## Wednesday, July 11, 2007

### Václav Klaus: Climatologists and economists

In the former Austrian-Hungarian monarchy, church bells were obliged to ring every summer to fight against lightnings and thunderstorms - a practice that was ultimately banned by the enlightened emperor Joseph II. During the first July's Saturday, hundreds of musicians across the world were playing against global warming. Our present goal shouldn't be to ban concerts; instead we should find someone who will explain them the matters.

Although I am already repeating it for the x-th time, it is necessary to mention once again that my point is neither to measure the temperatures nor to question that the current temperatures exceed those between the 1940s and 1970s, a period when people used to think that a new ice age was imminent. A global measurement of the average temperature is a difficult task (due to the limited number of weather stations, asymmetric representation of the land and the oceans, questionable information value of any kind of average, variations of temperatures both in space and time, regardless of the scale, and so on) but there is no good reason for me to join the polemics: meteorologists should debate these matters among themselves.

However, meteorologists have to invite climatologists and other natural scientists to collect arguments and decide whether these phenomena are new, whether we see a change of a trend or a normal fluke that may be a part of a cycle, whether the observed dynamics has a short-term or long-term character, and these questions - at least as far as people such as myself can see from outside - are not settled among natural scientists. On one hand, some people claim that there exists "scientific consensus" that these phenomena are new and unexplainable by natural processes (and therefore man-made) and on the other hand, there are numerous people who are proving that the situation is very different, that the observations can be explained "naturally", and that Man plays a secondary or even negligible role in the current warming trend. 2500 scientists grouped around the IPCC, the U.N.-organized intergovernmental climate panel, defends the former opinion while 4000 scientists signed e.g. under the Heidelberg Appeal claims just the opposite. Whatever the right answer is, there is no consensus about it, and even if there were consensus, it wouldn't be a proof.

These questions are not the cup of tea of economists and representatives of other social sciences. These people ask very different questions (which is why they shouldn't be blamed for not being weather or climate experts). They are asking to what extent a particular phenomenon such as warming will be a problem, what its consequences will be, what will be the costs of adaptation, and perhaps what would be the costs of eliminating the phenomenon altogether. This is not a domain of natural sciences.

Economists primarily know that every problem should be considered in its context and it should be assigned a certain weight or measure. I will demonstrate this rule on a random example. Richard Posner, a well-known Chicago professor whose opinions I usually share, wrote in his article Disaster Insurance (Hoover Digest, 2007 vol. 2) that it was necessary to do something about the climate because higher temperatures would lead to higher sea levels, by about two feet in 100 years (even though it is 0.5 - 1.3 feet according to the latest IPCC report) and that this would require a forced transfer of tens of millions of people (see page 45). At first glance, this looks horrible. It is like moving several Czech Republics from one place to another.

However, if we think for a while and consider these issues in their proper context, we realize that what we talk about is about 0.5 percent of the world population. We should immediately see that every year, much more than 0.5 percent of the world population is moving. But this relocation should occur not within one year but within one century: only one hundredth of the number cited above would be moving every year: five thousandths of a percent of the people of the world! This is a completely negligible number - but we could only see this fact by considering the context.

This example was trivial. Economists are adding other contexts - technological progress, human adaptability, increasing wealth (that moves the mankind further away from the subsistence level, allowing us to treat Nature ever more "generously"). Their main tool to acknowledge this context is to discount the future i.e. to give events the right weight that depends on the moment when they occur. A one-thousand-crown bill is "more" than what it will be in 2017 (even if it remains in the form of a banknote or a constant record in a certain bank account): this is a clear conclusion of theories in economics, any other theories about the real life, as well as common sense. But this principle applies not only to banknotes: what about the quality of my life today vs in 2027? Do I pay the same attention to these two quantities in my decisions? If I were doing so or if we were doing so, we would surely listen to all those people who talk about healthy food and we would behave very differently. Why doesn't a student sufficiently invest into his "human capital" (from his parents' viewpoint)? Is it purely because of his ignorance or stupidity, or is it also important to realize that he prefers his life right now over the rest of his life?

We could give a lot of examples of similar kinds. The magic of discounting, i.e. the appraisal of utility of some present acts for the future, plays a role in all of them. This principle is not an erroneous human myopia (that could be eliminated by better eyeglasses). Instead, it is an aspect of elementary human rationality that economics is based upon.

Economists thus agree - without exceptions - that the discount rate is a key parameter of any public i.e. political decision about the reaction of Man (or, hypothetically, the whole present mankind) to a potential climate change. There is not a slightest difference between them in this respect.

Gary Becker, an economics Nobel prize winner, shows that even if we used a discount rate as low as 3 percent, the consequences of global warming for the utility of mankind in 2057 would "weigh" only one quarter of the impact that the same warming would have on the present generation. For the generation in 2107, it would be one sixteenth. (An Economist Looks at Global Warming, Hoover Digest, 2007 vol. 2, page 51.) Slight changes of the discount rate in either direction are able to do total miracles with these calculations - and exactly these calculations appear in computer simulations of the current popularizers of global warming.

However, serious disagreements exist among various economists regarding their opinions about the correct value of the discount rate. They have thought about this issue for centuries but they usually end up close to one of the two possible extremes. One of them is clearly visible in the well-known Stern report that makes almost no distinction between the current generation and the future ones. The report, in fact, explicitly states the following: "If the future generations exist at all, we assume that they deserve the same amount of ethical attention as the present generation." This sentence obviously assumes a zero discount rate.

The opposite extreme argues that the investments into a fight against climate change reduce other investments and all serious cost-benefit analyses should thus incorporate "expenses for the availability of capital" which is nothing else than the free-market interest rate.

What should we choose? Should we believe the market (and its ethics) or ethics of the prophets of global warming? I would prefer to believe the free market (and its interest rate) more than the elitists from the rich and developed world who want the discount rate to be zero (or almost zero).

The debate about this issue must continue. But this debate is unrelated to measurements of temperatures and it is only marginally related to the causes of these changes.

And that's the memo.

Václav Klaus, Czech president, Mladá fronta DNES, July 11th, 2007

Bonus articles related to global warming on The Reference Frame