Learning curves, negative and positive--a Carbon Based original

    Under most circumstances, the more we practice at a task or a project, the greater our skill. In a positive learning curve, the costs of acting go down as the rewards increase.  But in some instances, practice makes our performance worse.  Economists and psychologists describe a negative learning curve as one where the more we persist with an activity, the greater the costs we face.  Practice makes us worse off.

    A 2011 article by the vigorously anti-nuclear Joe Romm in Think Progress asked, "Does nuclear power have a negative learning curve?"According to the piece, even the most successful nuclear operations suffer from a sharp growth in construction and operating expenses, even after adjusting for inflation.  Unlike wind and solar, where the cost per kilowatt hour has been steadily dropping, nuclear's has climbed.  A 2007 Moody's study finds nuclear costs mounting from $4000 before 2007 to $5000 to $6,000 today. One case Romm cites in Florida is even more expensive.

    Lest you think that this is just a problem for the balkanized, inefficient, poorly regulated US, Romm links to a paper that finds the same pattern in France's nuclear industry. Arnulf Grubler of the International Institute for Applied Systems in Austria analyzed public records for Energy Policy and wrote “The costs of the French nuclear scale-up: A case of negative learning by doing”.

     The cost escalation has happened even though French reactor designs are standardized to a degree that impossible in the US, and even though costs go down per unit as the size of the reactor increases.   France has other advantages, too, such as a powerful, well-run state utility. But this hasn't saved it from the negative learning curve.  Grubler speculates that the French cost rise stems from the inherent complexity of nuclear technology, which demands "a formidable ability to manage complexity in both construction and operation."  It's an ability nobody has, not even Electricite de France. 

    Romm's stinging conclusion: "New nukes have gone from too cheap to meter to too expensive to matter." 

    So much for nuclear power (though I wonder whether the same objections would apply to thorium-based nuclear reactors).  But I'm struck by the notion of negative learning, defined as an activity that grows more costly the longer it's pursued.

    In the broader climate change landscape, the business as usual scenario -- the path we're on now -- exemplifies negative learning.  Sticking with our carbon-intensive ways entails worsening costs in the form of natural disasters, sea level rise and other impacts.  Most casual onlookers or organizations tend to regard climate impacts as random.  But they are externalities that follow predictably from burning fossil fuels.  The more greenhouse gases we emit into the atmosphere, the higher the costs go.

    One reason we remains stuck in this negative learning curve is ideological.  A substantial minority of American citizens have political objections to the kind of actions required to cut emissions drastically.

    Occasionally public opinions leans toward actually taking action against climate change, usually after a natural disaster.  That's when fossil fuel propagandists hurl themselves into the fray.  Hundreds of megaphones start blaring , stupefying the debate with a cacophony of marginal scientists, pro-capitalist think tanks, and industry flacks. A coalition of petroleum, steel, autos and utilities use their legislative clout to stop anyone from thinking about the origin of the growing costs, or noticing that they're not random. 

    This kind of political bind bedevils the whole world, not just the United States. The dispiriting fizzle of the latest round of international climate talks in Doha revealed yet again that the US inaction has global allies.  The motives of poorer countries are different from the wealthy nations, and stem largely from the urgent need to use energy to advance their development.  They have much catching up to do, and to reach the goal, they believe, they need a full energy portfolio, including fossil fuels.

    The irony is that with climate change, a positive learning curve awaits us when we cut emissions.  Because of the physical nature of growing concentrations of greenhouse gases in the atmosphere, early carbon mitigation can have huge benefits.  We have the power to avoid decades of growing costs.

    A recent report in Nature suggested that an international price on carbon at $20 per ton today gives the world an almost 60% chance of holding global temperature increases under 2°C. This temperature level would blunt the costliest impacts of global warming, including: rising sea levels, floods, droughts, and extreme weather.

    Unfortunately for slow learners or non-learners, the cost of action closely tracks the level of greenhouse gas concentrations.  By 2020, when the parts per million are higher, we will need a price of $100 per ton of carbon to achieve the same result.  If we wait until 2030, no price on carbon, no matter how expensive, will be able to hold the line on temperature. 

    Under these circumstances, the moral and economic case for action now is strong. Rather than linger in a negative learning curve, we should actually try to benefit from our experience.  But we live in a cynical, paralyzed, ungovernable time, when our elites cannot act on behalf of our species in any coherent way. 

