Friday, July 07, 2006

Return Of The Bean Counter

Bjorn Lomborg, publicity-shy economist, statistician and climate change sceptic, is busy pushing his new book "How To Spend $50 Billion To Make The World A Better Place". The number-crunching Peter Schmeichel lookalike has written up the findings of his Copenhagen Consensus think-tank in a format that we mere mortals may find more accessible. In a Comment article in last Sunday's Observer ("Climate Change Can Wait. World Health Can't") he continues his campaign to persuade us that money spent on combating climate change is wasted. Following on from his 1998 best-seller "The Skeptikal Environmentalist", his core message is that we will get much better value from investing in the areas of human health and economic development than in measures aimed at reducing or mitigating the impacts of human-induced climate change. But still missing from his work is any idea that the environment has value in its own right, rather than as a life support system for the human race.
Lomborg is the master of the misleading book title. In "The Skeptikal Environmentalist", he proved that he is by no stretch of the imagination an environmentalist. His new book should be called "How To Spend $50 Billion To Make The World A Better Place For The Human Race, And Stuff Every Other Species".
For the full text of the Observer article, go to
observer.guardian.co.uk
To add your comments to the debate on how to give the planet a $50bn makeover, go to
www.observer.co.uk/blog

10 Comments:

At 9:59 am, Blogger Robert Metcalfe said...

What you need understand is how the formulations were made. The usual cost-benefit approach was used so the benefits and costs of each policy proposal are compared and the projects that yield the highest net value (benefits minus costs) are those such as health. One might think that the environment would add significant costs to the assessment, but all costs and benefits are discounted, usually at the rate of return, roughly around 5%. This is exactly what the Copenhagen Con uses, but others, such as the UK Treasury Greenbook argues for a rate of 3.5% but declining after 30 years. So if one took the rate of 5% and applied it into the future, climate change policies have a very high cost in the short term whereas the high benefits in the future are discounted, which means that they become negligible.

Therefore your point about Lomborg's analysis missing that the "environment has value in its own right" is not the correct arguements. The problem is that this analysis assumes that the environment (i.e. natural capital) can be substituted by other forms of capital, such as education, manufacturing etc. However, at the limit, natural capital cannot be substituted by other forms of capital, because of issues of irreversibilities and the episodic nature of natural capital. If one assumes that natural capital cannot be subsituted by other forms of capital, then a declining discount rate should be proposed, but one has to to be aware that a discount rate of zero is inappropriate, as is advocated by many ecological economists.

 
At 7:36 am, Blogger Matt Burge said...

Thank you for your thoughts Robert. Good to have some input regarding the environment economics approach as this is a growing discipline/approach (eg. carbon trading).

My initial response is this (although I didn't create the original post);

I think your post looks to present a number of arguments on how to approach discounting. I'm not sure the services that a forest provides (for example), other than timber and tourism, can realistically
be valued and therefore discounted for various investment options. Trying to value the Amazon for health products is obviously ludicrous because of its vastness and the lack of knowledge of what's in it. The Amazon's role as a part of the globe's oxygen/CO2 cycles is impossible to value in economic terms. Even if a figure was put on it, it couldn't be used because the margin of error would measure in the trillions! Hardly useful economics.

The overall argument of valuing a forest for its human required services therefore leaves huge gaps in its calculations when the other services that I have mentioned above cannot be accurately valued. It becomes a useless guessing game and not much use for informed economic decisions.

The pound/yen/dollar cannot always rule when it comes to making 'resource use' vs 'natural state preservation' decisions. Larger issues of population growth and the rate of resource use and waste generation need to be factored in as it is these areas that need attention.

Matt Burge

 
At 9:41 am, Blogger Robert Metcalfe said...

Well CBA can use contingent valuation which is a methodology that can incorporate existence values, bequest values and altruistic values (i.e. non-use), which is something that can go beyond use values, such as timber and tourism. So I think CBA can help to find the values of nature, which is the value according to human beings. While this is anthropocentric, it is a framework that can put everything into a monetary unit so as to trade-off these projects with others in society.

Try to have a read of: Pearce, D. and MOURATO, S. (2004) The Economic Valuation of the Environmental Services of Agroforestry. In: G. Schroth, G .Fonseca, C. Harvey, C. Gascon and H. Vasconcelos (eds): Agroforestry and Biodiversity Conservation in Tropical Landscapes. Island Press, Washington DC. This does a good job in trying to elicit these values.

