-1=E,
Your comments have done nothing to persuade me that the very low discount rates being used in the IAMs to justify mitigation policies have a sound basis. Saying that discount rate is a moral judgement and cannot be derived from long term historical trends is unhelpful. I think about where my father and grand father would have invested 70 and 100 years ago if they’d been asked to invest in climate mitigation policies or in their childrens’ education. I know what they would have done.
New research from Dr David Evans blows holes in climate modelling systems.
Yes, he definitely says doubled CO2.
But what is unclear is the timeframe for doubling. It is not specified.
Imo, the only thing that makes sense is Hansen took him to mean, what if CO2were doubled long before 2030… what would we be looking at out this window?
Others could argue what was meant was a CO2 doubling as of 2030, but that makes little sense.
Jim D,
You are not using a successful mitigation strategy for the scenario. Use AR5’s 2 C strategy because that gives the most benefit.
That’s a statement of your belief, not fact. It’s a baseless assertion. Surely you know better. by know.
As far as I could tell you used half Copenhagen which isn’t a successful mitigation strategy by far.
Well you couldn’t tell because yuou don’t understand what it is is. Its the assumed particpation rate in global mitigation policies. It unattainable, completely unrealistic. It’s purely an academic exercise – as are all the IPCC excercices.
You clearly don’t understand what strategy means. 2C target is not a strategy. In fact it is nothing except an ideologically based target.
Jim D, you have no credibility. You are not objective. You simply quote the mantra from the CAGW alarmist’s cult.
“If that is the case the argument about discount rates will go indefinitely.”
Not really. The question on if murder is wrong is a moral question. The vast majority of people in society agree murder is wrong.
“I prefer to have it base don empirical evidence”
This isn’t exclusive to the fact that choice of discount rate is a moral question. You can still use empirical evidence when answering that question.
Anyway, can we first focus on agreeing about what to use (rate of social time preference or real interest rate) in cases of no risk? Then deal with the question of risk?
“Your comments have done nothing to persuade me that the very low discount rates being used in the IAMs to justify mitigation policies have a sound basis.”
Okay, I’ll a different approach.
Suppose that you are an individual that earns $10 per year for the rest of your life and you have a rate of social time preference of 2% (that is, you value consumption in 1 years time at 98% the value of present consumption). Well if the interest rate were more than 2%, you would be willing to save some money for future consumption and if the interest rate were less than 2%, you would be willing to borrow some money for present consumption. So a society that consisted of such individuals would result in a real interest rate of 2%.
Now suppose we have the exact same scenario, except in this case the economy is growing in real value per capita by 2% per year, so every year the person gets a 2% raise. In this case, would the individual being willing to borrow or save if the interest rate were 2%? Well if the individual has diminishing marginal utility, then the person would be willing to borrow some money for present consumption since in the future they will be richer (and thus have a lower marginal utility). So in this case, the interest rate will be more than 2% in such an economy.
That is, the combination of diminishing marginal utility + economic growth causes a departure of the social rate of time preference from the real interest rate. This is basically all the Ramsey equation states.
If you wish to compare Utility levels of the individual at different points in time, the rate of social time preference is what you want.
Or maybe look at things another way.
Let’s say you are trying to determine the net present value of consumption using a discount rate r. Then you are calculating:
sum(i = 0 to infinity; (1+r)^(-i)*C(i)).
This gives you a way of ranking varies consumption distributions over time.
Now lets say instead you wanted to determine the net present value of utility of consumption, where utility is a constant relative risk aversion function of consumption. I.e. U(C) = C^(1-a)/(1-a), where a is the coefficient of relative risk aversion.
Does net present utility give you the same ranking of consumption distributions?
sum(i = 0 to infinity; (1+r)^(-i)*(C(i))^(1-a)/(1-a))
No it does not. If a is positive, then generally the choice of r will be too high to give you the same ranking (and thus maximizing net present value of consumption is not the same decision rule as maximizing net present value of utility; at least if you use the same discount rate).
