Great analysis as always. It's unsurprising that results are so sensitive to the discount rate given the long time horizons, though I have a hard time thinking about how much to value future lives lost. The cost of offsetting future lives lost depends on the discount rate but also the cost of saving a life in the future, which might be much greater than saving one today. But in scenarios where the cost to save a life is much greater, incomes are likely to be higher, so the excess mortality due to climate change will be lower.
I also have two possible concerns in mind that could have significant effect but weren't listed. One is the cost of air pollution, which results in millions of deaths per year today: https://ourworldindata.org/data-review-air-pollution-deaths. It's different from looking at CO2 in general because coal has a vastly larger effect on air pollution than natural gas, but is relevant to some aspects of decarbonization. Another is the small contribution of climate change to existential risk, which is harder to quantify.
We'll try to be brief. But you've hit a sore spot for us ("Social Cost of Carbon").
Readers can see Nordhaus' ranges (cost/ton)and discount rates at Table 1 and 2 on pp. 16 & 18. Those tables, as well as your piece and Friedman's work, make it clear that there are two easy ways to jack up the "SCC". And a third that helps, too but should be irrelevant. You and Friedman note all three. (The "why?" Charlaticians do this we'll get to at the end of our comment).
One reduce the discount rate. Two, reduce the future avg. surface temp reduction goal. Moving the goal posts out further (note Nordhaus stops his analysis at 200 years, and focuses on to yr 2100 principally, for most of the reasons you mention above) - 300 YEARS! - also helps. Especially when you reduce the discount rate.
The wide ranges and the assumptions show the folly of it all.
But increasing the SCC has a political advantage for ideologues. We're going to make a connection here you might not have made to date: the analogue for ideologues (some of the same ones with climate change) is Covid-19(84).
Ready? It's about fear and the concept of "The Precautionary Principle".
> fear = > receptiveness to "The Precautionary Principle"
Increase the perception of risk enough, The Precautionary Principle can be weaponized so citizens will willingly accept (or clamor for) a whole host of things they would not ordinarily consider but for the subterfuge. These include (but are not limited to) the promise of government protection, agreeing to higher costs and/or lower living standards, sacrificing human prosperity and even justify withholding resources from the developing world, all under the name of saving humanity and the planet.
Or, in the case of Covid-19(84), sacrifice their freedoms. Remember what former NY Governor Cuomo said in the height of the Covid-19(84) lock down panic in summer 2020 as he forced state nursing home to accept sick, elderly patients who'd tested positive. "If my policies save even one life of a New Yorker it will have been worth it! (It didn't) .
We are a team of environmental industry professionals who finally had enough of this insanity. We're not hard to find (click the link next to our name).
I'm skeptical that the inflation-adjusted treasury bond rate reflects people's time value of money. US government bonds are considered to be risk free. People choose to invest in all kinds of things with risk, however, like stocks, corporate bonds, and startup businesses. I think a higher rate is more realistic.
For those about to click the Bill Nordhaus link... a particular Steve Keen post on how applingly Nordhaus underestimates the cost - and how flawed Nordhaus' reasoning is is here https://www.patreon.com/posts/appallingly-bad-38048063
A choice point I would like to note
- Assuming most of the economy is indoor (including *mining* as it's underground...) and so won't be affected by the climate because it won't be affected by weather.
-- (not in the post but even I can see the flaw that if NYC and their subway keeps getting flooded, even the most climate insulated finance job would be disrupted - and building a higher seawall for 4C rather than 2C would be much more costly)
Another one is Nordhaus assigning a continuous, quadratic function for GDP to temperature change saying that there are no tipping points within 300 years triggered by warming below 3C, citing a study from Lenton et al.
When Lenton et al...
- Specifically cities loss of Arctic summer sea ice, with warming between 0.5-2C triggering it.