While I recognise your point that it is impossible to fully incorporate the complexities of nature, CBA is the best method so as to evaluate policies. Indeed, it is easy to criticise but it is extremely difficult to come up with a viable alternative. Otherwise, one is just left with an argument to preserve an unidentified level of nature, as per precautionary principle or SMS.

 
At 3:55 pm, Blogger Pete Smith said...

Sorry being so long in responding, this is pretty esoteric stuff and I don't want to make a complete tit of myself.
Robert, you said that I'm wrong in arguing that Lomborg's analysis skirts the issue of the intrinsic value of the environment. Not so much an argument as a statement of fact. Of all the items on the Copenhagen Consensus' shopping list, only climate change has any bearing on the non-human. All the rest are aimed at improving the human condition. Ecological health and resilience? Not important, unless it improves delivery of human-specific ecosystem goods and services.Biodiversity? Forget it. In fact Lomborg applies the same sort of twisted logic to biodiversity loss as he does to climate change. Since we don't know the exact proportion of change that is down to human activity, it's pointless trying to do anything about it. A bit like the occupants of a small sinking boat arguing about fixing the hole because they don't know how much of the water in the boat is down to the leak and how much to the waves coming in over the bow. Answer: it doesn't matter, just fix the hole.
I agree with Matt in having difficulties with the idea of assigning monetary value to 'nature'. There's something else I have trouble with: how does cost benefit analysis really help us choose options aimed purely at human health and affluence. How do we know the marginal utility of another thousand, or million, or billion human beings? Do we actually need to allow the human population, and its associated consumption and waste, to increase still further?

 
At 12:08 pm, Blogger Stephan Smith said...

It seems to me that when it comes to the choices that humans have, the term environment has no meaning when considered independently of us. Assigning a monetary current value to something that offers us no utility (“intrinsic value of the environment“), or with some undefined or unknown benefit that is temporally distant seems somewhat foolish. There are so many immediate causes that need to be addressed and a coordinated and concerted effort along the lines prescribed in the article would, most likely give far greater benefits in the long run. We are having this debate because we live in a society that provides us with healthcare, education, and democracy largely freeing us from the tyranny of life threatening diseases, giving us an amazing amount of freedom in our life choices, and equipping us with the tools to make those choices wisely. We choose to have smaller families, to recycle, to pass laws that limit pollution, to set aside land for national parks and to preserve our cultural heritage etc. It is surely evident that by widening these same opportunities to as many people as possible as soon as possible provides the best hope of making our environment sustainable and equitable in the not too distant future.

 
At 5:01 pm, Blogger Robert Metcalfe said...

Thanks for the reply.

You have raised many points but I will only answer a few.

Firstly, Lomborg doesn’t even consider the non-anthropocentric value of nature, so issues of biodiversity and ecological health are not incorporated. Now this is a purely economic version of cost-benefit analysis (CBA). There are strands of academics and policy officials (such as the World Bank) who use CBA to analyse non-use values, which includes biodiversity, cultural aspects etc. These are seen as standard and there are many attempts at valuing biodiversity and those hard to get intrinsic values. Now this is purely in monetary units, since you can obtain a person’s willingness-to-pay for an environmental good, but surely monetary units are better than other units of measurement. There are a whole host of problems of trying to gauge effects by using land area or even weight – such as ecological footprints and material flows. Therefore, it is easy to criticise CBA, but against other alternatives, it is a much better tool for public policy.

Secondly, what Lomborg does in essence is that he merely calculates the most rewarding way of spending several billion dollars. It isn’t a proposal to forget about the environment. The environment is characterised by externalities and an in-optimal delegation and management of property rights, which means that governments must either subsidise or tax polluters. Therefore, it is quite impossible to make money (i.e. high rate of return) from the abatement of pollution, and therefore climate change. He’s a statistician and not an environmental economist at the end of the day!

