Calculus or Conscience? A Critique Of The Ethics And Hidden Assumptions Of Cost-Benefit Analysis Applied To Climate Change
1. Judith M. McNeill
jmcneill@une.edu.au
University of New England
Armidale, NSW, Australia
Jeremy B. Williams
jeremy.williams@griffith.edu.au
Griffith University
Brisbane, QLD, Australia
Reclaiming the Societal Dimension:
New Perspectives on Society and Business
IABS, Sydney, Australia, 19-22 June 2014
3. This paper argues that …
1) Economists have befuddled the climate
change debate
2) Computer models of the economy have been
used in a way they were not designed for
3) The true extent of climate risk is not being
adequately debated
4. Cost-benefit analysis (CBA) method
for organising information to aid decisions
about the allocation of resources over a
given time period
$
$
5. Jules Dupuit (1844) On the Measure of the Utility of Public Works
• CBA has been around for a long time
• Objective: to determine net change in social
welfare
① Calculation of benefits and costs (direct/indirect)
① Sensitivity analysis – how likely? scale of uncertainty?
② Discount the future value benefit/ cost today > value
benefit/ cost next year
③ Comparison of benefits-costs net social rate of return
④ Comparison of net rate of return between projects
6. • CBA applied effectively in big public sector projects
• Not always without controversy …
• Shortcomings of CBA:
– Attitudes to risk
– Distributional consequences
– Valuing non-market goods
– Valuing human life
7. The shortcomings of CBA
have become more apparent
when the technique went
from bridges to climate
change policy
11. The modelling conducted for the 2013 study produced larger budgets than
indicated by the modelling of Meinshausen et al (2009) in 2011 Carbon Tracker
work. That approach produced a range of 565 – 886GtCO2 to give 80% - 50%
probabilities of limiting warming to a two degree scenario (2DS)
12.
13. <20C
Ian Dunlop
Chair, Australian Coal
Association (1987-88); CEO
of the AICD (1997-2001)
?
“The 20C target is too
high. It is now the
boundary between
and
extremely dangerous
climate change”
17. The One Percent doctrine
‘If there's a 1% chance
that Pakistani scientists
are helping al-Qaeda
build or develop a
nuclear weapon, we
have to treat it as a
certainty in terms of our
response. It's not about
our analysis ... It's about
our response.’
Dick Cheney, 2001
23. • Using IAMs economists have frequently
suggested that the ‘optimal’ policy is to go
slowly and to do relatively little in the near
term to reduce GHG emissions
• We trace this finding to the limitations and
hidden assumptions of IAMs
The crux of the problem
24. Stated limitations of IAMs
• The systems modelled are large, complex, and chaotic
• It is difficult to capture the complexity of natural and social systems
• The full consequences of policies may not be known for decades
(and beyond)
• Over this time period, many unforeseen events can occur
• Scientific knowledge may be incomplete (or absent) in certain areas
• The values of human, animal, and plant life, health, and diversity
are difficult to quantify.
Center for International Earth Science Information Network (CIESIN) (1995)
25.
26. Hidden assumptions of IAMs:
① All impacts can be monetised
“violation of compatibility” (Spash 2007: 711) …
how does death and destruction get translated
into (harmless sounding) decline in GDP?
27. • In early studies, future impacts of climate
change were discounted at relatively high
rates
• This is fine for bridges but its extension to
intergenerational environmental issues is
problematic
Hidden assumptions of IAMs:
② It is fair and reasonable to discount the future
28. The two reasons used to justify the
application of a discount rate …
(i) The future always
counts for less in the
present
(i) People in the future
will be better off
because of economic
growth
• The future for future
generations, will be
their present!
• This could be a valid
reason, but can we be
sure that they are going
to be?
33. Conclusion of the article was that finding the
parameters for the equation was a very
difficult question
34. Scientism?
“In my experiences, the problem
here is that many neoclassical
environmental economists are
more eager to save their
theories and methods than to
improve the chances of human
survival on this planet”
Söderbaum (1990: 491)
35. The power of the paradigm?
‘… Stern deserves a measure of
discredit for giving readers an
authoritative-looking impression
that seemingly objective best-
available-practice professional
economic analysis robustly supports
its conclusions, instead of more
openly disclosing the full extent to
which the Review’s radical policy
recommendations depend upon
controversial extreme assumptions
and unconventional discount rates
that most mainstream economists
would consider much too low.’
Weitzman (2007: 724)
40. ‘The problem is
framed as one of
profitable returns on
an investment not
precaution to avoid a
disaster.’
Spash (2007: 713)
41.
42.
43. “…planning for
adaptation to a
Four Degree
World within
established state
structures seems
an indulgence of
fantasy”
Garnaut (2014)
44. ‘Even just acknowledging more openly the incredible
magnitude of the deep structural uncertainties that are
involved in climate-change analysis …
Weitzman (2009)
… and explaining better to policy makers that
the artificial crispness conveyed by
conventional IAM-based CBAs here is
especially and unusually misleading
compared with more-ordinary non-climate-
change CBA situations …
… might elevate the level of
public discourse concerning
what to do about global
warming.’
45.
46. • Policy decisions should be based on a
judgment about the maximum tolerable
increase in temperature /CO2 levels given
scientific understanding
• The appropriate role for economists would
then be to determine the least-cost global
strategy to achieve that target
Conclusion