Almost three months after publication, The Stern Report on the costs of climate change still generates much buzz. Some of the buzz echoes methodological concerns we have aired earlier about use and abuse of cost-benefit analysis. (Or, if in a hurry: Top 10 Reasons why CBA fails ….) Here is an condensed version of Jane Galt's recent commentary:
Discount rates, again, Jane Galt, Asymmetrical Information, 01.09/2007: …[T]hough I essentially agree with the Stern Report's conclusions, I am bothered by its methods. …
It is really, really hard to price the costs of climate change. This is true for many reasons. First, some regions will benefit: Siberia and Canada will probably blossom under global warming. A true cost benefit analysis would net those benefits out, but how do you price them? How do you price losing Bangladesh? Is that a one-time loss, or should be impute to each generation a new cost for not being able to visit Bangladesh, and how do we counterbalance that against the new pleasures of visiting the Minnesota Tropical Rainforest? Should we take into account happiness research which indicates that people are roughly as happy after a big loss as they were before?
The uneven distribution of the benefits presents another pricing problem, particularly since there are wide income disparities between the affected countries. I'm not entirely clear which way this cuts, since Britain and Ireland get hosed along with Bangladesh, but it's hard to dodge the moral injustice that the United States, which produces more carbon per capita than these countries, may end up a net beneficiary of global warming.
The biggest problem is the easiest one to state: what is a cost and what is a benefit? How do you value the changes?