“The Nobel Prize for Climate Catastrophe”… Seriously?

Guest ridiculing by David Middleton

Just when I think I’ve read the dumbest thing I’ve ever read about climate change…

The Nobel Prize for Climate Catastrophe

The economist William Nordhaus will receive his profession’s highest honor for research on global warming that’s been hugely influential—and entirely misguided.

BY JASON HICKEL
DECEMBER 6, 2018

Many people were thrilled when they heard that the Nobel Memorial Prize in Economics this year went to William Nordhaus of Yale University, a man known for his work on climate change. Finally, the economics profession is giving climate the attention it deserves, just as the world is waking up to the severity of our ecological emergency. Media outlets have taken this positive narrative and run with it.

But while Nordhaus may be revered among economists, climate scientists and ecologists have a very different opinion of his legacy. In fact, many believe that the failure of the world’s governments to pursue aggressive climate action over the past few decades is in large part due to arguments that Nordhaus has advanced.

[…]

So, Nordhaus’ career has been devoted to finding what he calls a “balance” between climate mitigation and GDP growth. In a famous 1991 paper titled “To slow or not to slow,” he argued firmly for the latter option: Let’s not be too eager to slow down global warming, because we don’t want to jeopardize growth.

To justify this conclusion, Nordhaus manipulates what is known as the “discount rate,” which is how economists value the costs of climate breakdown in the present as compared to the future. It might sound arcane, but it’s really quite straightforward. A discount rate of zero means that future generations are valued equally to the present; a high discount rate means that future generations are valued less, or “discounted,” compared with nearer generations.

Nordhaus prefers a high discount rate—very high. Discounting the future allows him to argue that we shouldn’t reduce emissions too quickly, because the economic cost to people today will be higher than the benefit of protecting people in the future. Instead, we should do the opposite: Focus on GDP growth now even if it means locking in future climate catastrophe. This is justifiable, he says, because future generations will then be much richer than we are and therefore better able to manage the problem.

[…]

Remarkably, Nordhaus—like most orthodox economists—has never bothered to consider this question. The growth-is-good mantra is so baked into our consciousness that to question it seems almost crazy. Indeed, growthism is hegemonic to the point of transcending ideology. Politicians on the left and right alike hold it up as the single most important policy objective; they may quarrel about how to make growth happen, and how to distribute its yields, but on the question of growth itself there’s no daylight between them.

This is starting to change. In recent years, ecological economists have been staking out an alternative vision. We will have a much better chance of accomplishing our climate goals, they say, if rich countries abandon their pursuit of GDP growth.

[…]

It’s a staggering idea—and could be a complete game-changer. But what would a post-growth economy look like?

[…]

We are at a crossroads. Nordhaus, and many world leaders, remain wedded to the obsolete dogmas of the last century. But scientists are clear that this is no longer good enough – and the rest of the world is ready for something better.

Jason Hickel is an anthropologist, author, and a fellow of the Royal Society of Arts. @jasonhickel

Foreign Policy

Is this a good spot for Tim Allen?

When I saw the headline, I would never have guessed that the “Climate Catastrophe” was the economic ignorance of an anthropologist.  This now stands as the stupidest, dumbest, most moronic, most idiotic sentence ever written by a primate…

A discount rate of zero means that future generations are valued equally to the present; a high discount rate means that future generations are valued less, or “discounted,” compared with nearer generations.

A discount rate has nothing to do with the value of “future generations” versus “nearer generations.”

Discount Rate

REVIEWED BY WILL KENTON Updated Dec 10, 2018

What is the Discount Rate?

Depending upon the context, discount rate has two different definitions and usages.

[…]

Discounted Cash Flow Analysis

The second use of discount rate is in the discounted cash flow analysis. DCF is a commonly followed valuation method used to estimate the value of an investment based on its expected future cash flows. Based on the concept of time value of money, the DCF analysis helps assess the viability of a project or an investment by calculating the present value of expected future cash flows using a discount rate. In simple terms, if a project needs a certain investment now (as well as in future months) and predictions are available about the future returns it will generate, then using the discount rate it is possible to calculate the current value of all such cash flows. If the net present value is positive, the project is considered viable, else financially unfeasible.

In this context of DCF analysis, the discount rate refers to the interest rate used to determine the present value. For example, $100 invested today in a savings scheme that offers 10 percent interest rate will grow to $110. Put another way, $110 (future value) when discounted by the rate of 10 percent is worth $100 (present value) as of today. If one knows (or can reasonably predict) all such future cash flows (like future value of $110), then using a particular discount rate the future value of such an investment can be obtained.

