Lisa Heinzerling, a Georgetown law professor, has written an essay arguing against the embrace of cost-benefit analysis by environmentalists. She suggests that environmentalists enjoy nature in a very concrete and reverential manner that cannot be captured by economic analysis.
I think this is a fairly substantial misinterpretation of the use of cost-benefit analysis. Heinzerling makes a number of key errors.
First, economists aren't pulling their discount rates out of nowhere, they're making an effort to capture actual human valuations of the future. Analysts place less value on outcomes well down the road because you and I do, too. That's what interest rates are all about.
It's also important to note that there are disagreements within the economic community about the appropriate discount rate. It's a bit dishonest to argue that the median economic position is that nothing should be done on climate; certainly some in the field believe this, but in many cases their rate choices are influenced by ideology more than data. If we remove the cost-benefit abstraction, their positions would not substantially change. The analysis isn't the evil in such cases -- the belief system is.
And at times, Heinzerling seems to acknowledge this, suggesting that cost-benefit analysis might have been all right in her book if only the users had gotten their numbers right -- that is, come up with discount rates more favorable to her position. She also acts as if it's improper to consider these analyses alongside other pieces of information, as if once the dollar abstraction has been made, all other information has been erased. That's not the case at all -- in fact, many economists have looked at different economic models of climate change, observed the findings, and speculated that other things are worth taking into consideration.
But the big -- enormous, really -- problem with this line of thought is that there is no good alternative. Economists, by and large, haven't adopted this mindset because they're emotionless and cruel. They've adopted these techniques because it's almost impossible to grapple with the problems and solutions involved in climate without abstracting to some degree. It's all well and good to observe that the globe is warming and the spiritual power of nature compels us to act to halt this process ... but then what? What changes should be made, who will those changes help and hurt, and what costs should we be prepared to accept in this battle?
I suppose Heinzerling would answer that more should be done, and that present humans should be prepared to suffer more for the sake of the future. Ok, fine. Why? Are costs not to be considered at all? Are all potential trade-offs to be ignored? A person in her position, observing the environmental destruction of the industrial age, might have argued that we were vastly underestimating the costs of such destruction. On the other hand, the wealth generated from that industrialization has materially improved billions of lives.
It's important to acknowledge the weaknesses and limitations in any of the models used to establish costs and benefits, and to fill in gaps with qualitative information when possible. But to toss out the analysis completely is bound to do more harm than good. Doing so would, in all likelihood, lead to worse decision making. It would also deprive environmentalists of a common language with which to debate these issues with policy makers and skeptics. Answering hard numbers with discussions of nature's transcendent power is unlikely to be helpful when the rubber meets the road.
If environmentalists don't want to be marginalized, and if they don't want the weight of undue human suffering on their hands and consciences, then they'd do well to embrace cost-benefit analysis. Because these issues are so important, we can't afford to toss aside the best analytical tools we have, imperfect as they may be.
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Comments
View as Flat
Bart Anderson Posted 5:04 am
17 May 2008
If you can set the terms of the debate, if you can frame the way in which problems are defined, then you have won before the debate has begun.
For example, note the blithe way that Ryan uses the term "economists." One would never suspect from this that there are multiple schools of economics. It is as if one re-defined "political analyst" as "Republican," and claimed that only that approach was valid.
In one way, Ryan is right. The problem is not really abstraction or specific tools like Cost Benefit Analysis.
The problem is the assumptions, the framing, the blind spots, the taboos.
I can see why the subject of CBA turns people's stomachs.
It's rather like trying to argue against Medieval theologians and the Divine Right of Kings. The whole field is laced with ideology and it's hard to separate the rational from the manipulative.
In the same way, neo-classical economics is about 30% useful tools, and 70% theology for the current economic system.
I prefer the analytic techniques that are used in business and management. More honest, more down-to-earth.
Bart
Energy Bulletin
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Neuroeconomist Posted 6:05 am
17 May 2008
The new science of neureconomics shows that the midbrain and prefrontal cortex often collude to produce irrational choices. Individuals and their collective actions in the market frequently move resources in ways that severely damage our future. A case in point is the present mortgage crisis. Moreover, this irrationality can also result in outcomes that are patently reprehensible to the majority of observers. Few would argue that market forces resulting in child labor are ethical.
One might try to fix the cost-benefit approach by exercising due diligence to include hidden costs, such as ecosystem services. To date, this has been exceedingly hard to accomplish, and our current system is inherently unstable because such externalities are not included in the cost accounting. Even if all such externalities were appropriately embraced by the economic system, this would not insure that the market will operate in an ethical manner.
I agree strongly with Heinzerling and Ackerman, and I am not starry-eyed or reverential when it comes to my children's future. A cost-benefit analysis should never provide the most important criteria for action or inaction. Unfortunately, law makers seem to be enamored of such analysis. Ethical formalism is the basis of law, and it transcends the marketplace. I would suggest that any market requires rules and constraints that are dictated by ethical constraints. In places, Avent sounds to me like he is straining to rescue the failed paradigm of market dominance. I sincerely hope that it is such thinking that is eventually marginalized, rather than the thinking of environmentalists.
