Of discount rates and candy-canes

By Christopher Monckton of Brenchley

“The time has come,” the Walrus said,

“To talk of many things:

Of shoes and ships and sealing-wax,

Of cabbages and kings,

And why the sea is boiling hot,

And whether pigs have wings.”

Lewis Carroll, Aliciae per speculum transitus

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Dr Mark Freeman (January 4) wrote that the 5% intertemporal discount rate recommended by the Nobel-prizewinning economist William Nordhaus for appraising the net welfare loss or gain arising from investment in measures intended to abate global warming was, if anything, too high. Dr Freeman said he and his colleagues had recently published the results of a survey of almost 200 economists with “expertise in intergenerational social discount rates … to be used by governments when … determining climate change policy”. The survey had concluded that Nordhaus’ rate was too high.

In this reply, I shall begin by explaining what an intertemporal discount rate is and why it is used. The bird-in-the-hand rule states that a dollar in our billfold today is worth more to us at present than a dollar in the sticky pocket of our sticky grandson 100 years hence. To work out how much more that dollar is worth today than the day after tomorrow, one begins by estimating the flow of incomings and outgoings from today until a chosen future date. Next, one purges the figures of inflation, so that all the dollars in the ledger are at today’s prices.

Now comes the discount rate. From experience, we can predict that predicting the future is uncertain. Accordingly, if we want to reassure ourselves that a hefty investment we are thinking of making today is prudent and likely to convey a healthy net welfare gain over the chosen period, we discount the future cashflow at a chosen annual intertemporal discount rate so as to convert it to what is called “present value”. Present value is the discounted sum of the annual net inflows or outflows throughout the term of the proposal.

The higher the discount rate, the more the uncertainty there is and the less likely it is that the calculation will show our investment to be net-profitable. The reason is that the bulk of our proposed investment is upfront, in the form of capital expenditure to build our factory or railroad, while the bulk of our hoped-for reward will arrive only after the factory is delivering its shoes or ships or sealing wax, or after the railroad is carrying passengers or cargo.

As a guide, the minimum commercial overall or “social” discount rate is Nordhaus’ 5% (see Nordhaus 2008; Murphy 2008). The U.S. Office of Management and Budget uses 7%. A submarket overall discount rate appears unduly to favor future generations at the expense of our own: in practice, however, it harms future generations by making the economy in our generation less efficient, greatly reducing the inherited wealth we are able to bequeath to them.

Therefore, since most of the outgoings in a proposed investment will be in or near the present, whatever discount rate we choose will not make much difference to the present value of our proposed enterprise’s cost. It will, however, make a large difference to our income from the distant future. That is why high discount rates reduce the likelihood that our present-value calculation will show our proposed investment to be worthwhile.

The overall or “social” intertemporal discount rate comprises two parts: the utility discount rate and the consumption-growth rate. A typical commercial investment will tend to allocate half the discount rate to the former and half to the latter – say, 2.5% for each half, or 5% in all, which, approximately, is Nordhaus’ discount rate.

However, the Stern review (2006) of the economics of climate change for the then Socialist government in Britain, chose an overall discount rate of just 1.4%. Stern started from the assumption that annual per-capita consumption growth would be depressed by global warming from 2.5-3% to an average of 1.3% over the 21st century.

Stern’s utility discount rate (also known as the pure rate-of-time preference), which describes a lower weight on the future simply because it is the future, was only 0.1%. The astonishing pretext for this absurdly low utility discount rate was not explicitly stated in the review itself, but was subsequently revealed in Dietz+ (2007), of which Stern was a co-author. Laughably, Stern had assumed a 10% probability that global warming would end the world by 2100.

Garnaut (2008), in his me-too economic report for the then Socialist government in Australia, adopted an overall discount rate similar to that of Stern. Many other economists have done likewise, as Dr Freeman points out. All these me-too economists choosing zero or near-zero utility discount rates and consequently submarket overall discount rates are, in effect, assuming that global warming is likely to destroy the world.

Which raises the questions that should always be asked by anyone proposing an intertemporal investment: How much will the proposed investment cost upfront, and what return will I eventually get for my money?

A small child entering a candy store with a handful of coins has the rationality to ask: “How many candy-canes can I buy with this, Mister?” How much global warming that will otherwise eventuate will any present or proposed abatement measure – however piously intended – actually abate, and at what unit cost?

The “integrated assessment models” used by economists in attempting to justify excessive diversion of taxpayers’ and fuel-users’ money towards attempts to make global warming go away are incapable of answering the candy-cane question. Most economists do not know enough climate science to calculate how much global warming a given mitigation measure will abate, and most climate scientists do not know enough economics to do the calculation for themselves.

Governments, panicked by shrieking, lavishly-funded environmental-fanatic lobby groups, do not trouble to ask the candy-cane question. The French Government did not ask the candy-cane question when in 2018 it proposed to inflict additional taxes amounting to $3 billion a year on gasoline and diesel.

Had M Macron asked that preliminary question, without which – as will become apparent – there is simply no point in fussing about the intertemporal discount rate, the costed answer would have revealed to him the egregious futility of his proposal. As the costed French example will amply demonstrate, no policy to mitigate global warming by taxing, trading, regulating or reducing emissions, however piously intended, is at all likely to be cost-effective solely on grounds of the expected net welfare gain from that mitigation.

The French Government had proposed to increase gasoline tax by 0.029 euros per litre and diesel tax by 0.065 euros per litre from January 2019. France uses 1.6 million barrels a day of oil (IEA). Each barrel yields ~31 U.S. gallons of fuel, of which 20 gallons are gasoline and 11 gallons are diesel (IEA). At 3.7854 litres per U.S. gallon, the product of the 44.243 billion litres annual gasoline consumption in France and the 0.029 euros per litre tax increase is 1.283 billion euros a year. The product of the 24.334 billion litres annual diesel consumption and the 0.065 euros per litre tax increase is 1.582 billion euros a year. Total additional revenue – and thus the total welfare loss occasioned to the citizenry by the Government’s proposal – would thus have been 2.865 billion euros a year.

Mean fuel tax increase is 0.042 euros per litre, or 3% of the 1.46 euros per litre mean retail price of gasoline or diesel in France prevalent at the time of the protests of winter 2018.

