Kyoto and the Stern Review of Climate Change
In preparing the new printing of my energy economics textbook, several widely publicized topics were deliberately omitted. One of these was the Stern Review on the Economics of Climate Change. On several occasions I heard this document mentioned when I was visiting professor at the Asian Institute of Technology (Bangkok), which caused me to immediately make it clear that it was not to be discussed in my classroom in the course of what might be described as normal business.
Last year Lord (Nicolas) Stern (of Brentford) appeared in Stockholm in order to entertain a large audience with the conclusions reached in his famous analysis of potential climate change calamities. I of course was not invited to attend his presentation, because it was almost certainly believed by its arrangers that had I been present, there might have been what is sometimes called an `incident'. This was definitely not certain, because I would have been willing to exercise a maximum of restraint in order to avoid informing Lord Stern that many leading economic theorists regard his work on this topic as scientifically meaningless.
Meaningless and in the light of the finished product, pedagogically superfluous. To my way of thinking the Stern Review -- or at least the small portion that I have examined -- is an insult to both conscientious economics teachers and the students who require their knowledge, as well as innocent bystanders who pay taxes in order for -- among other things -- systematic and professional attempts to be made to ascertain the extent and mechanics of global warming, and if necessary to suggest or devise efficient programs for reducing its possible dangers. The analytical fragments of the Stern Review remind me of esoteric contributions to a journal called `The Review of Economic Studies' which played an important part in my education at the University of Stockholm, and contained articles which were often a part of the curriculum when I taught mathematical economics in Uppsala and Australia. I feel it appropriate to mention that I haven't read anything in that journal for more than 20 years, and I enjoy informing students and colleagues that I consider myself a better person as a result of this abstention.
After scrutinizing a few pages of the Stern Review, the first thing that came to my mind was that if it is true that we are now living in the most dishonest period in modern times, as a Canadian billionaire claims, then the so-called research done by Stern and his team might turn out to be a prime contender for the paramount scam of the present century: in wisdom and verbosity it belongs in the same category as Mein Kampf, and this is perhaps the reason that Professor Richard Tol said that if it were presented to him as a `Master's' thesis, he would grade it F (for failure).
But please take note that I am not criticizing nor denigrating climate scientists or anybody else who takes the position that global warming is a clear and present or nearly-present danger, because this may well be true. Instead I am merely commenting on an economic investigation whose ennoblement can be attributed to careerists in the faculties of economics and the environmental bureaucracies, and where the principal concern of some individuals on both the writing or reading end of enterprises of this nature may be money and some of the beautiful things that money can buy. Here I am thinking of subsidized travel and accommodation on the one hand, and on the other a superficial understanding of a fashionable topic.
Let us suppose for the purpose of this discussion that I was totally and obsessively corrupt, and found myself with the opportunity to write a thick book with the title The Ferdinand E. Banks review on the economics of climate change. Please be aware that what I am implying is that for me to write a book with that title, I would have to be `bent' in one sense or another, because otherwise I would never have anything to do with an assignment of this nature.
Given the limitations of economic theory, there is only one sensible approach to the project, and that is to find a model that can be adjusted and/or refined and/or extended and/or tweaked in such a way as to allow my assistants (and perhaps myself) to carry out rambling discussions of the economics of climate change in perhaps 700+ pages. The model that would be chosen by me, or my assistants, or my graduate students, or by party animals posturing themselves and courting attention at the bar of an Uppsala University student club could only be the one published by Frank Ramsey in his famous article `A mathematical theory of saving' (1928).
What is the logic behind this choice? First of all, the Ramsey model is complicated but not too complicated. Even if they are put off by its mathematics, the basic intent of such a model should be recognizable to a majority of advanced economics undergraduates, to include those pursuing their education in or near certain store-front universities where environmental studies constitute almost a religion.
Equally as important, the Ramsey model can be summarily enriched in case someone visiting a lecture on global warming decides to play ego games with the lecturer, in the course of which they proclaim the triviality of the basic Ramsey construction. If the basic model is polished up, a skilful lecturer might be able to successfully convince a drowsy audience that it is capable of providing some genuine insight into whether future benefits from `present' action to prevent climate change outweigh the cost of this action. The model -- though not the real world - reduces this puzzle to determining the discount rate that should be used to evaluate future benefits.
