The Stern Review and its critics: Implications for the theory and practice of benefit-cost analysis

Natural Resources Journal

Volumn 48, Issue 1, 2008, Pages 53-90

  Cole, Daniel H ^a  

^a Indiana University School of Law Indianapolis   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

CLIMATE CHANGE; COST-BENEFIT ANALYSIS; ECONOMIC IMPACT; ECONOMIC INSTRUMENT; FUTURE PROSPECT; THEORETICAL STUDY;

EURASIA; EUROPE; UNITED KINGDOM; WESTERN EUROPE;

EID: 56849117488     PISSN: 00280739     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (257)

1. Martin Weitzman, A Review of the Stern Review on the Economics of Climate Change, 45 J. ECON. LITERATURE 703, 717 (2007).
2. NICHOLAS STERN, THE ECONOMICS OF CLIMATE CHANGE: THE STERN REVIEW (2007), available at http://www.hm-treasury.gov.uk/ independent_reviews/stern_review_economics_climate_change/ stern_review_report.cfm.
3. See, e.g., WILLIAM R. CLINE, THE ECONOMICS OF GLOBAL WARMING (1992);
4. Robert O. Mendelsohn et al., Country-Specific Market Impacts of Climate Change, 45 CLIMATIC CHANGE 553 (2000);
5. WILLIAM D. NORDHAUS & JOSEPH G. BOYER, WARMING THE WORLD: ECONOMIC MODELS OF GLOBAL WARMING (2000).
6. CTR. FOR SCI. & PUBLIC POL'Y, THE STERN REPORT: SOME EARLY CRITICISMS (2006), http://ff.org/centers/csspp/pdf /20061104_stern.pdf;
7. LEONARDO RIBÓN, REVIEW OF THE REACTIONS GENERATED BY THE RELEASE OF THE STERN REVIEW: THE ECONOMICS OF CLIMATE CHANGE (2006), http://www.global.rmit.edu.au/ GS@MIT%20Review%20of%20Reactions %20to%20Stern%20Dec06.pdf.
8. See, e.g., William D. Nordhaus, A Review of the Stern Review on the Economics of Climate Change, 45 J. ECON. LITERATURE 686 (2007);
9. Partha Dasgupta, Commentary: The Stern Review's Economics of Climate Change, 199 NAT'L INST. ECON. REV. 4 (2006);
10. David Maddison, Further Comments on the Stern Review (unpublished manuscript on file with author);
11. Robert O. Mendelsohn, A Critique of the Stern Report, 29 REGULATION 42 (Winter 2006-2007);
12. Richard S.J. Tol, The Stern Review of the Economics of Climate Change: A Comment, 17 ENERGY & ENV'T 977 (2006);
13. Gary W. Yohe, Some Thoughts on the Damage Estimates Presented in the Stern Review - An Editorial, 6 INTEGRATED ASSESSMENT J. 65 (2006);
14. Gary W. Yohe & Richard S.J. Tol, The Stern Review: Implications for Climate Change, 49 ENVIRONMENT 36 (2007).
15. See, e.g., John Quiggin, Stern and the Critics on Discounting (Dec. 20, 2006) (unpublished manuscript), available at http:// johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf;
16. Kenneth J. Arrow, Global Climate Change: A Challenge to Policy, 4 ECONOMISTS' VOICE (Special Issue) 1 (2007), available at www.bepress.com/ev (go to "Special Issues: Climate Change");
17. Thomas Sterner & U. Martin Persson, An Even Sterner Review: Introducing Relative Prices into the Discounting Debate 1-21 (Resources for the Future, Discussion Paper No. 07-37, 2007),
18. Eric Neumayer, A Nlissed Opportunity: The Stern Review on Climate Change Fails to Tackle the Issue of Non-Substitutable Loss of Natural Capital (Apr. 2007) (unpublished manuscript), available at http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=980740.
19. Weitzman, supra note 1, at 705.
20. For a history of BCA in the United States (at the federal level) and an assmment of current practices in light of potential "best practices," see Daniel H. Cole, "Best Practice" Standards for Regulatory Benefit-Cost Analysis, 23 RES. L. & ECON. 1 (2007).
21. Put differently, "[a]n IAM is essentially a model of economic growth with a controllable externality of endogenous greenhouse warming." Martin Weitzman, Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change 28 (Nat'l Bureau of Econ. Research, Working Paper No. 13490, 2007), available at http://papers.nber.org/papers/w13490.