Fuel is a Giffen-good: demand is inelastic in the face of price increases. Raising its cost by 3% does not cut consumption by 3%. Here, 1% is optimistically assumed. Since France’s CO2 emissions from gas and diesel are ~200 million tonnes per year (International Energy Agency; worlddata.info), the proposed tax increase might cut global CO2 emissions by 2 million tonnes a year, or 0.006% of global CO2 emissions of 32.5 billion tonnes a year (IEA).

Importantly, since the mean atmospheric residence time of CO2 is ~125 yr (IPCC 2013), abatement only affects the 3 parts per million by volume per year (NOAA 2018) business-as-usual perturbation in concentration, of which 0.006% is 0.00018 parts per million by volume per year.

Radiative forcing from doubled CO2 concentration, the mean of the midrange estimates in 15 CMIP5 ensemble members (Andrews et al. 2012), is 3.346 W m^(-2). Since reference sensitivity to CO2 is an approximately logarithmic function of the proportionate change in concentration, the coefficient in the CO2 forcing function is 3.346/ln(2), or 4.83.

Reference sensitivity to doubled CO2, before allowing for temperature feedback, is the product of the CO2 forcing and the Planck sensitivity parameter, currently 0.3 C° W^(-1) m^2 (Schlesinger 1985): i.e., 0.3 x 3.346=1 C°. Since CMIP5 predicted midrange equilibrium sensitivity to doubled CO2 is 3.4 C° (Andrews 2012), the implicit midrange transfer function that allows for the operation of temperature feedback is the ratio of equilibrium to reference sensitivity: namely, 3.4 C° / 1 C°, or 3.4.

Since expected business-as-usual global CO2 concentration (NOAA 2018) at end 2019 will be 413 ppmv, the expected welfare benefit in global warming abated by the proposed French fuel tax increase would be 3.4 x 0.3 x 4.83 ln[413/(413-0.00018)], or 0.000002 C°.

The direct welfare loss arising from any strategy to mitigate global warming by abating emissions of greenhouse gases is the cost to taxpayers and consumers of fuel and power. Opportunity losses are additional. The direct welfare benefit of any such policy is the value of the global warming abated. Indirect benefits are likewise excluded here, brevitatis causa.

The ratio of the direct welfare benefit of a mitigation strategy to the warming abated by the strategy is the strategy’s unit abatement cost per Kelvin abated. Derivation of the unit abatement cost allows direct comparison to establish which – if any – of competing mitigation strategies is cost-effective.

The unit abatement cost of the French proposal is the cost of abating 1 K global warming by strategies whose benefit/cost ratios are that of the proposal: namely, the ratio of 2.865 billion euros per year to 0.000002 K, or 1.4 quadrillion euros per Kelvin abated.

The cost of abating all of the 4.2 K global warming predicted for this century on the RCP 8.5 scenario (IPCC 2013, fig. 1.25) would thus be 1.4 x 4.2=6 quadrillion euros. At 7.5 billion global population, the annual per-capita abatement cost would be 8000 euros, or approaching 90% of the 8950 euros global mean annual per-capita income in 2016 (World Bank).

The French example, by no means untypical in its high cost and low effectiveness, illustrates the principal reasons why no mitigation strategy is at all likely to deliver a net welfare benefit solely on grounds of global-warming abatement. The cost is absurdly high, but the quantum of business-as-usual CO2 emission and concentration and hence of global warming abated in return for the expenditure is necessarily very low – and low not only by comparison with the high cost but also in itself.

The above calculation assumes that, per impossibile, the midrange rate of global warming currently predicted by climate models is correct. Since that warming rate, owing to the error of physics on which it is based, is approximately thrice the legitimate expectation, the true expected welfare benefit in the shape of global warming abated by the proposed French fuel tax increase would be 1.3 x 0.3 x 4.827 ln[413/(413-0.00018)], or 0.0000008 C°. Then the cost of abating 1 K global warming by measures of equivalent cost-ineffectiveness would be the ratio of 2.865 billion euros per year to 0.0000008 C°, or 3.6 quadrillion euros.

We have answered the candy-cane question that the French Government, like nearly all governments worldwide, does not take the trouble to ask. Answering that question reveals at once the futility of wielding intertemporal discount rates in the vain hope of providing a rational economic justification for measures to make global warming go away. For the above calculation assumes a zero discount rate. Any positive intertemporal discount rate will have the effect of reducing whatever minuscule net welfare gain might be conceived to have arisen from forestalling 0.0000008 C° of global warming in return for the very substantial welfare loss in the cost of the proposed measure.

The “Democrats” in Congress have begun to realize that any “climate action” against the small, harmless and net-beneficial anthropogenic warming that is likely to continue for the next century or two is unjustifiably expensive and egregiously ineffective. Their original ambition to prevent the funding of the Republican party by the coal-mining and coal-burning industries, formerly among the Republicans’ biggest donors, has already been achieved. Now they are proposing a “new green deal” to finish off the free market altogether.

Their proposed “fee-and-dividend” scam, which, like others of its kind, is being presented as a “cost-free” or “no-regrets” measure, involves a large and annually-increasing additional tax levied upon fossil-fuel corporations until they go bust. This is Mr Obama’s “war on coal” on steroids. But the State will not retain the money it has thus grabbed from the corporations. Instead, the money will be divided up among the populace in the form of a cash dividend. Millions of jobs will be created in “renewable” energy, just like that. There will be motherhood and apple pie all round, with extra cream and jam and chocolate sprinkles.

Here are just some of the costs of the “Democrats’” “cost-free” fee-and-dividend scam. Affordable, reliable, continuous, base-load, high-density, low-environmental-impact energy will be replaced by costly, unreliable, intermittent, part-time, low-density, high-environmental-impact windmills, solar farms and suchlike wondrous boondoggles. The lights will go out all over the nation. Millions of jobs will be destroyed. Tens of millions will starve (historically, this is the usual consequence of extreme Socialism).

After all, it’s working elsewhere in the world. Just look at the Third World, which is largely unelectrified. Chiefly owing to lack of access to electricity, mean life expectancy in the Third World is 60 years. In the electrified West, it is 80 years. Some 1.2 billion people – a sixth of the global population – have no access to electricity – “access” being defined, I kid you not, as the ability to turn on a single 60-Watt bulb for four hours a day (IEA).