However, if consumption is growing at a rate of approximately g per year, then if you use the social rate of time preference p = r – a*g when determining net present utility
sum(i = 0 to infinity; (1+r-a*g)^(-i)*(C(i))^(1-a)/(1-a))
Then this is what gives you approximately the same decision rule as when you are maximizing net present value of consumption.
Or put more bluntly.
Using the real interest rate when comparing consumption levels, or things measured in dollar values makes sense.
However, when comparing utility levels, or levels of social welfare, the social rate of time preference is more appropriate.
AK, your “Gas or liquid hydrocarbons produced from solar-powered biocatalysts” link looks pretty hopeful, at least until Rud Istvan puts on his green eyeshade and shoots some holes in it.
I quote AR5 and you choose not to accept it even when they use models of the type you keep referring to.
Jim D,
I quoted DICE-2013R and you you responded to my comment but didn’t deal with my comment. You’ve applied the 4th and 6th “Signs of Intellectual Dishonesty” http://judithcurry.com/2013/04/20/10-signs-of-intellectual-honesty/
Currently, as we now know well, 1 and 3 have run into conflict, and new non-fossil-based technology would be the only way around it.
I could also say you are ignoring AR5 and the studies that put the social cost of carbon at an average of $40 per tonne, because you haven’t commented on them, even though that is what I led with.
Jim D,
SCC of $40/tonne is meaningless without getting into a full debate about the underlying assumptions and the method.
You are diverting. I raised the comment and used DICE and posted links and a chart. Please come back to my comment. Have you found any significant errors in the analysis on which the chart is from, and particularly the red curve. If so please state them specifically.
-1=e^
Anyway, can we first focus on agreeing about what to use (rate of social time preference or real interest rate) in cases of no risk? Then deal with the question of risk?
Certainly.
I don’t understand well enough ‘rate of social time preference’ or Ramsay Equation. So let’s deal with risk free real interest rates plus risk premium for the advocated policy. I agree we can do that in two steps.
So, can you show a chart of risk-free, real interest rates for the world for the historical past – e.g. over 300 years, 1000 years?
If you can’t show that, can you show me an authoritative chart (not from the CAGW consensus advocates) which justifies discount rates of 5.2% declining to 2.2% by 2300 for high risk investments (with virtually no chance of a return on investment)?
You used real interest rate of 2% in your example. Consumers preferences demonstrate they use discount rates of 20% to 50% in their purchasing choices.
You are using many economists’ terms but they are not defined. Nordhaus does the same. And he, Tol and others keep changing the terms without defining what they are and which ones they use in an equivalent sense. I wrote to Nordhaus about it after a long discussion we had following release of his book “A Question of Balance”. He replied and agreed he should define all the terms and state which terms are used interchangeably. If he has done that I haven’t seen it. Perhaps you could do it in a post so we can all use it to reference to.
So, there is no point in keeping using all these terms. For me they are just confusing. That’s why I asked you to stay at the high level and justify the discount rates used in DICE-2013R (without reverting to discussion about the Ramsay equation). I just want an unbiased sanity check about the discount rates and why they are so much lower than governments use for other economic analyses.
Jim D,
I replied to your comment and asked:
What policies are your referring to?
What is the net cost benefit of those policies, to say 2050 and 2100? What’s the uncertainty on your estimate of the net cost benefit?
You didn’t answer.
Melbourne University late3st Magazine ‘The ESSAY’
same ol’ same ol with pickchure.
The road ter Paris
ain’t the road ter Damascus
fer the ideologically committed..
http://mag.alumni.unimelb.edu.au/the-essay-signs-of-hope-on-the-road-to-paris/
Republicans should frame energy policy around the economy and industrial expansion for the future. Similar to Getty etal. paved the way for 20th century American exceptionalism, etc. Actionable items could include stepping away from intergovernmental solutions and setting up trial cities with maxed out alternative energy solutions to measure progress and drive adoption.These ideas already exist but it would weaken the momentum of rent seekers and and global government types.
“So, can you show a chart of risk-free, real interest rates for the world for the historical past – e.g. over 300 years, 1000 years?”
No.
