Three Part Structure

1. Ethics, Economics and climate changeNicholas SternIG Patel Professor of Economics & Government,Chair of the Grantham Research Institute on Climate Change and the Environment,London School of Economics and Political Science 21 October 2010

2. Three Part Structure • Part 2: Relationships between current and future generations • Part 3: Relationships between countries and between groups • Part 1: The problem 2

3. Understanding the potential magnitude of change (I) • Thinking about relevant ethics and assessing policies towards climate change should begin by thinking about the potential magnitude of risks. Probability of temperature rises associated with different GHG concentration levels. Source: Meinshausen 2006; extrapolations from Murphy et al. 2004; calculations. The calculations have excluded the role of aerosols which are likely to diminish strongly over time. For more recent and detailed discussion see Bowen and Ranger (2009). • Currently at 435 ppm CO2e, and adding at a rate of 2.5 ppm per year; that rate is rising. BAU likely to take us to 750 ppm this century. • Would imply around 50-50 chance of 5°C some time early next century. And this modelling excludes crucial feedback effects. 3

4. Understanding the potential magnitude of change (II) The planet last experienced temperatures 5°C above pre-industrial levels over 30 million years ago. Those who argue, e.g., for stabilisation levels of 650 ppm CO2e and above, are accepting very big risks of a transformation of the planet. Source: This graph is a compilation from various sources listed at http://en.wikipedia.org/wiki/File:All_palaeotemps.png 4

5. Choices for our generation This is the first generation which through its negligence and inaction could destroy the prospects for human activity on the planet. The voice of future generations can be heard only through ourselves. What are our responsibilities? 5

6. A double inequity Rich countries are responsible for the bulk of past emissions. They have badly damaged the global commons. Poor countries and poor people generally are hit earliest and hardest. Rich countries became rich through high-carbon growth and we must now all find a different way. Rich countries, with their technology and human capital, may have an advantage in the ‘new way’. On current plans 2/3 of emissions will be from developing countries in 2020. They are 6 billion out of 7 billion now and likely to be 8 billion out of 9 billion in 2050. What are the ethics here? 6

7. The challenges of the century and of the decade The two defining challenges of the 21st century are the battle against poverty and the management of climate change. If we fail on one, we will fail on the other. The next decade is especially important. Must handle great risks and uncertainties, and launch a new energy and industrial revolution. Need to manage this new energy and industrial revolution, and intensify the fight against poverty, during a decade of great challenge, e.g., deficit reductions, great international macro imbalances, sustaining a fragile recovery, continuing recasting of the international division of labour, etc. Will do better on each if we understand them together. Collective action is at the heart of the story. It must be build on (i) an understanding of the economics and the science; (ii) some basic ethical principles. 7

8. Three Part Structure • Part 1: The problem • Part 3: Relationships between countries and between groups • Part 2: Relationships between current and future generations 8

9. Overview of Part 2 We examine four different (although related) ethical approaches to climate change. We examine two applications. How to evaluate future catastrophes; Discounting. 9

10. Ethical approaches to climate change across generations Many ethical approaches are relevant. Rightness, virtues, rights, duties: including providing key rights to development. Sustainability - leaving overall list of capital stocks with “value” at least equivalent to our own inheritance. Stewardship - leaving whole list of what we had, or more. Welfarism or, more generally, utilitarianism - the standard but very narrow economic approach based on individual utilities. In the case of climate change most of these approaches point in similar policy directions. 10

11. What ethical approaches can guide us? Rights/duties Deontological ethical systems focus on ethical qualities, the ‘rightness’ or ‘wrongness’ of actions in themselves, often setting out various duties and obligations. Can link rights/duties to consequences but the approaches are not identical. Rights/duties: the predicted impacts of climate change raise questions of rights and corresponding duties. Do future generations have the right to enjoy a world whose climate has not been transformed to compromise basic physical security or result in other dangers? Rights to participation in a society, be a member of society. Rights to development including food, shelter, education, health… Do we have duties to respect those rights? How are they influenced by our understanding of the consequences of our actions? Within communities our own rights may be related to duties to respect those of others: there is a ‘symmetry’. But does that apply across generations? 11

