Answering Three Questions on Climate Change

Paul Klemperer has three unanswered questions on climate change. I can't answer them fully, of course, but it might be useful to at least make a first-order approximation, or an attempt at one.

The first question is how likely the occurrences are against which we should be paying an insurance premium: what's the chance that global warming is going to get disastrously bad?

This is actually two questions. You can insure your house against fire, but you can't insure your house against global thermonuclear war. There are two types of disastrous climate change: the insurable type – which can be prevented if we "pay the premium" in terms of reducing our carbon emissions – and the uninsurable type. Some disastrous outcomes, such as the aforementioned nuclear conflagration, are going to be possible no matter how much we reduce our carbon emissions.

That said, the "business as usual" forecasts in the IPCC reports and elsewhere are unremittingly grim. If we don't reduce our carbon emissions, then the chances of a disastrous outcome are very high indeed – somewhere between 50% and 100%. The ice sheets in Antarctica and Greenland will continue to melt, the atmosphere and the oceans will continue to get warmer, and sea levels will continue to rise. Eventually – and this is mostly a question of when, not of whether, if we don't act now – most of sub-Saharan Africa and the Indo-Gangetic plain will become uninhabitably hot, while most people living in low-lying cities will find their homes flooded. Both are indubitable global disasters.

So the probabilities Klemperer is worried about are very high indeed – much higher than most insurance companies would ever be comfortable with. The much more difficult question is the size of the insurable probabilities. Let's say we do spend 1% of global GDP reducing our carbon emissions: then what would the disaster probability become? The difference between that answer and our first answer is very important, and it's that number which it's very hard indeed to get a good bead on.

Klemperer's second question deals with other types of catastrophe-as-seen-by-future-generations, such as the extinction of millions of species, especially in the oceans. This one's easier, I think: we know is that after you add them in, the chances of a global disaster can only go up, and the chances of an insurable disaster can only go up as well. So if a course of action makes sense to our eyes, it only makes more sense after answering this question.

The third question is about the moral standing of future generations. Klemperer concentrates on discount rates here, but the really big effects of Nick Stern's calculations come not only from discount rates but also from the fact that if you push forward 200 years, the sheer number of future humans so vastly outweighs the number of present humans that even if they're given only a fraction of our moral weight each, they still easily outweigh us in aggregate.

The journalistic shorthand, which Klemperer uses, is to talk about "our great-grandchildren" – which I think provides one interesting hint as to how we might tweak our approaches here. It's well known that individuals care much more, in terms of how much they are prepared to spend, on their own family as opposed to others' children; on their own neighborhood; on their own state; and on their own country. A certain percentage of today's population will die childless, and therefore have no great-grandchildren at all; other families, too, will die out within a generation or two. It is reasonable to assume that those families might not be prepared to spend quite as much, in terms of insurance premiums for their great-grandchildren, than those families which will be vastly larger in 100 years' time.

It's also reasonable to assume that most of the population growth over the next 100 years will come from countries which punch well below their population weight right now in terms of global GDP. Essentially, Northern Europeans are paying the insurance premium for Indian families. Which is quite right, in that it's the Northern Europeans and the North Americans who caused the problem in the first place. But even so, the number of families today who would want to pay the insurance premium might be a little bit lower than assumed in Nick Stern's calculations. So maybe the answer here is to keep Stern's discount rate within families, but to do the calculations giving each person alive today – along with all their descendants – an equal weight. That would have the effect of raising the effective discount rate, but probably not enormously.