“If you can’t show that, can you show me an authoritative chart (not from the CAGW consensus advocates) which justifies discount rates of 5.2% declining to 2.2% by 2300 for high risk investments (with virtually no chance of a return on investment)?”
No. But too be honest, at that interest rate, the last 100 years have basically negligible impact on the social welfare function. So I wouldn’t pay too much attention to it. Is the DICE model perfect? No. Could it use improvement? Yes. Are predicted interest rates fairly reasonable over the next 100 years? I would say yes.
Perhaps Nordhaus should have chosen a smaller elasticity of marginal utility of consumption, which would have caused a smaller drop in interest rates.
Anyway, in the discussion of whether it makes sense to use the rate of social time preference, the exact values chosen by Nordhaus is a bit of a distraction.
“You used real interest rate of 2% in your example. Consumers preferences demonstrate they use discount rates of 20% to 50% in their purchasing choices.”
That number was relatively arbitrary. The point was to illustrate how the rate social time preference can diverge from the real interest rate due to economic growth. Also, consumers are dealing with very risky situations (I certainly am) and their GDP per capita is increasing over time. So the fact that consumers use much higher discount rates in their purchasing choices doesn’t mean the rate of social time preference is much lower.
“You are using many economists’ terms but they are not defined.”
List terms that you think are undefined and I can define them for you.
“Perhaps you could do it in a post so we can all use it to reference to.”
Okay. I’ll keep in mind to have clear definitions for the less economically inclined if I do a guest post.
“So, there is no point in keeping using all these terms.”
Why? If they weren’t useful, I wouldn’t be using them.
“That’s why I asked you to stay at the high level and justify the discount rates used in DICE-2013R (without reverting to discussion about the Ramsay equation).”
Well understanding Ramsey’s equation is part of the reason that can explain the drop in the interest rate. Population growth is declining and GDP per capita growth is declining. These both will cause a declining interest rate. And yes we have observed a declining interest rate since the 80’s. And yes, the current global interest rate is actually lower than what is in the DICE model for 2015.
“I just want an unbiased sanity check about the discount rates and why they are so much lower than governments use for other economic analyses.”
Because it’s a different type of analysis. It is comparing utility values over time, not dollar values over time.
Let’s say I have a bunch of pairs of spheres. Is finding the pair of spheres that has the maximum combined surface area the same thing as finding the pair of spheres that has the maximum combined volume? No. The pair of spheres might be the same in both cases, but maybe not. In the case of maximizing social welfare, that isn’t the same thing as maximizing net present value, so why would you expect the use of similar discount rates?
-1=e^
at that interest rate, the last 100 years have basically negligible impact on the social welfare function. So I wouldn’t pay too much attention to it.
Why? Surely the long term real interest rates over the past 300 years should be a good reality check on what to expect for the next 300 years.
Is the DICE model perfect? No. Could it use improvement? Yes. Are predicted interest rates fairly reasonable over the next 100 years? I would say yes.
I am not criticizing the model. It seems to be the most or one of the most widely accepted and cited IAMs for estimating SCC, optimal carbon price, abatement costs and benefits (i.e. climate damages avoided). However, I’ve followed Nordhaus for a long time and noticed him being “got at” by the alarmists. It’s always the alarmists he’s responding to by tuning the inputs to show higher damages. His book “Climate Casino” shows this very clearly.
So, for me, it is not the model that I am disagreeing with. It’s the input assumptions:
Discount rates (for 300 years)
Damage function
ECS = 3.2
RSP8.5
Totally unrealistic participation rates
The other assumptions I listed in my two part post here:
‘Why carbon pricing will not succeed Part I‘ http://catallaxyfiles.com/2014/10/26/cross-post-peter-lang-why-carbon-pricing-will-not-succeed-part-i/
‘Why The World Will Not Agree to Pricing Carbon II’
http://catallaxyfiles.com/2014/10/27/cross-post-peter-lang-why-the-world-will-not-agree-to-pricing-carbon-ii/
I am still hoping you can give me something authoritative that provides a reality check on Nordhaus’s discount rates of 5.2% now decreasing to 2.2% in 2300. I believe these is far too low for making policy decisions on what is clearly an extremely high risk investment with enormous consequences of diverting money away from clearly very beneficial projects (health, education, infrastructure, institutional strengthening etc.) on the basis of ideological beliefs about highly controversial CAGW.