22. "PAGE" stands for "Policy Analysis of the Greenhouse Effect." See STERN, supra note 2, at 173,
23. Chris Hope, The Marginal Impact of CO2 from PAGE2002: An Integrated Assessment Model Incorporating the IPCC's Five Reasonsfor Concern, 6 INTEGRATED ASSESSMENT J. 19 (2006), available at http:// journals.sfu.ca/int_assess/index.php/iaj/article/view/227.
24. The failure to discuss all relevant details of the model, itself, can be considered a possible violation of "best practices" for BCA, especially given the overall importance of the choice of model to the outcome of the BCA. However, all relevant details about the model are available in Hope, supra note 10, on which this summary of the Stern Review relies extensively.
25. The term "discontinuity" in this context refers to a dramatic, non-linear increase in the damage function resulting from a potentially catastrophic event, such as the collapse of the West-Antarctic ice sheet. Richard Posner defines a "catastrophe" as "harm so great and sudden as to seem discontinuous with the flow of events that preceded it." RICHARD A. POSNER, CATASTROPHE 6 (2004).
26. See INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE 2001, IPCC THIRD ASSESSMENT REPORT, IMPACTS, ADAPTION AND VULNERABILITY (2001) [hereinafter IPCC THIRD ASSESSMENT REPORT].
27. Hope, supra note 10, at 20.
28. Id. at 36-37, app. I.
29. Id. at 20-21.
30. Maddison, supra note 5, at 4.
31. In simple terms, a "probability density function" is normally (but not always) a bell-shaped curve that describes the various probabilities of occurrence (or non-occurrence), which must sum to 1 (or 100 percent). For a more accurate but technical definition, see, for example, MERRAN EVANS ET AL, STATISTICAL DISTRIBUTIONS 9-11 (3d ed. 2000).
32. In contrast to PAGE2002, the IAM used by Mendelsohn et al. does not account for non-market impacts or catastrophic events. Mendelsohn et al., supra note 3, at 567.
33. However, contrary to assertions made by STERN, supra note 2 at 171, fig. 6.3, other available models seem quite similar to PAGE2002.
34. See, e.g., Richard S.J. Tol, Estimates of the Costs of Climate Change - Part II: Dynamic Estimates, 33 ENERGY POL'Y 2064 (2002);
35. NORDHAUS & BOYER, supra note 3.
36. STERN, supra note 2, at 34.
37. Id. at 149.
38. Id. at 150.
39. Id. at 151.
40. Weitzinmi, supra note 1, at 705, appears to agree with this assessment in noting that "the Stem Reuiezv consistently leans toward (and consistently phrases issues in terms of) assumptions and formulations that emphasize ... pessimistically high expected damages from greenhouse warming- relative to most other studies of the economics of climate change." Whether or not the Stern Review's worse-case approach comports with (presumed) "best practices" in regulatory 13CA is a question addressed later in this article.
41. It is worth wondering why the Stern Review was published just months before the IPCC released its Fourth Assessment Report (FAR) in 2007, which significantly altered some of the projections made in the 2001 TAR. The Stern Review's authors incorporated into their model a good deal of the science on which the FAR is based. However, they could not await the FAR's publication because they were operating under an autumn 2006 deadline set by the Chancellor of the Exchequer.
42. 1 (10).
43. IPCC THIRD ASSESSMENT REPORT, supra note 13, at 947.
44. Hope, supra note 10, at 23-24.
45. Id. at 25;
46. STERN, supra note 2 at 170.
47. As we shall see later, Weitzman seems to agree.
48. STERN, supra note 2, at 158.
49. Id. at 157-159.
50. Id.
51. Id. at 153.
52. Id. at 155.
53. See, e.g., Thomas C. Scheffing, What Makes Greenhouse Sense?, in T.C. SCHELLING, STRATEGIES OF COMMITMENT AND OTHER ESSAYS 34-35 (2006).
54. STERN, supra note 2 at 179.
55. Virtually everyone would rather receive a dollar today than a dollar tomorrow or five years from now. A dollar in hand today can be invested at some positive rate of interest so that it will be worth more than a dollar tomorrow and worth much more than a dollar five years from now. The "pure rate of time preference" or "utility discount rate" is an estimate of the interest rate at which individuals discount the value of money over time.
56. See Weitzman, supra note 1, at 706.
57. Quiggin, supra note 6 (explaining the effect of the choice of η (eta): "Using eta = 1, a sacrifice of $70 per person (1 percent of income) today would be justified only if it increased the income of our great-grandchildren in 2100 by at least $1,000. If this trade-off appears reasonable, then a value of eta = 1 is appropriate. If the future payoff required is higher (or lower) then so is the preferred value of eta.").
