Utility as the informational basis of climate change strategies and some alternatives
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Utility as the informational basis of climate change strategies, and some alternatives. Simon Dietz, LSE. This paper. The question: What role should economics play in evaluating climate change strategies? Main points:

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

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

Simon Dietz, LSE


This paper

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

SSCW, Moscow

July 2010


Efficient climate policy

Efficient climate policy


The standard applied economic approach to climate change i

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

SSCW, Moscow

July 2010


The standard applied economic approach to climate change ii

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

The standard applied economic approach to climate change, II

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

SSCW, Moscow

July 2010


What does the typical iam look like

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

SSCW, Moscow

July 2010


What is the typical finding

What is the typical finding?

Source: Nordhaus (2008)

SSCW, Moscow

July 2010


Where have the disagreements been

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

SSCW, Moscow

July 2010


Interdependence as the strength of the economic approach

Interdependence as the strength of the economic approach


What might there be to commend the economic approach i

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

SSCW, Moscow

July 2010


What might there be to commend the economic approach ii

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

SSCW, Moscow

July 2010


Utility as an informational basis for climate change strategies

Utility as an informational basis for climate change strategies


The wide ranging effects of climate change

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

SSCW, Moscow

July 2010


What we climate change economists do and our critics

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

SSCW, Moscow

July 2010


Just keep maximising but

Just keep maximising, but…?


Resolution i cba with side constraints

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?

SSCW, Moscow

July 2010


Resolution ii formal but pluralistic evaluation of climate change

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?

SSCW, Moscow

July 2010


Current practice

Current practice

Source: IPCC (2007)

SSCW, Moscow

July 2010


Current practice1

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

SSCW, Moscow

July 2010


Thank you

Thank you

Simon Dietz, LSE


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