Deepak Lal: Climate change: Ethics, science, economics - II

Inquisitors propagating the theory of climate change cannot do today what had been done to Galileo.

We recently went to see Bertolt Brecht's Galileo, which provides interesting parallels between the last large paradigm shift about Man's relationship to the stars, and the current one, in the new theory of cosmoclimatology discussed in my last column. The scientific establishment was wedded to a theory which the celestial observations of the scientific sceptics Copernicus and Galileo contradicted. The Inquisition tried to suppress the heretics, by excommunication (Copernicus) or silencing them through showing them the instruments of torture (Galileo). Today, the peer reviewed process of funding and validation of scientific research in climatology is equally controlled by the modern equivalent of the Collegium Romanum (the Vatican's Institute of Research), the Inter-government Panel of Climate Change (IPCC).

They in turn answer to the equivalent of the Inquisition, the Green ideologists, who, mercifully, can only torment through derision or denying the heretics research funding, and not the frightening instruments of torture. But, even the Collegium Romanum was imbued by the rational scientific spirit and confirmed Galileo's discoveries in his lifetime, though it took the Pope till 1993 to formally recognise the validity of Galileo's work. Finally, in both cases the new theories were dismissed by the theologians as they seemed to downgrade the primacy of God's agents (human beings) in the universe.

Fortunately, it is much more difficult to suppress the scientific enterprise today. A recent seriously flawed paper (Lockwood and Frolich, Proc. R. Soc. A, 25 May, 2007) hyped in the media seeks to reinforce the CO2 theory. It argues that, whilst the sun had an effect on the climate during most of the 20th century, since 1988 its activity has declined but global warming has continued. However, the paper's data stop in 2000. In fact, the global temperature record shows that, when the sun was active the world warmed, and since "it peaked in the late 1980's within a few years global warming stalled" (Whitehouse: "The truth is we can't ignore the sun," Sunday Telegraph, July 15, 2007). When the CERN CLOUD experiment is completed in 2010 and (hopefully) vindicates Svensmark's cosmoclimatology theory, the CO2 theory of climate change will be buried. It will be recognised that humans cannot control the climate and must adapt as they have done for millennia to its continual changes.

Hence it is ironic that many economists (and policymakers) base their climate change policy recommendations on acceptance of the CO2 theory upheld by the IPCC as the irrefutable scientific truth, the latest example being the Stern Review put out by the UK government. There is nothing particularly novel about the cost-benefit methodology which is used, nor about the model used to incorporate the scientific judgments, as William Nordhaus (the author of the most serious previous study of the economics of climate change) has noted in a recent review (W D Nordhaus: "The 'Stern Review' of the Economics of Climate Change," NBER WP. 12741, December 2006). What is novel is its conclusion that, without drastic immediate action to curb greenhouse emissions, the world faces economic catastrophe "on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century".

This is a dramatically different conclusion from earlier models of climate change (Nordhaus: Managing the Global Commons, MIT, 1994; Nordhaus and Boyer: Warming the World, MIT, 2000) that find that the "optimal climate change" policies involve modest reductions in emissions in the near future. The reason for the contrary Stern results is the near zero social rate of discount used, representing a contentious ethical judgment of the weight placed on the consumption of future relative to present generations. Apart from the "pure" time preference component of the discount rate, there is also the component that depends upon the fact that, with ongoing economic growth, future generations are going to be richer than the current generation. Hence a rupee accruing to the richer future generation should be less valuable than that accruing to the current poorer generation. How much less valuable depends upon the inter-generational distributional judgment.

The discount rate crucially determines how far future costs and benefits need to be counted. If the discount rate is close to zero, the whole of the infinite future stream of costs and benefits becomes relevant. Hence, the highly speculative economic damage the Stern Review adduces from rising temperatures two centuries from now can be valued equally with any economic costs we have to currently incur to mitigate them. But, as Nordhaus rightly notes, this low discount rate can lead to absurd results. It would imply trading off a large fraction of today's income to increase the income stream of those living two centuries from now by a tiny fraction. For, with a near zero discount rate, this tiny increase in the future generations income stream is cumulated to near infinity.

By contrast, the estimates I made for the Planning Commission in the early 1970s (see Lal: Prices for Planning, HEB, 1980) based on the same methodology as the Stern Review, but with more plausible parameters, yielded a social discount rate of 7 per cent for India. At this discount rate, the present value of Re 1 accruing 75 years from today would be worth nothing, making most of the speculative economic costs and benefits, and the apocalyptic predictions of the Stern Review, irrelevant for India.

This does not downgrade the serious current environmental problems caused by rapid growth in India and China. Anyone who has choked in the fetid air of Chungking, Xian, Beijing or Delhi will know that no climate scares are needed to provide a case for dealing with their unhealthy air pollution. Similarly India and China face a growing water crisis irrespective of what is happening to global CO2 emissions. Subsidies to energy and water use need to be removed for efficiency reasons. Whilst, given the political instability and growing political determination of supplies of fossil fuels from the countries where they are concentrated, it is sensible to diversify energy sources. Both nuclear power and India's coal reserves provide more secure alternatives. Bio fuels, by contrast, have the disadvantage of competing for limited land with essentials like food. However, the sun, which most probably controls the climate, also offers the backstop technology which will provide the unbounded energy for India's continuing economic growth. In thinking about all these economic issues, the changing climate is a red herring.