Some learning curves from an 1899 issue of Popular Science Monthly

Gobbling our way to utopia--a Carbon Based original

     Back in 1567, Pieter Bruegel the Elder painted a satirical allegory called the Land of Cockaigne, also known as Schlaraffenland.  The painting depicts a clerk, a farmer, and a soldier sprawled on the ground, stupefied with gluttony. Above their heads, a table bends under the weight of a half-gobbled feast.  The tools of their trades lie unused beside them.

    Nearby, a knight lies slackjawed in a lean-to roofed with pies, apparently waiting for one of them to slide into his mouth.   In the background a man has found his way to Cockaigne by eating a tunnel through a cloud-like giant pudding.  For the orally inclined, that's a favorite path to bliss.

    An egg with a spoon in it jogs from one sleeping figure to another.  Behind the tree, a cooked pheasant lays itself upon a silver platter, and a roasted pig runs about with a carving knife strapped to its flanks. In this enchanted land of consequence-free feasting, food eagerly searches for eaters.

    We live in a climate Schlaraffenland today, peopled by hearty eaters who don't want to believe the truth about our relentless appetite for energy.   Many understand the potential for decades of horrible impacts from atmospheric greenhouse gas., and they want a different, better future. But they want it without interrupting the flow of tasty pies.

    I often entertain two fantasies about how to save ourselves, one technical, one political.

    In the technotopian vision, some genius creates a form of energy superior to fossil fuels, an improvement as dramatic as kerosene's advance over whale oil in the 1860s.  The transition to the new energy regime happens in a matter of a few years, and the might of the fossil fuel industry wilts before the new energy's economic advantage.  The electricity generation business steadily abandons coal and natural gas.  Electric cars replace the petroleum fleet.   Upgraded dwellings draw on the electrical grid only occasionally. An abundance of clean energy ends pollution and cuts greenhouse gas emissions to zero.

    Some visionaries even propose using the abundance of energy in this scenario to extract greenhouse gases from the atmosphere, so we can eliminate the decades of impacts that already burden the climate system.

    We need such solutions today, or a decade ago, but in fact they are some distance in the future, if they are even possible. Our grid is built to deal with uninterrupted base load power generation, and most utilities must struggle to exploit fluctuating sources like wind and solar.   What's more, energy consumers lack the education and willingness (and spare time) to make decisions about energy consumption based on real-time monitoring.   Even more fundamentally, no renewable options currently have the energy density that makes petroleum so well-suited for transportation.

    Energy economist Vaclav Smil warns us that energy transitions usually take 50 years, at least. It's a slow process with plenty of missteps. As for extracting CO2 from the atmosphere, it would require an enormous amount of energy.

    The political fantasy of avoiding climate impacts sometimes feels even more unreal than the technical one.  Our dream is to devise governing structures that are equal to our climate challenge.  The fossil fuel industry uses its vast lobbying might to promote green energy, instead of blocking it. Sound leadership nurtures a large variety of renewable energy options until the best ones emerge. As a society, we avoid splitting into a small factions of puritanical scolds versus everyone else.

    Local governments steer development away from coastlines and floodplains, and invest heavily in infrastructure improvements, so that roads and bridges can withstand stormier and wetter conditions. We bury our power lines, so that blackouts and other outages are much reduced, and we're better able to weather natural disasters.

    Far-seeing leaders reshape our usage of land, energy and other species in a comprehensive way, and diligently plug loopholes and exceptions. We also cultivate the ability to alter course when needed, so that unforeseen consequences do not trip us.  

    I hear you groaning out there. To take the necessary steps would be almost impossible for a sound democracy that functions well; attempting the same task with our current hobbled, corrupt, dolt-ridden Congress is ludicrous.

    The problem wouldn't disappear even if we could magically replace today's crop of intransigent politicians with a more reality-based crowd. As economist Martin Weitzman notes, in a democracy, the most enlightened elected officials face an impossible task.  As a society, we must aggressively tax carbon to create strong incentives for renewable energy.    This results in much pain spread among a large number of constituents. These aggrieved citizens can easily unite to defeat the very long-term-oriented climate action party.

    Had we started climate action decades ago, the compromises that were politically possible then might have gradually steered our overall energy trajectory to a safer path.  Unfortunately, we have delayed well past the point that such compromises will begin to address the emergency. Given today's climate conditions, such politically doable measures won't be nearly enough to hold global temperatures below the 2 degree threshold urged by the IPCC.