What is the appropriate discount rate to use for an investment or a business project? While investing in standard assets, like treasury bonds, the risk-free rateof return is often used as the discount rate. On the other hand, if a business is assessing the viability of a potential project, they may use the weighted average cost of capital (WACC) as a discount rate, which is the average cost the company pays for capital from borrowing or selling equity. In either case, the net present value of all cash flows should be positive to proceed with the investment or the project.

[…]

Investopedia

No sane person would invest $100 today to get $100 back in the future.  The future return has to be worth more than the present investment in order to be an investment.  The minimum discount rate is currently usually 3% because that’s you can get in US 30-yr Treasuries.  The Office of Management and Budget guideline is for a 7% discount rate “as a base-case for regulatory analysis”…

As a default position, OMB Circular A-94 states that a real discount rate of 7 percent should be used as a base-case for regulatory analysis. The 7 percent rate is an estimate of the average before-tax rate of return to private capital in the U.S. economy…

OMB

In the oil & gas industry, we use a 10% discount rate when valuing proved reserves…

PV10

REVIEWED BY WILL KENTON Updated Jul 19, 2018

What is PV10

PV10 is the present value of estimated future oil and gas revenues net of estimated direct expenses and discounted at an annual discount rate of 10%. Used primarily in the energy industry, PV10 is helpful in estimating the present value of a corporation’s proven oil and gas reserves.

To calculate PV10, reservoir engineers create a reserve report for existing wells and proven undeveloped well locations, taking into account every well’s present production rate, individual production costs, expenses for reserve development, and the forecast decline rate.

[…]

Investopedia

The value of proved reserves lies entirely in the cash flow that can be generated from their production and sale.  Cash flow in the future is worth less than cash in the bank today.  Hence the future cash flow is discounted.

Dr. Nordhaus’ model suggests a ridiculously low discount rate of about 2.5%…

Abstract

The social cost of carbon (SCC) is a central concept for understanding and implementing climate change policies. This term represents the economic cost caused by an additional ton of carbon dioxide emissions or its equivalent. The present study presents updated estimates based on a revised DICE model (Dynamic Integrated model of Climate and the Economy). The study estimates that the SCC is $31 per ton of CO2 in 2010 US$ for the current period (2015). For the central case, the real SCC grows at 3% per year over the period to 2050. The paper also compares the estimates with those from other sources.

Figure 3 from Nordhaus 2017. Social cost of carbon and growth-corrected discount rate in DICE model. The growth-corrected discount rate equals the discount rate on goods minus the growth rate of consumption. The solid line shows the central role of the growth-corrected discount rate on goods in determining the SCC in the DICE model. The square is the SCC from the full DICE model, and the triangle uses the assumptions of The Stern Review (10). A further discussion and derivation of the growth-corrected discount rate is given in Supporting Information.

Perhaps this is where the anthropologist got the notion that a discount rate devalues future generations…

The model optimizes a social welfare function, W, which is the discounted sum of the population-weighted utility of per capita consumption. The notation here is that V is the instantaneous social welfare function, U is the utility function, c(t) is per capita consumption, and L(t) is population. The discount factor on welfare is R(t) = (1)t, where ρ is the pure rate of social time preference or generational discount rate on welfare.

W=t=1TmaxV[c(t),L(t)]R(t)=t=1TmaxU[c(t)]L(t)R(t).W=∑t=1TmaxV[c(t), L(t)]R(t)=∑t=1TmaxU[c(t)]L(t)R(t).

[1]

The utility function has a constant elasticity with respect to per capita consumption of the form U(c)=c1α/(1α)U(c)=c1−α/(1−α). The parameter α is interpreted as generational inequality aversion.

Net output is gross output reduced by damages and mitigation costs,

Q(t)=Ω(t)[1Λ(t)]Y(t).Q(t)=Ω(t)[1−Λ(t)]Y(t).

[2]

In this specification, Q(t) is output net of damages and abatement, and Y(t) is gross output, which is a Cobb−Douglas function of capital, labor, and technology. Total output is divided between total consumption and total gross investment. Labor is proportional to population, whereas capital accumulates according to an optimized savings rate.

[…]

Nordhaus, 2017

The only thing that is discounted is the value of future generations’ consumption.  This is simply a function of the time-value of money.

What happens if the OMB guideline is followed?

At a 7% discount rate, the Social Cost of Carbon becomes…

It’s a staggering idea—and could be a complete game-changer. But what would a post-growth economy look like?

It would probably look a lot like RCP8.5.  With the anthropologist’s stunning economic ignorance, it’s not surprising that he would embrace the notion of Malthusian zero-sum economics.

Reference

Nordhaus, William D. Social cost of carbon in DICE model.  Proceedings of the National Academy of Sciences Feb 2017, 114 (7) 1518-1523; DOI: 10.1073/pnas.1609244114

via Watts Up With That?

http://bit.ly/2Sd8vHR

December 21, 2018 at 08:06AM

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