E QUITY, E THICS, AND THE E CONOMICS OF C LIMATE C HANGE LSE 400 Lecture 6 March 2015 Nicholas Stern Chair of the Grantham Research Institute on Climate Change and the Environment, Chair of the Centre for Climate Change Economics and Policy, IG Patel Professor of Economics & Government, President of the British Academy London School of Economics and Political Science

3 Structure 1.Climate change: sciences and social sciences interwoven 2.Need for change: scale, risks, dangers of delay 3.Ethics and equity aspects of climate change

4 Climate change starts and ends with humans Understanding the relevant processes: – Human activity to emissions of greenhouse gases (GHGs); – Emissions (‘flows’) to increased concentrations (‘stocks’). Ratchet effect because CO 2 long-lived and difficult to extract; – Increased concentrations to increased temperatures and climate change; – Climate change to human impacts. All links in the chain subject to uncertainty.

5 The science shapes economics and politics The structure of the science embodies four major difficulties for understanding, analysing and setting public policy: – Immense scale, – Large risk/uncertainty, – Long lags, – ‘Publicness’ of the causes and effects. Key implications for economics and analysis: about management of immense risk.

6 Many subjects matters Analysis of climate change requires: – Sciences: physics, engineering, chemistry, biology, medicine… – Social sciences: Economics, economic history, political science, philosophy, law, psychology… In nerdy language, the problem embodies a stochastic, non-marginal, infinite time-horizon CBA. And it is a complex, international, inter-temporal, inter- generational, collective action problem under uncertainty.

7 Structure 1.Climate change: sciences and social sciences interwoven 2.Need for change: scale, risks, dangers of delay 3.Ethics and equity aspects of climate change

8 The science is robust and GHG concentration rising rapidly Climate science is built on two centuries’ of theory and evidence 1820s: Joseph Fourier recognized the atmosphere was trapping heat. 1860s: John Tyndall discovered the gases that were doing so – the GHGs. End of 19 th century: Svante Arrhenius provided calculations of the possible size of effects. 1940s: Walter Elsasser explained that GHG molecules oscillate at a frequency that interferes with the escape of infrared radiation. CO 2 e concentrations now around 450ppm (Kyoto gases). Adding CO 2 e at a rate of over 2.5ppm per year (likely to accelerate with little or weak action). This is up from 0.5ppm per year , 1ppm and 2ppm Inaction could take us to 750ppm CO 2 e over a century. Strong possibility of eventual temperature increase of more than 4°C (or more than 5°C)

9 The risks are unprecedented for homo sapiens Damage from climate change intensifies as the world gets warmer: Already at 0.8°C at edge of experience of Holocene and civilisation of last few thousand years. Seeing strong effects but small relative to what we risk. Temperature increase of 4 or 5°C or more not seen for tens of millions of years (homo sapiens, 250,000 years): Likely be enormously destructive, including much more intense extreme events. Deserts, coastlines, rivers, rainfall patterns: the reasons we live where we do, would be redrawn. Potential cause of migration of hundreds of millions, perhaps billions, of people around the world: likelihood of severe and sustained conflict.

10 What to do to hold warming below 2°C Necessary emissions path for chance of 2°C: –under 35Gt in 2030; under 20Gt in 2050; zero by end century. Can do a little more earlier and a little less later and vice versa but shape of feasible paths similar, and costly to catch up if postpone action. Necessary path likely to require: –zero emissions from electricity around mid-century. –Zero total emissions by the end of century. –Negative in major sectors well before end of century.

11 Why the next 15 years are critical Source: New Climate Economy

12 What we cannot cover here: all fascinating and all are important Technology options – renewables, energy efficiency. Innovation – tipping points, spill-overs. Market failures – the six key ones. Policies to foster the transition. Public-private interaction. International and regional cooperation.

13 Structure 1.Climate change: sciences and social sciences interwoven 2.Need for change: scale, risks, dangers of delay 3.Ethics and equity aspects of climate change

14 Ethics and Equity (I) Climate change gives rise to many important and complex normative questions. Some approaches are difficult to apply to climate change, but all seem to point in the same general direction: strong action to reduce emissions is morally required. Fundamental issues (and many different approaches to them): –What matters? Welfare or utility? Capabilities and opportunities? Rights, liberty, justice. –Distribution. –Who are the relevant moral agents? Individuals? States? Past, present, future ?