    Fantasies are so seductive because they promise a happy ending without strain. 

You'll find Bruegel's 1567 painting in the Alte Pinakotek in Munich

On a beach

Happy New Year from Carbon Based, on a beach in Narragansett, Rhode Island...

The day the dam broke--a Carbon Based original

    On December 26 in a local church, a neighbor read several stories by James Thurber.  One of these was "The Day the Dam Broke," which recounts a stretch of two hours in 1913 when sudden rumors of a failed dam in Columbus, Ohio, provoked a mass panic.  Thurber says, "The fact that we were all as safe as kittens under a cook stove did not, however, assuage in the least the fine despair and the grotesque desperation which seized upon the residents of the East Side when the cry spread like a grass fire that the dam had given way." 

    To comic effect, Thurber dwells on the terror that erupts instantly and the citizens' shamefaced return to their lives when no waters appear.  (Actually, a similar theme crops up in a number of Thurber stories, such as, "The Night the Bed Fell Down.")

    Residents fled east to avoid the rushing waters of the Scioto River. There were none. Authorities worsened the alarm.  Soldiers patrolling the streets announced that the dam had NOT failed.  Everyone heard as, "The dam has NOW failed.

    But were the citizens of Columbus so irrational to flee? Dams do break, and it's usually disastrous when they do.  In fact, in a real dam break, everyone downstream must act quickly to reach higher ground.  Thurber observes that everybody ran because the starting the cars of that era required a crank, and presumably that took too much time with an inundation gushing at one's heels.  

    The irrational part lay in not bothering to check for water, even after some minutes.  But coastal dwellers today, if they heard a tsunami warning, would remember the horrifying YouTube videos of the Aceh tidal wave coming ashore in 2010.  They would flee in an instant. I know I would.

    Nothing in Thurber's story considers the dam's soundness and its state of repair, or the quality of its management.  But presumably, after the panic of 1913, the leaders of Columbus probably checked the dam and made inquiries into what they could do to prepare for an actual dam break.  But that's a much less amusing story.

    This is how everyone wants climate change to turn out -- a hasty alarm that we slink away from when its foolishness is revealed. But of course, that doesn't fit the climate change pattern.  Evidence from direct observations, the paleoclimate record, and climate models all corroborate anthropogenic global warming.   This means intensified water cycles, more weather-related disasters, and a variety of other effects.

    What's more pertinent is speed. Climate change as a whole does not suddenly appear full blown. It builds slowly and on any given day doesn't impinge on people's minds or their lives. A catastrophe right in front of us grabs all our attention, but sorting out the climate signal it contains is not so obvious, nor is it the most pressing task when the waters are rising. 

    The analogy between Thurber's story and climate change would be even better if there were a well-funded movement in Columbus whose goal was to stop any effort to maintain the dam. Actually, something similar has happened to infrastructure in the United States, as state and local governments have allowed bridges, roads, dams, water treatment plants, and so on to fall into disrepair.  Decades of skimped maintenance has resulted in degraded service and outright failures.  The American Society of Civil Engineers gives US infrastructure a "D," and estimates a five-year investment of $2.2 trillion will be necessary to bring everything into good repair.

    We have time to prepare for slow-moving risks.  The cry of denialists notwithstanding, it's worth spending money today to avoid a catastrophe tomorrow.  Of course, we've already lost decades in the battle against climate change, thanks to fossil fuel industry's propaganda onslaught.  But there is still plenty we could do, and we will need to spend decades at it.

    Not long after our neighbor finished his Thurber reading, a sleeting snowstorm began, and was still underway a day later.  But everyone returned to their homes in an orderly way.

Thurber's own illustration for "The Day the Dam Broke"

The sense of an ending--a Carbon Based original

    It's December 22, the snow is falling, and I'm basking in relief that Mayan apocalypse fizzled.   A 5,125-year cycle in the Mesoamerican Long Count Calendar ended yesterday -- December 21, 2012.  Some New Age thinkers claimed that this date heralded a major spiritual transformation, the beginning of a new era, or the end of the earth in a collision with a planet or a black hole.

    Historians of Mayan culture scoffed at these internet-stoked rumors and theories, doubting that any authentic sources supported such a gaudy Hollywood interpretation. Astronomers were derisive about talk of black holes or planetary collisions. 

