Stern Stuff, eh?

Chennai is all set to host Sir Nicholas Stern and his team for a discussion on what is what is known (in)famously in the climate change circles as the Stern Review.

The Stern Review (for the uninitiated) is a 700 page long document on climate change, global warming and the like. Released on October 30th 2006 (the October Revolution, which was neither in October nor much more than a Bolshevik coup), the Stern Review was undertaken for the British government by former World Bank chief economist.

The Stern Review discusses at length the impact of global warming and climate change on the world economy. A leading member of the Stern Review will speak at the Clive Dupleix Hall, Taj Coromandel from ten in the morning on Friday, the 23rd.

The report suggests in its conclusion (the only human- readable part) that a 1% of the world GDP would be required in investment every year to tackle carbon emissions failing which the loss in pure GDP terms would be somewhere between 15-20% of the global GDP. Upfront I guess, this is great news for environmentalists, there is much evidence though that the Stern Review is really nothing much more than an alarmist publicity stunt.

The Stern Review has received much praise and criticism (rightly so). A more momentous environmental milestone though that most people don’t talk about also took place on the 30th of October, 2006. The Copenhagen Consensus Centre headed by Bjorn Lomborg ( a statistician by profession and of Skeptical Environmentalist fame, a book I highly recommend to anyone who seriously intends to do anything about the environment) held a session with United Nations ambassadors from twenty four nations “representing fifty four percent of the world’s population”. These nations, were both developed and developing, large and small.

Lomborg asked them a single question, “If you had an extra $50 billion to be put to good use, what problems should be solved first?” The question was meant to reflect national priorities. Unhappily, for the blissfully unaware Sir Stern, mitigating climate change was nowhere close to the top five or even the top ten national priorities. I could easily suggest that this was because climate change by definition is something that requires international and transnational cooperation. And yet, you and I both know that this argument is flawed. If climate change was really bothering people, action would be happening.

The ambassadors in question unanimously agreed that “diseases, sanitation and water, malnutrition and education,” ought to be addressed first. Most ambassadors agreed that getting this baseline right also meant that mankind at large would be better equipped to deal with climate change at a later stage.

The Stern Review is problematic on several fronts which I will eventually discuss, what is more upsetting though is how this so called ‘green-agenda’ is being pushed forward aggressively and lapped by the media at that. I study and work with Public Policy, the vast majority of my teachers unfortunately derive their opinions from newspapers. And why not? Newspapers supposedly report facts, the opinions are therefore theirs, right? Not so.

Of the several classes I attend, one has to do with ‘Environmental Policy’. This class is taught by a beautiful woman who has an empty mind. She started out as a student of Economics, moved on to what she undoubtedly thinks is Philosophy (her lectures abound in references to a return to Wilderness, Deep Ecology, feeling for the Earth and of course Buddhist Ethics), then went to America and joined the Audubon Society dancing around camp fires with indigenous Americans.

My problem is not with Deep Ecologists, the Audubon Society or indeed with American Indians. My problem is with the perception of environmentalism. My problem is that all these collectives represent but one side of the story. For every developed and so called overtly consumerist nation there has also been an environmentally disastrous and state regulated USSR, China and so on. The point is that while Deep Ecology addresses an environmental gap in the more affluent nations where perhaps ‘returning to the land’ is a culturally important value, this is not global. In India for example, environmental problems are livelihood and human rights problems first. At any rate, this is a discussion for another day.

This particular woman, has been, like several other environmentalists brainwashed into guilt. She persistently talks about equity and believes that economic growth is evil. She will only talk about redistributions, but doesn’t see the argument about increasing the size of the economic pie. Don’t get me wrong, I’m not anti ‘green’; as a matter of fact I think the environment is a vector of several very valuable and scarce resources.

I’m merely suggesting that perhaps E.F Schumacher’s most valuable contribution did not lie in his questioning why mankind cannot live within a GNP many times in size now than it was for older civilizations, but instead in how to live within our means– through appropriate technology, something only an economist or otherwise solution driven mind could arrive at.