A simple example might feature being able to continue enjoying the marvellous beach life on the west coast of Sweden in future summers, while the estimated (or presumed or postulated) present cost of achieving this goal might involve altering Sweden's energy architecture in such a way as to include more wind turbines and natural gas, while promoting a nuclear retreat. Of course we know something about what this would mean, because the cost of electricity in Denmark -- which is the promised land of wind-based energy -- is perhaps the highest in Europe, while the cost of electricity in Sweden -- which has a large nuclear commitment -- is among the lowest.
For readers who are curious about this particular trade-off, I can refer to an article in the latest IAEE Energy Forum by Mary Hutzler (2009), in which she examines a proposal by the billionaire T. Boone Pickens for the massive employment of wind and natural gas in the United States, where it would be used to generate electricity (wind) and provide an alternative motor fuel (natural gas). I have attempted to convince large numbers of persons in the U.S. and elsewhere of the futility of this approach, however their fear (or hatred) of a situation in which the United States must depend on Middle Eastern countries for increasing amounts of energy has tended to undermine their rationality.
Another option for solving this problem is to get producers to invest in production equipment featuring clean outputs. For instance, electric generators might use coal, but carbon dioxide emissions from this coal would be sequestered underground or in the ocean, or perhaps generators could buy permissions to emit from other firms that possess the knowledge to greatly reduce the production of CO2. (This is apparently a big thing in Australia just now). In any event, and this is important, physical capital that might be used to produce items that were important in the manufacture of present necessities and luxuries would (directly or indirectly) be devoted to the suppression of CO2 emissions. In other words, the present consumption of necessities and luxuries would be reduced, and the disutility this would entail would have to be weighed against being able to visit the west coast beaches in the future.
Ramsay-type equations are designed to provide a `scientific' approach to comparing a future utility with a present disutility -- e.g. enjoying the beaches of the west coast of Sweden in the future in return for a present monetary outlay. Of course neither those equations nor any equations derived since Adam and Eve can carry out this particular commission to my humble satisfaction, but that is irrelevant. When many persons see or maybe just hear about the mathematics employed by Frank Ramsay and Lord Stern, they tend to draw the conclusion that it is in the same category as that employed by Albert Einstein or Isaac Newton. My comment on this situation is that this is precisely what is wrong with academic economics at the present time.
As mentioned above, many economic theorists find it difficult to accept the validity of Lord Stern's theoretical work, but some are of a different opinion. I certainly respect many economists who find the Stern analysis important, but as far as I can tell they find it important because they accept that anthropogenic global warming (AGW) is the real deal -- which it may be -- and genuinely feel that the general public should be made aware of what could happen in the event that bad news in the form of e.g. rising sea levels arrive before precautions are taken to deal with its most unfavourable aspects.
As to be expected, some concerned citizens are almost totally confused when confronted with the opinions expressed in this short paper. Take for example Joan Ruddock, Parliamentary Under-Secretary of State for Energy and Climate Change in the UK. She has dismissed the criticisms of people like Professors Tol, Partha Dasgupta and Martin Weitzman because -- according to her -- these economists suffer from "a fundamental misunderstanding of the role of formal, highly aggregated economic modelling in evaluating a policy issue."
I'm afraid that I must reject that point of view Ms Ruddock: they do not misunderstand. You and I are guilty of that shortcoming! You because your education in economic theory is inadequate, and me because the only interest I have in aggregated economic modelling is the slender amount necessary for me to write this note.
I would like to close by saying that the Stern Review may well be on its way to enjoying the same status as `The General Theory of Employment, Interest and Money' by John Maynard Keynes, or `The Theory of Games and Economic Behaviour' by John von Neuman and Oscar Morgenstern. These are famous books that everyone knows about, although very few have actually read them. I for instance know a great deal about them, and may even have told some inquiring student or colleague that I have read them from cover to cover, but if I made this assertion, it is a departure from the truth. What is true is that if I had been ordered to read every page in these works by e.g. my regimental commander in the U.S. Army -- Colonel Michael (`Screaming' Mike) Halloran of the 24th Infantry -- I might have made an attempt, but even an order by a president of the United States would not cause me to read, think about reading, or even to thumb the pages again of Lord Stern's attempt to clarify the importance of the Kyoto Conference on the Environment.
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