“It doesn’t matter a damn what ethical assumptions you use,” says Michael Grubb, an expert on climate change policy at the University of Cambridge, cold financial arguments are enough to decide what to do about global warming. Spend now and reap the benefits later.
As arguments over the science behind climate change have cooled, the question of how much nations should be willing to pay has come to dominate the debate. Now Martin Weitzman of Harvard University has developed the first thorough method for including unlikely but extreme events, such as widespread crop failures, in cost-benefit analyses. When you take into account extreme temperature rises of more than around 6 °C, he says, they dominate all other options and effectively demand that investment aimed at stopping them be made now. “This tells us that we should take the problem much more seriously that normal cost-benefit analyses suggest,” says Weitzman, who has submitted his paper to The Review of Economics and Statistics.
“Extreme temperature rises of more than 6 °C demand investment aimed at stopping them be made now”
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Economists have generally ignored extreme events when doing cost-benefit calculations. Such events are theoretically possible, they say, but are so unlikely and lie so far in the future that it is not cost-effective to spend money to prevent them. Computer models also suggest that using more renewable energy and reducing emissions in other ways would almost certainly avoid extreme temperature increases. But Weitzman’s results are so dramatic that some economists, many of whom argued in favour of caution, are shifting their position.
Environment groups argue that the risk of extreme events justifies large investment now, but other groups, notably industry-orientated think tanks and many Republican politicians, have resisted such calls. “In the United States, cost-benefit analyses have been used to back up questions about whether [investment] is worth much now,” says Grubb. “This throws a pretty fundamental spanner in the works.”
Richard Tol of the Economic and Social Research Institute in Dublin, Ireland, is one economist who used to argue for investment levels that fall short of what green groups say is needed. Investment choices are often measured in the amount of money that should be spent on preventing the emission of one tonne of carbon dioxide. Before reading Weitzman’s paper, Tol had that figure at $5 – now he thinks it should be $50. He is also developing a cost-benefit analysis for the US Environmental Protection Agency. “This work shows that we’re simply doing it wrong,” says Tol.
The new method also backs up the conclusions of the Stern Review on the Economics of Climate Change, albeit via different methods. Stern’s cost-benefit analysis, which was published in October 2006, did not consider extreme events. Even so, he found that the benefit of investing now would be enormous: the world could save $2.5 trillion a year if the rise in CO2 was halted at levels around 50 per cent greater than today. But when Stern put a price on the damages that rising temperatures could cause, he valued future costs in today’s money. Many economists, including Weitzman, criticised that assumption, arguing that it ignores the fact that investments made now are expected to be worth more in the future.
The debate remains unresolved, as ethical arguments continue to rage about how to value future generations. But Weitzman’s study shows that once extreme events are included, the argument becomes irrelevant. This is because the potential cost of extreme events is so great that they come to dominate the assessment of risk, whatever method is used to compare the value of present and future generations. “[Weitzman’s work] would have received substantial attention in the Stern report. He would have used it as supporting evidence,” says Grubb.
Weitzman could also create a headache for policy-makers. The analysis shows that traditional cost-benefit calculations are getting it wrong, but it does so only by proving that extreme events dominate the costs when included in the calculations. It cannot put a figure on how much should be spent now, unlike the old techniques. “The big picture is not as clear as economists had thought,” says Weitzman. “This probably means we should spend more money now, but it doesn’t tell us how much.”
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