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2010-02-25 | Book Chapter

In defence of sensible economics

Sterner,T (2009),“In defence of sensible economics”, in Solow, R. & JP Touffut eds, Changing Climate, Changing Economy, Cournot Centre for Economic Studies, Edward Elgar, 2009
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How can economics best contribute to the scientific and public debates? Professor Thomas Sterner, University of Gothenburg, together with Nicholas Stern, who wrote the The Stern Review, and Nobel laureates Thomas Schelling and Robert Solow are among the scholars who explain in this book both how economics has changed environmental understanding and how the study of climate change has modified the economy.

 

Uncertainty in climate and in the Stern Report
Michel Armatte provides an excellent and learned overview of the development of modeling in the area of climate change. Armatte is quite critical of the role of conventional economics in integrated assessments of large scale, risky issues such as climate change. While I share many of his concerns and agree with many of his points, I would lean somewhat in the other direction. As suggested by the title of this paper, I believe that economic models can help clarify some of the very difficult ethical and philosophical issues involved, at least if done sensibly.

One key phenomenon that has been the subject of much discussion in this area is the degree of uncertainty and the handling of this uncertainty. Although it should also be said, at the outset, that quite a few things are fairly certain: There is with reasonable certainty, an anthropogenic increase in the natural level of radiative forcing which is gradually leading to an increase in average global temperatures. The rate of warming that corresponds to any given increase in greenhouse gases is however quite uncertain, and the biological and other effects of this warming even more so. The highest degree of uncertainty concerns the economic costs of this human induced climate change.

In the Stern Review (Stern 2006) – and even more so in the debate that the review has sparked- there is a very wide range of costs of climate change. Some of this uncertainty is due to bio-geophysical uncertainties. These uncertainties build in part on physical feedback effects such as for instance the possible 2 release of giant amounts of methane that is currently trapped in permafrost. As climate change thaws the permafrost, it may lead to the release of the methane which would positively reinforce the warming itself in a form of vicious circle. Similar mechanisms and uncertainties pertain to the changing albedo of Earth, particularly as ice-caps melt, changes in cloud formation, biological feedback mechanisms and so forth.

In the face of all these natural science uncertainties, it is a striking fact that the biggest source of uncertainty in this kind of integrated assessment actually comes from the discount rate. The reason for this is of course that virtually all the costs being discussed will occur far into the future and thus they must be discounted.