Select Committee on Economic Affairs Minutes of Evidence

Examination of Witness (Questions 240-259)

Dr Terry Barker

22 FEBRUARY 2005

  Q240Lord Skidelsky: One of our witnesses, Professor Lomborg, made the argument that the costs of any mitigation that makes any difference over the period in question would far outweigh any possible benefits.

  Dr Barker: Absolute nonsense.

  Q241Lord Skidelsky: That was the argument that he put to us and that is generally one of his main contentions. Do you agree?

  Dr Barker: I do not agree with that at all, no. It sounds as if Lomborg is not looking at risk and returns; he is just looking at returns. If we just looked at returns I doubt if that would be the case; but the issue is not returns, the issue is risks. In any investment we look at the risk and the return, whereas in the case of climate change it is the risks that dominate consideration, to my mind, not the returns. It is climate variability that is important, not the fact that the sea level might rise a few centimetres; the fact that storm surges might overwhelm our sea defences; that is the issue and the problem. If we are looking at risk and returns, then we have to look at the balance on risks and what action we might take which would reduce the risks and, as far as I can see, this means that mitigation becomes far more important than adaptation because mitigation reduces the risks through the whole system, whereas adaptation only reduces the risks at the end, after it has all happened.

  Q242Lord Lawson of Blaby: I do not think that is true, if I may say so, with great respect. Climate change is not like a tsunami that is going to happen suddenly, just like that; climate change is a thing which is very gradual over a very long period of years, that is what we are told. Therefore, there is plenty of time to adapt. Farmers can adapt with perhaps different seeds, slightly different crops, different types of things to changing climatic conditions; that is what farmers always do. Sea defences can be gradually built up. When you are in your model looking at the cost of climate change, do you assume that there is continuous adaptation, which is what would happen in the real world, or do you somehow assume that what we have been told is the dumb farmer hypothesis, that everything stays exactly the same and that there is no adaptation at all, and base your cost estimates on that?

  Dr Barker: The modelling that I personally am involved with is modelling of mitigation rather than adaptation. However, the work I do is part of an integrated assessment model which indeed does take into account the fact that private groups, social groups will adapt, of course they will adapt. They see the risk of climate change. When you live in Bangladesh and you can see that the floods get worse each year, then you will build your house a little bit stronger and a little bit higher, and this is a very important response. But there is a large difference between that and mitigation because as an economist I would not expect mitigation to take place on the scale of adaptation, simply because mitigation is a global problem and if each of us mitigates it makes precious little difference to the overall problem. Whereas if I adapt by moving to higher ground or building a house higher, then I shall have an immediate benefit for myself and my family. So it makes a very large difference between adaptation and mitigation and it means that mitigation has to be a social response—in fact a global response—for it to make sense in the long term.

  Q243Lord Macdonald of Tradeston: Dr Barker, can I just come in here? You talked about the difficulties in monetarising loss of life, but as an economist how do you approach the possible damage to cultures or the extinction of species? Can you factor that in?

  Dr Barker: I do not accept that the extinction of species or the extinction of the human race for that matter is subject to a monetary valuation. My view is that we need to look at these subject to political and social decisions as well as economic decisions. Economists can use different valuations coming out of the political process and accept that as a reasonable thing to do in making these evaluations, but at the end of the day I would suggest that you need to do not simply a monetary cost benefit analysis but a wider one, taking into account loss of life and employment effects and extinction effects, and not necessarily put them all in monetary terms.

  Q244Lord Sheppard of Didgemere: Dr Barker, you went into the problem of how one adds together, both from an ethical point of view and an economic point of view, the benefits; but there are some benefits that are not often mentioned, such as agricultural benefits, be it length of season or whatever. How do you pick those up in the model? Not necessarily your model but in the models generally?

