Final Report Summary - RISKEQCC (Risk and equity in climate change problems)
The aim of this project was to develop method for policy evaluation specifically designed for the issue of climate change. Such evaluations have to take the question of intergenerational equity seriously, hence propose a fair sharing of the burden of climate change mitigation between generations. This problem is reflected in the so-called social discount rate that translates future costs and benefits in current values. Evaluation methods must also deal with the problem of the uncertainty of the future evolution of climate. They must promote a fair sharing of risks at the global level.
The traditional cost-benefit analysis balances the costs of undertaking the policies with the expected benefits. When benefits are delayed, they must be discounted using a discount rate. The choice of a social discount rate is a very important and debated problem. There is a long history of economists proposing low discount rates (and hence a higher present value of future costs and benefits). A fair treatment of future generations indeed requires to take seriously into account the damages they may incur. For this to be possible, we must not discount these damages too much. This line of argument was put forth in the so-called Stern Review (Stern, N. The Economics of Climate Change: The Stern Review, London: H.M. Treasury, 2006), drawing on earlier contributions.
One aim of the research conducted within the RISKEQCC project was to explore ethically justifiable reasons for discounting. One reason for discounting is the uncertainty about the existence of future generations. It was already mentioned by the Stern review. Our research has examined a second argument which has never been explicitly used in the literature: if future generations are richer, putting less weight on their utility can be seen as a simple matter of equity. Indeed, as is already known in the theory of cost-benefi t analysis, using equity weights (putting more weights on the costs and benefits of the poor) is a way of introducing redistributive concerns - measured in economic theory by an index of 'inequality aversion'. For example, the literature on equality measurement has developed rank-weighted measures (the most famous being the popular Gini index) to capture this idea of a priority to the poor. Changes in rank-weights completely determine the equity weights to be put on the costs and benefits of different people.
In the RISKEQCC project, we have developed rank-discounted criteria for the case of (infinite) intergenerational distributions of goods. These criteria are called extended rank-discounted utilitarian (ERDU) criteria. These criteria have several appealing properties. They treat all generations equally (the interests of all generations are treated similarly), they display some preference for redistribution (expressed by the Pigou-Dalton transfer principle) and they can represent a wide range of such preferences. We have also showed the implications of these evaluation criteria for climate policy: if future generations are richer, a higher preference for redistribution yields a higher discount rate; if on the contrary future generations are worser, a higher preference for redistribution yields a lower discount rate. Hence, the social discount rate is crucially determined by the attitudes regarding intergenerational distribution. Last, we have showed that our criteria promote sustainable discounted utilitarian policies. This last result is significant for policy design: the aim of sustainability is clearly supported by appealing moral concerns.
All these results are presented in a paper which is forthcoming in the Journal of Economic Theory. They have been presented in several conferences and they have attracted the attention of several scholars (to the best of our knowledge, at least 3 papers or working papers quote our results). They also have conducted to new research project that the researcher conducts with professor Asheim from the University of Oslo.
Another important aspect of inequalities that arise in the question of climate change is that of the unequal uncertainties faced by different regions in the world. Both Stern report and the 4th Intergovernmental Panel on Climate Change (IPCC) report both argue that the effects of climate change are highly inequitable, with poor countries being hit harder. However, they have not specifically studied the inequalities arising from the climate uncertainty. One aim of the RISKEQCC project was to provide some insights concerning this question.
Due to an early termination of the project, we were only able to provide a few results on the empirical side of the issue while the methodological part was still under development. To evaluate inequalities of climate change in different policy scenarios, we used the CLIMNEG world simulation (CWS) integrated assessment economic-climate model (developed at the host institution, CORE). The climate and economic part of the model are closely related to other integrated assessment model such as the RICE model by Nordhaus and Yang. Distinctive features of the CWS model are that it allows a wide range of regional coalition structures, strategic behaviours. It also includes a new partition into 18 regions, which allows a precise inequality analysis. Part of the project was to include an ex ante decision procedure into the model: regions make investment plans based on their expectation on the climate sensitivity parameter. This gave rise to a model named stochastic CWS model (S-CWS).
Using the S-CWS model, we were able to model different scenarios: a business-as-usual scenario, a fully cooperative scenario (where countries choose their emissions to maximise global welfare) and a fully non-cooperative (Nash) scenario. In this context, we highlighted an additional gain to cooperation, namely risk reduction. We also provide evidence that risk reduction from cooperation may benefit particularly some poor regions such as Africa, India, South Asian countries or the Mediterranean. However, some rich regions (Europe, Japan) also significantly benefit from a cooperative policy, both in expected terms and in terms of risk reduction. These results have been published in the journal Environmental Modeling and Assessment.
These results can have significant impact for European policy. They highlight new gains (in particular in Europe) from cooperative agreement. They may also be of interest to the general public which may better understand the importance of such agreement. At the global level, they may also be of interest to developing countries who may want to promote a global climate policy.
