What Al Gore doesn't understand about climate change.

How the dismal science applies to your life.
Oct. 22 2007 7:44 AM

Save the Earth in Six Hard Questions

What Al Gore doesn't understand about climate change.

(Continued from Page 1)

5. Just how rich are those future generations likely to be? If you expect economic growth to continue at the average annual rate of 2.3 percent, to which we've grown accustomed, then in 400 years, the average American will have an income of more than $1 million per day—and that's in the equivalent of today's dollars (i.e., after correcting for inflation). Does it really make sense for you and me to sacrifice for the benefit of those future gazillionaires?

6. How risk-averse are we? This matters not just because of uncertainty about the effects of climate change but because it affects the way future generations want us to behave. Imagine yourself as a disembodied soul, waiting in line to be born—possibly next year, possibly 100 years hence. If you have little tolerance for risk, you'll want us to pursue policies that make life about equally good at all times; if you're willing to roll the dice, you might prefer a policy that allows some generations to live riotously at the expense of others.

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Only after you've addressed each question in turn can you say something sensible about climate policy. To carry out that program in detail would indeed be a Nobel-worthy achievement. I don't propose to earn my Nobel Prize in this column space, but I can at least offer a quick back-of-the-envelope calculation to show you how this stuff works.

First, I'll make the extreme assumption that our environmental recklessness threatens to shave 1 percentage point off economic growth forever. Because of compounding, our disposable incomes will be reduced by 9.5 percent a decade from now and by 63 percent a century from now—perhaps because we'll spend 63 percent of our incomes relocating coastal cities. Now toss in some standard (but arguable) assumptions about risk aversion and discounting. (Note to econogeeks: I assumed a risk-aversion coefficient of 1, and I discounted future generations' welfare at an annual rate of 5 percent, partly because we might care less about them and partly because we're not sure they'll exist.) Run this through your calculator, and you'll find we should spend up to about 17 percent of our incomes on climate control—provided that our investment is effective. That's an expenditure level that I expect would satisfy Al Gore.

Change the numerical assumptions, and you'll change the numerical conclusion. Make the discount rate 1 percent instead of 5 percent, and you can justify spending up to a whopping 62 percent of our incomes on climate control; lower the discount rate to 10 percent, and you can't justify spending more than 8 percent of our incomes.

The moral of that story is not that economists can justify anything; it's that assumptions really matter. Therefore you need to be clear about your assumptions, and you need to be prepared to justify them. If you're not talking about discount rates and levels of risk aversion, you're blathering.

The most thoughtful assessment of climate change is the Stern Review, prepared in October 2006 at the behest of the British government. The Stern Review reaches conclusions generally compatible with Al Gore's worldview, but only after laying out the underlying assumptions so clearly that skeptics like me can tinker around with them and see how the conclusions change. In other words, they've taken a hot-button issue and reduced it to its constituent pieces so that opposing parties can stop yelling at each other and say, "Let us calculate." That's what I call a contribution to world peace. I wish the Nobel Committee had agreed.

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