    These party poopers didn't stop hundreds of credulous souls from flocking to Merida in the Yucatan, near the Mayan ruins of Chichen Itza, and to Tikal in Guatemala. The photos look festive.

    There were casualties. In Sergeyev Posad, a village near Moscow, police blamed a retiree's suicidal leap from her apartment window on her Mayan-based fears. And Chinese authorities arrested around 1,000 members of the Church of the Almighty God for spreading tales about the supposed end times.

    Not for the first time, a calendar served as a screen for some people to project their fears of mortality.  The projection plays into our hardwired narrative bias -- we love stories with a beginning, middle and end.  The Mayan curtain rings down with a bang, and the story's ridiculous falsity didn't make it any less satisfying.

    By coincidence, last night I went to the documentary Chasing Ice, director Jeff Orlowski's chronicle of one photographer's attempt to grapple with a single aspect of a real catastrophe.  It's also one that doesn't lend itself readily to a simple narrative.

    The project began in 2005: The National Geographic sent photographer James Balog to document the impacts of climate change in Iceland.  Dubious about climate change before this trip, he saw enough to change his mind and to give him a mission:  He founded the Extreme Ice Survey to systematically photograph the disappearance of a number of Arctic glaciers using an array of time-lapse cameras.  His goal was to provide visual evidence to the world of the reality of climate change. 

    He surely succeeds. We witness two large calving events, in which a large chunk of the glacier face breaks off and floats away.   In Alaska, Greenland, and Iceland, we see moulins with melt water coursing away, and time-lapse sequences showing vast ice fields dwindling and slipping away.

    Another satisfaction to Orlowski's documentary lies in the courage and persistence of Balog and his crew.  They wrangle their cameras into the best position for their shots, or deal with technical failures in the harsh polar landscape.   They even have to redesign and replace the timing mechanism for many dozens of cameras, which costs them months of work.

    Balog rightly describes the images the Survey has collected as beautiful and horrifying. Of course, the visual evidence probably resonates most with those who already believe in climate change. It's unclear whether it will convince any denialists.  A YouTube video showed one self-described Fox News viewer declaring that she now believed in global warming as she left a showing of Chasing Ice, shaken by what she saw. But it's unclear whether the change of heart has lasted, and whether many others will follow her.  Certainly the most recently polling data shows that a sizeable minority of Americans continue to believe that climate change is a fraud, or at worst an overhyped issue.

    Climate change believers who aren't scientists probably exceed the numbers of those who believed in the Mayan apocalypse. Even so, along with evolution and reproductive health, climatology has been plunged into the cauldron where conservatives boil the science they hate.

    We suffer from cultural insanity when a New Age trifle like the Mayan apocalypse can command hours of airtime, while the screaming emergency created by greenhouse gas emissions scarcely rates a fraction of the sustained focus that it needs. As Balog points out, as a result of our own greenhouse gas emissions, we are approaching the end of a relatively benign and hospitable period for human habitation.  The stormy, wet, unstable future we are creating will contain threats whose contours are just coming into view.

    With his narrow focus, Balog attempts to counter the tide of denial and the unshapely vastness of climate change as a whole.  A dying glacier has a definite end point, and our love of story is mobilized when watching its death throes.  Struggling with climate change will be the work of centuries, and it will probably take forms we don't anticipate. It won't be a story with a satisfying arc, or even an ending.

A Mayan zodiac circle, shot by theilr, Wikimedia Commons via Flickr, under the Creative Commons Attribution-Share Alike 2.0 Generic license

Where are the climate change investments? A Carbon Based Original

    Markets can fall prey to inefficiencies or fail altogether. The annals of investment are replete with tales of visionary investors who find ways to exploit these failures.      Climate change, in addition to being a global emergency, is also a market failure.  In the words of climate economist Nicholas Stern in 2007, "Climate change is the greatest market failure the world has ever seen, and it interacts with other market imperfections."

    So where are the investors who are profiting from exploiting this failure?  In fact, their numbers are small, and so far their performance has not attracted other asset managers. 

    One disadvantages is that investors in climate change do not have need politicians committed to the right policies.  As Stern put it, "The first is the pricing of carbon, implemented through tax, trading or regulation. The second is policy to support innovation and the deployment of low-carbon technologies. And the third is action to remove barriers to energy efficiency, and to inform, educate and persuade individuals about what they can do to respond to climate change."