Some 4.5 million people a year die in some-filed huts because they have no electricity to cook with. Another half million, all of them women, die in childbirth for lack of electricity. Half a million neonates ditto. Several million more die each year because they cannot get treatment in a hospital with electricity, or because they cannot keep food or drugs refrigerated, or because there is no electricity to pump clean water to them or drive sewage-disposal plants, or because they cannot run air-conditioning by day or heating by night.

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Yet the World Bank and the IMF will no longer lend to third-world countries for digging coal or building coal-fired power stations, and from next year there will be no lending to poor countries for oil and gas extraction either. The Dark Continent will stay Dark.

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I end, as I began, by looking briefly at the science. If Napoleon had bothered to stick his nose outside the Elysee Palace and check in with his totalitarian comrades at the European Commission in Brussels, the unelected Kommissars would have told him that, not so long ago, they commissioned some research to find out just how many lives would be lost in Europe if global warming were to continue unchecked.

To their horror, they found that the more global warming happened the more lives would be saved. For, as every schoolboy knows, it is colder weather, not warmer weather, that is the big killer. Warmer weather saves lives.

There is a horrifying recent example from my own country of what happens when electricity prices are hiked so much that poorer families can’t afford to turn on the heater. There was a brief cold snap last winter, and 25,000 more excess winter deaths than usual resulted, chiefly because those who are less well-off can no longer afford electrical power or heating oil because global-warming policies have made these essential commodities six times costlier than they would be if the free market had been allowed to work without governmental interference. When the gilets jaunes took to the streets in France, set fires and threw cobblestones, they had very good reason to complain at their government’s policy.

As for the discussion of discount rates, it is pointless unless and until one has first asked and credibly answered the candy-cane question. Slowly, infinitely slowly, my team is convincing the few open-minded governments in the world that they should ask that question and replace the anti-scientific, uneconomic hysteria of current intergovernmental climate policy with a rational economic approach.

In the long run, the use of reason will triumph against the current epidemic of irrationality. But how many more tens of millions must die in third-world countries, and increasingly in Western countries too, before common sense and common humanity prevail?

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126 thoughts on “Of discount rates and candy-canes

  1. In the 70’s fossil fuel taxes had to be increased because fossil fuel supplies were being depleted and their conservation was needed. At the time they supplied ~90% of global energy demand. There was some concern that global cooling could portend the start of a new ice age.

    Since about the late 90’s, fossil fuel taxes had to be increased because these fuels are leading to increased atmospheric CO2 that contributes to global warming (later climate change). They still supply ~90% of global energy demand.

    It seems the only commonality is the demand to increase taxes on fossil fuels.

    • And gosh darn it, they were right back then…we have depleted world supplies to such an extent that, despite burning ever more, steadily, every year since, the quantities that are known to be available are higher than ever before.
      In 1980, proven reserves were somewhere around 700 billion barrels.
      Since then, the world has used, according to a rough back of the envelope calculation, somewhere around 1100 billion barrels (65mbd in 1980, 95mbd in 2019, avg 80mbd x 365 x 38), which leaves us in the awful predicament of only having 1500 billion barrels (conservative est) left!
      *Not to worry though, just this week BP found a billion barrels in the Gulf of Mexico near New Orleans, and the Saudis located a few extra billion barrels in an untapped oilfield they share with Kuwait*

        • Trebla,
          By golly and begorra, I have an easy time believing you have a very firm grasp on the obvious, me laddy!
          And yet after using one and a half times (at least) the entire amount estimated to exist as reserves, back when we were told we would soon run out in the late 1970s, we have more on hand than ever before.
          In fact, this has always been the case since shortly after was discovered and used in quantity in the late 1800s.

          And in case you think I do not know how to do arithmetic, I will just say, I took three semesters of engineering calculus and got two As and B+.
          Hey, maybe next you can make a prediction of when we will use the last drop of oil on Earth, using the rate it is consumed and the amount of proven reserves.
          Then maybe look up what such terminology means.
          Then maybe see if you can purchase a sense of humor somewhere…yours seems to have gone missing.
          You’re welcome.

          • Trebla!

            Wouldn’t you just love if oil was gonna run out soon! There would be no need then to genuflect in the Church of Climate Change. But, of course, we have an enormous quantity of oil left in the ground. Various estimates put that at anything from 3 – 10 trillion barrels. Not all of that is recoverable, of course, but technology advances have already increased the amounts we can reasonably expect to recover so we can anticipate oil production well into the next century…..which is just as well since hydrocarbons provide ~80% of our primary energy supply (as they have done for decades).

            And what about natural gas? We probably have 300 years supply of that resource thanks to horizontal drilling and hydraulic fracturing…….and when that runs out, we will no doubt already have figured out how to exploit gas hydrates that exist in vast areas of the seabed and near-subsurface. The methane in gas hydrates is estimated to exceed reserves of ALL other hydrocarbons on the planet!

          • Menicholas – It’s no good working with Reserve, you have to work with Resource. That’s because Reserve is continuously replenished as needed from Resource. I know this because it’s a mistake I made in the past.

    • You make a common but as far as I know completely unproven claim with a wave of your hand. Here is an idea. Point me to the statistically significant datasets which prove 1. Atmospheric CO2 is a driver of global warming ( that means the oceans also by the way) AND that MAN is responsible for that….. You need to look hard because no such dataset exists…. but oh what is this you say… you keep hearing this in the MSM and a political body call the IPCC and Al Gore and Leonardo De Caprio tell you so….. hmmmm…As I sad SHOW THE FACTS!

      • Who exactly are you addressing here Jon?
        I am wondering if it is me.
        I have not seen anyone making any assertions such as the ones you are asking for proof of.

  2. Instead of taxing fuels to reduce consumption, how about rationing as was done during WWII. I expect your analysis of that alternative would be interesting.

      • Oh no.

        The Canadian federal government is putting a price on carbon dioxide but they are rebating $300 to each taxpayer. That’s supposed to keep the taxpayers from complaining when they can’t afford to drive or heat their houses. It’s something like the frog in a pot of slowly heating water. The frog isn’t supposed to notice the slow change and jump out. Similarly, the taxpayers aren’t supposed to notice how badly they are getting scrod.

        Rationing would be far more honest. It would enable the taxpayers to immediately see the stupidity of the situation.

          • The stupidity will be really obvious and it won’t be hidden by BS and subterfuge. IMHO, that’s what we want. yes/no?

        • Why ration?

          If CAGW is real, ban all tourist travel. Air travel is roughly 12% of the transportation emissions. Canadians do not need to go to warm places in their winter to get away from the cold.

