: Most focus, and associated controversy, has been on

how to weight the consumption of individuals living in different ‘locations’, especially in time (i.e. discounting)

But this is unnecessarily narrow An equally, if not more, important ethical judgement

comes earlier, when we take utility to be the only relevant measure of human wellbeing

Efficient climate policy


The standard applied economic approach to climate change, I

Maximise the expectation of a utilitarian social welfare function over time Choose a utility discount rate Specify utility as a CRRA function of

aggregate consumption, adjusted for the costs and benefits of climate change and of GHG emissions reductions

Specify a representative individual for each region and multiply their utility by an estimate of the regional population


The standard applied economic approach to climate change, II

Construct a full-scale ‘integrated assessment model’ (IAM) that couples the economic and climate systems

Technology, capital, population

Emissions

Atmospheric concentrations of GHGs

Radiative forcing and global climate

Regional climate and weather

Environmental impacts (e.g. crops, forests, ecosystems)

Socio-economic impacts


What does the typical IAM look like?

Standard Ramsey/Cass/Koopmans model of economic growth, which produces emissions

Simple climate model Model in itself But calibrates model parameters

on other climate models that are much more complex

Damages Include production losses, and

the consumption equivalent of other welfare changes (e.g. leisure)

Adaptation to climate change is implicit in the ‘damages function

‘Mitigation’ Divert output to cutting

emissions


What is the typical finding?

Source: Nordhaus (2008)


Where have the disagreements been?

Predictions about the (undiscounted) costs and benefits of adaptation and mitigation

Parameterisation of the utility and social welfare functions Utility discount rate Elasticity of the (constant) marginal

utility of consumption

Interdependence as the strength of the economic approach


What might there be to commend the economic approach? I

Sen (1987) on positive economics: “The fact that famines can be caused even in

situations of high and increasing availability of food can be better understood by bringing in patterns of interdependence which general equilibrium theory has emphasized and focused on.” (p9)

Examples in the context of climate change Decentralised market incentives The ‘rebound’ effect Adaptation to climate-change induced moves in

relative prices


What might there be to commend the economic approach? II

Broome (1999) on normative economics: “we have to balance the interests of future people

against the interests of presently living people, fun in retirement against fun in youth, the wellbeing of the deprived against the wellbeing of the successful or lucky…These are places where the scarcity of resources forces a society to weigh up alternative possible uses for these resources, and economics claims to be the science of scarcity.” (p1-2)

i.e. think comparatively Examples in the context of climate change

Discounting Compare returns to investing in clean technology

with returns to investing in e.g. aids prevention or primary schooling

Utility as an informational basis for climate change strategies


The wide-ranging effects of climate change

Climate change is likely to have wide-ranging direct effects, on: Water supply Food availability Land availability Health Natural ecosystems

Which will in turn have wide-ranging, indirect economic and social effects


What we climate-change economists do, and our critics

All of these effects can be modelled, as long as we can monetise them

Concerns that have been aired: Baseline wellbeing is aggregate consumption;

narrow view of where people start from Monetary valuation of e.g. species loss, risk of

environmental conflict etc. is very difficult Approach does not get right the distinction

between vital needs and instrumental needs ~ approach does not single out inviolable

welfare rights

Just keep maximising, but…?


Resolution I: CBA with side constraints Maximise discounted utility subject to side constraints

(e.g. Alan Randall) predicated on moral acceptability In an environmental context, ~ Safe Minimum

Standard (SMS) of conservation Currently global climate negotiations are aiming at a

limit of 2°C global warming, which is a form of SMS But:

What happens when the side constraints are in conflict? i.e. only works when set of possible strategies is not empty

Also, runs the risk that side constraints are not rigorously justified (see origins of 2°C target)

Anyway, if CBA is broken, why not try to fix it?


Resolution II: formal but pluralistic evaluation of climate change

Generalise notion of utility as a function of a set of determinants of human wellbeing, with weights that are not known a priori

On the set of determinants, e.g. Rawls’ primary goods; Sen’s capabilities

Use partial aggregation to identify the range of weights over which the appropriate climate strategy is clear

Question: don’t we in effect do that already?


Current practice

Source: IPCC (2007)


Current practice

As embodied by e.g. the IPCC is: Informal And its dimensions of evaluation are

rather ad hoc Trouble is, there is a reason for this:

It is not easy to trace through the impacts of climate change to what ultimately matters to human wellbeing

Thank you

Simon Dietz, LSE

Documents

Utility as the informational basis of climate change strategies, and some alternatives Simon Dietz, LSE