Antony Millner

On Welfare Frameworks and Catastrophic Climate Risks

Recent theoretical work in the economics of climate change has suggested that climate policy is highly sensitive to ‘fat-tailed’ risks of catastrophic outcomes (Weitzman, 2009b). Such risks are suggested to be an inevitable consequence of scientific uncertainty about the effects of increased greenhouse gas concentrations on climate. Criticisms of this controversial result fall into three categories: The first suggests it may be irrelevant to cost benefit analysis of climate policy, the second challenges the fat-tails assumption, and the third questions the behaviour of the utility function assumed in the result. This paper analyses these critiques, and suggests that those in the first two categories have formal validity, but that they apply only to the restricted setup of the original result, which may be extended to address their concerns. They are thus ultimately unconvincing. Critiques in the third category are shown to be robust, however they open up new ethical and empirical challenges for climate economics that have thus far been neglected - how should we ‘value’ catastrophes as a society? I demonstrate that applying results from social choice to this problem can lead to counterintuitive results, in which society values catastrophes as infinitely bad, even though each individual’s utility function is bounded. Finally, I suggest that the welfare functions traditionally used in climate economics are ill-equipped to deal with climate catastrophes in which population size changes. Drawing on recent work in population ethics I propose an alternative welfare framework with normatively desirable properties, which has the effect of dampening the contribution of catastrophes to welfare.

Agreeing to disagree on climate policy

Significance The social cost of carbon—the cost to society of an additional ton of CO2 emissions—is a crucial measure of the desirable intensity of climate policy. The models economists use to calculate it, however, are highly sensitive to the choice of discount rate, which measures our concern for the well-being of future generations. Different economists favor different values, and this leads to radically different policy prescriptions. We present a method for combining a diverse set of discount rates into a single “representative” rate and apply it to the analysis of the social cost of carbon performed by the US government. This approach may help resolve ethical conflicts and, hence, lead to consensus policy recommendations. Disagreements about the value of the utility discount rate—the rate at which our concern for the welfare of future people declines with their distance from us in time—are at the heart of the debate about the appropriate intensity of climate policy. Seemingly small differences in the discount rate yield very different policy prescriptions, and no consensus “correct” value has been identified. We argue that the choice of discount rate is an ethical primitive: there are many different legitimate opinions as to its value, and none should receive a privileged place in economic analysis of climate policy. Rather, we advocate a social choice-based approach in which a diverse set of individual discount rates is aggregated into a “representative” rate. We show that performing this aggregation efficiently leads to a time-dependent discount rate that declines monotonically to the lowest rate in the population. We apply this discounting scheme to calculations of the social cost of carbon recently performed by the US government and show that it provides an attractive compromise between competing ethical positions, and thus provides a possible resolution to the ethical impasse in climate change economics.

Adaptation to climate change and economic growth in developing countries

Developing countries are vulnerable to the adverse effects of climate change, yet there is disagreement about what they should do to protect themselves from anticipated damages. In particular, it is unclear what the optimal balance is between investments in traditional productive capital (which increases output but is vulnerable to climate change), and investments in adaptive capital (which is unproductive in the absence of climate change but ‘climate-proofs’ vulnerable capital). We develop a model of investment in adaptive and productive capital stocks, and show that while it is unlikely that the optimal strategy involves no adaptation, the scale and composition of optimal investments depends on empirical context. Application of our model to sub-Saharan Africa suggests, however, that in most contingencies it will be optimal to grow the adaptive sector more rapidly than the vulnerable sector over the coming decades, although it never exceeds 1 per cent of the economy. Our sensitivity analysis goes well beyond the existing literature in evaluating the robustness of this finding.

What Is the True Value of Forecasts

Understanding the economic value of weather and climate forecasts is of tremendous practical importance. Traditional models that have attempted to gauge forecast value have focused on a best-case scenario, in which forecast users are assumed to be statistically sophisticated, hyperrational decision makers with perfect knowledge and understanding of forecast performance. These models provide a normative benchmark for assessing forecast value, but say nothing about the value that actual forecast users realize. Real forecast users are subject to a variety of behavioral effects and informational constraints that violate the assumptions of normative models. In this paper, one of the normative assumptions about user behavior is relaxed—users are no longer assumed to be in possession of a perfect statistical understanding of forecast performance. In the case of a cost–loss decision, it is shown that a model of users’ forecast use choices based on the psychological theory of reinforcement learning leads to a behavioral adjustment factor that lowers the relative value score that the user achieves. The dependence of this factor on the user’s decision parameters (the ratio of costs to losses) and the forecast skill is deduced. Differences between the losses predicted by the behavioral and normative models are greatest for users with intermediate cost–loss ratios, and when forecasts have intermediate skill. The relevance of the model as a tool for directing user education initiatives is briefly discussed, and a direction for future research is proposed.