          There were 10 million visitors to Paris in 2018.

          If the French were serious about reducing CO2 emissions they would ban all tourist visits to Paris.

          • You could make the same point by showing that all immigration into European Union should be restricted or prohibited in the name of slowing GHG emissions and ACW abatement because the rate of fossil fuel is greater in the EU than in the countries of origin of the illegal migrants.

        • Send us the taxes up front, don’t worry though, we’ll ‘rebate’ them back to you …minus processing and handling fees.
          Nobody ever loses money underestimating the stupidity of the public.

        • I could be wrong, but I think I heard our Fearless Leader say that the rebates would be there “for the transition” to a low-carbon economy. I.e. the rebates will eventually disappear and we will be stuck paying more taxes??? For nothing?

          • No taxes necessary.

            Eventually the unicorns will come and sprinkle pixie dust and renewable energy will become cheaper than fossil fuels ever were. That’s what they’re selling. They are either liars or extremely stupid, or both.

            Q: How do you tell if a politician is lying? Answer

      • Huh? Rationing is a way to control consumption. There can be different reasons why consumption needs controls. What is your point?

      • The second oil shock in 1977 was addressed by the nascent Department of Energy who chose not to hire anyone who had experience in the oil industry. Rather than rationing, they used an allocation scheme based on prior years usage. The result was long lines at gas stations because people did not want go too far and get stranded. What I learned when we took the risk and went a popular summer tourist area highlighted the stupidity of this plan We went a gas station, pulled up to a pump, filled up and were off. The guy at the gas station told me they had a high allocation due past usage but too few customers willing to risk getting stranded and stayed home.

      • More to the point, rationing would not generate the fat tax revenue for the government to use to control the weather waste.

    • If you believe in human-induced climate catastrophe and believe in rationing to “solve” it, feel free to “ration” your own use. Just don’t think your delusion should be crammed down everyone else’s throat.

    • Rationing would be the logical conclusion if the Climate Change™ ‘crisis’ was as serious as claimed but it wouldn’t be popular amongst the governing elites, unless they were exempt nomenklatura-wise.

    • Dunno if this study and its revision are what Chris had in mind, but the revamp is instructive and sadly predictable:

      Extreme temperatures and health

      PDF
      Indicator Assessment Prod-ID: IND-189-en Also known as: CLIM 036 expired Created 08 Nov 2012 Published 20 Nov 2012 Last modified 04 Sep 2015 10 min read

      This is an old version, kept for reference only.

      Go to latest version

      https://www.eea.europa.eu/data-and-maps/indicators/heat-and-health-1/assessment

      Original:

      Key messages
      Mortality and morbidity increase, especially in vulnerable population groups, and general population well-being decreases during extreme cold spells and heat waves, as well as above and below local and seasonal comfort temperatures, with different temperature thresholds in Europe.
      The number of warm days and nights has increased across Europe in recent decades. Heat waves over the last decade have caused tens of thousands of premature deaths in Europe.
      Length, frequency and intensity of heat waves are very likely to increase in the future. This increase can lead to a substantial increase in mortality over the next decades, especially in vulnerable groups, unless adaptation measures are taken.
      Cold-related mortality is projected to decrease in Europe due to climate change as well as better social, economic and housing conditions in many countries.

      Revised:

      Key messages
      Heat waves and extreme cold spells are associated with decreases in general population well-being and with increases in mortality and morbidity, especially in vulnerable population groups. Temperature thresholds for health impacts differ according to the region and season.
      The number of heat extremes has substantially increased across Europe in recent decades. Heat waves have caused tens of thousands of premature deaths in Europe since 2000.
      It is virtually certain that the length, frequency and intensity of heat waves will increase in the future. This increase will lead to a substantial increase in mortality over the next decades, especially in vulnerable population groups, unless adaptation measures are taken.
      Cold-related mortality is projected to decrease owing to better social, economic and housing conditions in many countries in Europe. There is inconclusive evidence about whether or not the projected warming will lead to a further substantial decrease in cold-related mortality.

  3. Lord Monckton, you are a rational person in an increasingly irrational world. The forces pushing the global warming/monetary redistribution schemes surely cringe at your name, and I hope that is a satisfying reward.

    • There is likely a greater number of rational people alive in the world today than ever before in history. How does that make you feel?

      • R Shearer, is that a joke? It is also true that there is likely a greater number of irrational people alive in the world today than ever before in history.

        A similar question: Do you realize that half the population of America is dumber than the average American?

      • R Shearer, I based my comment on the well-publicized world-wide decline in the average IQ of the Earths population. I said something like this before and some commenters didn’t like it, but it is both inescapable and alarming.

        • Many thanks to Mr Long for his very kind comments. It is indeed unfortunate that totalitarians will tend to put the Party Line before any rational attempt to discern the objective truth.

  4. “… the French Government, like nearly all governments worldwide, does not take the trouble to ask.

    Au contraire Monsieur Monckton of Brenchley, one purposefully does not ask the question if one does not want to hear the answer from the experts.

    Nice analysis.
    The economics of climate change action is where the battle will be won against the climate cabal and their rentseeking scientists who have perverted their scientific intellectual integrity beyond any recognition for their masters.

    https://dilbert.com/strip/2017-05-14

    • What Iam struck by is that in the land of Climate Change alarmism is indeed a Wonderland straight out of Lewis Carroll’s tales of Alice’s adventure there. And you sir are the Cheshire Cat, grinning widely from your perch. And all of those governments who went down the rabbit hole a

      “The Cheshire Cat explained to Alice that madness is the chief characteristic of the residents of Wonderland, and that to be in Wonderland is to be mad. In order to exist at all in Wonderland, one must accept its inherent irrationality. The Cheshire Cat reasons that in order to accept this irrationality at all, one must be mad.”

      “The Cheshire Cat understands that Wonderland and all of its inhabitants exists as a figment of Alice’s dreaming imagination.”

      – analysis for Alice’s Adventures in Wonderland
      at http://www.sparknotes.com/lit/alice/section6/

      That pretty much explains the irrationality of Climate Change Alarmism. Everyone who lives there is mad and politicians imagining all the future climate hobgoblins is merely a dream and even Climate Wonderland itself is a figment of that imagination run wild.

    • I have often thought that to teach society a lesson it won’t quickly forget, that all fossil fuel pipelines should be closed in North America for 48 hours in mid January. In the name of cutting emissions, you understand.