12. What ethical approaches can guide us? Virtues Virtue ethics: emphasises virtuous character as a guide to moral behaviour, rather than focusing on consequences or rules. In the tradition of Aristotle and Plato. We can recognise a ‘good’ person as we can recognise a ‘good’ violinist. Does not include, e.g., taking pleasure in dog-fighting. Many argue virtue ethics offers a more plausible explanation of how individuals actually think about ethics (Anscombe 1958; Wiggins 2006). Some argue our existing values are not up to the challenge of climate change and a change in values – virtues – is the only promising ethical approach (Jamieson 1992). Our values or notions of virtue may have evolved through experience of how communities functioned well: this evolutionary basis may be inadequate for a global, “one-off”, very long-term and possibly irreversible set of issues. 12

13. What ethical approaches can guide us? Sustainability Sustainable development: some argue that future generations should have a standard of living - or opportunities to attain a standard of living - no lower than the current one. Economists have suggested this means maintaining a constant overall or aggregated stock of all forms of capital (physical, social, cultural, institutional). But how to or should we aggregate the different dimensions? It is probably impossible for the global and ecological system to be sustained in its entirety. This has lead to special rules for the preservation of specific critical environmental assets, e.g., Article 2 of the UNFCCC: “Stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. 13

14. What ethical approaches can guide us? Welfarism/utilitarianism Economics generally adopts the particular, narrow approach of standard welfare economics. Some form of Social Welfare Function, often expectation of discounted sum of individual utilities. Looks only at the consequences of actions and assesses those consequences in a narrow way, i.e., the welfare or ‘utility’ of individuals in a community, where utility is derived from consumption of goods and services. Described by Sen as ‘Welfarism’. This approach is based in ‘consequentialism’: does not directly take into account the nature of actions by which the consequences are caused. 14

15. Making all generations better off: so strong ethical assumptions may not be necessary? Greenhouse gas (GHG) emissions are externalities: they represent the biggest market failure the world has seen. Basic welfare economics tells us that correcting a market failure can make all involved better off (a ‘Pareto improvement’). In some models this can be achieved by bargaining; but future generations are not directly ‘at the table’. In this case our generation can shift resources from one type of inheritance (e.g., roads or bridges) to another kind of inheritance, a better environment, whilst consuming the same ourselves. The next generation can then be better off. Or if I cut down one less tree and save less to just compensate myself (say p, the market price of the tree), the next generation has p less, but has the tree plus less concentrations of greenhouse gases. If the next generation has similar preferences they are better off. Note too that irreversibilities are relevant here. But can we/will we? 15

16. Endogenous values / behavioural economics Public discussion of what is responsible behaviour is an important element of policy (see also J.S. Mill). Are values endogenous? The more that people take on board damages to others, through discussion and information, and worry about them directly, the less is the need for other public policy actions. We learned that mixing alcohol and driving is dangerous and in a number of countries laws were introduced in the 1960s. Many criticised these laws as infringing freedom. Today most of us desist as, over and above concerns with sanctions, we see it as wrong and irresponsible. Economics has paid too little attention to the role of public discussion of responsibility in the making of policy. Some interesting analogies with behavioural economics where an individual, who lives for (say) two periods, follows actions in period one which damage him/her in period two; the individual might welcome constraint or restraint in period one (smoking/pensions…). Could give “Pareto improvement”, relative to the self in period 1 and the self in period 2 (see Stern 2010). 16

