Wednesday, May 13, 2009

On the Stern Review on the Economics of Climate Change and Discount Rates

Discounting the Future. By Indur M Goklany
Is it equitable to favor tomorrow’s wealthier generations over today’s poorer generations?
Cato "Regulation" - May 2009

[Full article at the link above]

One of the difficulties of analyzing climate change policies is that the costs of greenhouse gas emission reductions would be near-term while any benefits from those reductions would be delayed because of the inertia of the climate system.How should we compare costs and benefits that occur at different times? This, of course, isn.t a new problem. It is inherent to any investment that provides less than instant gratification, but it becomes a critical issue if an investment -and its associated benefits- are spread out over several years. It is precisely to deal with such problems that economists developed discounting.

Discounting recognizes that both individuals and societies prefer to get benefits sooner and to postpone any costs untillater. Discounting gives lesser weight to benefits and costs that occur in future years. Thus, for each year that eithercosts or benefits are delayed, their value is reduced by the annual discount rate.

Because this reduction is compounded, a benefit of $1 trillion obtained in the year 2100 would be valued much lower today. The higher the discount rate, the lower the present value of either costs or benefits occurring in the future. Thus a trillion-dollar benefit in the year 2100 would be valued today at only $1.2 billion if the annual discount rate is 7 percent, but at $52 billion if the discount rate is 3 percent.

Many people argue that if we value future generations. welfare, then we are ethically bound to employ a lower discount rate for future benefits that stem from global warming control policies enacted today. In contrast, use of a high discount rate for future benefits reduces the likelihood that carbon emission constraints today would pass a benefit-cost test, which, it is claimed, could put the welfare of future generations at risk. Some analysts such as Nicholas Stern, who conducted the Stern Review on the Economics of Climate Change, while emphasizing intergenerational equity, would use a near-zero discount rate (adjusted for the probability that a catastrophe might wipe out the human race and for the possibility that future generations may be wealthier than us). But the underlying premise behind using a low discount rate is that climate change, unless reduced sufficiently, could or would leave future generations worse off than current generations. This contrasts with the standard practice of using a market discount rate for both costs and benefits, so as to better consider the opportunity costs and avoid hurting both current and future generations by depriving them of the benefits flowing from current investments.

In this article, I address the threshold question of whether future generations would in fact be worse off than we are if climate change is allowed to occur and is uncontrolled. I compare current and future welfare per capita after accounting for the costs of climate change. To do this, I will reduce estimates of future welfare per capita in the absence of climate change by estimates of the welfare losses from climate change. For those downward adjustments, I use the Stern Review.s estimates of the costs of climate change from market effects, non-market (i.e., public health and environmental) effects, and the risk of catastrophe, even though several researchers have characterized the Stern Review.s estimates as excessive. I show that through 2200, at least, future generations will be much better off than present ones even after accounting for the costs of climate change.

'A Blatant Extortion': the DBPC case in Nicaragua and Dole Food

'A Blatant Extortion.' WSJ Editorial
A judge slams plaintiffs lawyers' torts-for-import game.
WSJ, May 13, 2009

Court cases get dismissed all the time, but rarely are dismissals as significant as the two lawsuits against Dole Food and other companies that were tossed recently by a California judge. Among other good things, the ruling is a setback for tort lawyers who troll abroad seeking dubious claims to bring in U.S. courts.

The allegations against Dole, the world's largest fruit and vegetable producer, involved banana plantation workers in Nicaragua who alleged that exposure to the pesticide DBPC in the 1970s left them sterile. The only problem is that most of the plaintiffs had not worked at plantations and weren't sterile. In fact, there's no evidence that farm workers at Dole facilities were exposed to harmful levels of the chemical -- which was legal and widely used at the time -- or that the level of exposure they did experience even causes sterility.

"What has occurred here is not just a fraud on the court, but it is a blatant extortion of the defendants," said Los Angeles Superior Court Judge Victoria Chaney in her oral ruling. More than 40 related cases involving thousands of plaintiffs from Honduras, Costa Rica, Guatemala, Panama and the Ivory Coast are pending in her court. And the ruling puts in doubt some $2 billion in judgments that plaintiffs lawyers have already obtained in Nicaragua.

