Distributional impacts of climate change

Among some bloggers (such as Tim Worstall), and now on the BBC, it is becoming fashionable to say that Nicholas Stern's analysis of the economics of climate change overstates the case for intervention to prevent climate change, because it overstates the value we should attach to the income of future generations. 

In simple language, the claim is that Stern does not properly take into account the principle that an extra pound of consumption is worth less to you as you get richer.  This means that future generations – who are expected by everyone to be much richer than we are – will value an extra pound of consumption less than we we will. If you take account of this, we should attach less weight to the possible costs to future generations when we compare those to the immediate costs of making the adjustment.  (For a technical version of this critique, you may want to read this piece by Byatt, Castles, Goklany, Henderson, Lawson, McKitrick, Morris, Peacock, Robinson and Skidelsky.)   I am undecided on whether this is an important weakness in Stern's account, and I wish that the report had contained a more systematic analysis of the sensitivity of his conclusions to different assumptions about discount rates (there is some of this in the new Technical Annex to the Postscript).

But even if you do conclude that Stern overstates the case for action now to prevent future costs, there is an important distribution effect that is masked by the aggregate numbers that Tim Worstall and others quote.   The likelihood is that the main beneficiaries of the anticipated economic growth will be in rich countries, as they have been through the twentieth century, while the costs of climate change will be borne disproportionately by the poor.   If it turns out, as predicted, that agricultural productivity in Niger collapses as temperatures rise in sub-Saharan Africa, leaving 12 million people with nothing to live on, it will be little consolation to them that people in Western Europe and North America are living much better as a result of the economic growth that the high carbon consumption has permitted.   

So this is the challenge to those who take the view that the overall numbers do not make the case for action against climate change:  are you prepared to support the massive transfers in resources that will be required from those who enjoy the growth to those who suffer its consequences? 

8 thoughts on “Distributional impacts of climate change”

  1. The problem with that argument is that it doesn’t conform to what the SRES (which are the economic scenarios which underpin the IPCC report) actually say. All of them, as you know, are business as usual scenarios, none contain any mitigation.
    In the family of scenarios that emissions paths actually seem to be following (A1) gloibal inequality is predicted to fall: that globalization (upon the continuance of which the A1 family depends) continues to boost growth in the poor countries faster than it does in the rich: as people like Paul Ormerod, Xavier Sala i Martin and Deepak Lal  say it already is.
    In the A1F1 scenario, which is the one I have used as an illustration of this point, the entire globe in 2100 is at 2000 levels of consumption in the US.
    So my argument is rather that, if we are indeed to be concerned with the incomes of our descendants, we should follow the policy recommendations which lead us to the scenario where those incomes are highest and where there is the greatest convergence.
    Whether we want to add mitigation as well is another question. The A2 scenario used by Stern (broadly speaking, the sort of regional and local economies advocated by people like Caroline Lucas) gets us to one result, pre-mitigation. The letting global capitalism rip one (A1F1) gets to four times that wealth per capita in 2100.
    If I am to, as you suggest, concern myself with the future incomes of those alive in 93 years,  which policy mix should I be advocating? One that costs us something (leave aside the argument about how much) now, and improves their lot by 20%, as Stern avers? Or one that not only costs us nothing now, actually benefits us now, and benefits those in the future by 300%?

  2. Tim

    I hope that global inequality will now start to fall – though the evidence of a century of rising inequality does not make me hopeful.  The emergence from poverty of China and India will lead to massive reductions in the number of people living in poverty; and could, in principle, lead to a fall in the Gini coefficient.

    But that does not address my point.  There are communities in some of the poorest countries – such as Bangladesh or Chad – for whom some of the climate change scenarios will be catastrophic.   Even if those countries grow faster than the world average – so closing the gap on the richest countries in percentage terms – the increase in income and wealth in absolute terms will accrue to you and me more than it will to them.  They have no prospect of being able to adapt to the change in temperature, the impact on agriculture, the movement of people, or the extreme weather events that are predicted under some scenarios. 

    So if we in rich countries decide to impose that outcome on them, we should be ready – much more ready than we have shown ourselves to be until now – to support the most disempowered communities live with the consequences of our actions.  Nothing in our history suggests we are ready to do this.

    That distributional effect is, for me, a persuasive reason to look beyond the aggregates that you quote.  Even if you turned out to be right about the aggregate effects, we simply do not have international mechanisms to compensate the losers for the effects on them with some of the gains of the winners.

    Owen

  3. "There are communities in some of the poorest countries – such as Bangladesh or Chad – for whom some of the climate change scenarios will be catastrophic. "

    That’s true of any technological or trade change as well. It isn’t specific to climate change.

  4. Tim

    Right.  And we do not have adequate international institutional mechanisms to compensate the losers with a portion of the benefits that accrue to the winners.  In the absence of such mechanisms, we cannot be quite as sanguine as you are about the aggregate costs and benefits.

    Owen

  5. To which the obvious answer is that you seem to be asserting that we should stop technology and trade in their tracks until we do have adequate international mechanisms.
    Which, given my views on public choice theory, I don’t ever think we will have.
    Stop the world isn’t a very attractive slogan to me.

  6. A higher tax on carbon (I certainly support Pigouvian taxes BTW, despite the public choice problems) doesn’t solve that distributional problem though, does it?
    The correct Pigouvian tax (from Stern, roughly the Air Passenger Duty we have now, for fuel duty it should be much lower than it is now) does indeed provide the socially optimal amount of the activity: but it doesn’t solve any of your distributional concerns.

  7. Tim

    That rather depends on how you value the negative externalities.  If your social welfare function places a high weight on the welfare of the least off group in (global) society – which is what John Rawls among others would recommend – then the absence of a mechanism to compensate the poor makes the negative externalities higher, which means that the the optimal Pigouvian tax is also higher.

    Owen

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