-- Nordhaus justified its exclusion by saying Lenton et al marked it with only one asterisk * on a scale of 3, meaning least importance (compared to stuff like eg Sahel monsoon). This criteria apparently doesn't exist in the Lenton et al paper
-- (while Arctic ice floats in water and wouldn't increase sea levels from melting - replacing ice with water would increase the heat energy absorbed by the oceans, which can increase ice melts for other ice packs, and also weaken the jet stream with a warming arctic...)
- events that could take longer to happen - eg the loss of ice on Greenland, labelled as taking more than 300 years, take a long time to fix. If it is estimated that loss of all sea ice on Greenland will happen in 300 years, it's way too late to wait - eg, 250 years to try and fix it, because *the cumulative emissions from the past are still effecting this*!
-- therefore, at least *some* action would have to be taken now. Just like stopping a cargoship.
And also more broadly, Nordhaus dismissing the 20-30x larger estimates of economic damage climate scientists gave to 3C warming vs various economists as the climate scientists underestimating human adaptability. Essentially just assuming economy will return to a steady state, no matter how large the exogenous shock (even noting -2C from pre-industrial average was era when north half of US was covered in ice sheets).
I'm not saying it climate change will end our civilisation - even our business as usual doesn't reach the +10C preindustrial average (same change as Permian extinction)
But I want to note that something like eg +4C from preindustrial average
- is not the same as your current weather +4C --> the bell curve of temperatures shifts. What was once a skinny tail for heatwaves is now fatter
- is not just "we'll still have GDP growth, just lower". GDP growth at all would be a bold assumption, with that level of warming (even considering only how much agricultural zones would shift, ignoring all the costs on trying to mitigate rising sea levels).
-- People can change and adapt from exogenous shocks, but this would be a staggeringly large one. -2C (ie minus 2C) from pre-industrial average was 18,000 years ago, ice ages - ice sheets covering US up to New York, not minor by any means, so neither would a +2C change.
And as for the conclusion, that it's essentially better just to wait for tech advancements in decades to come(?), and do less now (because transitioning can be tricky), I really am struck by the "What if we create a better world for nothing?" comic https://imgur.com/up6yu
And the fact that the more we do now - on stuff that isn't so cutting edge - electrifying things, making electricity zero carbon - whether it be intermittent renewables and pumped storage, or nuclear - means we have more time - rather, more carbon left in a carbon budget - to figure out what to do with hard stuff - eg aviation
David Friedman isn't an economist. He might know about economics from a certain ideological standpoint. But he isn't trained in the discipline, he thinks about it from a anarcho - capitalist way. Unless you think that title is inherited like a house is, he isn't. Anarcho - anything is impractical. You might as well call Alan Moore, writer of V for Vendetta an economist as well.
He's also very, very close to being a climate change denial guy. I'm sure he's very careful with his language so as to bring up plausible deniability. But when you look at they way he frames things, he certainly serves that purpose.
Everything 'inspired' by what he's writing should be read with those things in mind.
Great post that digs into some critical assumptions.
I do think that setting high discount rates on problems that have moral relevancy can be tricky. As Derek Parfit wrote:
"Why should costs and benefits receive less weight, simply because they are further in the future? When the future comes, these benefits and costs will be no less real. Imagine finding out that you, having just reached your twenty-first birthday, must soon die of cancer because one evening Cleopatra wanted an extra helping of dessert. How could this be justified?"
I wrote a post about this issue myself (https://passingtime.substack.com/p/chasing-infinities). I work in clean energy finance and so I use discount rates every day at my job to make decisions. But in setting discount rates, you have to choose between Pascal's Mugging yourself and being okay with being Cleopatra in the above example.
Great analysis as always. It's unsurprising that results are so sensitive to the discount rate given the long time horizons, though I have a hard time thinking about how much to value future lives lost. The cost of offsetting future lives lost depends on the discount rate but also the cost of saving a life in the future, which might be much greater than saving one today. But in scenarios where the cost to save a life is much greater, incomes are likely to be higher, so the excess mortality due to climate change will be lower.