The value of Buddhist ethics similarly lies in their ethic of environmental conservation not in ‘connections with the soil’, and the value of the Sierra Club in its land acquisitions for environmental preservation. These are valuable lessons, and they are about strategy and method not about feelings, though I concede that feelings are a powerful means to action which brings me back to the Stern Review.

Among the many things wrong with the Stern Review, let me begin with the global GDP and the 1% figure which made the headlines. Current estimates of the global GDP stand at about $45 trillion. One percent of that figure is some $450 billion every year. Mind you, we’re talking about catastrophically bad weather at the very least a century away. The Stern Review suggests that at this cost Green House Gas (GHG) emissions could be stabilized. One way to look at this, or at least the Stern way to look at this figure is to say that four hundred and fifty billion dollars isn’t very much for the world. I disagree.

Any investment is undertaken at some cost, this cost is popularly known as opportunity cost. What could the opportunity cost of four hundred and fifty billion dollars be? Health, poverty, peace? The operating principle which prompts the hideous suggestion of spending this money on a phenomenon that doesn’t have any scientific consensus at all is what is popularly called the precautionary principle. You and I call this erring on the side of caution. What I want to know is this, should governments actually decide policy on a precautionary basis? Should our governments spend billions on developing anti-alien defense systems, because we suspect an inter-galactic attack?

Like all climate scientists, the Stern Review scientists based their report on climate projections and models. Much of climate prediction is itself circumspect. Weather and climate are complex, non-linear systems that do not conform. Predicting their patterns beyond a few months with any degree of accuracy is a mathematical joke. Our meteorological departments can’t get fishing weather forecasts right beyond a couple of hours let alone predict climate change and its effects a century down the line. The fault does not lie in the system, or in the maths–but in the fundamental understanding of chaos theory, unpredictability and in assuming variables to be static when they really are quite the opposite!

To understand this better; the Stern Review combines worst case climate model predictions with worst case economic model predictions, which is whence the predictable disaster arrives. The economic analysis is based upon what is called the A2 storyline. The IPCC Special Report on Emissions Scenarios describes a series of plausible ‘worlds’ of which A2 is one.

The A2 storyline is a world wherein relatively slow economic growth dominates, IPCC puts the figure around 2%. The world is a pretty dismal place with global economic self sufficiency (economic self sufficiency is suicide), continued population growth, and close to no technological growth. Call it a Malthusian nightmare. From this picture, we are to expect that by 2100 global per-capita GDP would rise by a paltry sum of $ 16,000 making the global GDP $243 trillion dollars. The population would be close to 15 billion and income would be inequitably distributed.

This is one scenario, and I might add rather improbable, if one were to remember Paul Ehrlich’s bet or indeed wonder why what Malthus predicted never came to pass. There are other ‘worlds’, the A1 scenario of the IPCC which is far more happy and indeed plausible discusses strong economic growth, trade in a globalised world, the population stabilizing and indeed outstanding technological progress which we have seen in the last century.

Contrast the A1 scenario GDP with the dismal picture, the projected GDP stands at $550 billion with a per capita income of $80,000 for the same time span. I am often amused in the class I discussed above– because I have to tackle an activist who takes every shot to call me ‘anti-people’, only ‘growth-oriented’, ‘right-wing’ and indeed everything short of evil, as though my horns are visible!

I’m assuming though that any reasonable person would want to avoid the A2 scenario and therefore would logically realize that the best way to deal with climate change and a shrinking natural resource base is to create greater capacity for future generations. In that vein, it is surely obvious that best policies are those that encourage economic growth. Here’s another weltanschauung– with wealth future generations can make and use better technology to deal with climate change, if it happens! I’m suggesting, that it makes for good policy to move from slow growth to high growth even if you are green, red, blue or indeed any other political color!

Economists concerned with the environment like Sir Nicholas Stern consistently talk about the poor in South Asia, especially Bangladesh. Its funny how the only thing in recent times to have made a difference to the average poor Bangladeshi is entrepreneurship and the availability of credit capital through from micro-finance, but I will let that pass. Let’s assume that Sir Stern gets to raise energy prices through a carbon tax, what is the immediate impact? An economic growth slowdown, by a trifle let’s say about 1%. How would a 1% fall in the growth rate of a third world nation like Bangladesh matter?