58. Weitzman, supra note 1, at 706.
59. Id. at 708. Weitzman rightly notes that this "no frills stripped-down variant of the Ramsey model ... is liable to a thousand and one legitimate questions and criticisms about its oversimplifications, but at the end of the day ... this exercise is highlighting fairly what really counts in the economics of climate change."
60. Id. For a clear and accessible discussion of alternative models for discounting and the various issues they raise,
61. see also Mark A. Moore et al., Just Give Me a Number! Practical Values for the Social Discount Rate, 23 J. POL'Y ANALYSIS & MGMT. 789 (2004).
62. STERN, supra note 2, at 186-87.
63. Id. at 191.
64. Id. at 227.
65. Id.
66. Id. at 191, 268.
67. Id. at 320.
68. Id. at 271.
69. Id. at xvii-xviii. A carbon tax would establish an explicit price, while a tradable permitting system would establish an implicit price by setting quantitative limits on carbon emissions.
70. See generally Martin Weitzman, Prices vs. Quantities, 41 REV. ECON. STUD. 477 (1974).
71. See, e.g., Robert M. Carter et al., The Stern Review. A Dual Critique: Part I: The Science, 7 WORLD ECON. 167 (2006), available at http://meteo.lcd.lu/globalwarming/Carter /WE-STERN.pdf.
72. It is, perhaps, the first "best practice" standard of regulatory BCA to exercise due care in avoiding the problem of "garbage in, garbage out."
73. Yohe & Tol, supra note 5, at 39, allege that the Stern Review "subjected academic standards to political goals." Similarly, Nordhaus, supra note 5, at 688, suggests that "the Review should be read primarily as a document [that] is political in nature and has advocacy as its purpose," Such statements fall short, however, of alleging deliberate manipulation of inputs or procedures. Neither Nordhaus nor Yohe and Tol provide any evidence of deliberate manipulation. The use of a low pure rate of time preference is not necessarily evidence that the Stern Review authors were massaging the numbers to yield an outcome they preferred. Even if we disagree with ρ = 0.1 percent, the Stern Review sets forth legitimate reasons (aside from instrumental political values) to support that value.
74. INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, FOURTH ASSESSMENT REPORT (2007) [hereinafter IPCC FOURTH ASSESSMENT REPORT].
75. Yohe & Tol, supra note 5, at 40, tbl. 1. Statisticians use the concept of "standard deviation" to describe the extent to which data points in a probability distribution are dispersed around the mean. In other words, it is a measure of variance. A higher standard deviation (e.g., three instead of one) implies a greater variance from the mean.
76. Mendelsohn et al., supra note 5, at 44. It is worth noting that Mendelsohn's own models of climate change exclude nonmarket damages altogether.
77. Sterner & Persson, supra note 6.
78. However, Sterner and Persson assume that climate impacts have a positive income elasticity, whereas studies show that poorer people tend to be more vulnerable to climate change effects. See, e.g., Robert Mendelsohn et al., The Distributional Impact of Climate Change on Rich and Poor Countries, 11 ENV'T & DEV. ECON. 159 (2006). I am grateful to Richard Tol for pointing out this aspect of Sterner and Persson's analysis.
79. This is not to endorse six percent as an appropriate value of r but merely to demonstrate the sensitivity of damage estimates to the consumption discount rate.
80. Yohe & Tol, supra note 5, at 39-40.
81. Richard S.J. Tol, The Marginal Damage Costs of Carbon Dioxide Emissions: An Assessment of the Uncertainties, 33 ENERGY POL'Y 2064 (2005).
82. Id. at 2073.
83. Weitzman, supra note 1.
84. See. id. at 713-14.
85. Compare Stern, supra note 2, at 322,
86. 2eq" stands for ton of carbon dioxide equivalent. It represents a means by which emissions of various greenhouse gases, which have differential effects, can be commonly evaluated.
87. Tol, supra note 60, at 2067.
88. Tol, supra note 5, at 979. In the popular media, Tol was even more damning of the Stern Review's conclusions: "If a student of mine were to hand in this report as a Master's thesis, perhaps if I were in a good mood I would give him a 'D' for diligence; but more likely I would give him an 'F' for fail.... There is a whole range of very basic economics mistakes that somebody who claims to be a Professor of Economics simply should not make." Quoted in Simon Cox & Richard Vadon, Running the Rule over Stern's Numbers, BBCNews, Jan. 26, 2007, available at http://newsvote.bbc.co.uk/mpapps /pagetools/print/newsbbc.couk/2/hi/science/nature/6295021.stm.