Getting the Most out of Ensemble Forecasts: A Valuation Model Based on User–Forecast Interactions

Abstract A flexible theoretical model of perceived forecast value is proposed that explicitly includes the effects of user and ensemble characteristics and their interactions. The model can be applied to arbitrary decision problems and is sensitive to a much wider range of factors than traditional forecast valuation models. A simple illustration of its application to the cost–loss decision problem familiar from the forecast valuation literature is discussed. It is shown that perceived value is highly sensitive to perceived model accuracy and that in most cases a high level of perceived accuracy is required for the forecasts to be thought to have any value at all. Decisions with a cost–benefit ratio that is close to the climatological probability of the adverse event are shown to be less sensitive to perceived accuracy. The model shows that it is possible for perceived value to remain unchanged when perceived accuracy increases, thus suggesting an explanation for why forecast uptake often does not increase...

Transmogrifying fuzzy vortices

We show that the construction of vortex solitons of the noncommutative abelian-Higgs model can be extended to a critically coupled gauged linear sigma model with Fayet-Illiopolous D-terms. Like its commutative counterpart, this fuzzy linear sigma model has a rich spectrum of BPS solutions. We offer an explicit construction of the degree-k static semilocal vortex and study in some detail the infinite coupling limit in which it descends to a degree-k kN instanton. This relation between the fuzzy vortex and noncommutative lump is used to suggest an interpretation of the noncommutative sigma model soliton as tilted D-strings stretched between an NS5-brane and a stack of D3-branes in type-IIB superstring theory.

Beliefs, Politics, and Environmental Policy

Experts and the general public often perceive environmental problems differently. Moreover, regulatory responses to environmental issues often do not coincide with consensus expert recommendations. These two facts are mutually consistent—it is unlikely that regulations based on factual claims that are substantially different from voters’ opinions would be politically feasible. Given that the public’s beliefs constrain policy choices, it is vital to understand how beliefs are formed, whether they will be biased, and how the inevitable heterogeneity in people’s beliefs filters through the political system to affect policy. We review recent theoretical and empirical work on individual inference, social learning, and the supply of information by the media and identify the potential for biased beliefs to arise. We then examine the interaction between beliefs and politics: can national elections and legislative votes be expected to result in unbiased collective decisions, do heterogeneous beliefs induce strategic political actors to alter their policy choices, and how do experts and lobby groups affect the information available to policymakers? We conclude by suggesting that the relationship between beliefs and policy choices is a relatively neglected aspect of the theory of environmental regulation, and a fruitful area for further research.

Time consistency and time invariance in collective intertemporal choice

Recent work on collective intertemporal choice suggests that non-dictatorial social preferences are generically time inconsistent. We argue that this claim conflates time consistency with two distinct properties of preferences: stationarity and time invariance. While time invariance and stationarity together imply time consistency, the converse does not hold. Although non-dictatorial social preferences cannot be stationary, they may be time consistent if time invariance is abandoned. If individuals are discounted utilitarians, revealed preference provides no guidance on whether social preferences should be time consistent or time invariant. Nevertheless, we argue that time invariant social preferences are often normatively and descriptively problematic.

Non-Paternalistic Social Discounting

The long-run social discount rate sets the rate of return a public project with long-term consequences must earn to be welfare improving, and is thus a critical input to the cost benefit analysis of policies such as climate change mitigation, nuclear waste management, and infrastructure investments. Economists have had persistent disagreements about the appropriate values of the welfare parameters that determine this quantity, leading to substantial disagreements on the benefits of policies with long-run consequences. I present a model in which public decision-makers have heterogeneous opinions about the normative inputs to social discounting formulae, but their preferences are non-paternalistic, i.e. they do not impose their own views on others when evaluating future social wellbeing. I show that non-paternalism causes all decision-makers to agree on the long-run social discount rate. While surveys suggest that the 5-95% range of economists’ recommended values for the social discount rate is 1-7%/yr in common growth scenarios, non-paternalism could reduce this to a range of 3.2-3.3%/yr for projects with a maturity of 50 years, with even greater consensus emerging for longer maturities.