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GreyFlcn Posted 6:25 am
17 May 2008
Depending on what costing perspective you take, it automatically creates the assumptions for preservation or capitalization.
And virtually all cost-benefit analysis's use relatively short term costing.
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Delay And Deny Posted 8:55 am
17 May 2008
Suppose that the IPCC is wrong and the Bailo Model is right. As you know, the Bailo Model affirms that all temperature rise is due to natural causes. It also says that the temperature may go up quite rapidly in the next few years and that there is no linkage to CO2.
What then?
Well, think of it this way: up until now, the Greens have presented only one way out: reduce Co2 and bring the temperature down. But if I'm right, then then reducing CO2 alone will have left us without an escape plan.
If we are going to prepare for a hotter future, and CO2 reduction will not decrease temperature, we're going to need a truckload of energy to air condition ourselves and maybe save some part of civilization while the temperatures reach their maximum.
Texeme.Construct(Participant)
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Pangolin Posted 3:19 pm
17 May 2008
Wind power beats coal power not because of how many pennies a kilowatt hour it will cost but because once the turbine is properly installed the energy required to build and maintain it is much less than the energy it produces. A society that appropriately uses wind power gets a thermodynamic free ride on that portion of their power grid. Coal, once burned, leaves damaged landscape behind and further damages the atmosphere. Because of global warming and watershed loss burning coal continues to cost more once it's burned.
Similarly concentrated solar power allows for the capture and use of far more energy than was required to build the plant. Build the plant, hook up the wires and it's a downhill ride from there. It doesn't matter what you say it costs because the energy output is greater than the energy input with minimal externalities.
There are potential projects like this all over where the energy yield exceeds the energy cost. They are like a billion little Panama canals distributed around the planet. The Panama canal had a huge, short-term, energy cost but the energy yield in shipping savings has far exceeded the wildest dreams of the builders. In a sense almost everybody is richer because it was built.
Economic analysis of Global Warming that I see seem to discount conservation and promote thermodynamic waste. Building a "clean coal" plant to air condition houses with black roofs is insane. Paint the roofs white first, then hook the HVAC systems to a thermal sink (geoexchange or ice storage) then see if you still need the coal plant.
Most economists I read are writing some sort of financially insane clean-coal or new nukes proposal while putting cheaper, more-efficient conservation measures on the back burner as "not feasible." What isn't feasible is to pay some CEO several million dollars a year to supervise roof repairs. And guess who pays the economists?
In the real world abstraction isn't needed. An engineer or even a handyman like myself can look at a building and suggest cost effective improvements in energy efficiency. What we need is for the economists to free up some of the money that Wall Street is speculating with to do what's needed.
Put the Carbon Back
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JMG Posted 4:44 pm
17 May 2008
(The lead editorial comment is also stellar too, nicely connecting our decline in democratic vigor and the attendant losses of liberty with the explosion of inequality in America, the great crime of the present day.)
The 5% Project
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Russ Posted 7:07 pm
17 May 2008
Here's a few alternatives which are possible and often required in theory (and sometimes even miraculously applied in practice):
-"best available science", even if what it requires would be more expensive.
-"maximum available control technology"(MACT), again even if it's more expensive. Indeed we currently have the "cooling water" case before the supreme court, which case pits "best available technology" (required by CWA) vs. CBA, which industry wants to illegally substitute.
Speaking more broadly, the polluter pays principle can and should be applied without reference to how much it costs the malefactor. We don't take CBA into effect with regard to any other sort of criminal in setting restitution he must pay.
The precautionary principle, depending on how rigorously it's applied, can and should also transcend all such money-grubbing concerns. If a dubious proposal can't be reasonably proven to be safe, then no amount of speculative benefit should outweigh any possibility of significant harm, no matter how speculative this is.
(It's speculation vs. speculation, but you'll notice how market aggression boosters only refer to the speculation on harm as "speculative", in order to dismiss it, while they take any projected benefit, no matter how dubious, as in the bag, or at any rate as rationally calculable.)
The rigorous application of just these concepts and practices can provide an aggregate alternative to CBA which is still rational and quantifiable, not just some hippie writing bad poetry, the way some here want to caricature alternatives.
As for the discount rate, I'll happily set it very low and not care whether the mythical market participant "actually acts that way", precisely because this participant is a myth.
I'm sick of pussy-footing around all the lies of econ 101 about "the market":
-that participants are "rational" (Where have you ever known people to be rational?)
-these rational participants are willing buyers and sellers with tranparency regarding information (But in practice the system does all it can to let the seller withhold info, and often to lie as well.)