89. Most recently, Tol, along with Gary Yohe and Dean Murphy, has taken a more generous approach to the Stern Review. After noting that "unusually harsh words have been said about the Stern Review" (including by both Tol and Yohe), they concede that "the Review may be right," albeit "for the wrong reasons." Gary Yohe et al., On Setting Near-term Climate Policy While the Dust Begins to Settle: The Legacy of the Stern Review, 18 ENERGY & ENV'T 621 (2007).
90. Instead of berating Stern for shoddy economics, they treat the disagreements over discount rates, damage functions, etc. as technical details, which, while controversial among economists, should not deter policy makers from taking immediate action. Id. at 624.
91. Nordhaus, supra note 5.
92. Id. at 689.
93. Arrow, supra note 6, at 1.
94. Id. at 5.
95. Id. at 4.
96. Nordhaus's newly minted DICE-2007 model uses a constant pure rate of time preference of 1.5 percent. For a more extensive description of DICE-2007, see infra note 142.
97. STERN, supra note 2, at 170-73.
98. Other critics have made similar arguments about Nordhaus's model. See, e.g., William Cline, Meeting the Challenge of Global Warming, in GLOBAL CRISES, GLOBAL SOLUTIONS (Bjørn Lomborg ed., 2004);
99. Frank Ackerman & Ian Finlayson, The Economics of Inaction on Climate Change: A Critique (Oct. 2005) (unpublished manuscript, available at http://www.hm-treasury.gov.uk/media/9/F /climatechange_tufts_2.pdf);
100. Quiggin, supra note 6.
101. In an e-mail message sent to Sir Nicholas Stern, Nordhaus reportedly stated that the Review is "a great study, but it is 50 years ahead of its time .... Since everybody else is 50 years behind the times, if you average the two, you might come out just right." David Leonhardt, Amid the Ivy, A Battle About the Climate, N.Y. TIMES, Feb. 21, 2007, at C1.
102. STERN, supra note 2, at 35-36.
103. Frank Ramsey, A Mathematical Theory of Saving, 38 ECON. J. 543 (1928).
104. What Ramsey refers to as a "failure of imagination," Arrow et al. refer to as "impatience or myopia." Kenneth J. Arrow et al., Intertemporal Equity and Discounting, in GLOBAL CLIMATE CHANGE: ECONOMIC AND POLICY ISSUES 5 (M. Munasinghe ed., World Bank Environment Paper No. 12, 1995).
105. David Pearce et al., Valuing the Future: Recent Advances in Social Discounting, 4 WORLD ECON. 121, 122 (2003).
106. For a more extensive discussion of economic and philosophical arguments against discounting and their potential role in determining "best practices" for BCA, see Cole, supra note 8, at 30-31.
107. STERN, supra note 2, at 45.
108. On the significance of the probability of human extinction for the choice of the social rate of discount, see Menachem E. Yarri, A Law of Large Numbers in the Theory of Consumer's Choice Under Uncertainty, 12 J. ECON. THEORY 202 (1976).
109. DISCOUNTING AND INTERGENERATIONAL EQUITY 1, 4 (Paul R. Portnoy & John P. Weyant eds., 1999).
110. Weitzman, supra note 1, at 709, 720 (making a similar point).
111. See Cole, supra note 8, at 27-32.
112. Matthew Adler argues that "the presumption against paternalism that informs much economic writing should be no part of CBA [cost-benefit analysis]. CBA should neutrally assess the costs and benefits of paternalism, recognizing that paternalistic measures (like all government measures) have costs, but these costs might be outweighed by the, benefits." Matthew Adler, Cost-benefit Analysis: New Foundations, LEGISLAÇÃO 42-43 (2006).
113. See also MATTHEW D. ADLER & ERIC A. POSNER, NEW FOUNDATIONS OF COST-BENEFIT ANALYSIS (2006). Even assuming Adler is right about paternalism in BCA, however, it is not obviously the place of the economists who prepare economic analyses to impose their own subjective values in the process. We will return to this issue in the following section.
114. See Dasgupta, supra note 5.
115. Partha Dasgupta et al., Intergenerational Equity, Social Discount Rates, and Global Warming, in DISCOUNTING AND INTERGENERATIONAL EQUITY, supra note 80, at 51.
116. See CLINE, supra note 3.
117. In fact, Cline adopted parameter values, all of which were very close to those chosen by Stern. In Cline, ρ = 0%, η = 1.5, and g = 1%, which in the Ramsey model yields r = 1.5%, a mere one-tenth of one percent above the Stern Review's value for r. Weitzman, supra note 1, at 712, notes that Cline, like Stern, reached "strong activist conclusions."
