jueves, 28 de abril de 2011

A tale of conferences: Economists, Scientists and Policy-Makers. Part I -Discounting the future...

These weeks have been very particular, I attended some conferences that were particularly stimulating. Weeks like this do not happen regularly, even in the world of Ivy-League Schools.

As the world approaches 7 billion inhabitants and evidence of a warming climate accumulate, we are approaching the inevitable: Action. It is clear to me that there is something not quite right in our paradigm of progress and development. That certainty brought me to Columbia, made me borrow amounts of money that I still feel uneasy to think about. I remember a conversation that I had some years ago with my father, I came to him with my never-ending concerns about the possible impacts of climatic change in the future of our species. He said to me that I should not worry so much about it and that the world would find a solution and solve it sooner or later. Some time later a colleague at work told me that I worried too much, in the end we could be hit by a meteorite anytime and life would probably be wiped out of earth anyway, "just enjoy your life and don't worry as much" - were his words. Later on, a professor that I respect enormously, explained to me that when he was younger he also lived in fear of nuclear war that could destroy the world. He wasted so much energy worrying for something that never happened and in the end he would have used that time to do more productive things. I guess they were trying to escape from my stubborn conversations about the path for change. In the end I quit my job, left my country, burdened myself with debt, hoping that I could help the world find a solution to some of its major issues. When I first came to Columbia I hit a wall, I was looking for answers and more questions arose. Little by little I have managed to structure my experience into something tangible. Today I found the first step of the ladder...

So let me try and convey to you my line of thought. The threat of industrial overshooting is growing every day. As the flows of Green House Gases increase and the atmospheric stock accumulates the future scenario for world stability looks grimmer. If we do not manage to control our impact on the planet we will have to suffer the consequences and adapt to an world of climatic extremes and impoverished ecosystems. So what are we supposed to do about it? The answer has to be responded in several levels, first is the understanding of the possible impacts and the technological solutions for mitigation and adaptation, this is the job of scientists and engineers. Then comes the problem of how much do mitigation and adaptation strategies will cost, how much we will benefit from it, this is the job of Economists. Finally comes the question of who will pay, who will benefit and how should we tackle the issue, this is the job of Politicians, Policy-Makers and this involves private corporations, the general population and international organizations. It appears we are facing a global problem of collective action on our largest shared common good: the atmosphere. And it also appears that we are failing at constructing an adequate plan of action. I sometimes feel that we are behaving irrationally, I find so many common aspects with the collapse of Easter Island that Jared Diamond explains in his book Collapse that I am afraid we might act when it is already too late. Why are we failing? What can we do about it? I went to listen to the brightest minds in Columbia and Harvard to obtain some answers. Economists, Scientists and Politicians are currently debating this issues and they certainly know way more than I do. So let me tell you what I learned.

Conference 1: Fourth Arrow Lecture, Time and Persons in the Economics of Climate Change. Dasgupta, Stiglitz, Barett, Healy and Arrow. April 12th 2011. Columbia University.  

Climate Change is the perfect example of the management of a common good, the perfect setting for the biggest market failure of all times. It is an issue of global collective action that will require a global deal from all nations in the world. At least in this conference everyone agreed that climate change is a reality and that it could have negative impacts on GDP. But the question is how much should we spend on this problem? 

And here starts the nightmare, since we humans live in an uncertain world, we prefer the present to the future. Future possibilities are discounted because we expect the future to be uncertain and in the case of the economy we expect to obtain more from our investment. So any future gains have to be discounted to present values. If we play with the value of the future then we might find that action is not imminent. That we should perhaps wait until we get richer to start acting to reduce our impacts on the planet. 

The question seems to be how much will future generations pay us for taking a sacrifice in the present from which we will not see the benefits. Indeed tackling climate change today would require to reduce consumption in the present so that future generations can be richer than they would be if the suffer the future damages of today's emissions. Some argue that we are poorer than our future generations and that we would actually be transferring money from the poor in the present to the rich of the future. Yes, this is part of the debate amongst economists, economists disagree on the discount rate of the future and thus arrive to different conclusions on how much we should be doing about this issue. 

I think this is quite a crazy idea, but hey I am not an economist. (Actually economics was to me another area of Terra Ignota to me until recently)

But economists have come to the conclusion that the economics of climate change need to also consider risk. Yes, there is some probability that if we allow concentrations to exceed a certain threshold the impacts on the World could bring consumption to 0. We of course don't want this. But what is this probability? We don't know, scientist are doing the best they can to define this probabilities. In the mean time economist are modeling their discounts models with the probability of catastrophe (thank god!).

But discounting the future has several ethical issues, we are basically saying that future generations have less value than the present one. I call this discrimination.

But one point that struck me was that indeed we have to decide how much we are going to spend on on reducing climate change. The money we spend (not invest) on this issue is money that we can't spend on other issues (like consuming). But if we are uncertain about the temperature change and the damages of these increases then what should we do? Some politicians argue that we should wait until we have more certainty. But the problem with this is that by the time we know it might be too late. If the doctor tells you that you have a tumor that has a 10% chances of being cancer would you risk it until its too late?

So while economists debate about how much we should value the future, some scientists are talking about the end of civilization. One quote from the conference was: "Extinction is not infinitely bad". This is one of the ideas that the best minds of our world have come up with... Should we be worried? You bet!

It appears that we are underestimating the real costs of Climate Change in all this discussion. If we actually reach a catastrophic scenario then the costs of inaction are close to infinity, at least that is what I believe. But in this economic discussion there is no room for this sort of ethical discussion, we should abate emissions until the marginal cost of emissions abatement is equal to the marginal social benefit of abatement. Economist work at the margin, but again we don't know these costs, we won't know these costs until it is too late. The truth is that the today the marginal cost of emitting carbon is still 0. Countries are not really doing anything to abate their emissions, countries have indeed agreed that we should avoid a warming of 2 degrees but the problem is that we need to define who will start abating. And since it is a collective action issue everyone is responsible or more precisely: no one is responsible!

At some point in the discussion, a nobel laureate decided to mention that the discounting discussion is a stupid controversy. If we had 100 planets then let's look at the average, let's measure the migrations costs from one planet to the next and if scientist are not wrong then we move to the next planet and reduce emissions. I wanted to laugh but the subject is too sad for me.

Let's take the example of Japan, the had modeled all possible scenarios and had everything under control. But the low probability, high impact event did happen. And now? Now what? 

The truth is not only that we are really bad at dealing with low probability events, the problem is that we are waiting until the catastrophe becomes highly likely before deciding on taking action.

I came to Columbia to find the answers to what needs to be done about the threats of the environmental crisis that we are facing. I have learned that this environmental crisis is not only environmental but that it is highly linked to development. If we act we will hurt our development, if we don't act we will also hurt our development. If we develop we will make the environmental crisis worse. It seems we are in quite an impasse. No one wants to make the first move, developed countries don't want to take action and loose their supremacy to the new rising economies. The new rising economies don't want to give up on their big moment, the time for them has come and now they have to sacrifice for the sake of the planet. 

In the end those who will suffer the most are again the poorest of the poor, those who don't emit will be the first to suffer from climatic variability and natural extremes. I guess that humanity will demonstrate what we are really made of in the way we solve the climate change crisis. It seems that indeed extinction is not infinitely bad... Especially when the first to become extinct are other species and poor nations...

It seems that we are not on the path to sustainable development, and it is not clear to me if economists have the answers to the problems we are facing...

Maybe scientists have something to say...

See part II

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