I also have two possible concerns in mind that could have significant effect but weren't listed. One is the cost of air pollution, which results in millions of deaths per year today: https://ourworldindata.org/data-review-air-pollution-deaths. It's different from looking at CO2 in general because coal has a vastly larger effect on air pollution than natural gas, but is relevant to some aspects of decarbonization. Another is the small contribution of climate change to existential risk, which is harder to quantify.
Super piece, Maxim.
For readers interested in more detail, here's a link to Bill Nordhaus Nobel Prize lecture at Yale after receiving the award in 2018 in economics. https://www.nobelprize.org/uploads/2018/10/nordhaus-lecture.pdf
We'll try to be brief. But you've hit a sore spot for us ("Social Cost of Carbon").
Readers can see Nordhaus' ranges (cost/ton)and discount rates at Table 1 and 2 on pp. 16 & 18. Those tables, as well as your piece and Friedman's work, make it clear that there are two easy ways to jack up the "SCC". And a third that helps, too but should be irrelevant. You and Friedman note all three. (The "why?" Charlaticians do this we'll get to at the end of our comment).
One reduce the discount rate. Two, reduce the future avg. surface temp reduction goal. Moving the goal posts out further (note Nordhaus stops his analysis at 200 years, and focuses on to yr 2100 principally, for most of the reasons you mention above) - 300 YEARS! - also helps. Especially when you reduce the discount rate.
The wide ranges and the assumptions show the folly of it all.
But increasing the SCC has a political advantage for ideologues. We're going to make a connection here you might not have made to date: the analogue for ideologues (some of the same ones with climate change) is Covid-19(84).
Ready? It's about fear and the concept of "The Precautionary Principle".
> SCC = > climate change damage estimates
> climate change damage estimates = greater perception of risk (frequency/severity)
> perception of risk = > fear
> fear = > receptiveness to "The Precautionary Principle"
Increase the perception of risk enough, The Precautionary Principle can be weaponized so citizens will willingly accept (or clamor for) a whole host of things they would not ordinarily consider but for the subterfuge. These include (but are not limited to) the promise of government protection, agreeing to higher costs and/or lower living standards, sacrificing human prosperity and even justify withholding resources from the developing world, all under the name of saving humanity and the planet.
Or, in the case of Covid-19(84), sacrifice their freedoms. Remember what former NY Governor Cuomo said in the height of the Covid-19(84) lock down panic in summer 2020 as he forced state nursing home to accept sick, elderly patients who'd tested positive. "If my policies save even one life of a New Yorker it will have been worth it! (It didn't) .
We are a team of environmental industry professionals who finally had enough of this insanity. We're not hard to find (click the link next to our name).
I'm skeptical that the inflation-adjusted treasury bond rate reflects people's time value of money. US government bonds are considered to be risk free. People choose to invest in all kinds of things with risk, however, like stocks, corporate bonds, and startup businesses. I think a higher rate is more realistic.
For those about to click the Bill Nordhaus link... a particular Steve Keen post on how applingly Nordhaus underestimates the cost - and how flawed Nordhaus' reasoning is is here https://www.patreon.com/posts/appallingly-bad-38048063
A choice point I would like to note
- Assuming most of the economy is indoor (including *mining* as it's underground...) and so won't be affected by the climate because it won't be affected by weather.
-- (not in the post but even I can see the flaw that if NYC and their subway keeps getting flooded, even the most climate insulated finance job would be disrupted - and building a higher seawall for 4C rather than 2C would be much more costly)
-- Even the example of clean room semiconductors - those can be affected too, by droughts that can be happening with increasing frequency https://www.industryweek.com/supply-chain/article/21161812/taiwans-worst-drought-in-decades-deepens-chip-shortage-jitters
Another one is Nordhaus assigning a continuous, quadratic function for GDP to temperature change saying that there are no tipping points within 300 years triggered by warming below 3C, citing a study from Lenton et al.
