(dramatic music) - You know arguably, climate change is the biggest challenge that
the human race is facing, although there are lots of people who deny that it does even exist. Those people agree that this is happening, and this is happening mainly as a result of human activities, and we
need to do something about it. (plane engine roaring) So a lot of people are
wondering whether we need to change the economics system in order to address this issue. These are quotes from Naomi Klein, the Canadian, activist and author. The capitalist system or
the free market system is at the root of the environmental problem. The response from the
economics profession, dominated by neoclassical economists, is that actually the solution
to the environmental problem is more markets, not less markets. Actually these economists
have urged us to use markets more widely in terms of
both setting the goals of environmental policy
and creating the means of by managing the environment. Reducing pollution actually means that you are also going
to forego the benefits of those activities that
have generated pollution. This is a very reasonable point. Therefore these economists say, the optimal level of
pollution is not zero. It doesn't means that you are
going to completely forego the benefits of producing
something, driving around. So they say, that you have to
compare the cost of the damage that pollution creates and the benefits from the pollution generating
activities, and compare them. The neoclassical approach
tries to express all benefits and costs in monetary terms. So how much is it going to benefit people to produce this things? How much damage does it do in terms of ridding peoples health and sorts. They try to monetize all this, so that they compare them on
a sort of objective basis. When trying to put monetary
values on various costs and benefits involved a certain policy, neoclassical economists
prefer to use a market price. If there's a market, you know. So a forest of trees used
for Christmas trees is relatively simple to calculate. Of course, when it comes
to environmental policy, typically the values
of environmental assets are very complex. That for us to also
provide other benefits. Sanctuary for an endangered
species of birds, or it might give people a
place for pleasant walks, and sports activities. This is among the specialists
known as the amenity value of the forest. There is no market for
endangered species of birds, and it becomes quite complicated. So suppose that the
government is contemplating the introduction of
this involuntary glacier about drinking water that
will reduce the level of say arsenic in water, and you know it's going to save one life in one million per year. Then suppose that this country
has a hundred million people, that's the population of
Mexico, Ethiopia, you know so. So this means if you
introduce this regulation, you're basically going to save 100 people. They'd be some cost that to doing this, so you need to compare
that cost to the benefit but how do you value human life? And all the people at that point, give up, you can not value human life. But, many of my professional
colleagues are undaunted by that, so they try to
calculate it somehow, how markets value, human life. So one popular measure is to
look at the wage differentials. What I mean is suppose
that they are two jobs, but one job involves some risk. And another is risk free. Now the risky job would
require paying higher wages to people, because people are not stupid, they know that their is a slight risk that of being killed in the job. So suppose that that
probability is 1/10,000. So what economists due is to
look at that and then say, what is the actual wage differential. If it's say, $900 per year, you will say, well people are worth
willing to get paid $900 more for a 1/10,000 chance of being killed. Multiply $900 by 10,000, you
will get $9 million dollars. So by using wage differentials, in the labor market economists
have cleverly calculated, how people actually value their lives. I mean no one said, that
I'm thinking human life is at $10 billion dollars,
or $100 million dollars, but using a market prices,
they have cleverly worked out how you can infer the kind of value that people put on what their own lives. Now this is a fictitious example, but it's not completely
fictitious in the sense that $9 million is indeed the value upon what they call statistical life, used by US government agencies. When the US government
agency decides on introducing tougher regulations on drinking water, or relaxing regulation on
road safety they basically say one person is worth $9 million dollars. Well once again, we have a
serious ethical problem here, because a lot of people will
just refuse to value human life in monetary terms, period. But even when you accept that
this is morally acceptable, there are lots of practical problems, because A, this suggests that
when people choose these jobs that they do it with the full information. No, I mean usually they don't. No, I mean, yeah, people will vaguely know that there is a chance of getting killed, 1/10,000 chance, but do they
really know it's 1/10,000 or that 1/9,000, 1/6,000,
they really don't know. Also this practice assumes that wage is the only factor
determining which job to take. Some work can be boring to the point of being soul destroying. So that there are these
other dimensions of work, I mean that people consider
when they choose jobs, so even though this neoclassical
environmental economists, go out on limb to put monetary
value even for human beings, even they admit that there are things where you simply can not use market prices to infer the value for. Environmental economists will recognize that environmental assets like forests provide ecosystem services like, stabilizing the soil, retaining water. So typically when you have
a forest, when it rains, the water gets absorbed by the trees, and the forest as a
whole, and moves slowly at the release so the risk
of flooding is reduced. If you have just a de-forested area, the water just pours down,
and actually creates flooding. And most relevantly for climate change, the trees absorb carbon dioxide. So it, there are these ecosystem services, some natural assets
