Climate change econometrics


Maybe econometricians have their uses after all. That is my view having just heard a paper on the economics of climate change by Chicago prof Kevin Murphy.

Murphy pointed out a few concepts that are a mundane part of economics, but which seem to cause great confusion to global warmists. Such as the discount rate. A bird in the hand is indeed worth two in the bush: but by imagining that the bird in the bush is worth nearly the same as the handy one, allows things like the Stern Review come up with hugely alarmist demands. A 1% difference in handiness makes a huge difference over a century or two, or three.

So future generations want us to make sacrifices now to make them better off? Suppose Stern demands we make an investment now of £1bn in order to give the world a benefit of £20bn in a century's time. Twenty-to-one benefit: a no-brainer? No, says Murphy: if interest rates are 6%, we would be better to invest the £1bn, which would earn £339bn by 2108. So the lucky people then could buy their own £20bn benefit - and blow the other £319 on a big party.

Indeed, 'the incremental costs of emissions reduction,' says Murphy, with some simple calculus, 'should rise at the interest rate.' The more you expect the future economy to grow, the more you are making yourself and your future offspring poorer by Kyoto-style cutbacks today. QED.