A few other research projects have been started during the fellowship on the methodological aspects of the measurement of inequalities in a risky context. The draft of two manuscripts (in collaboration with Professor Marc Fleurbaey from Princeton University) have been initiated: they aim at defining an ex post approach to inequality in the context of climate change. The objective is to take into account the inequality of the distribution of goods in any realisation of the climatic risk in the evaluation of climate policies.
The traditional cost-benefit analysis balances the costs of undertaking the policies with the expected benefits. When benefits are delayed, they must be discounted using a discount rate. The choice of a social discount rate is a very important and debated problem. There is a long history of economists proposing low discount rates (and hence a higher present value of future costs and benefits). A fair treatment of future generations indeed requires to take seriously into account the damages they may incur. For this to be possible, we must not discount these damages too much. This line of argument was put forth in the so-called Stern Review (Stern, N. The Economics of Climate Change: The Stern Review, London: H.M. Treasury, 2006), drawing on earlier contributions.
One aim of the research conducted within the RISKEQCC project was to explore ethically justifiable reasons for discounting. One reason for discounting is the uncertainty about the existence of future generations. It was already mentioned by the Stern review. Our research has examined a second argument which has never been explicitly used in the literature: if future generations are richer, putting less weight on their utility can be seen as a simple matter of equity. Indeed, as is already known in the theory of cost-benefi t analysis, using equity weights (putting more weights on the costs and benefits of the poor) is a way of introducing redistributive concerns - measured in economic theory by an index of 'inequality aversion'. For example, the literature on equality measurement has developed rank-weighted measures (the most famous being the popular Gini index) to capture this idea of a priority to the poor. Changes in rank-weights completely determine the equity weights to be put on the costs and benefits of different people.
In the RISKEQCC project, we have developed rank-discounted criteria for the case of (infinite) intergenerational distributions of goods. These criteria are called extended rank-discounted utilitarian (ERDU) criteria. These criteria have several appealing properties. They treat all generations equally (the interests of all generations are treated similarly), they display some preference for redistribution (expressed by the Pigou-Dalton transfer principle) and they can represent a wide range of such preferences. We have also showed the implications of these evaluation criteria for climate policy: if future generations are richer, a higher preference for redistribution yields a higher discount rate; if on the contrary future generations are worser, a higher preference for redistribution yields a lower discount rate. Hence, the social discount rate is crucially determined by the attitudes regarding intergenerational distribution. Last, we have showed that our criteria promote sustainable discounted utilitarian policies. This last result is significant for policy design: the aim of sustainability is clearly supported by appealing moral concerns.
All these results are presented in a paper which is forthcoming in the Journal of Economic Theory. They have been presented in several conferences and they have attracted the attention of several scholars (to the best of our knowledge, at least 3 papers or working papers quote our results). They also have conducted to new research project that the researcher conducts with professor Asheim from the University of Oslo.
Another important aspect of inequalities that arise in the question of climate change is that of the unequal uncertainties faced by different regions in the world. Both Stern report and the 4th Intergovernmental Panel on Climate Change (IPCC) report both argue that the effects of climate change are highly inequitable, with poor countries being hit harder. However, they have not specifically studied the inequalities arising from the climate uncertainty. One aim of the RISKEQCC project was to provide some insights concerning this question.
Due to an early termination of the project, we were only able to provide a few results on the empirical side of the issue while the methodological part was still under development. To evaluate inequalities of climate change in different policy scenarios, we used the CLIMNEG world simulation (CWS) integrated assessment economic-climate model (developed at the host institution, CORE). The climate and economic part of the model are closely related to other integrated assessment model such as the RICE model by Nordhaus and Yang. Distinctive features of the CWS model are that it allows a wide range of regional coalition structures, strategic behaviours. It also includes a new partition into 18 regions, which allows a precise inequality analysis. Part of the project was to include an ex ante decision procedure into the model: regions make investment plans based on their expectation on the climate sensitivity parameter. This gave rise to a model named stochastic CWS model (S-CWS).
Using the S-CWS model, we were able to model different scenarios: a business-as-usual scenario, a fully cooperative scenario (where countries choose their emissions to maximise global welfare) and a fully non-cooperative (Nash) scenario. In this context, we highlighted an additional gain to cooperation, namely risk reduction. We also provide evidence that risk reduction from cooperation may benefit particularly some poor regions such as Africa, India, South Asian countries or the Mediterranean. However, some rich regions (Europe, Japan) also significantly benefit from a cooperative policy, both in expected terms and in terms of risk reduction. These results have been published in the journal Environmental Modeling and Assessment.
These results can have significant impact for European policy. They highlight new gains (in particular in Europe) from cooperative agreement. They may also be of interest to the general public which may better understand the importance of such agreement. At the global level, they may also be of interest to developing countries who may want to promote a global climate policy.
A few other research projects have been started during the fellowship on the methodological aspects of the measurement of inequalities in a risky context. The draft of two manuscripts (in collaboration with Professor Marc Fleurbaey from Princeton University) have been initiated: they aim at defining an ex post approach to inequality in the context of climate change. The objective is to take into account the inequality of the distribution of goods in any realisation of the climatic risk in the evaluation of climate policies.