might have even cultural or symbolic values. Some forests might be considered a place of special significance for some group of indigenous people. Now how do you value these things? Economists though are people that don't easily give
up, so what do they do? They do surveys. You can't just go to someone
and say well that forest, in your area, how much
would you value it for? No one has an idea like that, especially if the question
becomes something like how much that do you think is a value of protecting this
endangered species of bird that live in that forest. So that they have devised a
rather clever questions like, if there's this charity, protecting this endangered
species of bird, how much would you donate
per year to this charity? Is it zero, is it $20, is it $40? So they have developed
ways to kind of teasing out the people's real kind
of monetary measurement through these surveys. Unfortunately, these surveys
can be very unreliable, because these are totally
hypothetical questions, you know those kind of charities
may not even exist, yeah. And you might be asking people who have very different philosophy about their relationship with nature. And researchers have also found
that very often when asked, these hypothetical questions, people often integrate
them in their own way and re-frame the question
as something like, how much money do you
actually donate to charities protecting wild life. But that is a very different question from that very specific question about that particular endangered
species of bird. So their are lots of
problems with these surveys. But too go even deeper
into the limitations of cost-benefit analysis,
we can actually look at this very particular monetary value that you often hear in the
debate on climate change. Now there's apparent consensus,
that if we follow this path of business as usual, as it is called, basically do nothing to kind
of control climate change. The world average temperature
will rise by four degrees, and that will bring
costs that is equivalent to our around 5% GDP per year. Is that a pretty widely accepted estimate, but when you actually
pick this number apart and try to see how this
has been constructed, you begin to see that a
huge amount of assumptions and simplifications and
omissions have gone into it. The number is very problematic. This is not to say, that
we should never come up with these kind of numbers. When you are interpreting
these numbers you really have to understand how these were made. And I sometimes joke, that
numbers are like sausages. You don't know what went into them, you don't want to know
what went into them, no. Numbers that are basically manufactured, even relatively simple things
like rate of unemployment. These are highly manufactured numbers. Which is not to say that they
are wrong, or fictitious, or misleading, necessarily,
but you really need to know how this numbers have been
created in order to judge whether that number is useful
at least for the purpose that you are trying to use it for. There are a series problems illustrated by this 5% GDP number. And I've listed six of them. The first is that the issue of complexity. In estimating this 5% of GDP number, all of the things have been excluded, so people have pointed
out that this estimate did not include the possibility
of temperature rising above certain threshold, and starting the thawing
of the Arctic permafrost. That area of frozen
ground in the Arctic area, and some people argue that
this will release a massive amount of methane gas, which
is four times more powerful than carbon dioxide,
in terms of it's impact on global warming, and
they didn't include this. Others have pointed out,
this estimate didn't take into account the fact that
the rising sea level due to global warming, will destroy
a lot of island nations, and cost economies. And how are you going to value that? No I mean, this rising sea
level is a serious challenge for some of these islands states and I think one of the pacific
island states basically have decided to buy up land in Australia, and move their country if
the worst comes to worst. They'll get wiped out. People have pointed out that this estimate didn't include the cost
from conflict resulting from large scale migration
tens of thousands, hundreds of thousands of
people might be moving to a neighboring country, what is the potential
cost of that conflict. There is a very complex effects
which have not been included in this estimation mainly
because it's almost impossible to put the monetary value on these things. And then there is the
issue of uncertainty. For some things, you know
calculating problem is fairly easy, the insurance
industry basically can exist because it's a rather easy
to calculate the chance of someone with a
particular ethnic background and lifestyle and
occupation and someone dying in the next say 10 years,
20 years, or whatever. They have a pretty accurate estimation of the chance of some 18 year
old guy who just bought a car, kind of having an accident. But when it comes to
things like climate change, there's a huge uncertainty. Some would describe this
as a caging uncertainty, because this is an uncertainty
that does emphasize like cage you just can not estimate with any confidence the range
of plausible probabilities. I think the person who put this idea most beautifully is Donald Rumsfeld, the former Defense Secretary
of the United States. Of course he did it without
realizing what he was doing, but he once said, there are known knowns, and there known unknowns, but then there are unknown unknowns, that's caging uncertainty, yeah. So there are things that
we know that they exist, and can reasonably estimate
the probabilities for. That's known knowns. Known unknowns, these are things
that we know that is likely to happen, we can't quite
estimate the probability but we at least know
that they are possible. But with things like climate change, there are so many unknown unknowns. You don't even know that
the problem exists not to speak of calculating the probability. And then so, when you
have something like this, it is almost impossible
to assign probabilities, to likely events. A, you don't really know
what the likely events are. B, even if you know,
it's almost impossible to put a probability on them. I mean for these things that are difficult of putting monetary value on, is that there really secondary. By nature things like climate change happen over a long period of time, you have to somehow find a