Bangladesh’s growth rate is about 6% per year, so if this were to become 5% for say the next half century till carbon levels stabilize what would the GDP growth difference be? The math is really easy. At 5%, after fifty years Bangladesh’s economy will grow by $575 billion, at 6% it would be close to a $1 trillion. Its the trivial little 1% that makes the huge difference. Now let me ask you, what are Bangladesh’s or indeed any third world country’s most pressing problems? Is it really how “a warming world will cause rising sea levels to flood much of that country”? If the concern is really over flooding, I wonder how a whole host of Scandinavian countries including the Dutch actually manage to keep their low lying countries out of flooding with a GDP of just 500 billion dollars!

Actually, maybe I’m being a tad unfair. Sir Stern is a very competent economist and has pointed out several times in the Stern Review that raising the price of energy produced from fossil fuels could very well produce net economic benefits. Look at this as some form of competition, new technology and a huge market demand for low carbon alternatives. The point is that, here too the idea of opportunity cost still stands. As I write (and in some sense the very fact that the Stern Review ever took place implies that), there is a gradual progression to cleaner fuel.

Therefore choosing to make energy costlier through taxes doesn’t change much except maybe saving some time. In the mean time- human beings everywhere are losing money they could’ve otherwise spent on food, water, sanitation, education, housing etc. In other words we’d be taking away social primary goods and subsistence provisions for climate change a hundred years down the line! The Rockefeller University here, has an excellent write-up on energy and de-carbonisation that discusses some of the issues surrounding energy consumption, much more eloquently and on much firmer ground than I can.

Pondering upon Bangladesh, improving people’s lives involves boosting economic productivity and that definitely does not include a 1% growth rate sacrifice for climate change! The Stern Review is insane on several other counts, and not just unethical. Amongst other things —

1. Stern wants the world to pay close to four hundred and fifty billion dollars every year to mitigate climate change on the basis of a phenomenon which has no scientific consensus concerning its causes. Contrast that with the Kyoto commitment of a hundred and fifty billion dollars per year which is failing.

2. The Stern Review suggests that unless something is done about it, global warming will destroy anywhere between 5% to 20% of the world’s economy. Incidentally, economical losses we can blame on “climate change” in the present are equal to zero within acceptable error margins.

3. The Stern Review advocates among other things a form of pigouvian taxation. The important thing about a pigouvian tax is to remember that it is not a the levying of a punitive tax to make people change their behavior. It precludes incentives, although in the long run it might serve as an disincentive.

All that a pigouvian tax does is insist that the costs currently external to the price and market are included within them. The problem is that green taxes on driving and flying have a marginal impact, which is the point. Pigouvian taxation is not meant to stop people doing something or to price them out of an activity. It is simply to make them pay the full costs of what they do.

It is undiluted nonsense then to talk about raising taxes or prices to stop people from flying, for example. No such thing happens, all that happens is that the carbon costs of a flight is exactly what determines the tax rate. There are lots of practical problems with this sort of taxation, the most obvious one is also the hardest to overcome. How is a government supposed to set correct figures for carbon based taxation? Recall what Hayek said, it is impossible for a government to possess such vast amounts of symmetrical information.

One part of this problem is to use estimated costs of Co2 emissions, and these do exist. Eminent environmental economist and incidentally one of the loudest critics of the Stern Review Nordhaus estimates one tonne of Co2 at $2.50, the Stern Review estimate stands at a whopping $85!

At Nordhaus’s estimate incidentally in every country airline passenger duty is already too high. At the Stern Review’s estimate, it’s about half what it should be. There are all sorts of problems with the Stern number, to begin with it is larger by leaps and bounds when compared to similar estimates of the same tonne of carbon emissions.

Now, if people were to be taxed purely upon the CO2 externalities (for fuel, for instance) prices should drop. Of course, we are not taxed purely and solely on that one externality. Theoretically a green tax would also include additional charges for, particulates, congestion, noise and so on.

I’m however, still willing to bet that a pure green tax will be lower than present rates of taxation at least on fuel and transportation. Here’s why, when you pay a flight surcharge, you pay for what the airline gets charged by the government for operating in license costs, regulation, land and so on… you also pay for the service. A pure green tax is, therefore, cheaper but impossible. So much for prices changing behavior.