    Investments in the right actions face a political headwind. Instead of a concerted three-pronged push, would-be climate investors face virulent obstruction from conservative politicians.   These politicians and their fossil fuel backers work indefatigably to thwart all measures to price carbon. They do their utmost to thwart any large-scale post-carbon investing -- witness the near-criminalization of renewable energy at the hands of congressional Republicans.  They spout fossil fuel propaganda unabated even though governments and businesses pursue hundreds of small improvements in energy efficiency, and a majority of Americans believe climate change is real.

    Hostility from politicians and lobbyists is not the only obstacle. Psychology and cognitive habits place another barrier in the way of investing profitably in climate change action.

    Most people rarely notice long-term, lumbering problems for a number of cognitive and psychological reasons.  Their time horizon is too short. The climate signal emerges too slowly from the noise to command investors' attention.

    Traders, for example, operate in the briefest of short runs, and for them, climate change has hardly any existence at all. They buy securities, hold them for just a moment. 

    Investors work with a time horizon of three months to a year.  But even this somewhat longer field of view is the blink of the climate's eye. 

    Some asset managers defy this tendency, focusing on climate and renewable energy as investments, but most other investors quickly lose interest. 

    The time horizon problem even bedevils insurance, the one industry that cares the most about climate change right now.  Insurers have an immediate and obvious stake in reducing climate risk, since clients' disaster losses determine how profitable they are. 

    A growing number of property and casualty firms are focused on climate change. They are cutting their own emissions, taking climate into consideration in their portfolios, spelling out and communicating the risks of climate change, and even trying to influence policy. 

    Does this mean we should put our money in climate-savvy insurers?  Sometimes the industry does well, but the nature of the risk business prevents them from reaping extravagant payoffs. 

    The time horizon of insurers is one year -- policies are renewed every twelve months, usually in January.  Their judgment of their portfolios' risks only needs to be correct enough for a year. 

    Skill at assessing risk is only one part of the insurance business. The other half is investing. Insurers invest the premiums they take in, resulting in some of the largest asset pools in the world.  Their bias is conservative and short-term, since they might face large losses that could force them to unwind their portfolio in a hurry. In short, an insurer that has an acute understanding of climate risks has a better chance for staying in business, but it won't perform like a boom stock.

    Between the difficulty of thinking long term and fierce political opposition, sound climate investing has languished. That's alarming because all of us have a stake in stopping greenhouse gas emissions and reducing the harshness of its impacts. It should be profitable to do so.

Dunes at Gran Canaria, shot by Marc Ryckaert (MJJR), Wikimedia Commons, under the Creative Commons Attribution 3.0 Unported license

Dust Bowl reflections-- a Carbon Based original

One way to address climate change today is to fully appreciate yesterday's climate disasters. The recent broadcast of Ken Burns' documentary on the Dust Bowl is a starting point, if an often annoying one. Plaintive violins and banjos keep the nostalgia turned up high.  The personality-focused style of these shows often blunts general insights and muffle the sharp points that need to be kept in mind.   But at least the talking heads in "The Dust Bowl" were explicit in stating that the catastrophe was manmade, like today's climate change woes.

The story is a familiar blend of fragile prospertiy, delusional hope and harsh comeuppance. The Homestead Act after the Civil War lured growing numbers of farmers onto semiarid grasslands, with few trees and little water.  A period of higher than normal rainfall masked the consequences of this influx for a while.  Many Plains dwellers believed that the wetter weather was permanent. 

Policy choices played a destructive role in adding to the risks. "Rain follows the plow" was the dunderheaded motto used to promote the settlement.  Free or cheap land and price supports for wheat during World War I led to good years that attracted more immigrants. By this time, most residents were deeply attached to the land.

During these fat years, deep plowing destroyed the millions of acres of grasses that held the soil in place, and brought marginal land under cultivation. Fields were often left bare, without cover cropping despite the constant winds.  Topsoils dried up even before the drought returned, which was the prelude to the apocalyptic dust storms of the 1930s.

When the rain stopped and the dust storms came, most people in the area underestimated the dangers.  They said, "We've seen droughts before, we've seen dust storms before," even though the storms of the 1930s were larger and longer lasting. Moving away seemed unthinkable.   As the market for wheat collapsed and the drought worsened, most farmers were loath to see their own part in fomenting the disaster.  Just leave us alone, they said, and the rains will come back, and things will return to normal. 