way to decide whether say, cost of $100 dollars today, is bigger or smaller than
benefit of $120 dollars twenty years later. Because, not unreasonably,
all of the people argue that $100 dollar today, is more valuable than $100 dollar tomorrow. The main justification is that, especially when it comes to
things like climate change. The world will be richer twenty,
thirty, fifty years later, because we keep growing. The output keeps growing
faster than the population, however low the rate is. Our future selves and our
grandchildren they are going to be richer, so if we have
to spend $100 million dollars, to do something about climate change, and if they get only $100
million dollar benefit, your future self and grand
children then actually it's not worth it, because
the cost is higher. Because that future $100
million dollars is not as valuable as today's
$100 million dollars. So basically, what you do is
you introduce this thing called discount rate, which
is like interest rate, but into the future. And say, my discount
rate is 3%, which means that $100 next year is only
worth $97 dollars today. And then you keep using this
rate to essentially calculate that something equivalent
to compound interest rate that to know how much $100
will be worth, in 20 years, or 25 years, or 200 years. Now, discounting of course,
is once again a sensible thing to do, but I mean it doesn't quite work for something like climate change with the long time horizon. First of all, with something
like climate change, you don't even know that the
world economy will be richer than today in the future. Because some people are predicting that when this climate change, that effectively will be so devastating, that actually the world economy
might have trouble growing at the rate we have been growing. At some point, if the
environmental challenges become too large, and the
economy keeps shrinking, actually it becomes very
difficult to justify discounting. But moreover, because that
when you do this discounting, you do it in a compounding way, as the timeline gets longer
the effects get magnified. And if the future timeline is very long, the effect of compounding will be huge. So to illustrate this point,
you know the discount rate of for this environmental
things are often set at 5%. Now if you use the 5% discount rate and calculated the
value of World GDP which at the moment stands on 75.5 trillion. Say 200 years later, because
of this compounding effect, it will be only equivalent to
about $4.4 billion dollars. Which is 0.0058% of the original value, and equivalent to the GDP of Togo, the 155th largest economy of
the 193 UN member countries. So basically it's nothing. Problem with climate change
is that what the cost of that we need to pay to prevent it, mainly concentrated in
the next 20-30 years. And the benefits that
we see when we come in at the earliest of 40-50 years, and possibly 200 years into the future. So this is why many
environmentalists argue that applying discounting to
climate policy is a kind of discrimination against
a future generation, simply because they are not here, and they will be here in
200 years, they don't count. This is a serious issue for
something like climate change. I don't know calculating
the value of a building or road in a particular area, probably some reasonable practice to adopt because the cost and
benefit will be basically will be within the next
10, 20 years together. But for something like climate change, this is a big problem. What cost-benefit
analysis does is actually not compatible with Pareto
Criterion which is supposed to be at the foundation
of neoclassical economics. So Pareto Criterion
just to remind you says that you can not call a
social change an improvement if it makes even one person worse off. What the economists do, when
they do cost-benefit analysis, they aggregate all the costs
and benefits without regard to the distribution of cost and benefits, and some will come up with a single value for the whole country, for community, even for the whole world, when
it comes to climate change. There is no recognition that this is a completely
incompatible with climate change. Because yes, that the net
benefit might be positive, but it might mean making
lots of people worse off. Having said that, you know the problem with cost-benefit analysis, not just to do with
environmental policy but you have to recognize that, so that the distribution of consequences are completely ignored. And then there is the
issue of the challenge of valuing human life. We already discussed how economists try to infer the value of a human life, by looking at labor market
and wage differentials. However when it comes to climate change, the World Health
Organization has predicted that a four degree warming
would probably cost an extra half a million
premature deaths every year. Because there will be more malaria, and more people will
experience heat waves, or die of dehydration, and so on. How do you value the life of these people? Now the thing is, that if you use the wage differentials approach
that we describe earlier, it will actually mean that you are going to value the life of
people in poor countries much more lowly than you value the life of people in rich countries. Indeed, the entire governmental
panel on climate change, IPPC has valued lives
lost in rich countries due to climate change, at
$1.5 million dollars. But that the lives in poor countries, only at about $100,000 dollars. It's basically because
people in poor countries are a lot more willing to
accept higher risk jobs at a slight wage differential,
because they are desperate. These people saw a lot less willing to spend money on you
know avoiding the risk of climate change. Because they have little money. So if you used that wage
differential approach, the wage differential for
a given risk will be lower in a poor country than
that for the same risk in a rich country. So it, going back to that
fictitious example earlier, in the US you might have to
pay the guy $900 dollars more to make him do this job, that has the, 1/10,000 risk of death over risk free job. And in a developing country,
this could be just $20. A lot of people get upset,