Thirdly, related to the second point, malaria, aids and poverty are the most tragic problems of today’s generation. While I’m an environmentalist at heart, if one is purely committed to sustainable development, one has to recognise that to achieve inter-generational sustainability, you have to achieve intra-generational sustainability (as argued by the Brudtland report). Therefore tackling poverty is as crucial as tackling climate change. You can’t have one without the other, and vice-versa. It is recognised that as countries grow to become richer, they care more for the environment and their economies become more efficient in terms of its pollution and resources. Therefore, lifting Africa out of poverty is very crucial for the long term prospects of the environment. Indeed, it is pretty rational for people in poor countries to abolish their natural environment because their time span is very short due to their immediate need for existence. This is the point Lomborg I think tries to make indirectly, and it is an argument worth listening to. However, what Lomborg misses is the fact that countries such as China and India cannot necessarily get rich the way the Western world did. We need a program in order for China to achieve rapid technological progress so as to not emit massively. It seems that the Chinese government is aware of its ecological problems and is slowly doing something about it, although it should receive more help from the OECD.

Fourthly, it really does annoy me when environmentalists argue a la Malthus in order to limit population growth – very unethical and the only countries that this negatively effects is those trying to develop the most. Population growth is important for economic growth, and if we had no population growth, who will end up paying for your pension?

Personally, I think Lomborg’s analysis falls short of really trying to put the policy problems into perspective. He totally ignores any existence, bequest or altruistic values which goes against the practices of environmental economists, and therefore ignores any problems of irreversibilities and thresholds. Don’t be fool by his analysis, it is purely based on the fact that he thinks nature can be substituted by other investments in the economy, such as health and education. However, the problem remains of how much of nature can be substituted by man made investments, and at what point nature become critical. This is something Lomborg evades altogether.

(sorry this is probably way to long to read on a Monday afternoon!)

 
At 10:31 am, Blogger Matt Burge said...

All good points, now that I've read what you've said in the cool of morning!

As a biologist would tell us, all species have population limits. Humans would be foolish to ignore this. Nature determines this for us through disease and resource limitations. I do agree that poorer people have every right to what wealthier people have access to and most human beings will strive for better. It's in our nature. It doesn't mean they will achieve it. One reason being that it's also in our nature to compete (for resources). This is why there are more wars in the world right now than ever before.

Obviously the rate of consumption/capita in the 'west' is high and other countries such as India, Brazil and China are fast catching up.I doubt consumption rates will slow for some time. The 'gadget' is God. One of the biggest problems is that the quality of goods production has dropped off the cliff edge. Price drives everything but nothing lasts anymore. Externalities (which are still on the whole left out of market prices) must be imposed and enforced globally by the UN to provide an economic level playing field. This has to include some sort of guidance on acceptable product lifecycle periods and waste costs need to loop into this. Economic sanctions must be the enforcement tool for countries not enforcing at national level. Companies should also register to do business with a UN database/agency. If they don't comply they could be fined and ultimately have their trading licence taken away from them. Those producers that invest in reducing externalities (e.g. emissions) will win out.

I've extended the arguments a little as I think we've all done the Lomborg thing. I personally wouldn't give him the time of day.

 
At 6:49 pm, Blogger Pete Smith said...

Well, it seems Matt has got bored with Bjorn Lomborg; short attention span these Kiwis! 8-)
However, since it was my post originally I'll take the liberty of giving him one last mention. Enlightened folk like thee and me may not be prepared to "give him the time of day", but sadly a lot of people in high places don't feel the same way, including the UN. http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/06-09-2006/0004377598&EDATE=
I feel quite strongly that, whether you agree with Lomborg or not, he is an influential figure whose activities need to be monitored. That's why, in the cause of "Know Thine Enemy", I own a copy of "The Skeptikal Environmentalist" into which I often dip during my studies just to see what the opposition has to say about an issue. Incidentally, for the same reason I also have a copy of Michael Chrichton's awful eco-thriller "State of Fear". Lousy novel, pretty poor science, but a wonderfully eclectic bibliography.

 
At 7:14 am, Blogger Matt Burge said...

Yup, 'The best form of defence is attack' Israeli Defence Force (IDF).

 
At 11:17 pm, Blogger Matt Burge said...

To add to my second to last point; regarding driving externalities affecting the environment into production costs, the level playing field that I have suggested be administered at UN level should be administered via stock exchanges. Reasons being that they already have the power to suspend bad conduct and secondly there is the new trend of stock exchanges merging across borders. This may help deal with the problem of national governments getting in the way of encouraging a more level playing field for enforcing environmental laws. The UN Convention on the Law of the Sea is one such example of how environmental laws can be administered; http://www.un.org/depts/los/index.htm

 

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