In short I am not swallowing it and you have given me nothing so far to change my mind.
But I hope you will, because I am learning a lot (but not about Ramsay Function – I need that much more clearly laid out before I can tackle that again. And I need all the terms defined and all the different terms that are used by different authors to mean the same thing listed as well). That’s too big for a blog comment, so there is no point down into Ramsay equation here (I have to skip over that for now).
Are predicted interest rates fairly reasonable over the next 100 years? I would say yes.
Why? That’s a statement of your belief. But you haven’t been able to justify it with a reasonable reality check – such as discount rates or WACC or real interest rates plus risk premium for the past 300 years.
“So, there is no point in keeping using all these terms.”
Why? If they weren’t useful, I wouldn’t be using them.
They are useful to economists but you are not communicating clearly with me because you haven’t defined the terms and explained them clearly and fully. It’s the same as if an engineer or geologist or brain surgeon uses their specialist terms while talking to a lay audience. Even if you tried here it would be no help. It’s too much.
So, please let the Ramsay equation go for now, and answer my questions.
The point of my original post was to refute (yet again) that President Obama has been anti-Nuclear power. It has been largely Tea Party Republicans who have de-railed efforts to develop nuclear projects.
Has Obama’s efforts to support Nuclear Energy involved subsidies? Yes, absolutely.
Any CE Blogger who is absolutely consistent in their views to eliminate all subsidies across the spectrum of energy options can be respected (like Ron Paul).
However, many CE Bloggers are not consistent. Incentives for Renewables are railed against. But subsidies for oil, gas, and nuclear are either (1) never mentioned, or are (2) OK and justified.
I will post again Senator Grassley’s (a conservative Republican) comments on oil, gas, and nuclear subsidies: https://www.youtube.com/watch?v=5XMYQZQAlWw&feature=youtu.be
Per Senator Grassley: Oil and natural gas industry only tax break subsidies: (1) Expensing of Tertiary Injectants; (2) Expensing for intangible drilling costs; (3) Percentage depletion for oil wells; (4) special amortization for geological costs.
-1=e^,
Here are two reports on the Equity Risk Premium for Australia over the past 128 years and one for Discount Rate. Equity Risk Premium is one of the inputs used to estimate the Weighted Average Cost of Capital (WACC) which is used as the basis for the average discount rate to apply for LCOE calculations. However, as explained in the AETA report (linked below), some technologies are much higher risk than others and more advanced analyses of LCOE adjust the discount rate to take the technology risk into account. Renewables are high risk. CO2 pricing is high risk because it has negligible probability of succeeding.
The equity risk premium over 10 year bonds has averaged 6.3% from 1883 to 2011
Source, Report prepared for the Australian Ene4rgy Regulator, (see Table 5): https://www.aer.gov.au/system/files/John%20C.%20Handley%20-%20estimate%20of%20historical%20equity%20risk%20premium%20report.pdf )
A higher risk premium would be required for investments in GHG abatement (I’ve explained why in earlier comments in this subthread).
We present an updated set of estimates of the historical equity risk premium in Australia covering the 128 calendar years from January 1883 to December 2010. Relative to bonds (bills), the observed equity premium has averaged 6.1% (6.5%) p.a. over this period and we report a similar number for later periods of relatively good quality data. We also provide estimates that incorporate an adjustment for distributed imputation credits and include the annual time series of data relating to each of the underlying components – stock, bill and bond returns and inflation.
Source: http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1594&context=business_pubs
as a result of consultations with the Stakeholder Reference Group, a discount rate of 10 per cent has been applied to all technologies. [p22]
…
Higher perceived risks will in turn demand higher rates of return on investment. Typically, the discount rate can be used to account for some of these differences in risk with a higher discount rate applied to the ‘riskier’ projects.[
Source: Australian Technology Assessment (AETA) Report http://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/aeta/australian_energy_technology_assessment.pdf
