Ecological intuition versus Economic “reason”

1. Ecological intuition versus Economic “reason” O. Gueant, R. Guesnerie and JM Lasry October 2009 Lecture prepared by: Irene Clavijo

2. Motivation • Environmentalist have dismissed the economists’ approach to environmental problems, especially when long term issues are at stake • There is a trade-off between: • “Ecological intuition” which highly values the long-run preservation of the environment; and • “Economic reason” , in particular cost-benefit analysis in which discount rates lead to dismiss the long run concerns • Economists’ computations (Nordhaus, 1993) about global warming suggest lenient policies which have been rejected by environmentalists (Lomborg, 2001)

3. Objective • The paper attempts to address this antagonism between “Ecological intuition” and “Economic reason” by proposing a simple model to explore the long run issues associated with environmental quality • In particular, the cost-benefit model considers not only the standard discount rate but also an “ecological discount rate” • The authors discuss the discount rate to be used in projects aimed at improving the environment

4. The Model (vastly simplified)

5. The Model (cont’d)

6. Functions • Generation t, that lives at period t only, has ordinal preferences, represented by a concave, homogeneous of degree 1 utility function • Social welfare is evaluated as the sum of generational utilities using a standard utilitarian criterion

7. Implicit prices

8. Discount rates

9. Discount rates

10. Discount rates

11. Long run effects on discount rates • As T tends to ∞

12. The social optimum

13. The social optimum

14. Discontinuity in the ecological discount rate A clear opposition between the radical and the moderate environmentalist (this could be due to the crude model used)

15. Dynamics of ecological discount rates:The radical environmentalist

16. Dynamics of ecological discount rates:The moderate environmentalist • For a time period between 1 and 3 centuries the difference between moderate and radical environmentalist is very small (both have discount rates well below 1%.

17. The effect of wealth on the propensity to invest in ecology Poor country Rich country • The required return, in terms of environmental quality, of a 1-unit investment • Long run- the same for a poor country and for a rich country • Short run- may be negative for a rich country (while a poor country requires positive, high returns

18. Precaution against irreversible damage under uncertainty

19. Graphical illustration of the precautionary principle m(p) is concave and quickly increasing, so even for a small p, m is close to m(p=1) Results show that if we do not know whether or not climate issues will lead to real problems in the future, here at date t=0, we need to act nearly as if we were sure that the bad case were to occur.

20. Conclusions Long run environmental policies are crucially affected by the “ecological view”, esp. but not only, if the radical view is adopted The radical viewpoint, although unlikely has a determining effect on the policies adopted NB. Further reference Pour une politique climatique globale: Blocages et ouvertures