Wednesday, December 20, 2006

Taxing Thoughts About Climate

Brad DeLong has had a couple of posts up about the Stern report and the more general question of what we ought to do about global warming. Economists seems to believe that we ought to tax it, and I'm inclined to agree, but then comes the vexing question of the cost benefit analysis. It's at about this point that I tend to get really annoyed, mainly because any attempt at economic analysis seems at once hopelessly dependent on implausible models and largely beside the point.

The implausible models start with things like:

If the world grows in per capita income at about 2% per year, a marginal expenditure of roughly $70 today in cutting carbon emissions would be worth it if it were to enrich the world of 2100 by about an extra $500 of year-2006 purchasing power, once all the damages to the world economy and environment from global warming, costs of adjustment, and so on are taken into account. This looks like a very good deal to Nick Stern and his team.

On the other hand, critics point out that the world today is poor: average GDP per capita at purchasing power parity today is roughly $7000. We expect improvements in and the spread of technology to make the world of 2100, at a 2% per year growth rate much richer than the world of today: $50,000 per capita of year-2006 purchasing power. We today can use the marginal $70 per capita, critics say, much more than the richer people of 2100 will need the $500 or so they would gain from not having to suffer from the effects of global climate change.

Hey, if the economy keeps growing at a 2% per capita rate, the ecocatastrophe never happened - either that, or the number of heads will have shrunk even faster than the economy did in the ecocatastrophe. Even more importantly, from my perspective, are the costs that aren't measured in per capita GDP. How do value the loss of an ecosystem, or a million species, or costs to our health and happiness?

To ecologists, it's evident that the Earth is currently undergoing a mass extinction event on the scale of some of the major extinction events of the past, and that humans are the cause. Moreover, the damage to our ecosystems is proportionate not just to the number of people in the world but to their use of resources. If the people of China, India, and other emerging economies reach a point of wealth where their impact on the world ecosystem is comparable to that of the US (per capita), the speed with which the calamity unfolds will accelerate by manyfold.

The human race is not likely to be one of the species that becomes extinct in this scenario which is already rapidly unfolding, but the world left to our successors seems likely to be immeasureably impoverished in non-economic goods, and quite likely economically as well.

If economists figure out how to meaningfully value some of these things, they might have something interesting to say. Until then, their debates about rates of time discount are merely about how the deck chairs on the Titanic will be arranged.