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

1. Utility as the informational basis of climate change strategies, and some alternatives Simon Dietz, LSE

2. 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

3. Efficient climate policy

4. 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

5. 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

6. 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

7. What is the typical finding? Source: Nordhaus (2008) SSCW, Moscow July 2010

8. 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

9. Interdependence as the strength of the economic approach

10. 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

11. 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

12. Utility as an informational basis for climate change strategies

13. 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

14. 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

15. Just keep maximising, but…?

16. 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

17. 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

18. Current practice Source: IPCC (2007) SSCW, Moscow July 2010

19. 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

20. Thank you Simon Dietz, LSE