Thomas Piketty, climate change and discounting our future

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The prevailing view at the international level about action on climate change seems to be, “Why should I care about future generations?” It’s those views about what future generations are worth that will determine climate change policy in 2014 and beyond.

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The Conversation

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Economist Thomas Piketty has warned “climate change cannot be eliminated at the stroke of a pen”. Parti Socialiste du Loiret/Flickr, CC BY-NC-ND

French economist Thomas Piketty and his book Capital in the Twenty-First Century are a global publishing phenomenon.

But while Piketty’s writing on wealth inequality has been widely debated, far fewer people know that he has some useful things to say about climate change and public capital.

Seth Anderson/Flickr, CC BY-SA

In particular, Piketty discusses the discount rate and the differences in approach between Lord Nicholas Stern and Yale economist William Nordhaus.

The discount rate weighs future people’s benefits against costs borne by present people. It is the key to understanding action on climate change. The different views of Stern and Nordhaus go to the heart of how the planet addresses the climate change problem.

Pay now or later? And at what cost?

It seems to me that the main issue in terms of addressing the climate change problem is that, if we agree to reduce emissions now – and there is currently no global agreement in sight that provides for such reduction – people living in the future will benefit, not those living today. But we will, today, bear the costs of reducing such emissions.

Stern in The Economics of Climate Change, better known as the Stern Review, concludes that strong action on climate change is urgently required; Nordhaus’s view is not so much. Nordhaus thinks climate change requires only a modest response now, with more significant action delayed for decades (read more in A Question of Balance and The Climate Casino).

The discount rate accounts for these different approaches. It weighs future people’s benefits against costs borne by people in the present. If a cost benefit analysis uses a high discount rate, it discounts future benefits to a high degree, giving little weight to the interests of future people – on the basis that future people will be cleverer, richer and they’ll work it out (the Nordhaus approach). In contrast, Stern uses a low discount rate, and asks the present generation to make urgent sacrifices for the sake of future people.

Piketty’s take on discount rates

Piketty views Stern’s opinion as more reasonable. He argues, though, that more urgent need is:

to increase our educational capital and prevent the degradation of our natural capital. This is a far more serious and difficult challenge, because climate change cannot be eliminated at the stroke of a pen (or with a tax on capital)

He asks whether we really know what we should invest in and how we should organise our response to the challenge. Should we “count on advanced research to make rapid progress” in renewable energy, or should we immediately impose limits on carbon consumption? Piketty’s view is that no one knows how these challenges will be met or the role of governments “in preventing the degradation of our natural capital in the years ahead”.

And no one does know. Piketty’s uncertainty is shared by Oxford’s John Broome, who notes the current generation:

will be sacrificing some of its own well-being for the sake of greater well-being that will come to people far in the future. Is the sacrifice worthwhile? Does it improve the world on balance? This is a question of weighing: How do increases in future well-being weigh against sacrifices of present well-being?

Put another way, these questions highlight why the market may fail to adequately address the climate change problem. As Harvard’s Martin Nowak says: “Even if you want to cooperate with the future, you may not do so because you are afraid of being exploited by the present”.

The prevailing view at the international level about action on climate change seems to be, “Why should I care about future generations? What have they ever done for me?” And it’s those views about what future generations are worth that will determine climate change policy in 2014 and beyond.

Smoke, mirrors – and emissions trading

A larger question that Piketty doesn’t address is the usefulness of emissions trading schemes.

But it is a a question addressed in another important – albeit less famous – book, Philip Mirowski’s Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown, published late last year.

Mirowski offers a powerful critique of neoclassical economics. He argues that, for neoliberals, humans can never be trusted to know whether the environment is in crisis or not because:

both nature and society are dauntingly complex and evolving; therefore, the neoliberal solution is to enlist the strong state to allow the market to find its own way to the ultimate solution.

Emissions trading is a an elaborate “bait-and-switch” strategy, in which politicians are diverted from an original intention to reduce emissions into the endless technicalities of instituting and maintaining markets for carbon permits. The not unintended consequence is that the level of emissions continues to grow apace.

Once emissions trading is established, lobbying and “financial innovation” results in excess emissions trading permits and offsets, such that any cap on emissions never prevents emissions from growing. Mirowski argues that the “engineered glut of permits” – as we’ve seen with the European Union’s emissions trading scheme, a problem Europe is now struggling to solve – is not temporary, as unused or excess permits can be banked for future use.

It’s well understood, Mirowski continues, that emissions trading stifles technological innovation to curb emissions. Funds that ordinarily might have been used to alter energy infrastructure are “pumped into yet another set of speculative financial instruments, leading to bubbles, distortions of capital flows, and all the usual symptoms of financialization”.

For Mirowski, emissions trading does not curb global warming because it was never intended to do so; in practice, emissions trading – carbon permit trading – does not reduce emissions. Global experience to date might suggest that this is, in fact, correct.

Why this debate about the future matters now

Discount rates and emissions trading, of course, have present policy relevance.

At the end of next year in Paris, the world will meet to discuss whether developed and developing states alike will agree to emissions reduction targets from 2020 on.

In my view, the odds of such an agreement are about as good as seeing another Piketty proposal – a modest global tax on wealth – come true. Piketty understands such a proposal is “utopian”.

But in the meantime, in the United States the Environmental Protection Agency recently issued draft guidelines on fossil fuel power plants, and has set a national target of a 30% reduction in carbon emissions from such plants by 2030 on 2005 levels.