The assumption behind the green tax idea is simply that we tax the rich more. The rich fly, so airline taxes are huge. Take a look at Indian airports, throughout the city parking rates for cars are either nominal or nil.

At the airport you can choose to pay 120 Rs, for an hour of premium parking or 60 Rs for regular parking. Now that is a hefty user charge. User charges are good things, but not when differentially implemented to tax the rich. It doesn’t work. Consider this, almost every passenger, budget airline or not, carries luggage in India and so comes to the airport in a car or a taxi. All equity is lost.

4. Let’s go back to the IPCC scenarios for a bit. Why is it that the projected savings from a 15 billion people and a global GDP of $ 243 trillion plus a savings rate of 20% is a better idea than other worlds? Something makes me think the reason is simple. The Stern Review chose the lowest future wealth because the discounting make current expenditure look good. To understand what I mean, we need to look at the discounting debate on the Stern Review.

I can’t really explain discounting, the Wikipedia link should be able to do that just fine. Either way the basic idea is that one adjudicates if investments are worthwhile depending upon the discount rate used to evaluate them. It is generally accepted that if the opportunity cost of the investment is its consumption then the appropriate discount rate is what is called the social rate of time preference, if you don’t understand this you can take a look at this.

Now, this depends on a bunch of things;

1. Should society prefer current consumption to deferred consumption because current consumption is now? Several economists argue that this element ought to be set at 0. This is somewhat technical, anyhow what it implies is that Rs 100 of consumption is worth Rs 100 whenever it occurs regardless of time.

2. The other important question concerns the uncertainty about whether future generations will actually gain from the judicious use of resources now. Now this is a question of judgment. Personally I believe this is negligible, because better technology will ensure higher returns to future generations from lesser physical amounts of natural resource. Stern puts this element at 0.1, which by all estimates is rather high.

3. Then there is the question of who gets the Rs 100 to consume. I believe, Rs. 100 is worth more to someone who is poor rather than to someone who is rich. Either way, a parameter to express this value judgment is required. This parameter, which can vary, is then used to project the likely growth of consumption over time. The point of this entire exercise is to see whether an increase in consumption in the future is worth giving up consumption now for, even if those future people are richer, which I believe will necessarily be so.

At this point, there are two things we should remember about discount rates. Future generations will consume at a higher rate and states will plausibly become more welfareist and want to discriminate in the favor of the poor. Either will mean a higher discount rate.

Now, if one were to actually apply this notion to climate change and global warming it suggests that if (and I do) we believe in redistribution, we should definitely give to the poor now than redistribute the rich of future generations! In his brilliant paper, Sir Partha Dasgupta, argues precisely this: The Stern value of the parameter in question implies that we should redistribute from the presently poor sections to those who will be undoubtedly richer in the future, at the very least in relative terms.

If you ask me, I cannot think of a more unethical stance to take!

So what then you can ask me, at the end of this long tirade, can be done about climate change? Well, if you ask me, perhaps the best thing we can do about climate change and global warming is nothing at all. The Stern Review says that baseline economic growth will be twelve times as high by 2200 and I think that is enough. If we’re really concerned about equity, which is the sustainable development tune these days, there is nothing much to do except to make sure that the poor get a bigger slice of the pie, which will happen only when the size of the pie grows. Let capitalism reign, extend globalization and let there be enough and more capacity to generate wealth for everyone.

What makes me uncomfortable and keeps me up well past mid-night writing this is the fact that the climate change debate is no longer a discussion between the global warming skeptics and global warming scientists. It is between an honest reading of data and between alarmists who are all too clearly driven by a political if not economic agenda. I’ll end with this: The Stern Review is a “misguided” and “alarming” piece of research that has “no foundations in either science or economics”- OPEC.

PS. Download and watch The Great Global Warming Swindle, from YouTube or Google Video, amazing watch. There’s a torrent available here too, good quality video- from TorrentSpy so make sure you use an anti-virus after you download.

The documentary is fun, some factual errors but makes for a fantastic intro, especially for a virgin climate change skeptic !! 😀 Happy Watching, pip pip!

For more on Global Warming read NCPA’s policy digest here.