Judge Chaney dismissed the cases "with prejudice" to prevent the plaintiffs from filing again on the same claims, and she denounced the lawyers who hatched the scheme. "This is a very sad day for me to be presiding over such a horrific situation," said the judge, who described a "pervasive conspiracy" involving U.S. plaintiffs lawyers and corrupt Nicaraguan judges.

Judge Chaney said she heard evidence of U.S. attorneys colluding with judges, lab technicians and local officials in Nicaragua to suborn perjury and doctor medical reports. Ten thousand men were rounded up and coached to make false claims of sterility in hope of reaping billions of dollars from companies like Dole, Dow Chemical and Amvac. Anyone who revealed the ruse was threatened with violence, as were the U.S. investigators hired by the defendants.

"There have been groups of medical personnel providing sham laboratory reports indicating sterility where none really exists; groups of fathers denying paternity of their own children, posing as lonely men coming into the court, saying that they had no solace in their old age because they have no children," said the judge.

Plaintiffs attorney Juan Dominguez of Los Angeles was singled out for alleged behavior that Judge Chaney said has "criminal overtones." At a hearing last week, she announced that she was referring Mr. Dominguez to federal prosecutors for investigation of perjury, obstruction of justice, defrauding the court and conspiring to defraud a U.S. company. Mr. Dominguez didn't show at Judge Chaney's hearing and is thought to be somewhere in Nicaragua.

The plaintiffs were also represented by the Sacramento firm of Miller, Axline & Sawyer. The judge said she didn't believe the Miller Axline lawyers were in on the conspiracy but added that they should have been suspicious. "I would have thought that a bit of vigilance would have suggested to plaintiff's counsel that something was awry," she said.

The ruling is especially useful as a rebuke to the torts-for-import business, whereby U.S. tort lawyers travel abroad, join with local lawyers to manufacture claims, and then engage in client recruitment practices that are blatantly illegal in the U.S. In essence, the tort bar's goal is to import lawsuits from foreign countries where it's nearly impossible to challenge claims on factual grounds because evidence is hard to come by. In a related case involving Dole, the Texas plaintiffs firm Provost Umphrey is asking a federal judge in Miami to enforce a $98.5 million judgment obtained by banana farm workers in Nicaragua. Never mind that the Nicaraguan judge who made the initial ruling is the same one cited by Judge Chaney for allegedly taking bribes and fixing cases against U.S. firms.

Judge Chaney's actions are a welcome act of legal hygiene and an example for other judges of how to police false legal claims.

A bipartisan commission says we still need a strong deterrent

The Nuclear Realists. WSJ Editorial
A bipartisan commission says we still need a strong deterrent.
ArticleWSJ, May 13, 2009

A bipartisan Congressional commission on U.S. nuclear strategy released its report last week, and it deserved more attention than it got. It delivered a candid message that not many want to hear: We're a long way from a nuclear-free world.

Led by former Defense Secretaries William Perry and James Schlesinger, the commission is blunt on this point: "The conditions that might make possible the global elimination of nuclear weapons are not present today and their creation would require a fundamental transformation of the world political order." Until then, the report says, the U.S. must have a strong and credible nuclear deterrent.

To do so, the U.S. must maintain its triad of nuclear-delivery systems -- bombers, missiles and submarines -- a course of action that will require some "difficult investment choices." It also calls for modernization of the U.S. nuclear stockpile and the "transformation" of the aging physical and intellectual capital of the national nuclear laboratories.

The commission doesn't directly endorse the now-canceled Reliable Replacement Warhead program -- a political hot potato that President Obama rejects and Defense Secretary Robert Gates supports. But it does so indirectly by countering two of the arguments against it -- that it might lead to the need for nuclear testing and that it might undermine U.S. credibility on nonproliferation. The commission finds both risks to be minimal.

The commission warns that "we may be close to a tipping point" as more countries seek to go nuclear, in part because they may not have confidence in the reliability of U.S. nuclear weapons or that the U.S. would be willing to use them. It supports a "strengthening" of the international treaty system, including the Nuclear Nonproliferation Treaty, as well as nontreaty efforts such as the Proliferation Security Initiative. It also endorses a strong missile defense -- including against more "complex" threats, such as technologies that help incoming missiles penetrate U.S. defenses. It couldn't reach a consensus on the Comprehensive Test Ban Treaty, which Mr. Obama wants the Senate to ratify.

The commission's recommendations provide a welcome dose of nuclear realism. The Administration and Congress ignore them at the nation's peril.