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How to Spend $50 Billion to Make the World a Better Place Excerpt from How to Spend $50 Billion to Make the World a Better Place

by Bjorn Lomborg



Introduction
What Should We Do First?

Each day decisions are made about global political priorities. We choose to support some worthy causes while others are disregarded. Unfortunately, political decisions seldom take into account a comprehensive view of the effects and costs of solving one problem in relation to another. Priorities are often set in an obfuscated environment involving the conflicting demands of the media, the people, and politicians. Despite all good intentions, the decision-making process is marred by arbitrary and haphazard methods. The idea behind the Copenhagen Consensus is to render, in the future, this process less arbitrary, because political decisions should not be made arbitrarily, but should be based on facts and knowledge. The result stemming from the Copenhagen Consensus 2004 is very concrete: a ranked list of real challenges, for real people, in the real world.

If we had an extra $50 billion to put to good use, which problems would we solve first? That was the question put to the participants of the Copenhagen Consensus. Using more than 600 pages of scholarly papers as their point of departure, the participants engaged in an intense scholarly discussion that resulted in a set list of priorities regarding the world's most challenging problems.

The articles stem from the international conference, the Copenhagen Consensus, held in Copenhagen from the 24th to the 28th of May 2004, where 38 economists threw themselves headlong into a debate -- one that was both practical and theoretical -- on how we can best solve the world's greatest problems.

Why were all the experts economists? Many have questioned this. The goal for the Copenhagen Consensus was to set priorities using the expertise of economists to set economic priorities. It seems clear that climate issues are best assessed by climate experts, and issues relating to malaria are best evaluated by malaria experts. If we asked a malaria expert or a climate expert to prioritize global warming or communicable diseases as the most pressing global concern, it would not be difficult to imagine which issue each would find most important. As such, economists were the featured experts at the Copenhagen Consensus.

The purpose of the Copenhagen Consensus was to build a bridge between the ivory tower of research and the general public. We need the rational calculations of economists in order to understand how we can best realize compassionate solutions that will make for a better world. Research should be utilized. Knowledge should be utilized. These facts were taken very seriously at the Copenhagen Consensus.

Option 1: Optimal carbon tax

This policy is for an internationally agreed and coordinated tax to be levied by national governments. Each country would use the proceeds for its own purposes.

Optimal emission cuts (based on 1990 emissions as the baseline) would start at around the 40% mark, rise to nearly 50% by the end of the century, and peak at 63% in 2200 before declining to around 15% in 2300. Carbon taxes to achieve this would be similarly aggressive: $170 per ton in 2005, $600 in 2100, peaking at $1,300 in 2200, and tapering off.

The net effect is a gradual widening of the gap between projected warming from "business as usual" and the optimized carbon tax approach: By 2300, the temperature rise is limited to 5.4C compared to the 7.3C baseline. The discounted present value of the abatement costs is $128 trillion, but the value of benefits from avoiding damage is $271 trillion: a benefit-cost ratio of 2.1. Although this is what the model defines as optimal, there is still considerable scope to implement an even more aggressive tax policy and further reduce warming while still producing a benefit-cost ratio of more than one.

Option 2: The Kyoto Protocol

This option would commit the industrialized and transition economies to cutting emissions by 5% below 1990 levels and maintaining them at that level, with no constraints on developing economies. Such an approach would reduce global emissions far less than the Option 1.

Although the effect on temperature rise is modest -- a reduction from 7.3 to 6.1 by 2300 -- damage to the world economy is reduced from 15.4% to 10.3%. Over the same period, the benefits rise steadily after a lag period, becoming greater than costs around 2100, and reaching more than 5% of global GDP by 2300. The present value of the benefits is $166 trillion, against costs of $94 trillion, which yields a benefit-cost ratio of 1.77.

However, assuming the Kyoto Protocol option is the only abatement strategy in place, the full costs are borne by the present industrialized and transition economies ('Annex 1' countries). For this, they receive benefits of only $55 trillion, making the Protocol an unattractive option for these countries in economic terms.

Option 3: A value-at-risk approach

Value-at-risk is a concept used to manage risk in the financial sector, which seeks to identify the maximum loss within specified confidence limits, usually 90% or more. With a 90% confidence limit, you can be 90% certain that you will not lose more than the calculated maximum loss. Amongst climatologists, this approach has been used to define an upper limit for the Climate Sensitivity parameter (CS), the equilibrium temperature rise following a doubling of atmospheric carbon dioxide level. Using all available data, it was calculated that there was a 95% probability of CS lying between 1.0 and 9.3C. The value-at-risk approach then requires the evaluation of the damage caused when CS is at the upper end of the range (9.3C); over twice the upper bound benchmark of 4.5C used by the IPCC).

Using this higher figure in the climate model, instead of the mean IPCC CS value of 2.9C, a new set of optimal abatement results is obtained. The baseline warming reaches 15C by 2300, but this can be reduced to 5.9C using optimal measures to reduce emissions. Reduction by 90% is optimal (the model has this as an upper boundary) from now until the late 23rd century. To achieve this, a carbon tax starting at $450 per ton in 2005 would rise to $1,900 per ton in 2205, then decline after 2285.