  5. So the climate consensus is devolving into imperialist repression, denying the third world the benefits of coal, gas and oil.
    What a tragic horrible crime against the world’s poor the climate consensus is committing.
    Abundant energy equals freedom and life.
    It is clear that the climate change consensus is against abundant energy.

    • Also known as why I laugh when the Eco-Nazis clamor on about how “climate change” will have a disproportionate “impact” on “minorities,” when the reality is that it is climate POLICIES that will have such disproportionate effect, the example at hand being the prime illustration.

  6. I am a simple man, and my simple mind translates all of this, boils it down, and condenses it out into this:
    “We are going to tax your wallet empty because climate change, and you will never it miss it in the end, because end of world.”
    Then they wonder why we are not thanking them.
    Are these the same people who, when they do a cost/benefit analysis of burning fossil fuels, a la “the social cost of carbon” malarkey, clean forget to include the “benefit” part?
    Although, to be fair, they do manage an amazingly thorough inventory of the costs, being sure to include everything from lost productivity due to bad hair days, right back to the ruinous expenses incurred by humankind’s exile from Eden, and every dollar spent on anything, ever, since.

  7. The “abatement” measures are so fatuously ineffective there must be other motives for their imposition. With the French fuel taxes, it is probably hostility to rural people and their lifestyle.

    • It is basic Marxism, anti individual. The state will decide and the state only has rights.
      That is what is happening in France and increasingly across the whole EU, thank God we are leaving in a couple of months time.

      • Rod Evans is right. I campaigned for 40 years to get us out of the EU and to restore our national independence and demoocracy. The establishment is doing its best to wreck Brexit, just as it is doing its best to adopt the stupidest and costliest climate-change policies on the planet. But, if we succeed in actually leaving the EU (for the establishment has been working ever since the referendum to keep us in while appearing to accept the referendum result), we shall at least be able to vote out part of the establishment from time to time, whereas the people have no say over the unelected Kommissars who have all real power in the EU, and the elected European Parliament cannot even bring forward a Bill.

        • M of B – Many thanks for your efforts, and the wit that embellishes them. Watching the destruction of Britain by Theresa May and those in her party still loyal to Edward VIII has been and regrettably still is a jaw-dropping experience. It is truly remarkable how they have managed to push Britain towards what is surely the only option worse than the two principal options (stay, or no-deal leave). I hope they fail, but I fear that their very close friend Mr Corbyn will betray Britain to get them over the line.

          “Do not fear your enemies. The worst they can do is kill you. Do not fear friends. At worst, they may betray you. Fear those who do not care; they neither kill nor betray, but betrayal and murder exist because of their silent consent.” ― Bruno Jasienski

    • Yes! Bjorn Lomborg’s 2007 book “Cool It” made pretty-much the same points as Christopher Monckton makes in his above, excellent post. The examples were different but the basic message was the same. Spending (wasting) money today on a non-problem makes no sense whatsoever when we have so many other real problems that could be addressed with merely a fraction of those wasted funds. And, of course, the ultra-expensive implementation of treaties like Kyoto, would make almost NO DIFFERENCE in global temperatures anyway, even if CO2 was responsible for global warming.

      Christopher Monckton’s post is a refreshing and topical reminder of the extent to which governments will go to deceive their people in an effort to extract tax revenue from the population for their own egregious ends. Meanwhile, the poor are deprived of the most important commodity in the world – cheap and plentiful energy. It’s a crime!

  8. “In the long run, the use of reason will triumph against the current epidemic of irrationality.”

    You’re more optimistic than I am.

  9. Can we get a discount rate on the costs required to increase CO2 to 1200ppm based on the future value of the agricultural commodities it will enable?

      • LMAO – By all means, present some empirical (and I emphasize, EMPIRICAL; no “models,” “estimates,” “settled science” blather, or counts of published papers) evidence that the increase in CO2 level will cause ANY “climate change.”

        We’ll wait.

        • Oh dear! Has it escaped your attention that I make hundreds of comments on WUWT some weeks, and have done so for years?
          And every single one of them is from as staunchly a skeptical position as anyone can possible have?
          I have a nose for sarcasm which is nearly as keen as my built in BS detector, but I am aware that many do not possess these skills, innately speaking.
          Read mine and the one I was responding to a few times more, and maybe the one up top I wrote, and get back to me if need be.
          We’ll (We’ll? Really…I mean I’ll. What am I, royalty?) wait.

    • Many thanks to Bob Tisdale for his characteristically kind and generous comment. His own pieces are an ornament to this site.

  10. “Importantly, since the mean atmospheric residence time of CO2 is ~125 yr (IPCC 2013)”

    That statement from the IPCC is bullshit because it is based on the Bern model of CO2 sources and sinks which compartmentalizes the different sinks which contravenes a basic law of physics and mathematics. The real residence time ~ 1 year. There have been 100 different peer reviewed papers giving CO2 residence time from 1 to 5 years. See Salby’s latest talk.

    • Agreed. Which would significantly boost the costs of “mitigation” efforts and render their effects even more completely meaningless.

      • Mr Tomalty will no doubt realize how delightful it is to be able to take IPCC’s daft estimate of the mean atmospheric residence time of CO2 and turn it against the totalitarians by pointing out that, if it wer true, there woiuld be absolutely no economic justification for taking any measures to prevent global warming.

    • Alan Tomalty,
      From the C14 spike due to nuclear bomb test follows a residence time for a specific CO2 molecule of 14 years. The residence time for the excess of CO2 in the atmosphere before it is absorbed by the sinks is ~55 years. This is forcing (~110 ppm) divided by absorption (~2 ppm/year).

  11. But do we know that taking any action to mitigate against AGW will have any effect at all?
    According to mainstream science – No.
    From page 258 of the IPCC WG 3 AR5:

    • Despite the importance of the cost of mitigation, the aggregate cost of mitigating x tonnes of carbon globally is poorly understood. To put it differently, a global carbon tax of x dollars per tonne 259 Social, Economic, and Ethical Concepts and Methods 3 Chapter 3 would yield y(t) tonnes of carbon abatement at time, t. We do not understand the relationship between x and y(t).
    • The choice of the rate at which future uncertain climate damages are discounted depends on their risk profile in relation to other risks in the economy. By how much does mitigating climate change reduce the aggregate uncertainty faced by future generations?