this is morally unacceptable. You know, how can you
say that some guy living in a rich country is 15x
more worth than a guy that is living in a poor country. But whether we accept this
difference as convincing depends on whether we think that the market prices
are morally acceptable. Because that the lower value
of life in poor countries is a consequence of using market prices. So that you have wage
differential, in this country which is much lower, compared
to that in a rich country, so that gives you low
value of life, go back to Don Helder Camara quote, "When I give food to poor
people, they call me a saint. "When I ask why they do
not have enough to eat, "they call me a communist." That really shows how the market prices, are actually reflection of
the underlying social order. If you think that you know
poor people in poor countries are accepting this higher
risk in their work, only because the say land is
very unequally distributed when there's great barriers
to social mobility, when there's oligarchy that
prevents people's access to productive assets. Yeah, then you might say, well there's actually a wage differential which is much lower in a
developing country is wrong. Because the underlying social order that produces that wage
differential is wrong. And finally the issue of morality. From the Donald Trump camp
which basically denies that is a caused by human activities, and therefore we can ignore it. We can't really do anything about it, to de-green's life like
commented to address the cuts in emission,
right now, right here, all of these people have
moral concessions beyond GDP. And they are thinking about
climate change because this is not just about you
know do they have more money that 50 years later,
will your grandchildren that have the less money
than you do, it's about, first of all different
peoples responsibilities for past emissions and cuts
in future emissions, you know. You know 'cause a lot of
developing countries are very upset that you know basically
something like 70% of CO2 gas in the atmosphere was generated
by the rich countries. And then know they say,
what is done is done, you know you have to cut
your future emissions. And then you know that understandably a lot of developing
countries are upset about it, because it sounds like the
rich countries are washing their hands off from their
historical responsibilities. You know people are against
actions for climate change, tend to argue that government intervention to transform the economy
onto a low carbon path basically poses a great
threat to economic freedom. The government doesn't
have the right to tell us how to consume, how to produce. I mean, many environmentalists are not doing cost-benefit analysis, and say we should do this
because x years later, we'll be better off we did this. They are moral thinking
in terms of our obligation to the future generation, and
our obligation to the planet. And you know how do you
monetize this thing. If GDP was all that
mattered, you could say that the second world
war had not really effect on the world. No actually, by some
estimates the second world war increased World GDP,
so was it a good thing. Well no one will say that,
because there was the Holocaust, there was the Atomic
bomb in Japan, and yeah, I mean human suffering
on a kind of cosmic scale throughout the world. So this poses a fundamental moral dilemma, there are so many ethical
issues involved in, especially things like climate change. And we just have to know
how to deal with this. I have discussed various
technical, theoretical, and problems with cost-benefit analysis. This approach needs to
be used in conjunction with other approaches, because it has some serious deficiencies. First of all, we need to use things like structure interviews
or group discussion forums, in order to gain more nuance, understanding of what people want. Because I have already told you that when they do cost-benefit
analysis economists sometimes resort to surveys,
because there is no other way to find out how much people value this, how much they are willing
to pay for, I don't know, flood defense or whatever. So what we need is to really
keep people the opportunity to express their moral
and political judgments through this discussion forums, and more in-depth structured interviews, because trying to force
them to put monetary values on everything, is really
distorting the picture. Okay, this way, you may not
get one nice neat number, you know. But that's the nature of the world, it's messy, it's complex. Secondly, we need to take this issue of uncertainty very
seriously when it comes to climate change especially. And people advocate this thing called the precautionary principle. This is the first kind
of flag, in a major way in the 1992 Rio declaration
on environmental development of the United Nations. The first idea is that
we have to acknowledge the limits of our knowledge and accept that sometimes, that we just
don't have enough information to come up with a reasonable
probable estimation. Unfortunately, what happens is that when economists are supposed to do cost-benefit analysis
for some government ministry or agency you know they are forced to invent these probabilities. When they have no real scientific basis, to come up with certain numbers,
but since everything has to be put in monetary terms, and they need to produce a
single number in the end, They have to invent this. The second idea is that some
threats are fundamentally more serious, and should
be treated differently. So things like climate
change, is a problem in a class of its own. It's not like, I don't
know, building a bypass, your I don't know, some
market town in Cambridge. This is at the problem of by unique class and these problems need
to be taken seriously and precautionary actions
might have to be taken in relation to it, even if you
don't have the full picture. Having seen how the
cost-benefit analysis favored by the mainstream economist profession, the size of environmental
goals and what the limitations of the approach are. We still need to discuss
what kind of policy tools, and what kind of means
are recommended to deal with climate problems and
other environmental issues, and that will be the
topic of the second part of this lecture, which will
come later in the series.
