The clear conclusion from Deepak Lal's column 'Climate change: Ethics, science, economics - II' is that he does not believe in "drastic immediate action to curb greenhouse gas emissions".
Although his view is not mainstream, Lal is not alone. We have heard three main arguments from those who do not support the conclusion that urgent action to reduce the risks of climate change, economically speaking, is a good deal.
Some still deny the science of climate change. Some accept the basic science, but believe that human beings are fantastically adaptable; they can cope with anything that comes their way. And others believe that "whatever the effects are, they're way off in the future, and I'm not particularly bothered about the future, so I'm not going to do anything."
The first part of Lal's article suggests he is sceptical of the science and thus falls under the first category of deniers. Clearly it for the science to persuade him and other deniers otherwise, but the weight of evidence is now such that most people would see this point of view as simply absurd.
The February 2007 Fourth Assessment Report of the Intergovernmental Panel on Climate Change sets out the evidence in a very convincing and clear way.
Having expressed his doubt over the science, Lal need not have continued to discuss his views on the ethics because his prior judgement of the validity of the science will not be advanced much by ethical or economic analysis.
However, he goes on to explain why he believes our treatment of discounting to be misguided, placing himself in the third category of deniers as well as the first.
Lal states that the broad conclusion of our analysis that urgent action should be taken to reduce the risk of committing the world to the real possibility of very high temperature increases, is dramatically different from earlier models such as that of Prof William Nordhaus and is thus incredible. He fails to ask or understand why they are different. If he had, he might have come to different conclusions.
Our estimates of damage from business-as-usual are higher than some previously published for the following sound reasons:
We treat aversion to risk explicitly - climate change is all about risk and we invoke the economics of risk directly.
We use the more recent literature, from the science, on the probabilities of different outcomes. Previous studies have focused on temperature increases of 2 or 3 degrees Celsius. They are simply out of date.
The damages from 5 degrees Celsius, possible or even likely next century under business as usual, would be very much higher - damages rise much faster than temperature. Such an outcome would transform the planet.
We take account of the disproportionate impacts on poor regions, reflecting the fact that those in poverty will feel losses in consumption more keenly.
We adopt lower pure time discount rates than some earlier literature and thus the analysis gives future generations higher ethical weight.
Few existing studies include all these factors, and as a result their estimates of the damages tend to be lower.
Lal focuses on the fourth point, our treatment of the consumption of future generations in the Review. In the Review, we do discount future damages for the likelihood that future generations will be richer than we are.
However, applying a low discounting to the future simply because it is the future (we account for the possibility of extinction) would be unacceptable to many (including, for example, many of the great economists such as Maynard Keynes, Robert Solow and Amartya Sen).
Lal would prefer to place very low value on the future, or to put it another way, to place a very high value on near-term opportunities for consumption. This would generally involve what some economists would call pure time discounting, and we are convinced that such time discounting at a heavy rate would be viewed by most people as unethical.
It involves discrimination between individuals by date of birth and is as though a grandparent is saying to their grandchild, because you will live your life 50 years after me, I place a value of one quarter on your well-being relative to myself and my current neighbours (as would be the case with a pure time discount rate of 3 per cent), and therefore I am ready to take decisions with severe and irreversible implications for you.
It is not possible to read off these ethics from the behaviour of markets, as Lal would recommend by suggesting a discount rate of 7 per cent: we cannot see a collective expression in the markets of what, acting together, we should do for 100, 150 years' time. As Paul Klemperer rightly states in his Financial Times article of May 10, "Those (current market interest) rates tell us only about individuals' willingness - possible irrational to invest today for benefits tomorrow. How much society should spend on unborn generations is a somewhat different question."
Generally Lal, in his discussion of discounting - which ignores risk, the possibility of very big changes and a sharply rising relative price of environmental goods - fails to take on board the key features of the problem and thus he applies the wrong analytical method.
The Review builds its assessment of the benefits of climate-change mitigation - first and foremost around a disaggregated analysis of physical impacts worldwide, most prominently on temperatures, the water cycle, sea-level rise and extreme events.
The economics of climate change rests neither solely nor even primarily on the aggregate valuation of climate-change impacts. The aggregate modelling exercise in the Review was supplementary to the wider disaggregated statement of risks.
And such aggregated modelling exercises are very sensitive to assumptions, omit much that is crucial and are potentially very misleading as we warned in the Review. They have their value in illustrating possibilities and logic but should not be the first plank in the foundation of real policy.
Thus many critiques, which focus on such models and including the column from Lal, are fundamentally misplaced in their emphasis. Indeed they are naive in their treatment of this type of model.
Our central estimate of mitigation costs for stabilising emissions below 550 ppm CO2e (parts per million of carbon dioxide equivalent - all greenhouse gases expressed as a common metric relative to their warming potential) is 1 per cent of GDP per annum.
The basic question is thus, whether it is worth paying 1 per cent of GDP to avoid the additional risks of higher emissions as described in the disaggregated story of consequences. We should recognise the balance of risks.
If the science is wrong and we invest 1 per cent of GDP in reducing emissions for a few decades, then the main outcome is that we will have more technologies with real value for energy security, other types of risk and other types of pollution.
However, if we do not invest the 1 per cent and the science is right, then it is likely to be impossible to undo the severe damages that will follow. If Lal had listened more carefully to the scientists, applied the appropriate economics relevant to a long-term problem with big uncertainties, and had used his common sense of risk, he would have come to conclusions much closer to those of the Stern Review. The case for strong and timely action, supported by well-designed economic policies, is overwhelming.