17. How to approach valuations of possible future “catastrophes” Dimensions of change are unlike anything in human experience. All dimensions of life affected on a major scale: income/wealth; heath; education; environment… Likely radical disruption of economies, societies, habitats, political systems… Should any of the likely losses from large increases in temperature be evaluated at negative infinity? Does this mean we should pay an infinite amount to avoid them? Issues clearly include possibility of direct and intense human suffering from disaster and conflict. But must also think about how or whether to attach value to the existence or otherwise of future human beings. What is the value of a human life? According to John Broome, “there is a real possibility of extinction or a population collapse, and there is a real possibility that this event would be appallingly bad – so bad as to dominate all calculations of expected utility. So we are not able to judge properly what to do about climate change till we have found an answer” (Broome 2009). He examines the possible meaning of notions like “appallingly bad”. 17

18. Discounting and relative incomes The discount factor for good i at time t is the value of an extra unit of good i at time t relative to now. The discount rate for good (i,t) is the rate of fall of the discount factor. Relative incomes. If it is assumed that future generations will be wealthier than today, and for this reason we attach less value to an extra dollar to them, there would be a justification for discounting future increments in wealth or income. However, damage due to climate change may actually reduce the income of future generations implying a negative discount rate from this perspective along this type of path. 18

19. Pure time discounting With pure time discounting a person with a later birth date is valued less than a person born earlier but who is identical in all other respects. Often appears via δ in an integral or sum over time of “utility”, u(ch)-δt, for individual h at time t. Often have models with just one individual (or representative). Should we discount benefits to future generations simply because they are in the future? Essentially discrimination by date of birth. Weak ethical basis. Might be explained by interpreting e-δt as the probability of existence of the world. Hume discussed discounting based on “distance” (see Dietz, et al. 2008; Robinson 1990), for example “kin” might be seen as less distant. 19

20. Inverse optimum problem Can actual behaviour of policy makers or individuals singly or collectively reveal implicit social values? For example, government action on pensions or income transfers. “Deriving” values in such a way generally requires assuming a single rational decision maker with clearly defined objectives. And it requires assumptions on how she/he perceives the relevant constraints, e.g., on information, resources, incentives, markets, taxes and behaviour. These attempts, however, can produce incoherent or contradictory results, see for example, Atkinson and Brandolini, 2010 (refer also Stern 1976). Results seem to vary enormously. 20

21. Reading discount rates from markets: a common but misguided approach for climate change Discounting is a marginal approach where the evaluation of marginal changes depends on the path over time (e.g., consumption) under consideration. Some argue that relevant discount rates can be ‘read-off’ from market interest rates or rates of return. Mistake 1: as climate change potential involves looking at radically different future growth paths, i.e., the magnitude of change is great, it is a mistake to use a marginal method around a single given path. Mistake 2: there is no market on which one can ‘read off’ anything similar to a revealed collective preference or appropriate rate for 100 years or more. 21

22. Reading discount rates from markets: a common but misguided approach for climate change Mistake 3: such short-term markets that exist are full of imperfections of information, of taxation, and of ability to bear risk, so that rates of interest and return would, in any case, be unreliable guides. Recall CBA discussions of 1960s/1970s with social and private rates of return and social and private discount rates all different for different types of income. Mistake 4: relative valuations of environmental and ‘standard goods’ are central. If environmental flow of services is falling then discount rate w.r.t. these goods might be negative. Cannot treat this as a one-good model with consumption of standard goods as the single relevant determinant of utility. As it happens, long-run, real (i.e., inflation-adjusted), low-risk rates of interest on consumption or other loans are around 1.5%, not the 6% that analysts have often used (Nordhaus 2008; Weitzman 2007). 22

23. But not only about damages and how to discount The alternative path of low-carbon growth is full of dynamism and opportunity. And when achieved low-carbon growth will be more energy-efficient, more energy secure, more equitable, safer, quieter, cleaner and more bio-diverse. For example, halting deforestation protects water supplies, controls flooding and protects bio-diversity. Far more attractive growth story than what has gone before. The transition to low-carbon growth is likely to foster the most dynamic, creative and innovative period in economic history. Likely to be even stronger than past technological revolutions, e.g., railways, electricity, motor car or information technology (See Perez, 2002 and 2010). Already great breadth to the new low-carbon industrial revolution. This is not sci-fi, this is the start of a real period of innovation and there will be (already are) exciting developments and “breakthroughs” along the way. These range from the speculative (e.g., synthetic life, nanobatteries, CCS in cement) to known technologies being implemented now (e.g., solar, wind). Endogenous technical progress, direct investment in RD&D, significant job creation potential and investment opportunities will characterise this period of transformation and change. 23