118. Dasgupta, supra note 5, at 5.
119. Id. at 6.
120. Id.
121. In addition to his critique of the Stern Review's choice of η, Dasgupta, id. at 6-7, makes an important observation about the public choice implications of the Review's conclusion that the world should spend one percent of global GDP annually to combat climate change.
122. He reasonably assumes that all of the spending would come from the world's developed countries, and that one percent of global GDP would equal 1.8 percent of developed countries' GDP. But, he notes, that figure would be "some seven times the annual global aid budget." Implicit is the assumption that spending to mitigate global climate change constitutes foreign aid. Id.
123. This assumption is strongly supported by Tom Schelling's assessment of climate change as a political-economic issue. According to Schelling, supra note 36, spending to counteract climate change constitutes foreign aid because the primary (if not exclusive) "investors" would be developed countries, while the primary (though not exclusive) beneficiaries would be developing countries, which are expected to bear the brunt of climate change costs.
124. See also Schelling, supra note 36, at 34-35.
125. POSNER, supra note 12, at 125-26, 256, generally concurs in this assessment but suggests that spending to prevent abrupt climate change catastrophes would not constitute foreign aid because such catastrophes would impose huge costs on the developed world as well as the developing world.
126. To the extent that climate change investments would constitute foreign aid, a key question becomes how to persuade voting publics in developed countries "to instruct their governments, collectively," to increase foreign aid spending so dramatically in accordance with the recommendations of the Stern Review. Dasgupta, supra note 5, at 7. Dasgupta suggests that simply stating it as a moral imperative is unlikely to be effective. But, of course, the Stern, Review does not simply make a moral argument about the need for more spending to minimize the social costs of climate change; its argument is first and foremost economic. If spending more now can reduce costs down the road (after those costs are discounted to present value), then the choice is a matter of both economic efficiency and ethics. Whether or not developed countries would internalize enough of those efficiency gains to make the additional investment in foreign aid worthwhile remains questionable. And so the public choice issue remains. But the same issues would remain with respect to any recommendation to mitigate greenhouse gas emissions. Meanwhile, the possibility of climate change catastrophes, referred to by Posner, should reduce political opposition to mitigation investments. As such, spending would not amount to foreign aid.
127. Dasgupta, supra note 5, at 6.
128. Quiggin, supra note 6, at 15.
129. I am grateful to Marty Weitzman for his assistance in unpacking these discrete aspects of the η and the complications that can (but do not necessarily) arise from their combination into a single numeric value.
130. Weitzman, supra note 1.
131. Sterner & Persson, supra note 6, at 6.
132. Weitzman, supra note 1, at 717.
133. See STERN, supra note 2, at 52-54;
134. Weitzman, supra note 1, at 707.
135. Weitzman, supra note 1, at 704.
136. He does not argue, however, that Stern was wrong to adopt such a low pure rate of time preference but only notes that "Stern follows a decidedly-minority paternalistic view (which, however, includes a handful of distinguished economists)." Id. at 707.
137. Id. at 707.
138. Id.
139. Id. at 708.
140. It is not at all clear why Weitzman believes that the discounting assumptions in Stern or other models have been "hidden." They are debatable to be sure, and they may drive the outcomes of the Stern Review and every other economic analysis of climate change. However, Stern is certainly explicit about the choice of discounting assumptions and provides explicit arguments in support of its assumptions. Id.
141. Id. at 709.
142. Later in his review, however, Weitzman shows that observed economic behavior creates problems not just for Stern's choice of parameter values but "threatens all such formulations." Id. at 714.
143. Id. at 704-05.
144. However, as Newell and Pizer point out, "there are few if any observable market rates for investment horizons more than 30 years in the future, making the interest rate beyond those horizons even more uncertain than it otherwise might be." RICHARD NEWELL & WILLIAM PIZER, DISCOUNTING THE BENEFITS OF CLIMATE CHANGE MITIGATION: HOW MUCH DO UNCERTAIN RATES INCREASE VALUATIONS? 13 (Pew Center on Global Climate Change 2001), available at http://www.rff.org/RFF/ Documents/RFF-RPT-disbenefits.pdf. Given the lack of "observable market rates" for investments with longer time horizons and the likelihood that uncertainty over future interest rates militates in favor of lower discount rates, to what extent can the Stern Review really be faulted for ignoring "observed economic behavior" in selecting a value of ρ? Weitzman, supra note 1, at 714.