Under the EPA plan it’s left up to individual US states to set their own emission reduction targets and how to meet those targets. And, at the state level, emissions trading schemes appear to be the preferred option. The US Regional Greenhouse Gas Initiative is an emissions trading scheme comprising nine northeastern states. California also has an emissions trading scheme.

Apart from the EU, a number of developed and developing states around the world have also set up emissions trading schemes, including New Zealand, parts of China, Kazakhstan, Quebec and elsewhere.

These emissions trading schemes offer some hope that, together with other action, “bottom-up” approaches might result in an alternative to international action on emissions reductions.

The Conversation

Source: The Conversation. Reproduced with permission.

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10 Comments
  1. Alberto 5 years ago

    I always wondered how low can the appropiate discount rate R go…

    It could be zero… or even negative?

  2. Chris Fraser 5 years ago

    …”For Mirowski, emissions trading does not curb global warming because it was never intended to do so; in practice, emissions trading – carbon permit trading – does not reduce emissions.”If true that would be a fair kick in the guts for any hope of emssion reductions, especially after going to all that trouble to put a price on emissions in the first place. The Europeans have learned a valuable lesson.Although we’d probably all like to have people value emissions and emit less out of their own desire, i suspect it is going to take a ‘stroke of the pen’ to compel a critical mass people to do so, because that makes life more affordable.

    • wideEyedPupil 5 years ago

      The Carbon Tax is a supply side mechanism not a demand side mechanism, not as far as domestic consumers are concerned. 4% rise in price is not a factor for whether you nana uses a heater in winter or not, maybe how many nights of autumn or what temperature setting. People frequently think a CT is about getting people to use less power but thata’s not the prime object. Prime objective is to make renewable energy more price competitive against fossils when selling into the grid. Fossil plants need to factor that cost into their sell price.

      Not that that has stopped almost anyone talking about the CT as there as an incentive for Energy Efficiency choices, rooftop solarPV and switching things off. Not least the Libs who say it will hit the poor hardest (despite the overcompensation from Gillard Govt). And we know from their proposed rob-from-the-poor-to-give-the-the-rich, Hood Robin’ budget that it’s Australia’s poor they cry themselves to sleep over every night at Liberal House.

  3. Bob_Wallace 5 years ago

    “It seems to me that the main issue in terms of addressing the climate change problem is that, if we agree to reduce emissions now – and there is currently no global agreement in sight that provides for such reduction – people living in the future will benefit, not those living today. But we will, today, bear the costs of reducing such emissions.”

    Geeze, the main issue whether we clean up the mess we’ve created at our expense or dodge our responsibilities and make future generations pay our bill along with massive “accumulated interest”.

  4. Ross Lentell 5 years ago

    I think the subject of the debate (above) is now obsolete. Energy and energy efficiency technology is advancing so rapidly that the need to subsidize renewable energy is almost over if not already long gone. The real issue is getting the incumbents and the vested interests (and their subsidies / lobby groups / bought politicians etc) out of the way and allowing change to occur. The move away from fossil fuel is occurring at an accelerating rate and much faster than most people realize. The politicians and the talk groups will be playing catch up for some time. The focus must be on allowing the new technologies into the market (with all the benefits that they bring – incl reduced emissions & much greater energy productivity).

    • Tony Pfitzner 5 years ago

      I agree completely.
      Our real challenge is to get ahead of the pack with innovation, and to set ambitious goals such as actually going carbon negative. With abundant cheap renewable power, and a suite of sequestration technologies, this is a real possibility in the intermediate term.

      The strategy should be simply to overwhelm the fossil fuel industries and their political supporters- something which is already starting to happen.

    • wideEyedPupil 5 years ago

      I agree to the biggest issue in Australia with it’s falling demand seems to be securing Power Purchasing Agreements for potential builders of new utility scale renewable energy. Just the uncertainty around the RET has wreaked havoc and international renewable energy corporations must be seeing Australia in the light of sovereign risk now.

    • Petra Liverani 5 years ago

      Exactly. Remove the fossil fuel subsidy and do a couple of other common sense things and renewables will forge ahead (and as pointed out in RE elsewhere, we installed 480MW of PV in the first half of the year without subsidy). We don’t have to make any great sacrifice for future generations (not that I’m opposed to making a sacrifice); we only have to be sensible and if we can’t even do that …

  5. Tony Pfitzner 5 years ago

    Maybe I’m naive, but it seems that the discount rate discussion ignores the economic benefits of investment in new technology now. Sure there is a cost, but there are also massive social benefits in increased employment, and the economic benefits of cheap power, and developing sophisticated power networks which are also necessary to drive automation and increase production.

    This discount rate argument sounds like a typical Abbott govt economic rationalisation which includes the cost of everything and the value of nothing.

  6. wideEyedPupil 5 years ago

    “For Mirowski, emissions trading does not curb global warming because it was never intended to do so; in practice, emissions trading – carbon permit trading – does not reduce emissions.”

    Well there was one noble aim to the Emissions Trading concept (IIRC a bunch of musicians came up with the mechanism) and that was to save the great rainforests of the world’s developing countries by offering incentives that could outcompete strip mining, land clearing for crops/palm oil plantations and logging coups. That had a significant climate and environmental role to play but obviously it’s ambitious to think it would do much more than that.

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