24. Conclusions Part 2 We must describe the broad range of possible consequences as best we can given the inherent risk and uncertainty. As the risk of radical disruption in the future is large it is important to see this as a risk management problem concerning rights and welfare of future generations. Ethics must embrace both intergenerational welfare and risk. We should frame the issue around bringing down the probability of severe dislocation and catastrophe to small levels by taking strong action to cut emissions and encourage the transition to low-carbon growth. 24

25. Conclusions Part 2 Scale and nature of potential changes imply that narrow formalism of maximising the expectation of the integral of welfare across generations is unlikely to give much helpful guidance. We have to examine ethics directly. Market will not give the answer. “If informed scrutiny by the public is central to any such social evaluation (as I believe is the case), the implicit values have to be made more explicit, rather than being shielded from scrutiny on the spurious ground that they are part of an “already available” metric that society can immediately use without further ado.” A. K. Sen (1999, p. 80) Development as Freedom. 25

26. Three Part Structure • Part 1: The problem • Part 2: Relationships between current and future generations • Part 3: Relationships between countries and between groups 26

27. Emissions – origins of flows: countries Emissions in CO2e or carbon dioxide equivalent. 27

28. Emissions – origins of flows: per capita Majority of concentrations in atmosphere now come from past emissions flows of rich countries (1bn out of 6.9bn people). Still much higher per capita. Majority of future flows likely to come from developing countries: magnitude of population and growth in incomes. 28

29. Emissions - sources Emissions cuts on scale will require progress in: energy efficiency, new low-carbon technologies, halting deforestation. And action necessary in all sectors. Non-Energy (33%) Energy (67%) Based on 2005 global emissions (CO2e). Source: Climate Analysis Indicators Tool (CAIT) Version 7.0. (Washington, DC: World Resources Institute, 2010). 29

30. Emissions - 2°C target Holding below 500ppm CO2e, and reducing from there, is necessary to give a reasonable (say 50-50) chance of staying below 2 degrees. This requires bringing emissions down from 47Gt CO2e today to below 20Gt CO2e (approx. 50% of 1990 levels) by 2050. A plausible emissions path is around 47Gt CO2e in 2010 (reduced by economic slowdown – might have been 50), 44Gt in 2020, under 35Gt in 2030 and under 20Gt in 2050. Likely to have to go ‘well under’. Clearly necessary to ‘peak’ before 2020. *These results are based on the Hadley Centre climate model MAGICC Thanks to Jason Lowe and Laila Gohar for running these trajectories through the model. 30

31. Implications for global action Will have to act in all countries and sectors. Force of numbers and growth potential place developing world at centre stage for action in next few decades. Copenhagen Accord intentions if delivered would imply developing countries will constitute 2/3 of emissions in 2020. Population of around 8bn in 2030 and 9bn in 2050 imply that average global emissions per capita must be around 4 tonnes CO2e in 2030 and 2 tonnes in 2050. Since there will not be many below 2 tonnes per capita there cannot be many above. 31

32. Who should do what, when and who should pay (I) We have some indication of required global emissions paths. But how should reductions be divided across countries? How much should be expected of which countries? The brutal arithmetic dictates much of the answer. All countries will have to be close to 2 tonne per capita in 2050 and not far from 4 in 2030. On current plans China and the US might be around 13 and 17 tonnes per capita in 2030, respectively. The IEA estimates the total incremental investment required in low-carbon technologies and energy efficiency, to meet a 450 ppm greenhouse gas concentration goal, is US $2.4 trillion over the period 2010-2020, and US $8.1 trillion 2021-2030 (IEA 2009). But there will be many co-benefits (energy security, cleaner air, biodiversity) and a dynamic learning process in a new industrial revolution. 32