-this is a "free" market guided by an "invisible hand" (No, EVERY market is rigged one way or another, and the invisible hand, almost every condition of supply, price, and usually demand, is largely the result of political decisions made with the intent toward someone's profit. What we have now is simply a malevolent rigging, toward profit for the wrong actors, and all CBA assumptions flow from that. What I want is simply to rig the market a different way.)
The most laughable thing about the flap over the discount rate is the daft assumption that future generations are going to be "richer".
Ummm, isn't that precisely what's called into question by the peak fossil fuel/peak food/peak space/climate change specter?
They must assume this in the same way the DOE wants to assume future Saudi oil production by projecting future demand from current trends, then just assuming the Saudis will magically produce that amount of oil. 12mpd, 15mpd, 20, 25??? No problem!
That the discount rate can be derived from similar fantasy-land paper projections is an extreme manifestation of the pathology of the "growth" ideology. We can say the same for the flat-earth assumption that CBA is the only, CAN BE the only way of organizing and calculating social activities. It may be indicated in particular contexts, but we do not need it as the foundation.
Of course, I'm assuming we don't need the growth ideology itself. It seems the growth fetish (as JMG called it above) and gutter CBA money-grubbing probably do go hand in hand, and there's a contradiction in thinking you can still merrily "grow" but not worry about maximizing profit.
For the time being, since we're temporarily stuck with it, we can at least enjoy the ironic fact that even CBA, if not EXTREMELY distorted by ideology, is usually on our side.
To give a few examples, CBA/the market has definitively rejected nukes; coal-to-fuel; logging, mining, drilling, ORV use on public lands (all require subsidies, legal preferences, disregarding or forcibly choking off democracy/public opinion, secret auctions, etc.).
I may have stretched the concept from CBA specifically to free market mythology in general, but the one is a characteristic form of the other. It's all the same assumptions (usually unquestioned or fatalistically accepted the way you'd accept bad weather), based on the same ideologically motivated lies, all toward the goals of greed fundamentalism.
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Nucbuddy Posted 7:51 pm
17 May 2008
41 gigawatts of new nuclear power are in the pipeline:
world-nuclear.org/info/inf41.html#preparing
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caniscandida Posted 8:49 pm
17 May 2008
But it is a bit chilling that certain terms and phrases from economics are not explained to us among the laity.
The philosopher Simon Blackburn, finding himself in the embarrassing position of commenting on Plato's Republic for Grove Press, embarrassing because he strongly dislikes both Plato and the Republic, writes this on the might-makes-right spokesman, Thrasymachus, in Republic I, comparing him to the monstrous Athenian envoys who argued for and achieved the conquest of the unimportant island Melos (toward the middle of the Peloponnesian War):
<<
In Plato's drama, Thrasymachus is in effect the spokesman for the Athenian envoys. They represent the Machiavellian men of realpolitik, knowing they live in a dog-eat-dog world and adapting themselves to it. They and their successors leave a long red stain on human history (the Melians did not surrender, and the Athenians slaughtered the men and enslaved the women and children).
They are the direct ancestors of blitzkrieg, terrorism, the worship of the free market, and the ethics of the business school.
They are also the direct ancestors of American 'neo-conservatism', the ideology owing its immediate inspiration to political theorist and Plato student Leo Strauss ...
>>
The linking of business schools, a pillar of Western education, with anti-Western, pro-Islamic-extremist, pro-terrorist madrasas, as well as with the past devastating air strikes by the Nazis on the Poles and the British, is quite a statement.
But it is only surprising because of the ascendancy (till now, one may hope) of the Republican Party and the Bushies. In fact, Blackburn is a shrewd observer and analyst, and we can assume that he knows what he is talking about.
Chickens deserve our true friendship! So do fish! So do other sentient beings! Let us learn to be kind.
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rorywilliams Posted 8:48 am
18 May 2008
Its thrust was to identify the top ten challenges, and rank them. Strategies to address global warming were ranked at the bottom of the heap, on the grounds that you could get far better returns on money invested in strategies to address things like malnutrition, sanitation, disease and education.
I am neutral on CBA in general, but I have a number of reservations about this approach to making what is essentially a political decision. I would love to embrace a rational approach, but we have to acknowledge that even the statements made by the IPCC about climate science are tempered by political negotiations. Similarly, the chosen strategies to fight global warming will not be based on a mythically objective analysis. If we are to make headway before it is too late, expediency will be the name of the game.
Carbon Copy
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Wolverine Posted 9:48 am
18 May 2008
The problem with using a cost-benefit analysis is that no matter how it's framed, its main priority is economic. This is one of the most fundamental flaws in modern human thinking; i.e., that money is more important than the environment, and/or that a dollar value can possibly be placed on the lives of other species or on ecosystems. This is psychotic, but since the majority of the human race seems to have become psychotic regarding the environment, it seems normal and no one even notices how weird it sounds.
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mwildfire Posted 3:18 am
20 May 2008
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