The problem with climate change economics is that there is no good model to handle it. The normal method for evaluating environmental economics, cost-benefit analysis, is controversial enough when it deals with fairly short-term phenomenon. But when it deals with long-term phenomenon, it just breaks down into a philosophical argument rather than a technical one.

The root of the problem is the "discount rate". The discount rate is the idea that a dollar tomorrow is not worth as much a dollar today. This makes sense, but how do you apply it in the context of cost-benefit? Well, the normal assumption is that a dollar next year is with .95 dollars today, which is roughly consistent with low-risk interest on bonds. This is the type of number a corporation would use in evaluating a project, for example. This works well enough if you are talking about a project whose costs and benefits are mostly confined to the next five or ten years.

But what happens if you are talking about a project which has both costs and benefits that span hundreds of years? Well, .95^100 is a LOT different than .94^100 or .96^100 (they differ by about a factor of three each). Because of this, what ends up happening is that the conclusions of the cost-benefit analysis are entirely determined by the discount rate you choose rather than anything to do with the real costs or benefits.

Whenever your model's output is more dependant on the model's assumptions than it is on the data you put into it, the model's output is highly questionable. The heated debate between these economic modelers arises from the fact that their conclusions are not based on reality but philosophy.

The general case, though, is that every analysis out there justifies some action. It is only a question of how much. There is broad agreement for a carbon tax (preferable) or cap-and-trade (same thing in principle, but a bit more difficult to implement).

A point about Bjorn Lomborg:

Not even he argues that action with respect to global warming is a bad thing. It passes his cost-benefit under almost all combinations of assumptions. His argument is instead that while action on global warming would bring us a return on the investment, that other actions, such as fighting AIDS or malaria in Africa, would bring much better returns. Given that there is only so much money that governments have, we should redirect resources to the latter.

I do not disagree with his analysis. A dollar spent fighting AIDS is very likely to do more good than a dollar spent fighting climate change. Where Lomborg is wrong is in conflating a charity with something we bear responsibility for. Anyone paying a carbon tax (directly or implicitly through cap-and-trade) is paying to mitigate or fix a problem they themselves caused. This is profoundly different from a moral perspective than giving money to address a tragic problem that is not your fault at all. Everything on Lomborg's list of priorities except climate change is a charity. He is essentially comparing a bunch of different apples to an orange, and noting that the orange is quite different.

Do people generally realize that the time value of money is a concept distinct from inflation? That is, even if inflation were zero, one can still consider non-zero discount rates? Inflation is about units of exchange, and discount rate is about underlying value. I fear that they are sometimes confused.

The concept of discount rate is inherently selfish: it quantifies the notion that the only things of value are things that happen more-or-less in one's own lifetime, and that anything that happens later can be discounted to near-zero. This is fine for considering mortgages or retirement accounts, but it makes concern for the far future merely a personal virtue and of no value in a quantitative argument. In such an analysis a dollar spent today on, say, reducing the effects of global warming two hundred years from now, is almost entirely wasted. Perhaps we have to abolish the concept of the time value of money, or at least learn not to apply it to time scales longer than one lifetime.

The real problem with mainstream economists is their emphasis on growth. Quite simply, infinite growth in a finite system is impossible. In a steady-state economy, we can have change and development (which some confusingly call qualitative growth) but we cannot have continuous increase in economic throughput, which is what measures like GNP track.

Jane,
Your critique of the field of economics is succinctly stated!
On browsing your blog site, I loved your statement of 12/20/06, which seems to describe the origin for you of that insight--

"Tribute to Carl Sagan--

"Today is the ten-year anniversary of Carl Sagan's death and he is being memorialized in the blogosphere. Here is my own little contribution:

"Sometime in the eleventh grade, I was browsing the shelves of my local public library and came upon a copy of Pale Blue Dot. ...

"What about that book captured my attention so durably? It wasn't just the fascinating descriptions of the Solar System or the luminous visions of future space exploration. What touched me the most was Sagan's sense of the unity of humankind. We occupied a tiny mote of dust in a vast Cosmos, and the way we treated each other had to reflect that. Against the backdrop of space, all the subgroups of Homo sapiens are essentially one. Sagan wrote:

Look again at that dot. That's here. That's home. That's us. On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives. The aggregate of our joy and suffering, thousands of confident religions, ideologies, and economic doctrines, every hunter and forager, every hero and coward, every creator and destroyer of civilization, every king and peasant, every young couple in love, every mother and father, hopeful child, inventor and explorer, every teacher of morals, every corrupt politician, every "superstar," every "supreme leader," every saint and sinner in the history of our species lived there--on a mote of dust suspended in a sunbeam. ... "