33. Who should do what, when and who should pay (II) What are the key dimensions for equity? Action on emissions reductions? Technology? Financing? Transfers? Role of UN Secretary General’s Advisory Group on Climate Finance. Should a country do all its “win-win”? How to identify win-win when many co-benefits/learning/externalities? 33

34. Potential role of permits for emissions Permits not “rights”. There could be a right to develop or to energy but surely there is no right to damage the environment of the commons. There is a clear distinction between the distribution of action and the distribution of emissions permits (e.g., in trading schemes) across countries. Global emissions need to be around 2 tonnes per capita in 2050: but this does not imply that the permit allowance in a trading scheme for each country should be 2 tonnes per capita. How should permits be allocated? These could be associated with a trading scheme whereby a holder of a permit for Y tonnes can sell permitted emissions if he/she emits below that and must buy if he/she emits above. Thus permits are financial assets which can be allocated, bought and sold. 34

35. Role of history We might think of the difference between concentrations of 285 ppm CO2e in the mid-nineteenth century and the 500 ppm CO2e maximum (falling eventually to 450) associated with 2oC as a total carbon space or a reservoir which covers the period 1850-2050. At 435 ppm CO2e currently,150 ppm of this has already been taken and only 15 remains to 450, or 65 to 500. Alternatively we can think of there being only a certain amount of total cumulative emissions ‘remaining’. From one perspective those who have consumed more of the ‘carbon space’ have less right to consume later. To give equal permits in 2050 would be to say everyone has the same sized glass at the end of a 200 year party (‘starting’ at onset of rapid industrialisation), not withstanding previous drinking. 35

36. Role of history Should we ‘start the clock’ when we began to understand the consequences of our actions? When was this? Or are we responsible anyway (e.g., as with asbestos) whether or not we understood the consequences? We could ‘start the clock’ 20 years ago (IPCC was founded in 1988 and UNFCCC in 1992) and related arguments would still apply. UN Stockholm conference on the environment was 1972. But surely if a permit is a financial asset we should broaden the notion of what matters for equity. We do not usually think of equity in terms of the allocation of a single good (e.g., apples). 36

37. Should there be equal permits per capita p.a. Unconvincing as a piece of ethics or logic. Weak science/environment – stocks are the problem. Weak economics – distributional judgements about income or wealth as a whole, not one asset. Weak ethics – no right to damage the commons. But could suggest that equal per capita is only minimally equitable for the above reasons and should think of more equitable allocations, e.g., zero for rich countries. Negotiate on all aspects of climate change action: the equity or otherwise lies in the package. 37

38. The role of formulae One can imagine various approaches to calculating how much total “compensation” from rich to poor countries might be appropriate and how it could be allocated. Could fix “starting date” To for “knowledge of problem” and total compensation X (this can also be a choice variable). Could fix “remaining pot” of emissions Y (although in some modelling approaches this might also be a choice variable) constraining the sum of yit, emissions of country i at time t. Then set up criteria for evaluating how yit and xit, compensation to country i at time t, should be determined as a function of X, To, Y. In most simple models with concave welfare functions, could not avoid conclusion that allocation of “compensation” pot should be largely to poorest (e.g., up to point of equal marginal utility of income). 38

39. Problems in such modelling How do you deal with incentive structures, dislocation costs, etc? How do you deal with the absence of a single maximiser? There are many countries with different attitudes to welfare. How do you deal with “asserted” rights? How do you deal with co-benefits (energy security, clean air, bio-diversity) of going green? How, and this is likely to be of great importance, do you deal withthe dynamics of learning in the new industrial revolution, the recasting of patterns of consumption and production? These, and the preceding issue, make any notion of “incremental cost” very hard to identify and thus it is hard to make the sharing of such costs operational. Conclusions: (i) the formulaic approach is a dead-end; (ii) That does not mean that responsibility, co-operation, mutual benefit, income and wealth inequality, technology-sharing are empty or irrelevant. But do not expect a formulaic answer to be convincing. 39