145. Even if we could observe market rates for investments with very long time horizons, Sterner & Persson, supra note 6, at 5, argue that "using an observable real market variable as a benchmark is not appropriate because we are searching for a number on which to base ethical or normative judgments. We are not simply observing the market as we do in positive or empirical studies; rather, we are providing arguments for public action that involves the provision of very complex public goods."
146. Quoting Hume, they go on to note that "one cannot derive an ought from an is." Id. at 6. Obviously, Sterner and Persson have a different view than Weitzman of the role of BCA.
147. Weitzman, supra note 1, at 709.
148. The roles of analyst and policy maker are somewhat obscured in the Stern Review because, in his position as second permanent secretary of HM Treasury, Sir Nicholas Stern was not just an analyst but a policy maker as well.
149. Id. at 710.
150. See also Arrow et al., supra note 76, at 5, n.6 (noting that the issue of how to deal with uncertainty in forecasting is "[n]ot yet resolved").
151. Weitzman, supra note 1, at 710.
152. Id. at 723.
153. STERN, supra note 2.
154. CLINE, supra note 3.
155. Weitzman, supra note 1, at 713.
156. Id. at 714.
157. Id. at 715.
158. Schelling, supra note 36, at 33-34 (making a similar point).
159. See IPCC FOURTH ASSESSMENT REPORT, supra note 54.
160. Weitzman, supra note 9, at 2.
161. Weitzman, supra note 1, at 716.
162. Id. at 717.
163. See FRANK KNIGHT, RISK, UNCERTAINTY, AND PROFIT (1921) (distinguishing between "risks" to which probabilities can be attached and "uncertainties" to which probabilities cannot be attached).
164. Weitzman, supra note 1, at 717.
165. Id. at 720.
166. This assertion appears to impute bad faith to the Stern Review authors. But, as noted earlier, they specified ostensibly legitimate reasons for their choices of parameter values. Moreover, it is not clear why Weitzman considers it illegitimate to account for low-probability, high-magnitude climate events by adjusting parameter values. Id.
167. Id. at 724.
168. Id.
169. Id. at 722.
170. Id.
171. Id. at 723.
172. Posner seems to agree, recommending emissions limits now as an "insurance policy" against the "possibility of abrupt warming." POSNER, supra note 12, at 163.
173. But Posner also notes that emissions limitations, in the form of taxes, need not be terrifically high to have the desirable effect of inducing technological advancement and substitution, which he considers the "only" way to "halt global warming." Id. at 161.
174. Moreover, Posner suggests that " [m]aking shallower cuts now can be thought of as purchasing an option to enable global warming to be stopped or slowed at some future time at a lower cost." Id. at 162.
175. Weitzman, supra note 9, at 24-26.
176. Id. at 28.
177. Id. at 31.
178. Id. at 23.
179. Sterner & Persson, supra note 6, at 9.
180. Id. at 14.
181. Id. at 12.
182. Thomas C. Schelling, Climate Change: The Uncertainties, the Certainties, and What They Imply About Action. 4 ECONOMICS' VOICE, July 2007, at 4, available at http://www.bepress.com/ ev/vol4/iss3/art3.
183. Id. at 4.
184. Id. at 5.
185. Michael Margolis & Eric Nævdal, Safe Minimum Standards in Dynamic Resource Problems - Conditions for Living at the Edge of Risk 1 (Resources for the Future, Discussion Paper 04-03, 2004).
186. See S.V. CIRIACY-WANTRUP, RESOURCE CONSERVATION: ECONOMICS AND POLICIES, ch. 18 (1952) (SMS and BCA may not be mutually exclusive);
187. see also Bryan G. Norton & Michael A. Toman, Sustainability: Ecological and Economic Perspectives, 73 LAND ECON. 553, 561-63 (1997) (suggesting that SMS can be combined with standard BCA in a "two-tiered" system of policy analysis);
188. Mohan Munasinghe et al., Applicability of Techniques of Cost-Benefit Analysis to Climate Change, in GLOBAL CLIMATE CHANGE: ECONOMICS AND POLICY ISSUES 33 (Mohan Munasinghe ed, World Bank Environment Paper No. 121995, 1995) (suggesting that BCA "is a generic term that subsumes a wide body of specific techniques"). I am grateful to Ian Hodge for suggesting the comparison of traditional BCA with SMS.
189. Sterner & Persson, supra note 6, at 15-16.
190. Weitzman, supra note 1, at 707.
191. For the Stern Review's sensitivity analysis, see also STERN, supra note 2, at 667.
192. See generally Arrow, supra note 6.
193. See Cole, supra note 8, at 6;
194. see also Arrow et al., supra note 76, at 5 (explaining that the existence of market imperfections and suboptimal tax policy might jusffiy deviation from observed market rates of interest).
