Economics, ethics and climate change

1
Economics, ethics and climate change

• Dr Simon Dietz
• Grantham Research Institute on Climate Change and
  the Environment
• London School of Economics

2
Main point economics and ethics cut both ways

• Careful, explicit examination of ethical issues
  can guide economic analysis (i.e. markets dont
  provide a technocratic solution)
• Economic analysis can provide guidance on ethical
  issues by clarifying the consequences of
  particular ethical viewpoints

3
A sketch of the controversy about the Stern Review

• The conclusion of the Review strong and
  immediate action to reduce greenhouse gas
  emissions is thought to depend on the discount
  rate applied (partly true)
• Ramsey formula for the social discount rate
• d is the rate of pure time preference or utility
  discount rate
• ? is the elasticity of the (social) marginal
  utility of consumption, a measure of inequality
  aversion
• In Stern, d 0, ? 1, g 1.3 per year (net of
  climate change), so r 1.4 per year
• Others have set d and ? so that r 5 per year
  or more

4
Descriptive versus prescriptive

• This is an old (and slightly repetitive) debate
  between two standpoints
• A descriptive approach
• d and ? must be consistent with peoples
  preferences, as revealed in todays market place
• And/or d and ? must be consistent with public
  sector discount rates
• A prescriptive approach
• Make direct and basic ethical judgements on d and
  ?
• Could point in either direction, but is often to
  used to argue in particular for low d

5
The problem with using market data to reveal
ethics

• Market prices ? social valuations (this is
  actually the ultimate irony)
• Wealth affects market behaviour
• Markets dont cover climate-change time scales
• Consumer choices ? social choices
• Climate change has catastrophe potential, and
  market returns dont reflect that

6
The problem with revealed ethics as a whole

• Must make four assumptions about your data
• A unique preference is revealed by the observed
  behaviour
• The preferences revealed are true preferences,
  based on full and correct information without any
  errors in decision-making
• The preferences measured are contextually
  relevant to the ethical judgement at hand
• The preferences are appropriate for social
  decision making, and not merely individual
  decision making

7
The argument for policy consistency

• Dont distort public investment to less
  productive ends
• Local difficulties
• Wide variation in public-sector discount rates
  reflects many institutional factors
• Some evidence on social rate of time preference
  suggests it is much lower than public-sector
  discount rates
• Fundamental considerations
• Longer time horizon?
• Quite possible to immiserate future generations,
  because regular public-sector discount rates
  typically dont deal with climate catastrophes

8
So is climate change a special case?

• There seem to be two alternative resolutions to
  this particular (narrow) debate
• Both of which afford climate change special
  status
• Go back to first principles in setting the values
  of ethical parameters
• Set them consistent with other policies (i.e.
  higher discounting), but add a side constraint to
  ensure sustainability
• Question does it make any difference? (I hope to
  be able to tell you soon)

9
Economics, ethics and climate change

• Dr Simon Dietz
• Grantham Research Institute on Climate Change and
  the Environment
• London School of Economics