When Lenton et al...
- Specifically cities loss of Arctic summer sea ice, with warming between 0.5-2C triggering it.
-- Nordhaus justified its exclusion by saying Lenton et al marked it with only one asterisk * on a scale of 3, meaning least importance (compared to stuff like eg Sahel monsoon). This criteria apparently doesn't exist in the Lenton et al paper
-- (while Arctic ice floats in water and wouldn't increase sea levels from melting - replacing ice with water would increase the heat energy absorbed by the oceans, which can increase ice melts for other ice packs, and also weaken the jet stream with a warming arctic...)
- events that could take longer to happen - eg the loss of ice on Greenland, labelled as taking more than 300 years, take a long time to fix. If it is estimated that loss of all sea ice on Greenland will happen in 300 years, it's way too late to wait - eg, 250 years to try and fix it, because *the cumulative emissions from the past are still effecting this*!
-- therefore, at least *some* action would have to be taken now. Just like stopping a cargoship.
And also more broadly, Nordhaus dismissing the 20-30x larger estimates of economic damage climate scientists gave to 3C warming vs various economists as the climate scientists underestimating human adaptability. Essentially just assuming economy will return to a steady state, no matter how large the exogenous shock (even noting -2C from pre-industrial average was era when north half of US was covered in ice sheets).
I'm not saying it climate change will end our civilisation - even our business as usual doesn't reach the +10C preindustrial average (same change as Permian extinction)
But I want to note that something like eg +4C from preindustrial average
- is not the same as your current weather +4C --> the bell curve of temperatures shifts. What was once a skinny tail for heatwaves is now fatter
- is not just "we'll still have GDP growth, just lower". GDP growth at all would be a bold assumption, with that level of warming (even considering only how much agricultural zones would shift, ignoring all the costs on trying to mitigate rising sea levels).
-- People can change and adapt from exogenous shocks, but this would be a staggeringly large one. -2C (ie minus 2C) from pre-industrial average was 18,000 years ago, ice ages - ice sheets covering US up to New York, not minor by any means, so neither would a +2C change.
And as for the conclusion, that it's essentially better just to wait for tech advancements in decades to come(?), and do less now (because transitioning can be tricky), I really am struck by the "What if we create a better world for nothing?" comic https://imgur.com/up6yu
And the fact that the more we do now - on stuff that isn't so cutting edge - electrifying things, making electricity zero carbon - whether it be intermittent renewables and pumped storage, or nuclear - means we have more time - rather, more carbon left in a carbon budget - to figure out what to do with hard stuff - eg aviation
David Friedman isn't an economist. He might know about economics from a certain ideological standpoint. But he isn't trained in the discipline, he thinks about it from a anarcho - capitalist way. Unless you think that title is inherited like a house is, he isn't. Anarcho - anything is impractical. You might as well call Alan Moore, writer of V for Vendetta an economist as well.
He's also very, very close to being a climate change denial guy. I'm sure he's very careful with his language so as to bring up plausible deniability. But when you look at they way he frames things, he certainly serves that purpose.
Everything 'inspired' by what he's writing should be read with those things in mind.
Great post that digs into some critical assumptions.
I do think that setting high discount rates on problems that have moral relevancy can be tricky. As Derek Parfit wrote:
"Why should costs and benefits receive less weight, simply because they are further in the future? When the future comes, these benefits and costs will be no less real. Imagine finding out that you, having just reached your twenty-first birthday, must soon die of cancer because one evening Cleopatra wanted an extra helping of dessert. How could this be justified?"
I wrote a post about this issue myself (https://passingtime.substack.com/p/chasing-infinities). I work in clean energy finance and so I use discount rates every day at my job to make decisions. But in setting discount rates, you have to choose between Pascal's Mugging yourself and being okay with being Cleopatra in the above example.