Tuesday, 30 October 2012

More on climate change and budget deficits


When I wrote this, I was reminded of a rather different but clearly related argument that I have seen the Oxford philosopher (but also economist) John Broome make,[1] although its fullest exploration is probably by Duncan Foley (pdf)[2]. The Stern report clearly suggests that incurring the costs of mitigating climate change today will raise the utility of future generations by more than it reduces ours.[3] However the current generation appears unwilling to incur these costs.[4] Let us call the ‘status quo’ the situation where nothing much is done to prevent climate change, and so future generations suffer as a result.

Broome and Foley suggest that a Pareto improvement is possible compared to the status quo. (A Pareto improvement is a change where some people are better off, but no one is worse off.) This would involve taking measures today to mitigate climate change, but getting future generations to pay for it. How can this trick be pulled off? Following the logic of the arguments I discussed here and here - that government debt involves a transfer between generations - we could pay for climate change mitigation by issuing government debt, which would be redeemed by future generations. Reducing CO2 emissions would not cost us anything, because the money to pay for it would come from selling government debt to the young. The cost would fall on future generations, who would have to pay the higher taxes to either service the extra debt or pay it off. The Stern report suggests future generations would prefer this outcome to the status quo, because they would be prepared to pay to reduce climate change. It is therefore a Pareto improvement compared to the status quo. Let’s call this the ‘debt solution’.[5]

Now there is one immediate and powerful objection to the debt solution, which is that future generations have to pay for something that this generation is doing. It violates the polluter pays principle. This makes the debt solution unfair or unjust. It would be fairer if the current generation incurs the cost of mitigating climate change, just as it is right for a company that pollutes a river to pay to clear up the pollution. Let us call this the ‘just solution’.

The Stern review recommends that we move from the status quo to the just solution. Unfortunately so far most governments, individually or collectively, seem unwilling to do this. In these circumstances should we instead at least start by implementing the debt solution, and then work on achieving the just solution? Broome suggests “we should not encumber the process of controlling climate change with the quite different matter of transferring resources to future people.” That is a controversial suggestion: many will feel that giving governments that option will reduce the chances of achieving the just solution. But perhaps this is an example of where the best is the enemy of the good.

     





[1] Broome’s paper is mainly about how we value the hopefully small chance of total catastrophe, but the argument discussed in this post is made early on in that paper.
[2] Foley, D. 2007. The Economic Fundamentals of Global Warming. Working paper 07-12-044. Santa Fe, New Mexico: Santa Fe Institute.
[3] Stern argued that it was ethically wrong to value the utility of future generations less than our own. He values their consumption less, because they will be better off and so require more consumption to achieve a certain level of utility. Stern’s report was controversial among many economists because they prefer to follow the supposed ‘revealed preference’ of the current generation to discount the utility of future generations.
[4] The qualifier ‘appears’ is important here. My own, relatively uninformed, view of the politics is that policy in this area is guided by particular vested interests, rather than the collective view of the current generation. If it was the case that the current generation was simply unwilling to make a present sacrifice for future benefit, why is so much money spent on trying to discredit the evidence about climate change?
[5] Government debt probably crowds out productive capital to some extent, but this could be offset if the money spent today involves increasing capital, in the form of renewable energy generation for example.

13 comments:

  1. I'm not following this at all. The ppl who will be most affected by CC aren't even born yet. If the gov't issues bonds today, whom will they be sold to? I guess you could put them into a side account and just declare that future generations will have an obligation to pay for the bonds, but I don't think investors will value the bonds as such.

    Also, you have the issue of making financial decisions for ppl who aren't even born yet, which greatly infringes on freedom. Not saying it's not the just thing to do, but rather that you're going to get a lot of pushback from the freedom-fighter (i.e., libertarian) crowd.

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    1. You should read the earlier posts on how debt transfers income between generations (or the examples provided by Nick Rowe). There is no reason why the bonds will not be valued - investors get their money back.

      On your second point, its my turn to not follow. Why is raising the global temperature in the future not infringing on the freedom of those not yet born? So no pushback expected.

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    2. I'm not disputing the fact that investors will get their money back; I'm simply saying it would be a stretch to assume that investors wouldn't combine the new bonds with the government's overall debt stock. For example, if the government said today that it was going to issue $5 trillion in debt to fight climate change and that the debt would be paid for by future tax revenues, I reckon that investors would see the net effect as a surge in the government's debt-to-GDP ratio, which may lead to higher borrowing rates, crowding out, weaker growth, etc...

      I agree with you in principle on the freedom point. I'm just saying that it would be a tough sell in standard CBA philosophy, in which preferences for future generations are more or less left out because of the inability to calculate willingness to pay (CBA Boardman, et. al.).

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  3. "incurring the costs of mitigating climate change today will raise the utility of future generations by more than it reduces ours"

    How exactly do you compare different persons' utility?

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    1. Easily - economists do it all the time.

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    2. It's true that many economists do that, but I can't see a rigorous justification. In microeconomics textbooks you will find the notion that utility is ordinal and not interpersonally additive. Note that adding utility is not exactly the same as doing a cost-benefit analysis, Kaldor-Hicks style.

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  4. This discussion is based on the assumption that we're not stopping climate change because of the cost. But that's wrong, the cost is only an excuse. The real reason is vetted interest: there are very powerful people and companies, who would be very much affected by programs to stop climate change, running a powerful and very successful denial campaign.

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  5. Simon: Yep, this makes sense to me. I think it's interesting to compare it to the case where we build schools that will benefit future cohorts using deficit finance. Should we have paid the cost of the schools ourselves? Maybe it depends on whether future cohorts will be richer than we are. Or do future cohorts "own" the right to schooling in the same way they "own" the right to a clean environment? Coase theorem and the allocation of property rights and all that, except that we are negotiating with the unborn.

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  7. This article is based on the climate change that e are not stopping because of the expense. It's totally wrong, the expense is only a reason. The actual fact is checked out awareness, there are very impressive peoples and companies, who would be a very much suffering from applications to stop climate change. operating a highly effective and very successful refusal strategy. The highly effective argument to the debts remedy, which is that years to come have to pay for something that this creation is doing. This makes the debts remedy unfair or unjust. Market Research Reports

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  8. The whole discussion seems misdirected to me. The true cost of global warming mitigation is the real resources devoted to it. If, for instance, a coal-fired power plant is replaced as a power source, the manpower and material used for that cannot be used for something else. That is the cost.

    Any financial manipulation of any kind is just about who has claims to things now and in the future. Future generations cannot make new productive resources available in the present, no matter who owes what to whom.

    I speak without prejudice; I strongly favor incurring any costs needed to resolve the problem. I just don't kid myself about who will pay.

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  9. thanks for sharing.

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