What We Need

In Four Legs and a Tail I pondered what we need to get some action on climate. Over the holidays I heard Seamus Heaney on NPR. A story from his Nobel lecture came up, which I think rather poignantly illustrates the nature of the needed paradigm shift, in a different context:

One of the most harrowing moments in the whole history of the harrowing of the heart in Northern Ireland came when a minibus full of workers being driven home one January evening in 1976 was held up by armed and masked men and the occupants of the van ordered at gunpoint to line up at the side of the road. Then one of the masked executioners said to them, “Any Catholics among you, step out here”. As it happened, this particular group, with one exception, were all Protestants, so the presumption must have been that the masked men were Protestant paramilitaries about to carry out a tit-for-tat sectarian killing of the Catholic as the odd man out, the one who would have been presumed to be in sympathy with the IRA and all its actions. It was a terrible moment for him, caught between dread and witness, but he did make a motion to step forward. Then, the story goes, in that split second of decision, and in the relative cover of the winter evening darkness, he felt the hand of the Protestant worker next to him take his hand and squeeze it in a signal that said no, don’t move, we’ll not betray you, nobody need know what faith or party you belong to. All in vain, however, for the man stepped out of the line; but instead of finding a gun at his temple, he was thrown backward and away as the gunmen opened fire on those remaining in the line, for these were not Protestant terrorists, but members, presumably, of the Provisional IRA.

It is difficult at times to repress the thought that history is about as instructive as an abattoir; that Tacitus was right and that peace is merely the desolation left behind after the decisive operations of merciless power. I remember, for example, shocking myself with a thought I had about that friend who was imprisoned in the seventies upon suspicion of having been involved with a political murder: I shocked myself by thinking that even if he were guilty, he might still perhaps be helping the future to be born, breaking the repressive forms and liberating new potential in the only way that worked, that is to say the violent way – which therefore became, by extension, the right way. It was like a moment of exposure to interstellar cold, a reminder of the scary element, both inner and outer, in which human beings must envisage and conduct their lives. But it was only a moment. The birth of the future we desire is surely in the contraction which that terrified Catholic felt on the roadside when another hand gripped his hand, not in the gunfire that followed, so absolute and so desolate, if also so much a part of the music of what happens.

(Emphasis added)

Is the BC Carbon Tax Fair?

That’s the title of a post today at The Progressive Economics Forum, introducing a new report from the Canadian Centre for Policy Alternatives.

The bottom line:

In this study, we model the distribution of BC’s carbon tax and recycling measures. Our results conirm that BC’s carbon tax, in and of itself, is regressive. However, the overall carbon tax and recycling framework is modestly progressive in 2008/09 ’” that is, low-income families get back more in credits, on average, than they pay in carbon taxes. If the low-income credit is not expanded, however, the regime will shift to become regressive by 2010/11. It is important for policy makers to rectify this situation in the 2009 and future budgets by minimally ensuring that the credit grows in line with the carbon tax.

A related problem:

A second concern with the carbon tax regime is that tax cuts undermine a progressive outcome at the top of the income scale. In 2008/09, personal and corporate income tax cuts lead to an average net gain for the top 20% of households that is larger in dollar terms than for the bottom 40%.

I plotted the results in the report’s tables to show some of these effects. In 2009, the lowest income groups (quintiles 1-3) come out a little ahead, but the 4th quintile faces a net loss, while the top income group is overcompensated by the corporate tax cut:

BC carbon tax incidence and rebate distribution

Continue reading “Is the BC Carbon Tax Fair?”

Questioning Imbalance

Nature has a review, by economist Dieter Helm, of William Nordhaus’ new book, A Question of Balance. I don’t have the book yet, but I’ll certainly check it out. I like the conclusion of the review:

But it may be naive to assume that substituting for environmental systems is so easy. Feedbacks in the system may be such that as climate change unfolds, the return on capital and hence the discount rate falls. Environmental damage may slow or stop economic growth; if that were the case, we would not be much better off in the future. And if we are not so well off in growth terms, Nordhaus’s slower and more measured policy approach may not be so favourable over taking rapid action now. In other words, Stern’s conclusion might be correct, but not his derivation of it ’” right answer, wrong analysis.