  Dr Barker: Yes, in the models. It is extremely crude. The long-term economics of all of this is very immature; it is at a very early stage. Economists have largely concerned themselves in this context with rather short-term economic responses and effects and we have largely assumed that the technological change and change in tastes is outside the models. So the first remark I would make is that it is very stylised, very crude, very simplistic and not really believable if you look into the details of it. A lot of it just does not make very much sense. There is a real problem in just taking averages for large areas like Europe, the average temperature for Europe over the next 100 years, and then imputing damages from that; it is not really a good idea to do it. It may be the best you can do but it is an extreme simplification, especially since we know from the science that it is the variability of the climate that is important; it is the storms and the floods, not the fact that the temperature is a little bit higher. That is where the damages come from.

  Q245Lord Lawson of Blaby: If I may? This is interesting what you say, that it is not the global warming as such which is the problem, but the variability. You are the first witness to appear before us who has made this point. Others have talked entirely in terms of an actual rise in the temperature and the consequences of that. Are you yourself a scientist?

  Dr Barker: No, I am an economist.

  Q246Lord Lawson of Blaby: How is it that you come with a different scientific projection than our other witnesses?

  Dr Barker: Because I have been working in multi-disciplinary teams for the last 10 years, talking to scientists.

  Q247Lord Lawson of Blaby: But not all scientists take this view, do they?

  Dr Barker: I only see this literature in as much as it is condensed and synthesised. I do not read the scientific literature. I attend presentations about it but I am not a climate scientist. The reports state over and over again, and it is quite obvious, that this might be the case.

  Q248Lord Skidelsky: That variability is the issue?

  Dr Barker: Is the issue.

  Q249Lord Skidelsky: That is not the small projected increases in temperature over the next 100 years, which is the sensible focus of things like the Kyoto Protocol and other things.

  Dr Barker: Yes, but at the extreme range of the latest estimates the temperature increase is globally coming to 11 degrees centigrade, which is an awful lot. You add 11 degrees centigrade to a 40 degrees summer heat wave and we are talking about an extremely high temperature.

  Q250Lord Skidelsky: You are the first person who has mentioned the 11 per cent.

  Dr Barker: I am talking about the latest reports. I was at the Exeter meeting of the Met Office.

  Q251Chairman: Am I wrong in getting an impression—and you seem to be confirming what I feel—that the science is extremely uncertain, the economics are extremely uncertain? What is there that is certain about all this? What would you say are the certainties?

  Dr Barker: That is an interesting question. What is certain is that we are responsible for these emissions of greenhouse gases. There is no doubt that burning coal produces carbon dioxide. But what seems almost completely certain is that this leads to a greenhouse effect because the science is well known. What is less certain, but the evidence seems to suggest very strongly, is that this is leading to the phenomenon of global warming and climate change, so we are getting to much less certainties. Then we have seen the phenomena over the last year, since the topic has been investigated further, of more and more problems emerging, issues emerging from the science. As we are looking at it we see that we do not know as much as we would like to know about the world's climate and what might happen by putting more greenhouse gases into the atmosphere, raise the concentrations of greenhouse gases and lead to an enhanced greenhouse effect. We do not know the effect of clouds and water vapour, which is the most potent of greenhouse gases on global warming.

  Q252Lord Layard: I want to ask you about the discount rate because obviously much of the damage that has been caused by current emissions is in the future, and often in the quite far distant future, and we are talking about costs which we might incur in advance, to try to reduce them. So the discount rate becomes very important and obviously one of the reasons for discounting that has been given in the literature is that people will be richer in the future, and so on. What do you think about the right discount rate for dealing with these problems?