Baseline climate-related damage would be massive: 8.6% of global GDP by 2100 and as high as 68% by 2300. Optimal reduction of emissions would reduce these figures to 2.1% and 9.4% respectively. Abatement costs average about 3.5% of global GDP through this century, plateauing at about 5% thereafter. The present value of the abatement costs is $458 trillion, but this is set against a benefit (damage avoided) of $1,749 trillion, which yields a benefit-cost ratio of 3.8. Therefore, although the taxes appear punitive, this scenario would be highly beneficial in net terms.

All these policies have been evaluated on the basis of zero pure time preference, as discussed earlier. If conventional time-based discounting is applied, even at low rates, the options would look rather different. For example, costs exceed benefits for Option 1 if the discount rate exceeds 1%, and for the third option, the policy ceases to be cost effective at a rate between 1 and 2%. Because the total discount rate is about 1.5% per year higher than the pure time preference rate, these breakeven points correspond to about 2.5% for the first option and about 3% for the third.

Conclusion

Three alternative policy options have been evaluated, using an adapted climate model that makes allowance for the long timescale over which benefits of emission abatement are received. The timescale for assessment is also extended through to the year 2300, a period over which the full impact of policies will be felt.

A fairly aggressive abatement policy -- with carbon taxes set internationally but collected and spent nationally -- is the basis of the first option. Global warming would be reduced by 0.8C by 2100 and by 1.9C by 2300, and the benefit-cost ratio would be approximately two, using the optimal solution.

The second option -- following the Kyoto Protocol -- would have more limited effects, although the benefits would still marginally outweigh the costs. However, all these costs would be borne by the present industrialized and transition economies.

The third option is based on an estimate of the maximum value-at-risk. This is a very risk-averse approach and would require a carbon tax of $450 per ton, rising to $1,900 by 2205, to cut carbon emissions by 90%. Despite the high cost of this option, its benefit-cost ratio is still about four.

Phillip Martin

Population and Migration

Description of the challenge

For most of human history, migration has been constrained by physical barriers and transport difficulties rather than government action. More recently, sharply different rates of population and economic growth across the world have combined to make many workers from poorer countries eager to move to countries where more jobs are available and wages are much higher. Modern communications make the differences even more visible, and modern transport makes migration easy and affordable. But migrants are not always welcome in rich countries.

In an ideal world, such economically motivated migration would benefit migrants, increase global GDP and promote economic convergence between rich and poor countries. After a time, this would reduce the pressure to migrate. The challenge addressed in this chapter is ensuring that the migration that occurs promotes equality.

Global economic convergence is a goal supported by most economists and other commentators. However, there is no consensus on how migration might achieve this, with strong arguments being made both for and against.

In 2000, it was estimated that 175 million people -- 3% of the global population -- were migrants who had lived outside their country of birth or citizenship for a year or more. This number had doubled in the previous 25 years, during which the world's population grew by 50%. Most migrants move from poorer to richer countries, with about 60% of the total now living in the more developed countries. Although there are many more potential migrants, immigration has become a major political issue in receiving countries (for example, European Union Member States). Public opinion polls suggest that most residents oppose further immigration and support government measures to reduce illegal or irregular migration.

Most economists welcome migration from lower- to higher-wage countries, because it uses resources more efficiently and maximizes production. The global economic gain is the sum of net income gains of individual migrants, plus a small bonus for receiving countries. It was estimated in 1984 that world GDP could more than double if free migration was allowed, adding between $5 trillion and $16 trillion to the 1977 figure of $8 trillion. The global economy has now grown to over $30 trillion, making potential gains today far greater. With such potential gains, the benefit from even partial liberalization of labor flows could benefit the world economy far more than trade liberalization.

For countries receiving migrant workers, the overall economic impacts are clearly positive, albeit there will be some losers who must be compensated. For countries that are net senders of migrants, the situation is less clear-cut. So, although the global economy and individual migrants may benefit, sending countries may find their economic development held back by the loss of talented, educated citizens. In a worst-case scenario, migration may actually cause further divergence of per capita incomes.

Table 7.1. Europe and Africa, demography, 1800-2050 

Share of world population %

  1800 2000 2050
Africa  8 13 20
Europe  20 12 7
World pop. (bn)  1 6 9

There are clear arguments for developed countries, with aging populations and fewer young workers, to use immigration to stabilize work forces. Many developing countries are happy to export some of their excess labor to increase remittances and acquire new skills. However, managing migration optimally for the benefit of all parties is more difficult.

Migration is driven by differences. As economic differences widen, developing country populations continue to grow, and transport becomes cheaper and easier, migration pressures will increase. As well as the basic gap in GDP, the continued drift of labor away from agriculture (the world's major employer) creates a larger pool of willing migrants. This is partly a result of trade barriers to agricultural produce, which reduce farm employment in poor countries. At the same time, there is a demand for migrant labor to work on the subsidized, protected farms in industrialized countries.

Ethnic or security differences also drive migration. Conflict and the creation of new nations in the old Communist bloc have caused population shifts and contributed to the flow of migrants, for example.

Copyright 2006 Bjrn Lomborg