15 Ethics and Equity (II) Theories of justice: –Rights/entitlements and duties/obligations. –What is the basis for the rights or duties? Categorical imperative? Production/desert? Virtue? ‘Natural rights’? Capabilities? A social contract? Liberty – positive and negative. –What is the proper relationship between citizen and state? Intra-generational issues : –Who is entitled to produce / who bears responsibility to reduce emissions? –Eg. #1: States responsible for historic emissions of that state. (But: from when? Does knowledge of harm matter? Does it matter whether current citizens are beneficiaries of historic high-carbon growth paths of their ancestors? Many difficult empirical and normative issues). –Eg. #2: Equal per capita entitlements (or rights) to emit? (But: rights to emit, as opposed to development? Stocks not flows matter; redistributive role of asset allocation; ignores history).

16 Ethics and Equity (III) Inter-generational issues: –Getting into specifics using one theory: public welfare economics (consequentialist and [more narrowly] welfarist or utilitarian). –How can we compare the value of something to people today vs its value to future people? –Discounting: Discounting future goods (inter-temporal valuations of relative standards of living). Discounting future welfare (pure-time discounting).

17 Ethics and Equity (IV) Inter-temporal valuations of relative standards of living How do we value (today) goods consumed in the future? Should we discount the value of future goods because “people in the future will be richer”? And which goods matter? Relative value of unit of good i at time t relative to good i is now discount factor for good i and time t. Discount rate is proportional rate of fall of discount factor. Both factor and rate depend on i and t.

18 Ethics and Equity (V) Some argue that discount rates can be ‘read-off’ from market interest rates or rates of return. But: –The discount factors and the discount rates depend on the path and the generation: e.g., if future generations are assumed to be much richer than us, an increment to them can be argued to have a small social value. As climate change involves looking at very different future paths it is a mistake to use a marginal method around a given growth path. –Must also take care with the multi-good nature of this problem: different discount rates for consumption and the environment. Both rates may be negative in bad outcomes.

19 Ethics and Equity (VI) There is no market on which one can ‘read off’ anything similar to a revealed collective preference or appropriate rate for 100 years or more. –Many markets are for private agents and limited term. –Such markets that exist are imperfect. –We need discount rates for a range of goods/service. –For “riskless”, long-term, public markets, discount rates are often found to be around 1-2% but need to treat with caution (need riskless rates, because risk/uncertainty generally handled separately in calculation).

20 Ethics and Equity (VII) Better approach: Structured thought experiment For example if specify u’(c) = c -ᶯ can discuss ᶯ in terms of readiness to make transfer A to B. For example, consider if c A = 2c B. If ᶯ = 2 then would be ready to do so even if “lost” 75% en route. Inferring from government or individual action is very problematic – many different numbers emerge across a very big range. Have to guess what model of the economy may be in mind of “ decision maker” whose values are being inferred.

21 Ethics and Equity (VIII) Pure-time discounting Pure-time discounting is to give the welfare of future people less weight (irrespective of income) purely because some parts of their lives lie in the future. It is discrimination by date of birth. –Could such discrimination, i.e. on the basis of (lack of) temporal proximity be morally justified? –What about an analogy to physical proximity? Do we owe lesser moral duties to people further away from us physically (e.g. those outside our “community”)? Could you construct an argument for inter-temporal discrimination? –I suggest you would find it difficult to do so convincingly.

22 Key lessons Work to understand the empirical issues of the problem at hand, Here, that is the basic science of climate change and its complexities: first part of lecture. Ensure the analytical framework does justice to the underlying empirical matters (don’t try to shoehorn problems into frameworks just because we have the frameworks). Public policy-making is also a normative enterprise, don’t try to pretend that it is not; don’t dodge the ethics. Be transparent about normative assumptions; recognise that they are contestable; and be prepared to discuss them. Applying different moral and political-philosophical theories and approaches to a problem may yield similar conclusions, suggesting the conclusions may be more robust than if otherwise (e.g. climate change). Many complex issue today require the perspectives and expertise of very many disciplines – learn to understand and engage with other disciplines and perspectives.

23 The road to Paris A chance to build understanding not only of threats and risks but of the great opportunities that lie in the transition to the low-carbon economy. Equity must be centre stage. The next two decades will see rapid structural transformation of the world economy; this transformation coinciding with both very rapid technological change and a decisive period for the transition to the low- carbon economy represent a crucial moment. We can use it or lose it. If we take it we lay the foundations for the future and accelerate the dynamism for the rest of the century. These understandings plus the construction of a collaborative and dynamic approach can bring success in Paris in It is possible to rise to the two defining challenges of our century – overcoming poverty and managing climate change. If we fail on one, we fail on the other.