  Dr Barker: It is a surprisingly controversial and a complex topic. You would think that it is easy but it is not. One of the reasons for the difficulty is that in deciding what the appropriate discount rate is we have to imagine what future incomes will be. So it is basically the ability of future generations to pay. In doing that we need to look at how would one do such a thing? We could look at the history of income growth and what we would find is that it is a history where the growth has been punctuated by wars. Severe reductions in growth rates have occurred during wars, and also there have been periods where there have been very low growth rates and long-term depressions. So that would caution against taking the growth rate, say, for the last 30 years and extrapolating it for the next 100 years. One would want to be more cautious and therefore probably not take such as one would expect, just 2 or 3 per cent, but maybe just 1 per cent growth per annum. And this has to be taken into account as to how much we would say that future generations would be able to pay for future damages. So my own view is that in doing the cost benefit analysis and using the discount rates one would want to put in a very low discount rate to account for the fact that we are rather uncertain about future incomes.

  Q253Lord Layard: Could I follow that up, going back to the issue of lives, which you raise? You seem to be hinting at treating all lives as equally valuable, which might be right morally but if you look at the way we currently spend our money we obviously value lives in the NHS maybe 25 times more than lives saved through foreign aid. How do you respond to that?

  Dr Barker: It is an interesting question. My answer is fairly straightforward. I respond to that by saying, "Who is the `we' making the decision?" If the "we" is the British Government on behalf of the people through a political process which has decided what our current discount rate is, that is fine, I do not have objection. There may be objection though if we decided that the poorest members of our society were worth far less than the richest. Then there would be a problem. When we are coming to a global problem like global change then I suggest that the "we" should be governments meeting together in some kind of quasi-judicial way. It is an inter-governmental problem and it is a global problem in as much as mitigation is not in the interests of any single government but in the interests of all governments together and it is in that context that I think the "we" should be decided on the valuation, and in that context it is quite obvious that there has to be some equity in the value of human life. We are not at all sure that the people of Bangladesh would be as poor as they are now in relation to the people of, say, Europe, in 100 years' time. All sorts of things can happen.

  Q254Chairman: Could I ask you this question? You not unreasonably point out the need to have a relatively low discount rate because of the relatively low growth rates, which you assume. Yet when we started this inquiry one of the first things that was given to us in evidence, as I understand it, was the view that in 100 years or 150 years, or whatever figure it was, the whole world would have the same standard of living and therefore there would be considerable economic growth in those countries which now are underdeveloped and we would come to a pattern of equilibrium. We could understand the political need for having that in the IPCC process; we perhaps had a little more scepticism as to whether that was an economic reality of which one would put much money on a bet. But how do you square it with the low rate of growth for the discount purposes? How are they reconciled?

  Dr Barker: By the fact that one would want to be cautious, and look at a range of potential outcomes. That is the only reason for choosing for looking at a lower rate. If you ask me what I would have thought was the most likely outcome I would have thought growth rates of about two to three per cent in the long-term. That is what I would choose as the most likely outcome, but considering a long period of time and a lot of things can happen in that period of time. So I think we do need to be very cautious in looking and not just pick one particular view but pick a range of views and test policies against different possible states of the world.

  Q255Chairman: The convergence idea of all the countries in the world, is that therefore a political view rather than an economic view?

  Dr Barker: That is a subject of considerable controversy in the literature as to whether countries are converging or not. My own view is that they are probably not and that there are strong forces leading away from convergence as well as forces leading to convergence, and it is really a matter partly of politics and partly the way that the economic system works as to which way things go.

  Q256Lord Lawson of Blaby: If you are right and there is not this convergence, then of course it means that the projections of growth in greenhouse gases issues, based on the assumptions of convergence, are greatly exaggerated, does it not, because the lack of convergence, if you are right, is unlikely to be the developed world's economy suddenly leaping forward much faster than before? There is no evidence to suggest that it is likely. So it must mean that the Third World, or whatever you like to call it, is not going to catch up nearly as fast as is presupposed here. One hopes that in due course they will catch up, but it is not going to happen as quickly as that. Therefore the growth is likely to be less and therefore the growth in greenhouse gas emissions is likely to be less; therefore, the projections of global warming have been distorted in an upward direction by this convergence assumption.