    Even the IPCC acknowledges that mitigation has no evidence to support it doing anything.
    Surely the discount rate should be higher when it could have no positive impact at all.

    • In response to Mr Courtney, there is no need for a discount rate at all where the cost of a proposed investment exceeds any conceivable return by one or two orders of magnitude.

      • Fair point.
        I just like pointing out that Stern disagrees with the IPCC and so should be considered a fringe voice, according to those who believe in the authority of the IPCC.

  12. Lives cannot be saved, only lost, and we all lose our lives someday. Solar might work quite well in many development countries. The whole concept of the discount rate is ludicrous, just imagine what the world looked like in 1918, how could they then possibly have contemplated the world of 2019 or even World War II or the Dotcom crisis?

      • In 1923, GEN “Black Jack” Pershing said, “We never really let the Germans know who won the war. They are being told that their army was stabbed in the back, betrayed, that their army had not been defeated. The Germans never believed they were beaten. It will have to be done all over again….”

        “Black” is the edited version of West Point cadets’ pejorative nickname for their then instructor J. J. Pershing, bestowed because of his prior service with the 10th Cavalry, aka “Buffalo Soldiers”. During the Spanish-American War, as a 1LT, he rejoined the regiment in Cuba as its quartermaster.

        Others forecast an even more terrible war before the Versailles Treaty.

        • There was an American diplomat involved at the time the Treaty of Versailles was being negotiated who essentially told the “allied powers” that the extremely punitive nature of the proposed terms would result in Germany ending up with a lunatic in power.

          The only thing he didn’t do is provide Hitler’s name, pretty much. The French would have none of it, and were forced to sign their surrender in the same railcar where the Treaty of Versailles was signed, about 22 years later.

          • AGW,

            Winston Churchill vociferously argued against the punitive measures of the 1918 treaty. He knew the future result and dreaded what was to come.

            PBH

          • AGW,

            Winston Churchill vociferously argued against the punitive measures of the 1918 treaty. He knew the future result and dreaded what was to come.

            PBH

        • Even some French, whose government wanted more pounds of flesh than other Allies, could foresee the consequences of the “peace”.

          When Marshal Ferdinand Foch read the draft of the treaty with Germany written at the Paris Peace Conference in the spring of 1919, he famously complained that “this is not a peace. It is an armistice for twenty years.”

          Belgian-German but internationalist, socialist, anarchist, Georgist, communalist, vegetarian economist and radical activist Silvio Gesell wrote in his 1918 Offener Brief an die Berliner Zeitung am Mittag (Open Letter to the Berlin Noon Newspaper):

          “Trotz des heiligen Versprechens der Völker, den Krieg für alle Zeiten zu ächten, trotz der Rufe der Millionen: »Nie wieder Krieg!«, entgegen all den Hoffnungen auf eine schöne Zukunft, muss ich sagen: wenn das heutige Geldsystem, die Zinswirtschaft, beibehalten wird, so wage ich es, heute zu behaupten, dass es keine 25 Jahre dauern wird, bis wir vor einem neuen, noch furchtbareren Krieg stehen!”

          “Despite the sacred promise of the people to outlaw war for all time, despite the calls of the millions: “War Never Again! , contrary to all the hopes for a beautiful future, I must say: if today’s monetary system, the interest-rate economy, is maintained, I dare to state today that it will not take 25 years until we face a new, even more terrible war!”

          A crackpot but actually a pretty good economist.

          • Churchill opens his History of the Second World War with a ringing condemnation of the crippling reparations forced upon Germany by the Treaty of Versailles. Fortunately, the Allies learned from their mistake, and did not demand such savage reparations after the Second World War (though our then Russian allies seized the opportunity to grab half of Germany for themselves, and many other European countries besides).

  13. “..Lewis Carroll, Aliciae per speculum transitus…”

    If we are going to quote C H Carruthers, it might be nice to have it in the original:

    Sic Phoca “Venit tempus nunc
    De multis colloquendi
    Crepidas, naves, ceras, caules
    Regesque disserendi –
    Cur mare fervans sit, porcis
    Alaene sint quaerendi…”

  14. Eugenics never went away.
    The very same groups/types of people who embraced eugenics are selling Catastrophic Anthropogenic Global Warming,AKA CC,
    There will always be people who lust for power over everyone else.
    The needy and fearful will lead these groups.
    As many point out, one of the distinct “tells” of this mass hysteria over weather is the focus on limiting the options of poor brown people.
    This is a feature not a bug, as far too many of the wealth re-distributors keep reminding us.

    Hatred appears to be foundational to this cult.

  15. LMoB,

    Great article, thank you. Not to be nit-picky, but, “Some 4.5 million people a year die in some-filed huts…”

    Should that be, “…smoke-filled huts…?

  16. Ah, but you are talking about measuring changes in global warming. Our alarmist friends have moved past global warming and are using the generic baffle-gab of “climate change”, as in, “We have a plan to fight climate change and you don’t!” No one can measure climate change, so they can impose as many regulations and taxes as they wish, since any weather event can be classified a caused by climate change.

    This is all very attractive to our talent-challenged politicians, as they can always say that they’re working on Saving The Planet and don’t have time to deal with icky things like crime, bad roads, poor education, etc.

    • Sen Merkely sent me an e-mail last week … discussing three urgent priorities, including “climate chaos”.

      You are one step behind … its “CLIMATE CHAOS”…. (Per Merkely, anyway).

  17. Beware the Deadly Cold – Welcome Warm Prosperity
    During the Great Famine of 1695–1697, Finland lost 1/3rd of its population to famine caused by cold.
    The Minoan, Roman, and Medieval Warm periods were the most prosperous in recorded history.
    So why are we trying to prevent warming and seeking to cause cooling?!

    • They aren’t interested in any temperature change. The whole scam is there to impact energy use and consumption. The objective is to de-industrialise the world and reduce the population by so doing.
      Climate and all associated gibberish is just a useful tool to enable the reduction of available energy.

      • Rod Evans

        Agreed 100%……….but you can bet your boots that, when the temperature DOESN”T keep rising due to the climate system’s intrinsic checks and balances, they will undoubtedly claim that their campaign was successful and all the money was well spent.

        This is a criminal enterprise on a vast scale and governments, NGOs, the UN and numerous industries are complicit in its continuing implementation.

