Ecological intuition versus Economic “reason”

O. Gueant, R. Guesnerie and JM LasryOctober 2009

Lecture prepared by: Irene Clavijo

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Motivationo Environmentalist have dismissed the economists’

approach to environmental problems, especially when long term issues are at stake

o There is a trade-off between: “Ecological intuition” which highly values the long-run

preservation of the environment; and “Economic reason” , in particular cost-benefit analysis

in which discount rates lead to dismiss the long run concerns

o Economists’ computations (Nordhaus, 1993) about global warming suggest lenient policies which have been rejected by environmentalists (Lomborg, 2001)

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Objective

o The paper attempts to address this antagonism between “Ecological intuition” and “Economic reason” by proposing a simple model to explore the long run issues associated with environmental quality

o In particular, the cost-benefit model considers not only the standard discount rate but also an “ecological discount rate”

o The authors discuss the discount rate to be used in projects aimed at improving the environment

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The Model (vastly simplified)

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The Model (cont’d)

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Functions

o Generation t, that lives at period t only, has ordinal preferences, represented by a concave, homogeneous of degree 1 utility function

o Social welfare is evaluated as the sum of generational utilities using a standard utilitarian criterion

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Implicit prices

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Discount rates

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Discount rates

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Discount rates

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Long run effects on discount rates

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o As T tends to ∞

The social optimum

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The social optimum

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Discontinuity in the ecological discount rate

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A clear opposition between the radical and the moderate environmentalist (this could be due to the crude model used)

Dynamics of ecological discount rates:The radical environmentalist

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Dynamics of ecological discount rates:The moderate environmentalist

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For a time period between 1 and 3 centuries the difference between moderate and radical environmentalist is very small (both have discount rates well below 1%.

The effect of wealth on the propensity to invest in ecology

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The required return, in terms of environmental quality, of a 1-unit investmentLong run- the same for a poor country and for a rich country Short run- may be negative for a rich country (while a poor country requires positive, high returns

Rich country Poor country

Precaution against irreversible damage under uncertainty

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Graphical illustration of the precautionary principle

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m(p) is concave and quickly increasing, so even for a small p, m is close to m(p=1)

Results show that if we do not know whether or not climate issues will lead to real problems in the future, here at date t=0, we need to act nearly as if we were sure that the bad case were to occur.

Conclusions

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Long run environmental policies are crucially affected by the “ecological view”, esp. but not only, if the radical view is adopted

The radical viewpoint, although unlikely has a determining effect on the policies adopted

NB. Further reference Pour une politique climatique globale:Blocages et ouvertures