This is a crucial point. Richard Tol pointed out the substitutability problem back in 1994 but it hasn’t really found its way into formalization in mainstream IAMs. The issue of slowing or stopping growth isn’t limited to climate feedback; oil and gas depletion, the ever-present possibility of conflict, and degradation of other resources also impose constraints.

I have to take issue with one part of the review:

 

Where A Question of Balance has most power is where it is most controversial. Nordhaus tackles Stern head on. Stern’s case for urgent action, which the DICE model shows would be excessively expensive in the short term, rests upon his radical assumption that the time discount rate should be close to zero. This means that we should value people’s consumption equally regardless of whether they live now or in the future. Nordhaus has little time for this moral philosophy: he takes a much more positivistic position, grounded in market evidence and what people actually do, as reflected in market interest rates. The difference between Nordhaus’s optimal climate change policy and Stern’s policy based on a zero discount rate translates into a tenfold difference in the price of carbon. Stern’s discounting approach, Nordhaus argues, gives too low a rate of return and too big a savings rate on climate-stabilizing investments compared with actual macroeconomic data. Not surprisingly, then, his verdict is damning. [emphasis added]

The Stern discounting critique has been done to death. I recently discussed some of the issues here (in particular, see the presentation on discounting and welfare in integrated assessment modeling, based on the primer I wrote for last year’s Balaton meeting). In a nutshell, the discount rate can be decomposed into two terms: pure time preference and inequality aversion. Ramsey showed that, along an optimal growth path,

    interest rate = pure time preference + inequality aversion x growth rate

Stern has been criticized for choosing discounting parameters that aren’t consistent with observed interest and growth rates. That’s true, but let’s not confuse the map with the territory. Stern’s choice is inconsistent with the optimal growth framework, but is the optimal growth framework consistent with reality? Clearly, market interest rates reflect what people actually do in some sense, but they do it in a rather complex institutional setting, rife with opportunities for biases and misperceptions of feedback. Do market interest rates reflect what people actually want? Unfortunately, the micro foundation of macroeconomics is too wobbly to say.

Notice also that the equation above is underdetermined. That is, for realistic growth and interest rates, a variety of pure time preference and inequality aversion assumptions yield equality. Nordhaus, in his original DICE work, preferred 3%/yr pure time preference (no interest in the grandkids) and unit inequality aversion (doubling my income yields the same increment in happiness as doubling a poor African farmer’s income). Dasgupta prefers zero time preference on ethical grounds (as did Ramsey) and higher inequality aversion. The trouble with Nordhaus’ approach is that, unless the new book cites new research, there is no empirical basis for rates of time preference that heavily discount the future. It is difficult to create a realistic simulated context for such long term decisions, but the experimental evidence I’ve seen suggests quite the opposite, that people express some concern for even the distant future.

Thus it’s a mistake to call Nordhaus’ approach “positivistic.” That lends undue authority to what should be recognized as an ethical choice. (Again, this is subject to the caveat that Nordhaus might have new evidence. I await the book.)

Ethics, Equity & Models

I’m at the 2008 Balaton Group meeting, where a unique confluence of modeling talent, philosophy, history, activist know-how, compassion and thirst for sustainability makes it hard to go 5 minutes without having a Big Idea.

Our premeeting tackled Ethics, Values, and the Next Generation of Energy and Climate Modeling. I presented a primer on discounting and welfare in integrated assessment modeling, based on a document I wrote for last year’s meeting, translating some of the issues raised by the Stern Review and critiques into plainer language. Along the way, I kept a running list of assumptions in models and modeling processes that have ethical/equity implications.

There are three broad insights:

  1. Technical choices in models have ethical implications. For example, choices about the representation of technology and resource constraints determine whether a model explores a parameter space where “growing to help the poor” is a good idea or not.
  2. Modelers’ prescriptive and descriptive uses of discounting and other explicit choices with ethical implications are often not clearly distinguished.
  3. Decision makers have no clue how the items above influence model outcomes, and do not in any case operate at that level of description.

My list of ethical issues is long and somewhat overlapping. Perhaps in part that is due to the fact that I compiled it with no clear definition of ‘ethics’ in mind. However, I think it’s also due to the fact that there are inevitably large gray areas in practice, accentuated by the fact that the issue doesn’t receive much formal attention. Here goes: Continue reading “Ethics, Equity & Models”