Tim Brennan Professor, Public Policy and Economics, UMBC Senior Fellow, Resources for the Future

1. Can the Future Compensate the Present?Potential Limitations on Cost-Benefit Analysis in Climate Policy Tim Brennan Professor, Public Policy and Economics, UMBC Senior Fellow, Resources for the Future brennan@umbc.edu Society for Benefit-Cost Analysis Third Annual Conference and Meeting Washington, DCOct. 20, 2010

2. Motivation: Climate policy controversial • Inability to pass climate legislation • Not always sensible: Fight over “taxing energy” vs. “green jobs” • Yet, assume (at least here) that (at least some) significant climate policy passes a BC test • If so, climate policy wouldn’t be so contentious if the winners could just compensate the losers! • Green industries compensate coal miners • Developing world compensates developed world • Using climate tax revenues to reduce payroll taxes • But why don’t we seem to be able to go all the way? • Motivates a look at BCA in the climate context Brennan:Limits of BCA in Climate Policy

3. A rough list of costs and benefits • Climate policy involves present costs • Carbon taxes/permit prices • Renewable portfolio standards • Smart grid investments to facilitate wind, solar, electric cars • Energy efficiency investments, subsidies • Present lifestyle adaptations • Climate policy results in mitigated future costs from • Coastal flooding with sea level rise • More intense storms, tropical disease risk • Hydrological, agricultural disruption • Ocean acidification, current shifts, other ecological effects • Adaptation to the above • Enormous uncertainty: Itself a cost to mitigate Brennan:Limits of BCA in Climate Policy

4. Can BCA be applied to climate? Issue is NOT … • … Generic complaints against BCA, such as • Biases in quantification, especially politically motivated • Relevance of willingness to pay (Sagoff) • Pre-empts democratic deliberation (Heinzerling) • Deep ecology • [I’ve been drinking the kool-aid for too many decades] • … Issues with the specific implementation of BCA • Weitzman infinite WTP • Stern vs. Nordhaus on discount rates • But will have something to say on both • … Critique of underlying science • Accept climate change, if uncertain in scale and scope Brennan:Limits of BCA in Climate Policy

5. Rather, limits on BCA in climate rest on following: • Normative basis for BCA depends on availability of hypothetical redistribution of net gains • Redistributive effects not inherent in BCA • Allows BCA to transcend distribution question • Pareto-improvement requires that future generation winners compensate those in the present for sacrifices • Greenstone: CO2 has 100 year half life • Redistribution of gains from future generations to present generations impossible • Redistribution of money not the point; redistribution of goods • Goods can’t go in a time machine • => Climate policy unavoidably redistributive • Inability to redistribute the KEY issue: Is that correct? Brennan:Limits of BCA in Climate Policy

6. “Inability to redistribute”: Government debt? • Inviting as way to help the present, have the future pay • Run deficits to pay for climate policy? • But need to think of redistribution as goods—people don’t get utility from money • Deficits redistribute (ability to purchase) goods from lenders to borrowers today, in exchange for sending (more) (ability to purchase) goods tomorrow • Can represent intergenerational tradeoff for the borrowers • E.g., future U.S. citizens sending wealth to China • But it can’t work globally—only for the borrowers Brennan:Limits of BCA in Climate Policy

7. Other redistributional policy adjustments? • Reduce other public investments with future benefits • Education, research support, infrastructure • But are these defended by appeals to distant generations? • Provide net benefits to present households (including utility derived from welfare of children) • Need to compensate by reducing expenditure on other policies designed to benefit future generations • Yucca Mountain: Spending to keep nuclear waste radiation out of the environment for thousands of years (Anthony Paul) • Could be a good candidate, as more nuclear power reduces greenhouse gas emissions • Let future generations figure out the nuclear waste problem, in exchange for GHG reductions today • But is this large enough to constitute compensation? Brennan:Limits of BCA in Climate Policy

8. Redistribution and the interest rate debate • What does the discount rate mean? • Appropriate rate “time preference” plus discounting utility for added per capita wealth over time • Nordhaus: Use market rate • Nordhaus argues discount should be inferred from market behavior, gets 4% real rate • Stern: Only a very low time rate of discount defensible • Stern assume zero time discount on ethical grounds; gets 1.4%, => major climate effort • For Stern, $1000 in a century worth about $246 today; for Nordhaus, $18.30 – different by a factor of over 13 Brennan:Limits of BCA in Climate Policy

9. Redistribution => Stern wins • If policy could be Pareto-improving, it wouldn’t matter • Everyone at every time better off • No need to weigh future benefits against present losses • Who’s utility is maximized in the Ramsey integral? • Utility of people today from future consumption? • Utility of future people relative to utility of present people? • If the first, Nordhaus; if the second, Stern • Inherent redistribution => Stern wins • Nordhaus is right in comparing investments • Redistribution brings in ethics, not market rate • Rawls’s “veil of ignorance” – equalize wealth • Non-overlapping generations: market rates ethically dubious Brennan:Limits of BCA in Climate Policy

10. Does Weitzman’s argument bridge the gap? No • Unlimited obligation to invest now to avoid potentially catastrophic climate change has two steps • 1: Empirical statistical measures from finite data have “fat tails” on catastrophe end of distribution • 2: Standard “constant relative risk aversion” utility measures lead to - expected value of climate change • I can’t challenge the first statistical/empircal assertion • But the second is extrapolation out of application range • CRRA comes from quadratic Taylor series approximation to expected utility: Local, not global • Would imply infinite effort to reduce risk, which isn’t observed Brennan:Limits of BCA in Climate Policy

11. Can other defenses for BCA help? • Mimics what a market would do were there no failure • Justification for using market values for public good assessment • E.g.: statistical value of life, value of time • Don’t reduce risk than people are willing to pay • Justifies using future market prices (such as they may be) to value climate benefits, but not redistribution • Wealth maximization as intrinsically justified • Posner vs. Dworkin: Is wealth intrinsically valuable? • Could justify market-like pecuniary externalities • E.g.: Using BCA to support public good reduces demand for private substitutes • But “hypothetical consent” requires Pareto improvement • Otherwise, back to Rawls’ “original position” Brennan:Limits of BCA in Climate Policy

12. Implications for climate advocates not good • Three options: Disingenuous, Anti-democratic, or Difficult • Disingenuous (maybe): Claim that climate harms are not distant, but near-term • That wasn’t what the science seemed to say—but is this changing? • Implies present winners could compensate present losers without need for compensation from future generations? • Anti-democratic: Exploit biases in political influence • Special interest winners can defeat general population losers, even if CBA tilts the other way • The “Green Jobs” argument? Brennan:Limits of BCA in Climate Policy

13. That leaves “Difficult” • Inculcate sense of moral obligation to the future • What we “owe” future generations in terms of present sacrifices • Straightforward wealth effect • Ability to experience an “authentic” environment (assuming McKibbin’s “The End of Nature” isn’t quite that) • Deep ecology: Environment has standing apart from WTP • Moral duty, not future generations, provides the compensation • Can people in developed world be motivated to make material sacrifices? Brennan:Limits of BCA in Climate Policy