Thursday, November 23, 2006

Stern's Bias: Too Low a Social Discount Rate

Professor Willian Nordhaus of Yale University gives us an economist's view (PDF) of the Stern Report and finds one major flaw:
“The Review proposes using a social discount rate that is essentially zero. Combined with other assumptions, this magnifies enormously impacts in the distant future and rationalizes deep cuts in emissions, and indeed in all consumption, today. If we were to substitute more conventional discount rates used in other global-warming analyses, by governments, by consumers, or by businesses, the Review’s dramatic results would disappear, and we would come back to the climate policy ramp described above.”
Nordhaus covers the various possible ethical models that could set the social discount rate - for that alone the PDF is worth reading. He also looks at how Stern calculated the impact of global warming, including his use of Nordhaus' own study:
“If we look inside the impact boxes, we find some strange things. The damage estimates are much higher than the standard estimates in the impact literature. This probably occurs because of assumptions that tilt up the damage curve: rapid economic growth forever, high economic damage estimates, high climatic impacts of GHG accumulation, catastrophic risks, adverse health impacts, yet higher sensitivity of the climate system, and an adjustment for inequality across countries. Additionally, the Review drew selectively from studies, emphasizing those with high damage estimates, some of which are highly speculative. For example, the Review used estimates from the study of Nordhaus and Boyer (see footnote 12 below) that projected damages way beyond 2100; however, those authors noted that projections beyond 2100 were particularly unreliable.

However, the major point is that these impacts are far into the future, and the calculations depend critically upon the assumption of low discounting.”
via Prometheus

[Update: Prometheus has some great articles on misrepresentations of science in policy discussions and the politicization of science by scientists.]

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