40. Conclusions Part 3 (a) Climate change is inequitable in its causes and in its impacts. But all must be involved in the response if the necessary scale of action is to be achieved. The transition to low-carbon growth will be dynamic and creative. But major investments necessary. And low-carbon growth is more energy secure, cleaner, safer and more biodiverse. High-carbon growth will kill itself on the very hostile physical environment it will create. 40

41. Conclusion Part 3 (b) Must see the response to the challenge of climate change as positivesum, where all can gain, but in which the wealthier and those with past responsibilities should lead with finance and technology. No single ethical point should dominate and no single formula can drive a notion of equity. If clear on science, technology, economics and ethics can craft a response to the two defining challenges of our century which is very attractive for all. This requires clarity in analysis and a co-operative approach to shared problems. 41

42. Conclusion Part 3 (c) : A package Clarity on the climate science requires recognition of the implications for emissions of the 2°C target (interpreted as 50-50), i.e., for the world less than 35bn tonnes or 4 tonnes per capita (CO2e) in 2030 and less than 20bn tonnes or 2 tonnes per capita in 2050. Thus rich countries to limit actual emissions by at least 80% (1990-2050), since will be few big blocks below 2t/cap and average is the average. This embodies at its heart intergenerational ethics (but not necessarily intragenerational ethics since actual emissions and permit allocations not the same). Clarity that this requires: (i) embarking strongly on a new energy/ industrial revolution now; (ii) the transition will involve major investment; (iii) the transition can drive growth; (iv) low-carbon growth likely to be very attractive. 42

43. Conclusion Part 3 (c) : A package (continued) Recognise that this will move much more quickly with: (i) the scale that comes from all participation; (ii) the use of markets and competition; (iii) the direct promotion and sharing of technology; (iv) rich countries leading in pace of emissions reduction. Financial support from rich countries of at least $100bn p.a. by 2020, mitigation and adaptation. Needs for investment funding may be double this (although there are co-benefits). Recognise the ethical centrality of overcoming poverty and of advancing development, thus the industrial revolution can and must centrally involve poor people, including access to energy. 43

44. References Anscombe, G. E. M., 1958, Modern moral philosophy, Philosophy 33 (124), 1-19. Atkinson, A. and A. Brandolini, 2008, On analysing the world distribution of income, World Bank Economic Review, Oxford University Press, vol. 24 (1), 1-37. Bowen, A. and N. Ranger, 2009, Mitigating Climate Change Through Reductions in Greenhouse Gas Emissions: The Science and Economics of Future Paths for Global Annual Emissions, Policy Brief, December, Centre for Climate Change Economics and Policy, and Grantham Research Institute on Climate Change and the Environment. Broome, J., 2009, The most important thing about climate change, Inaugural Roseman Lecture in Practical Ethics, University of Toronto, October 23. Dietz, S., Hepburn, C. and N. Stern, 2009, Economics, ethics and climate change', in Kaushik Basu and Ravi Kanbur (ed.), Arguments for a Better World: Essays in Honour of Amartya Sen (Vol. 2: Society, Institutions and Development), Oxford: Oxford University Press. Jamieson, D., 1992, Ethics, public policy and global warming, Science, Technology and Human Values 17, 139-153. International Energy Agency (IEA), 2009, World Energy Outlook 2009, Climate Change Extract. Nordhaus, W., 2008, A Question of Balance: Weighing the Options on Global Warming Policies, Yale University Press. Perez, C., 2002, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, Edward Elgar, UK. Perez, C., 2010, Full Globalisation as a Positive-Sum Game: Green Demand as an Answer to the Financial Crisis, www2.lse.ac.uk/publicEvents/events/2010/20100518t1830vOT.aspx 44

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