Comments on Simon Dietz and Nicholas Stern's Why Economic Analysis Supports Strong Action on Climate Change: A Response to the Stern Review's Critics

Abstract

The science of economics has made a number of important contributions to understanding greenhouse gases and their optimal control. From basic economic theory, economists have pointed out the need to minimize the sum of mitigation costs and climate damages (Nordhaus 1992). From this simple insight, society can derive an elegant solution to greenhouse gases. The optimal policy for society should balance marginal mitigation costs with marginal damages. Economics also provides an important perspective on time. Time is valuable and cannot be ignored. This is especially critical for a problem that has a very long time horizon. Costs borne in the present are more burdensome than costs born in the future. Finally, economics has much to offer in quantifying both the costs of mitigating greenhouse gas emissions (Weyant 2008) and the damages that climate change will cause to society (Pearce et al. 1996; Tol 2002; Mendelsohn et al. 2006). Stern (2007) and Dietz and Stern (2008) largely reject all of these contributions by economics. They argue that “minimizing the present value of costs of climate change and costs of abatement is both misleading and dangerous.” They argue that treating future costs as though they are worth less than current costs is “unethical.” They reject the empirical analysis of actual impacts arguing that the impacts are unknowable. They reject the economic estimates of mitigation costs in favor of the free-lunch estimates of technologists. Dietz and Stern argue that “strong and urgent action is in fact good economics.” To make this case, they assume that the discount rate is effectively zero, that climate change poses “severe risks” far beyond any we can measure, and that the mitigation costs will be lower than the most optimistic scenario. Even then, they suggest a formal weighing of costs and damages is unacceptable and that instead society should turn to ethical principles to guide greenhouse gas policy. They invoke an “ethics of responsibility of current generations for future generations.” This is climate advocacy, not good economics. What can the current generation do for future generations? By investing in capital, infrastructure, and technology, many generations since the industrial revolution have spurred economic growth, allowing future generations to enjoy a much higher standard of living. Dollars invested in capital and new technology grow at the interest rate, providing a reward