Monday, February 18, 2008

Should We Discount Global Warming?

No, by "discount," I don't mean "ignore altogether." What I mean is what bankers and economists mean by the word. The discount rate is an assumed interest rate that is used to make economic decisions, as anyone who has taken engineering economics will recall. And the funny thing is, although discussions of global warming invariably deal with matters fifty or a hundred years in the future, hardly anyone applies the simple economics of discount rates to the problem. When you do, the result is a surprise.

Gary S. Becker is a Nobel-Prize-winning economist who thinks any discussion of global warming should factor in a reasonable discount rate. Here is his argument in a nutshell. Suppose, for the sake of argument, that if we do nothing about global warming, fifty years from now it will cause $2 trillion of damage (technically termed "utility costs" in terms of lost income from flooded coastlands, etc.). It turns out that if you roll the tape of time back to 2008, you could pay for that $2 trillion by investing only $500 billion at a rate of return of 3 percent, which is pretty easy to do (assuming you have the $500 billion in the first place). Becker makes the point that if we went ahead now with most of the more radical proposals for doing something about global warming—reducing carbon emissions by 70%, putting big restrictions on fossil-fuel-burning technologies, and so on—they would cost a lot more than $500 billion in the next few years. If these restrictions cost, say, $1 trillion, we are being foolish by spending all that money now to avert something we could offset with half that amount.

This is not an argument to do nothing. On the contrary, it is one of the few arguments I've seen on the subject that requires us to come up with some quantitative information in order to make a rational economic decision, which is what engineers do all the time. The usual approach used by advocates of extreme measures is to paint a picture of the end of civilization as we know it if we don't go green 24/7 and never allow the problem to leave our consciousness for the rest of our lives. Put more quantitatively, these folks use a discount rate of zero, which I suppose is a reasonable one if you assume that the alternative is either peace and security on the one hand by doing everything they advocate, or death to humanity on the other. If a mugger walks up to you in a dark alley, puts a knife to your ribs, and mutters, "Your money or your life," you're not likely to deliberate a long time before handing over all your cash, not just some of it.

But implicit in Becker's economic argument is the assumption that, as damaging as global warming and its consequences might be, it will not be the equivalent of a giant meteor smashing the earth to bits. Its effects will be gradual, not sudden; spotty, not universally bad everywhere; and will be quantifiable in economic terms. Anything with a finite future cost can be discounted using standard economic assumptions. The rate of 3 percent that Becker uses is quite conservative—many investments in physical capital pay rates of return much higher than that. What Becker is saying is that we shouldn't stop all economic growth and divert all our resources to fighting global warming, because we're wasting resources that would pay off better if invested in other things. Wise investment in future economic growth, which over the last century has raised billions of people from poverty into something approaching a middle class, can continue to bring prosperity to future generations even in the face of problems like global warming.

Economics isn't everything, of course. If we took a poll to find out what Americans would pay to keep the Statue of Liberty from submerging (which would also flood most of the East and West Coasts), the answer would probably come out close to "whatever it takes." But engineering is about economics as much as it is about technology. And any analysis of global warming that makes unrealistic economic assumptions is simply bad engineering, whatever else you might call it.

Sources: Becker makes his argument in an essay in the Hoover Digest (2007), no. 2, published by the Hoover Institution, at


  1. I have a question, combining two of your recent posts. A courtroom-drama movie once depicted an auto manufacturer as having made a conscious decision not to fix a problem with their brakes because they calculated economically that it was less expensive to pay off claims to people killed by the brake failures than to fix the flaw. The movie-makers obviously wanted the audience to view such conduct as morally odious, and I agree -- I think whoever makes a decision like that should be held guilty of negligent homicide, or some such.

    And in your post about industrial accidents, you seemed to kind of agree. You understood the corporate mindset about cutting into profits if safety costs exceed damages awards caused by lack of safety improvements. But at the end you stated a goal of no such deaths whatsoever.

    But when you consider global warming, cost again appears to be king. If we can put money in the bank now that's sufficient to pay everyone to abandon New York and Los Angeles when they go underwater, it would be foolish to try to avoid their immersion -- we should just pay everyone off? Did I understand that right?

    What DOES engineering ethics say about this subject, then? Is there a "moral premium" that makes a life worth more than its actual court-awarded-damages value, but still not an infinite amount? Are we allowed to be a little sentimental about the Statue of Liberty, but not too much? What multiplier would you recommend? And how about things that have no, or an incalculable, monetary value, like the survival of 40 percent of the planets' species (but not those that we KNOW are of direct economic value to humans; we'll figure out a way to keep them alive).

    Maybe what I'm suggesting is that by its nature this can't be an economic OR engineering issue.

    Those who discuss science versus faith often refer to differing realms -- fact versus truth, or some such. Maybe engineering can only tell us HOW to avoid death and destruction, not whether it's worth the bother.

    I know I'm a bit over the edge here. I know that if we really thought every life was infinitely valuable, we'd build autos like bumper cars, incapable of a fatal crash (and of getting us anywhere with their current efficiency) and we'd spend even more than we currently do on health care, trying to stave off every avoidable death (or more precisely, every avoidable shortening of life, since death is never avoidable, it can only be delayed).

    But it still gives me chills to think that the economically correct engineering solution to global warming is to leave the brakes flawed 'cause it'll cost too much money to fix.

    I hope that's not what you meant. It sounded like what you said. However, since I'm not educated in engineering, maybe I just didn't understand.

    Cousin Mike

  2. I disagree that there is a problem called "global warming". The earth has a history of warming and cooling periods. I do not believe this current "trend" of warming is due to man.

    NASA Administrator Michael Griffin has spoken quite a bit on this topic. He is quoted as saying, "To assume that it is a problem is to assume that the state of Earth's climate today is the optimal climate, the best climate that we could have or ever have had and that we need to take steps to make sure that it doesn't change."

    The article

    If we want the earth to cool, perhaps we should increase our pollution and carbon emissions. Then we may experience a summer as in 1816, or the “year with out a summer”. Our carbon emissions can block the awful sun and cause our earth to freeze.

    See reference:

    Oh –wait we don’t want that. Then what temperature is acceptable? There is no consensus on the science of "global warming." It is unscientific to disregard the scientists who dare say the world is round to those that believe the world is flat (as those with global warming).

    That being said, I do agree we are responsible for keeping our earth clean. The best approach to encourage people to be green is to show how it affects their pocket books. For instance I replaced our home with CFL. I saved 20% on my electric bill monthly. I also replaced my thermostat with a programmable one, also reducing my energy bills. I did not do this to be “green”. I did this to save money, which is where Gary S. Becker’s argument should have been focused around and not the cliché – “Global warming” topic.