195. From a prescriptive perspective, the fact that a chosen social discount rate is "glaringly inconsistent with observed behavior" (for example, government spending on education or research, development assistance by donor countries) should not be decisive. " [J]ust because the government fails to allocate resources in one area on the basis of ethical considerations is no reason to insist that decisions in other areas be consistent with that initial decision." Id. at 7.
196. Arrow et al., supra note 76, at 7, address this question directly, noting that analysts fall into one of two camps: descriptivists, who start from observed market behavior; and prescriptivists, who start from normative ethics.
197. Arrow et al. also describe in detail the different approaches to establishing the social discount rate but do not assert that one is clearly correct or necessarily preferable to the other. In fact, the authors treat both approaches as valid and conclude by finding that, with some refinements, the different approaches could lead to similar policy recommendations. Id.
198. See supra note 102. Because Stern was a policy maker at HM Treasury, he cannot be accused of "usurping" that role.
199. William Nordhaus has recently revised his DICE model. William Nordhaus, The Challenge of Global Warming: Economic Models and Environmental Policy auly 24, 2007) (unpublished manuscript), available at http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf. Among the most significant changes in DICE-2007, the pure rate of time preference (ρ) is reduced from 3.0 percent to 1.5 percent. Id. at 54.
200. In addition, Nordhaus sets the elasticity of the marginal utility of consumption (ρ) at 2. Id.
201. Significantly, Nordhaus expressly recognizes that the same real interest rate would be achieved by combining ρ = 0.1 % (a la the Stern Review) and η = 2.9. Id. at 62.
202. Unfortunately, Nordhaus does not specify a value of g (the per-capita growth rate of consumption), so we cannot directly compare his discount rate of consumption with that of the Stern Review. Earlier versions of the DICE model assumed values of g declining from 2.3 percent in 2000 to 1.1 percent by 2050. Taking the average of these numbers, g = 1.7%, would yield r = 4.6%, well above the Stern Review's r = 1.4%.
203. Consequently, Nordhaus's estimates of future damages from climate change and future benefits of GHG mitigation remain far below those of the Stern Review, despite Nordhaus's halving of ρ. Not surprisingly, therefore, Nordhaus still finds the Stern Review's recommendations too costly by far. Id. at 29.
204. Where Stern recommends spending one percent of global GDP to mitigate GHG emissions, Nordhaus recommends spending only one-tenth as much (about nine dollars per capita), which would reduce expected global mean temperature increases by 1.71°C over the next century. Nordhaus's bottom line policy recommendation remains the same: a slow and gradual ramping up of GHG emissions reductions. Id. at 36-37.
205. See DISCOUNTING AND INTERGENERATIONAL EQUITY, supra note 80, at 1-11.
206. See generally Cole, supra note 8.
207. See Weitzman, supra note 1, at 717-19;
208. see also Dasgupta et al., supra note 84, at 72.
209. Schelling, supra note 36.
210. Id. at 34-35.
211. Id. at 32. Presumably, the same logic would militate against inter-generational discounting.
212. Id. at 53.
213. Posner explicitly agrees with Schelling that "[f]rom the standpoint of the American public, the Kyoto Protocol would be a foreign-aid program." POSNER, supra note 12, at 126.
214. But later, Posner implicitly argues that not all investments in climate change should be thought of as foreign aid because abrupt global warming "could be catastrophic for the wealthy as well as for the poor countries and cannot be assumed to threaten merely in the distant future." Id. at 256.
215. But even if investments in climate change prevention do not constitute foreign aid, Posner asserts that we might choose " to dispense with explicit discounting altogether" because abrupt climate change could "happen soon enough to make discounting unimportant in deciding whether we should take steps to avert it." Id.
216. See Schelling, supra note 36.
217. See CLINE, supra note 3, at 249-50.
218. See supra notes 75-76 and accompanying text.
219. See generally Schelling, supra note 36.
220. See supra note 80 and accompanying text.
221. See supra note 97 and accompanying text.
222. HM TREASURY, THE GREEN BOOK: APPRAISAL AND EVALUATION IN CENTRAL GOVERNMENT (2003), available at http:// greenbook.treasury.gov.uk/media/3/F/green_book_260907.pdf.
223. See STERN, supra note 2.
224. See W. Kip Viscusi & Joel C. Huber, Hyperbolic Discounting of Public Goods (Nat'l Bureau of Econ. Research, Working Paper No. 11935,2006), available at http://www.nber.org/papers/w11935;
225. Maureen L. Cropper et al., Preferences for Life-Saving Programs: How the Public Discounts Time and Age, 8 J. RISK & UNCERTAINTY 243 (1994).