But the drought got worse. One farmer lamented, "One of those years, we put our entire wheat crop in one wagon."  Children and the elderly sickened and died from "dust pneumonia."

The exodus from the Dust Bowl eventually picked up after more than five years of no money and no crops.  "A migration of the defeated," the narrator intoned, it dwarfed the 19th century US migrations, but it's largely gone from public notice. 

Several of witnesses summoned by Burns showed some insight into the problem. Bernard Lewis, a child at the time, said, "We always had hope that next year was going to be better... we learned slowly." These hopes were cruelly shredded in the years of depression and dust, only to return in a blink when conditions improved.

In the last few minutes of part two of the "The Dust Bowl," various interviewees acknowledged the need for humility and for staying mindful of the land's limits and needs.  But the script did little to explain the predictable market failures that  worsened tolerable natural cycles into outright catastrophe.

The government's response was a mixed bag. Short-term, the Works Progress Administration in 1935 launched projects that, though they were condemned as make work, nevertheless brought labor to the region and helped busted farmers. More scientific agriculture was brought to bear on the problem, with contour plowing and better erosion control replacing destructive land use habits of yore.  But the improvements were modest, and the government did little to slow down the the reintroduction of the same detrimental practices once the rains returned.   In the 1940s, overplanting and developing marginal land resumed quickly. Smaller dust storms returned in the 1950s, held somewhat in check by the new methods.

Roosevelt may have brought hope to the region, but the political calculus left no room for the most sustainable measure in the long term -- leave the land alone, and avoid development where there isn't the water to support it.  We see a similar pattern happening today in the planting of crops for biofuel, and in the Great Plains today, in pumping ancient groundwater from the Ogallala Aquifer. One of the speakers estimates that only twenty years of water remain -- and then it's back to the drought cycle.

After the Dot Com bust after 2000, the Onion ran a headline:  "Americans angrily demand new bubble to invest in."   Maybe it's human nature. But it's worth resisting. The bad ecological outcomes of climate change that threaten us today are potentially much worse than the Dust Bowl.

FSA; Dust Storm; "Farmer and sons walking in the face of a dust storm"; Cimarron County, Oklahoma. Shot by Arthur Rothstein in 1936. This image gets a few minutes of its own in the Ken Burns documentary

Weighing costs and benefits--a Carbon Based original

In deciding whether to undertake large projects, most managers and policymakers begin with a cost-benefit analysis, or CBA.  The advantage of CBA is its comparative simplicity. The choice with the largest net gains is the one we should select. This method shows a way forward using straightforward assumptions.

Unfortunately, when the first step in an important assessment is a CBA, policymakers have already closed off major alternatives, usually the ones that involve non-economic values.  And in a changing climate, a naive use of CBA creates a strong bias against, for example, cutting greenhouse gas emissions. 

Most economic theory struggles to explicitly addressing environmental goods and ills, which are not so readily translated into costs.  In fact, global warming is a market failure, perhaps the most significant market failure of all.

Most CBA users assume that the environment will remain stable over the life of the endeavor.  Yet climate change jeopardizes that stability. When farm productivity dropped because of environmental degradation during the Dust Bowl, recovery took decades.  A growing frequency of coastal property being inundated and disrupted by storm surges can dramatically alter the environmental picture --and therefore the economic outlook. But economists rarely call attention to these issues.

Environmental goods and ecosystem services are not readily quantified, and thus easy to take for granted in a business-dominated world. Insurance is one business mechanism that quantifies natural disaster costs to some degree, but the point of view is pretty limited and stylized. It's a distorted lens for getting the whole picture of climate change.

Risk is a blind spot for CBA, too. Even a mainstream economist such as Martin Weitzman notes that low probability but high impact scenarios tend to disappear from conventional CBA.  The destruction from Hurricane Sandy is a recent instance. Everyone knew that a hurricane hitting New Jersey and New York had a serious potential for tremendous losses. But long decades between storms lulled everyone, economists included, into postponing decisive action.  This is true even though the Bloomberg administration has actually done more than nearly any other American city. Sandy has shown how inadequate this effort was.

A more fundamental drawback is philosophical.  Cost-benefit analysis embodies norms that persistently steer us toward short-term ventures, consumption, and individualist standards -- the prevailing ideology of our era. The utilitarian bias of economists lead to scant regard to matters of morality, rights and justice. Personal relationships count for little, as does art, and even nature itself except where some natural feature has an obvious dollar equivalent.

