This year?s presidential campaign has shown that a gulf exists between the two candidates on America?s energy future ? at least in theory.
Mitt Romney opposes renewal of the federal wind energy tax credit and champions the exploitation of fossil fuels. President Obama advocates an ?all of the above? strategy on energy but ? after a period of silence on the issue ? implicitly evoked the dangers of runaway emissions at the Democratic convention by warning that climate change is indeed a threat.
But Mr. Obama?s acceptance speech did not address what many researchers and policy analysis regard as the crux of the debate: How much are we as a society willing to pay today to prevent the climate-related costs of carbon dioxide emissions in the future?
In 2010, 12 government agencies working in conjunction with economists, lawyers and scientists, agreed to work out what they considered a coherent standard for establishing the social cost of carbon. The idea was that, in calculating the costs and benefits of pending policies and regulations, the Department of Transportation could not assume that a ton of emitted carbon dioxide imposed a $2 cost on society while the Environmental Protection Agency plugged 10 times that amount into its equations.
Instead, they decided, all of the agencies would use the same baseline of $21 per ton as the standard in monetizing the social costs of the seven-plus billion tons of carbon generated by American power plants, vehicles and factories each year.
But a new paper published in the Journal of Environmental Studies and Sciences concludes that the costs of carbon pollution and related climate change are vastly greater ? possibly two to 12 times as much. The problem, the authors argue, is that the federal government is not adequately taking into account the impacts of climate change on future generations.
At the heart of this debate is a disagreement about how to apply an economic concept known as the discount rate to the impacts of climate change. Simply put, the rate is based on how much it is worth to us now to prevent that future damage. Given that people are more concerned about having money now, economists posit that we are willing to spend less than a dollar today to prevent a dollar?s worth of damage in a year, or two years, or a generation.
A bird in the hand today is worth more than a bird in the hand tomorrow. Or perhaps two birds in the hand next week ? it all depends on the discount rate. Or, if you will, the discount rate helps to explain why a new college graduate borrows money from their anticipated future salary to live on while they are working their way up and why it?s so hard for people to forgo eating a doughnut today in the hope of losing five pounds by the end of the month.
The interagency group looked at discount rates of 2.5, 3 and 5 percent, ultimately settling on 3 percent and putting the cost of one ton of carbon at $21. But the new study opts for discount rates of 1, 1.5 and 2 percent, ultimately putting the cost of one ton of carbon at anywhere from $55 to $266.
The research was carried out by Laurie Johnson, chief economist in the climate and clean air program at the Natural Resources Defense Council and Chris Hope of the University of Cambridge?s Judge Business School.
Some economists have justified using higher discount rates because they expect that people in the future will have relatively more money and so be less affected by the damages. Every dollar spent mitigating climate change is also a dollar that cannot be invested in something else which could potentially have much higher returns in the future, they argue.
But Dr. Johnson contends that the discount rate needs to be lower because climate change has the potential to severely disrupt projected economic growth. Even if income does rise over all, the people most harmed by climate change may not be experiencing the same rate of economic growth ? a factor that she says bears significant consideration. And carbon pollution has a host of ?external? negative impacts like public health damage that she says must also be factored in.
?Looking at discount rates for climate change is especially tricky because unlike other situations, the people benefiting from current consumption are not the same people, not even the same generation or nationality, as those who will be most harmed,? Dr. Johnson said in an interview.
Michael Greenstone, a former chief economist for the president?s Council of Economic Advisers who helped create the $21 price tag back in 2010, said he stands by the 2010 analysis.
?I?m not overwhelmed by the opinions of two people, experts as they may be, about what the proper assumptions are, not compared to the collective effort of a dozen federal agencies and leading experts from the wide variety of disciplines that have insight into the climate change problem,? Dr. Greenstone said. ?Calculating the social cost of carbon requires many, many assumptions.?
?What the authors of this study are highlighting is that as you change those assumptions, you can make the number go up or down,? he said. ?There are other people that believe the discount rate should be even higher, which would lead to a substantially smaller social cost of carbon.? he said.
Frank Partnoy, a professor of law and finance at the University of San Diego, had a different take. ?The governmental working group used a very empirically based discount rate, which seems very concrete, but over the long term runs into an ethical brick wall,? he said.
?A human life is often estimated to be worth around $10 million,? he said. ?But if you apply a three percent discount rate to this, that means that a human life five hundred years from now is only worth $3.81 today,?
?Ultimately, we can?t rely on only numbers ? we have to make really hard value judgements,? Dr. Partnoy said. ?We should stop pretending this is a science and admit it is an art and talk about this in terms of ethics and fairness, not what we can observe in the markets.?
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