226. See, e.g., Larry Karp, Global Warming and Hyperbolic Discounting, 89 J. PUB. ECON. 261 (2005);
227. Moore et al., supra note 42.
228. Martin Weitzman, Gamma Discounting, 91 AM. ECON. REV. 260, 270 (2001).
229. Even if hyperbolic discounting is observed in practice, some argue that it is problematic as a matter of economic theory because it implies time-inconsistent plans. See, e.g., Maureen Cropper & David Laibson, The Implications of Hyperbolic Discounting for Project Evaluation 1 (World Bank Policy Research, Working Paper No. 1943, 1998), available at http://ssrn.com/abstract=629111 (follow the "download document" link, last visited Mar. 3, 2008);
230. Ben Groom et al., Declining Discount Rates: The Long and the Short of
231. To see why, assume a plan made in 2007 with effects extending over 100 years. According to Weitzman's schedule of declining discount rates, the effects in year 2083 would be discounted at a one-percent rate. See Weitzman, supra.
232. However, as 2083 approached, our rate of discount for those effects would rise in accordance with the discounting schedule, potentially altering our plans. Some economists believe this is an insignificant problem. Heal, for example, notes that individuals making plans at different times might as well be thought of as different individuals. GEOFFREY HEAL, VALUING THE FUTURE: ECONOMIC THEORY AND SUSTAINABILITY (1998).
233. Newell and Pizer, supra note 101, contend that even if time inconsistency of individual preferences is a problem, hyperbolic discounting ceases to present that problem if it is based not on individual preferences but on uncertainty over future events. As a practical matter, time-inconsistency is probably no more problematic than policy changes resulting from exogenous shocks or political shifts.
234. See Groom et al., supra.
235. See, e.g., EPA, THE BENEFITS AND COSTS OF THE CLEAN AIR ACT, 1970-1990 (1997), available at http://www.epa.gov/air /sect812/1970-1990/chptr1_7.pdf.
236. See, e.g., CLINE, supra note 3;
237. NORDHAUS & BOYER, supra note 3;
238. Mendelsohn et al., supra note 3.
239. Keyishianv. Bd. of Regents, 385 U.S. 589,603 (1967).
240. The phrase is often mistakenly attributed to Justice Oliver Wendell Holmes' dissent in the earlier case of Abrams v. United States, 250 U.S. 616 (1919). While Holmes clearly articulated the idea, using expressions like "free trade in ideas," he did not use the precise phrase "marketplace of ideas."
241. The physicist Francesco Calogero suggested something similar when he recommended that the Brookhaven National Laboratory commission two separate assessments of the risk of a catastrophic accident from the potential production of "strangelets" at its particle accelerator. Specifically, he recommended that a "blue team" of experts be appointed to make an "objective assessment," while a separate "red team" of experts played the role of "devil's advocate," coming up with high-danger scenarios that would challenge the "blue team." Francesco Calogero, Might a Laboratory Experiment Destroy Planet Earth?, 25 INTERDISC. SCI. REVS. 191, 192-93 (2000),
242. discussed in POSNER, supra note 12, at 190.
243. As Posner notes, Calogero's recommended approach envisioned "an adversary procedure similar to the clash of party-designated expert witnesses at trial." Id. at 190.
244. Valuations of non-market goods, including human lives, are not important for every BCA. However, where a BCA depends heavily on such valuations, as the Stern Review clearly does, then it becomes essential for those valuations to be clearly and fully presented.
245. Weitzman, supra note 1.
246. See NORDHAUS & BOYER, supra note 3.
247. Weitzman asserts that cases like climate change, which involve structural uncertainties and the potential for catastrophic events, may require the imposition of a "generalized precautionary principle." Weitzman, supra note 9, at 22-24.
248. See Weitzman, supra note 1, at 7.
249. STERN, supra note 2, at 163.
250. Weitzman, supra note 1, at 723.
251. I do not mean to suggest that inattention to the problem of climate change is a good thing, only that policy should not be unduly influenced by a single, methodologically flawed BCA.
252. Yohe et at., supra note 66 and accompanying text.
253. Weitzman supra note 1, at 710.
254. See Weitzman, supra note 9.
255. See supra note 142. In private correspondence, Nordhaus confirms only that he made the change in order to simplify his model. E-mail message from William Nordhaus to Daniel H. Cole (Oct. 17, 2007) (on file with author).
256. STERN, supra note 2, at 161.
257. Id. at 657.