In utilitarian style, CBA reduces values to mere preferences, which have to compete with a long list of stakeholder desires.  This group wants to preserve thriving wetlands, but other people want to buy houses that are "close to the land," and the alternatives compete in a CBA. If preserving ecosystem services imposes severe costs in the short term, then standard-issue property development will rule the day. It's left to environmentalists to object that, say, losing wetlands or species will result in overwhelming damage to property in a few years, or decades.

This raises another hitch for cost benefit analysis. CBA pays little attention to how the costs and benefits are distributed through time. By favoring the present generation, it allows those of us alive now to pass our knottiest difficulties on to our children and grandchildren. As I noted in an earlier post about the discount rate, economic theory struggles with how to coherently weigh the standing of later generations. Some economists openly declare that the present goods outweigh future utility -- which is why the future assigned a lower worth, using a discount rate. This may work well enough for financial investments, but it starts falling apart when ethics are involved.  And in climate change, ethics should be at the heart of the matter.

Dispensing with CBA altogether isn't possible, and it would be irresponsible to neglect the balance of costs and benefits of competing climate mitigation efforts. But when it comes to climate change, we have to be aware of the tool's limitations.

Discount rates and market failures: some original content

In grappling with climate change, we face a number of demanding decisions to make about land use, economic growth, and even basic justice. We must invest wisely, and our choices will have a dramatic impact on future generations. The stakes couldn't be higher.

In making these choices, policymakers assess the costs and benefits of a given measure over the life of a project, which in climate terms can be several generations, or even centuries. Because of the time frame, policymakers must gauge the present value of these costs and benefits. In other words, they use what's known as a social discount rate.  This measure looks like an interest rate, or the hurdle rates that corporations rely on when deciding to make business investments.

Many economists are drawn to the view that the social discount rate should track average market rates of return. A proper investment has a discount rate of five or six percent or more.   So the economically minded look for a six percent return on any climate change investments. 

A shaky assumption lies hidden in this point of view.  First of all, it means that the well-being of later generations matters less than economic growth right now.  The justification for this is the faith that later generations will benefit of years of economic development, to which investments like ours will make a strong contribution.

The social discount rate you choose is not a trivial decision. It can dramatically change the assessment of a given project, whether it's restoring wetlands or building flood barriers.

At five or six percent, a centuries-long issue like climate change is not worth much investment at all.  Positive discount rates have a magical effect on the costs of climate change -- they are minimized over short time periods, and they all but disappear over a century or two. Economic growth will take care of the problem.  Besides, an investor could make more money by buying a company and stripping its assets rather than investing in climate-friendly projects. 

Economists who study climate change disagree sharply about the social discount rate to use, with William Nordhaus arguing for a 5.5 percent rate, and Nicholas Stern insisting that a rate larger than 1.4 percent is, in fact, immoral. Stern even suggests that for ethical reasons, we should use a zero discount rate.

I side with Stern. When economists discuss the issue, the ethical dimensions are a major blind spot.   Climate change is also an ethical issue, not merely an economic one. The ethical reason for a zero discount rate -- otherwise we are reducing the standing and value of future generations.  In a moral discussion, all the participants should be on an equal or at least comparable footing.  Generations to come have a very strong stake in what we do today and ethically they must be taken into account.

Even more significant, climate change results from a broad, systemic market failure.  Without strong regulatory intervention, markets have no incentive of addressing externalities like pollution, greenhouse gas emissions, and the like.  We have little reason to believe that markets alone are going to solve the problems that unfettered markets have created.

Most economists are all too eager to minimize or eliminate the ethical dimensions to any discussion of climate change.  In doing so, they rely a psychological blind spot called hyperbolic discounting, which results when we dramatically overvalue present rewards over future rewards. It leads to short-term thinking run amok and unwillingness to plan for the long term.  Future generations get no say at all and have no standing when hyperbolic discounting is in force.

Since economists are inveterate hyperbolic discounters and often heedless of market failures, we should weigh their advice without much enthusiam.

Brooklyn Bridge with Freedom Tower and 8 Spruce Street in the background, New York, United States. A great shot by Kadellar, Wikimedia Commons, under the Creative Commons Attribution-Share Alike 3.0 Unported license