  18. In the long run, the use of reason will triumph against the current epidemic of irrationality. But how many more tens of millions must die in third-world countries, and increasingly in Western countries too, before common sense and common humanity prevail?

    Probably and unfortunately somewhere around 97%

  19. Christopher M.
    Your review of discounting is thorough. However, the overall level of interest rates change all of the time.
    Within this, there is a basic pattern for the course of interest rates through a great financial mania. AKA Bubble.
    The path is best followed through real rates in the senior market with the senior currency.
    Used to be London and sterling, now it is NYC and the dollar.
    Real interest rates are calculated by taking the difference between the nominal rate and the rate of CPI inflation.
    This is where it gets fascinating.
    Real long rates have declined through all five of the great bubbles form the first in 1720 to the one in 1929.
    Sometimes they went negative as the boom climaxed. Sometimes they just went down to zero.
    As with the bubble that completed in 2018.
    All of the examples were followed by massive credit contractions as all, repeat all, asset prices get marked down in price.
    Deflation, and this when financial history has become excrutiating.
    Reviewing all five such severe deflations, the typical increase in real long-dated interest rates has been 12, no typo, percentage points. In bond desk jargon that has traders throwing up into the waste paper bins.
    It will mess up assumptions about the discount rate.
    Soaring real rates has been Mother Nature’s way of ending the abuse of credit markets during a bubble.
    Market forces will end the authoritarian experiment in power delivery.
    http://www.bobhoye.com

    • In response to Mr Hoye, it is important to appreciate that, once the cashflow has been purged of inflation and is a real-terms cashflow, there is little connection between the intertemporal discount rate and the interest rate.

      To take an obvious example of the disconnect, at present interest rates are very low, chiefly because governments and central banks are intervening to keep them low not so much for the sake of the people as for the sake of keeping down the cost of servicing the ballooning government debt in most Western countries.

      Such interferences with the free-market interest rate are a flagrant and costly market distortion, penalizing the thrifty without benefiting the profligate.

      The intertemporal discount rate, however, is not an interest rate, and has very little connection with the interest rate. It reflects partly the expected growth in consumption and partly the fact that money is worth less to us the later we receive it. Commercial entities use the discount rate as a means to decide whether an investment is worthwhile, and they can set the discount rate in such a way as to reflect the risks to the anticipated future income stream.

      Tampering with the market discount rate is no less economically damaging than tampering with the interest rate. Both are very blunt instruments. In reality, one does not need to bring discount rates into the climate question at all, because the cost of mitigation exceeds that of adaptation by one or two orders of magnitude.

      • In reality, one CANNOT reasonably bring discount rates into the climate question at all, because

        … for projects at such scale, the assumed discount rate is a variable internal to the system, and can (generally) be termed as the self fulfilling prophesy rate of return.

        (and any (non-biased) idiot can see, just by looking, that the cost of mitigation exceeds that of adaptation by one or two orders of magnitude.)

  20. “There is a horrifying recent example from my own country of what happens when electricity prices are hiked so much that poorer families can’t afford to turn on the heater. There was a brief cold snap last winter, and 25,000 more excess winter deaths than usual resulted, chiefly because those who are less well-off can no longer afford electrical power or heating oil because global-warming policies have made these essential commodities six times costlier than they would be if the free market had been allowed to work without governmental interference. ”

    However Mr. Monckton you are forgetting that the ELITES wish this to happen. THEY DON”T CARE about the deaths because that is their aim.

  21. Lord Monkton – Not to high jack your thread, I was curious about how someone, specifically yourself would punch holes in the following article on Forbes:
    https://www.forbes.com/sites/startswithabang/2019/01/02/the-simplest-explanation-of-global-warming-ever/amp/
    Their “simplicity” doesn’t bother me so much as it seems a summary of appeals to authority and expects the reader to absorb the information without pause for critical thinking.
    One point in particular is the following information they show without calculations:
    50% of the 33 K greenhouse effect is due to water vapor, about 25% to clouds, 20% to CO2, and the remaining 5% to the other non-condensable greenhouse gases such as ozone, methane, nitrous oxide, and so forth.
    This seems to be a lot of green house effect attributed to less than 1 percent of the atmospheric composition.
    If you have a link with other work, I am content to read it rather than a new write up.
    Thank you,
    RHS

    PS, glad to hear you are feeling better and I look forward to reading your additional work.

    • In response to RHS, the Forbes article is yet another me-too regurgitation of Al Gore’s talking points. The article starts with two questions: Is the world warming [Yes, a bit], and What is the cause? [Partly nature, partly us and no one knows how much from each] But these are not the questions of interest.

      The correct questions are, Is the world warming at the predicted rate? [No: only at one-third of the predicted rate]. Is the observed rate of warming net-harmful or net-beneficial? [Net-beneficial]. Are the predictions that have not come true in the present likely to come true in the future? [No: the predictions are based on an elementary and significant error of physics]. And, even if global warming were as much of a problem as official climatology imagines, is it a) possible [No] and b) affordable [No] to abate it?

  22. “In the long run, the use of reason will triumph against the current epidemic of irrationality.”
    There is not much irrationality in ‘scientists’ pursuing the line of thought that provides easy access to public funds, while in the return governments use the so purchased ‘science’ to fleece the taxpayers.

  23. If the millions of people who die every year due to lack of electricity were dying from global warming, we’d have nuclear power plants on every corner, and gasoline powered cars would be banned. But what is the response from the Church of Climate Scientology? They deny them funds to build coal-powered electrical plants. Million of them will die, but it’s for their own good. (Maybe we’ll get you some money later.)

    There is a crowd that is constantly wailing that we must listen to the scientists because they know best. Well, they don’t seem to be very good at the branch of science called, “Decision-making Under Uncertainty.” There is no rational explanation for continued resistance to nuclear power, or for the extreme advocacy of windmills. When you add up the money it will take to address global warming, even using the alarmist assumptions, you have to come to the conclusion that we are better off waiting to see what transpires.

    • Steve O is right. It is better to wait and see rather than to squander our children’s inheritance on boondoggles such as windmills – 14th-century technology to solve a 21st-century non-problem. It is two orders of magnitude cheaper to wait and adapt than to abate and wait.

  24. By the way, it’s worth noting that when you ask the candy cane question, it doesn’t matter if mankind is the proximate cause of warming or not. It matters not a whit if it’s due to natural causes.

