TCS Daily

Lomborg's Lessons

By Arnold Kling - April 2, 2002 12:00 AM

Editor's note: This column is the second of two parts. Read the first part here.

When the environmental movement first emerged, economists were very sympathetic. Clean air and water were soon introduced into economic textbooks as examples of "public goods."

A "public good" is not just something that is good for the public. It is a good that the private sector lacks sufficient incentive to provide, and which therefore requires government intervention. Thus, economists were on the same side as environmentalists in arguing for a public policy role in protecting the environment.

From this hopeful beginning, economists and ecologists soon began to diverge. A disagreement emerged over whether to use taxes or regulatory restrictions to try to limit pollution. In the chapter on environmental policy in his superb 1987 manifesto Hard Heads, Soft Hearts, economist Alan Blinder noted that:

An interview survey of sixty-three environmentalists, congressional staffers, and industry lobbyists -- all of whom were intimately involved in environmental policy -- found that not one could explain why economists claim that pollution can be reduced at lower costs by emissions fees than by direct controls. Not one! This lack of knowledge, however, was not inhibiting; many of those surveyed opposed the idea anyway. [p. 137]

The Clinton Administration, perhaps influenced by Blinder's presence at the Council of Economic Advisers, actually moved in the direction of using economic incentives, such as tradable pollution licenses. These market-compatible mechanisms allow companies to choose the most efficient means of production, while taking into account the social cost of pollution.

Finite Costs of Environmental Damage

Pollution taxes and tradable licenses to pollute are sensible ideas as long as we are willing to make trade-offs involving the environment. Some environmentalists cannot accept this concept. To economists, these environmentalists appear to assign environmental harm a cost of infinity.

Economists would like to assign a finite cost to any example of environmental damage. We want to talk about the costs of carbon monoxide, or the cost of chemical pollution of water. The reason is that we want society to have a basis for trade-offs. These include trade-offs between environmental quality and other goods, such as health care or transportation; but they also include trade-offs between different aspects of environmental quality.

An environmentalist might think that electric cars will reduce environmental damage. However, suppose that re-charging the batteries on electric cars requires building nuclear power plants to increase generating capacity. Is the net impact on environmental risk positive or negative? Some sort of trade-off has to be made. While it may not be possible to estimate costs precisely, an erroneous but explicit estimate is more useful than a regulatory policy that assigns such costs only implicitly.

Ecologists are less willing to assign a finite cost to environmental problems. Although no one really believes that the pollution from one automobile imposes an infinite cost, ecologists are reluctant to speak as if it were otherwise. Apparently, their concern is that society will not devote enough resources to protecting the environment as long as the costs of environmental damage are perceived as finite.

The Future, the Present, and Interest Rates

Economists use interest rates to discount future benefits and costs. Because of discounting, environmental costs that are out in the future are given less weight than today's economic goods, including today's environment.

Ecologists suspect that economists are being short-sighted, when in fact we are being rational. The interest rate represents the price at which the economy can trade off future output for present output. What discounting says is that tomorrow's output is "cheap" in today's terms. Undertaking a large expense today to avoid the same expense tomorrow is inefficient.

Ecologists worry that we are consuming too much now, while depriving future generations of resources and leaving them with large unpaid environmental bills. Economists, on the other hand, argue that by investing in science and research we are providing a legacy of wealth to future generations. The assets that they inherit in the form of capital and know-how will be much greater than any environmental liabilities.

In The Skeptical Environmentalist, Bjorn Lomborg makes a strong case against the Kyoto Protocol, which attempts to restrict carbon dioxide emissions in order to forestall global warming. Even as one who accepts the thesis of global warming, Lomborg suggests that the Kyoto Protocol is a bad idea.

Lomborg estimates a finite (albeit large) cost to global warming. Also, because this cost will be borne in the future, he applies a discount rate.

If the present value of the cost of global warming is finite, then it becomes possible to estimate the benefits of policies to forestall global warming. Next, it follows that we can compare benefits to costs. It is on the basis of these cost-benefit comparisons that Lomborg is able to show that the Kyoto Protocol approach is unwise.

Can the Economist and the Environmentalist Be Friends?

The critics of Bjorn Lomborg accuse him of not having a background in environmental science. In effect, they are accusing him of practicing ecology without a license.

The way I read it, Lomborg is not disputing environmental biology or ecological modeling. He differs from ecologists primarily in the treatment of the economic aspects of the environment. Although he is not a professional economist, Lomborg uses mainstream analysis rather than the peculiar models of ecologists. (His analysis of global warming owes much to the work of Yale economist William Nordhaus.) If anything, his work rests on a better overall scientific foundation than that of his critics.

I believe that the economist and the environmentalist can be friends. But it would help if environmentalists would, like Lomborg, try to understand important principles of economics, including substitutability, finite cost, and discounting. When environmentalists simply denounce economics, without making a convincing alternative case using analysis and data, they fail to advance our understanding.

Bjorn Lomborg will be speaking on April 8 in Washington, D.C. For more information visit AEI-Brookings' Joint Center for Regulatory Studies.


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