  Dr Barker: I am a bit reluctant to be pinned down to just one projection because it seems to me that there are a lot of alternative ways that the world economy might evolve. The fact is that there is a large amount of coal available to be burnt, so much coal that we as mankind could really fry the planet over the next 400 years if we chose to use this coal. And we can imagine that the coal might be produced very cheaply with modern equipment, and therefore it is by no means sure if we continue as we are going, without any convergence, that we would not burn a large amount of coal. The Soviet Union wasted huge amounts of fossil fuel; China burns huge amounts of coal already and could easily burn more.

  Q257Lord Lawson of Blaby: You said that there is a wide range of different models and assumptions in the future and I would like to ask you a few quick questions on that front. The first question is what should policy makers do? Should they decide which within this huge range seems to them the most likely and base their policies and their calculations on that? Or should they say, "Let us take the extreme worst possible assumption, however unlikely, and base our policy assumptions on that?" The first question is: how should policy makers act? The second question is: can you explain why you say that this uncertainty means that the discount rate as to the long-term future should be lower? The ordinary man in the street, like myself, would think that if, for example, you were investing in a business project which was alleged by the promoters to produce a wonderful return in 100 years' time, you would want a pretty high rated discount because of the uncertainty, not a low one.

  Dr Barker: The first question was regarding how policy makers should treat this big range. I think it is fairly straightforward, that one would want to check that the policies that were being recommended were robust in the face of the different possible states of the world, or would they collapse if the world changed in a particular way? It is possible that we might have a high carbon world where a lot of fossil fuels are being burnt. We want to look at the policy recommendations in respect of that, as opposed to recommendations from the same policies if the world was a very high tech world with very low emissions. So it is a question of using these different projections and assumptions and comparing the effects of the policies under these different assumptions. On the second one, again it is a question of returns and risks; one would want to look at the risks as well as the returns and if the risk are particularly high it is then a matter for government as to whether they want to take these risks or not.

  Q258Lord Macdonald of Tradeston: Dr Barker, just building on that, as a Select Committee we are pretty open-minded, even after two months, perhaps because we have heard repeatedly from witnesses about the profound uncertainties of the science and the economics. On the economics, for instance, we have heard that the effect might be 1 or 2 per cent impact in GDP for the United Kingdom, which, in the context of wars and depressions of the 20th century that you mentioned, does not seem too alarming. Yet, on the other hand, you mentioned that you were at Exeter where clearly there appeared to be a great consensus increasing alarm about what they believed was happening. It is rather difficult for us because if we look at the linear changes, the 1 or 2 per cent does not seem overly alarming. But then people say, "But it could go exponential and accelerate at some alarming rate and who knows what might happen?" How as policy makers do you approach that? What guidance can you give in this context on whether you wait and see or whether you go in and spend vast sums of money despite all these uncertainties? How would you point us forward, to build on Lord Lawson's question?

  Dr Barker: My view is that since there do appear to be substantial risks and the costs of doing something about it are negligible, then we ought to be doing something about it. Of course I use that word "costs" in terms of macroeconomic costs. It is clear, for example, that if we use the word "costs" more widely, more in the way a lay person might use it and certainly in the way that Senators in the United States are currently using, then the political cost of introducing a carbon tax in the United States is obviously extremely high, and we know that taxes can be extremely unpopular. The economic instrument, which is most suitable for addressing this problem, is a carbon tax, with appropriate consideration of the equity and competitiveness effects of such a tax. The idea of introducing a carbon tax perhaps to replace Value Added Tax over a long term, which would have great appeal to me personally as an economist in terms of its efficient solution to the problem, may have a very high political cost as opposed to a macroeconomic cost. So it is a question of changing attitudes and perceptions, and there is a cost in doing that—a cost of institutional change.

  Q259Lord Skidelsky: Could I follow on from Lord Macdonald? The question Lord Macdonald asked had to do with the uncertainty but you have talked throughout about risks.

  Dr Barker: Yes.

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