    If it is beneficial to mitigate warming due to CO2 concentrations such that the expected benefits of taking action exceed the expected costs of taking action, then we should take action whether mankind is at fault or whether it is entirely natural. If the benefits of taking action do not exceed the costs of taking action, then we should not take action whether mankind is at fault or not. The proximate cause of the warming does not enter into the equation.

    The Church of Climate Scientology preaches about mankind’s contribution because asking people to pay higher gas taxes and to build windmills with the aim of altering a natural global climate cycle is too obvious in its stupidicy. Creating feelings of guilt are important to create leverage. We all want to leave the campsite without leaving trash behind, so reducing impact on the atmosphere sounds natural. Besides, people like to feel guilty. And everyone wants to save the world.

    But when it comes to deciding on whether to take action, it doesn’t matter how much we contribute to the warming or not.

  25. A good example of the above discussion is here, relating to heat-related deaths:

    https://www.sciencedirect.com/science/article/pii/S1462901114000999

    Table 5 in above doesn’t even list ‘cold-related deaths’. And below:

    https://www.abc.net.au/news/2018-01-18/heatwaves-australias-deadliest-hazard-why-you-need-plan/9338918

    Both talk about heatwaves being the ‘most deadly of all natural disasters in Australia’s history’, but both fail to even mention or analyze cold-related deaths, or ‘cold-waves’ (Why isn’t there such a word?).

    How anyone could sign their name on such papers, or editors sign off on them is actually a bigger mystery to me than anything in the papers/articles themselves. Willful ignorance.

    • This is in flux even as we speak. The president of the World Bank resigned this week, and the US President makes the nomination for the next one.

  26. TRIUMPH!

    Tonight I had the pleasure of enjoying a curry, in a nice restaurant with my wife and our two friends. Our friends are politically polar in their views, she is, like me, a committed Capitalist, he is a committed socialist. My wife listens but is politically ambivalent.

    We finished off our usual pleasant evening back at our house where the inevitable subject of Brexit came up in the conversation. My socialist friend of 25 years and a staunch believer in remaining in the EU went ballistic, I have never seem him so enraged.

    A few weeks ago we discussed the subject and he was all for a second referendum, in my view a complete betrayal of democracy, but he was insistent it was the right thing to do.

    Tonight, quite unexpectedly, he invited me to accompany him on a public demonstration to support Brexit and, more importantly, the concept of democracy we both cherish, despite our innumerable political differences.

    I’m not sure the rest of the world understands how important Brexit is in the global scheme of things. On the face of it, a simple decision to leave the EU or to remain in the EU. The referendum asked just two simple questions, ‘Remain’ or ‘Leave’ – Trump or Clinton.

    Had the vote been 52% remain, the UK would have remained 100% in the EU, obeying all it’s socialist (fascist) laws and regulations. It would have surrendered it’s legal authority, eventually it’s political authority and finally it’s land and identity. An EU military force would be raised and the continent, under the guise of defence, would be yet another nuclear capable continent with Germany in the driving seat. I’ll leave the consequences of that to your imagination other than to say I have nothing against German citizens, but I do fear their collective ambitions.

    But the vote was 52% to leave the EU, retain our sovereignty, re-establish our law making rights, manage our own immigration, engage in our own free trade with the rest of the world and re-establish relationship with the Commonwealth countries that fought with us through two world wars to protect the the modern worlds seat of parliamentary democracy.

    The British public’s perception of the 2016 Brexit referendum was that we would indeed be 100% in the EU had ‘Remain’ prevailed but they didn’t, and the expectation, despite the political shenanigans, is that having won the referendum, the Brexiteers belief of being 100% out of the EU should be respected.

    But those wishes have not, and are not, being respected.

    My socialist friend was apoplectic, not because his desire to remain in the EU was thwarted, but because the common bond between us both, democracy, is being betrayed by the politicians in the very country that influenced the world with it’s parliamentary procedures, it’s adherence to the rule of law and it’s commitment to democracy.

    And the triumph? Well, that’s for my socialist friend and my unity, in our belief in democracy.

    • I am delighted at HotScot’s story. For there are still some moderate Socialists who believe in democracy. They are few, and they are precious. Most Socialists these days are extreme totalitarians, who take the Establishment view on questions such as Brexit or climate change: the Establishment knows best, and to hell with the people, or democracy, or science. The Party Line is all, and the Party Line is set not by or for the people but by and for the totalitarian Establishment.

    • Downing street’s Freddie Frinton (aka PM) got it about right, her deal means that the UK will leave 52% of the EU laws and regulations, but for the rest and a day 48% of the EU laws and regulations will be followed without any say about it.
      UK’s referendum has created the classic division among it’s populous resulting in conflict between that part of the population that have no wish to be commanded or to be oppressed by the powers to be and the elite with a deep-rooted aspiration to command and rule the plebs.

    • Nordhaus (2008) said 5% was the minimum commercial discount rate. The article here at Wattsupwiththat to which I was replying also said Nordhaus used a 5% rate. No doubt he may have used other discount rates at one time or another, but 5% is indeed the minimum commercial discount rate (see e.g. Murphy 2008).

  27. Another Christopher Monckton of Brenchley masterpiece.
    Glad to hear you’re recovered and we sincerely hope you remain well for a very long time.
    Olive oil and turmeric daily (according to Dr Mosley); the only good thing from the BBC in recent time.

    Ctm don’t you think it’s time you kicked-off a WUWT fund-raiser for Christopher?
    Base it on medical bills; I’ll start the ball rolling with $200 from down-under.

    • Warren is most kind and generous in his comments. It is indeed good to be back after a year in which I had not been able to do very much. A fund-raiser for me is of course a most attractive concept: but there are more deserving cases, such as our kind host, whose business has been much affected by the terrible Californian forest fires of last summer. Perhaps Warren would like to send his $200 in Anthony’s direction.

  28. I recall a very very funny “Yes Minister, “” where a very outspoken female was having a go at Sir Humphrey.

    I am not your “Dear Lady”. But the finally agreed that the persons out in the country simply did not understand how things worked and thus “Needed guiding”.
    00

    It has always been thus, first it was the Church and the Kings, today its our “Leaders” who are all wish, thus we should obey them.

    MJE

  29. The higher the discount rate, the more the uncertainty there is and the less likely it is that the calculation will show our investment to be net-profitable.

    This is wrong. its a common error, but its wrong. For a detailed explanation see Brealy and Myers, Corporate Finance.

    Good practice is not to set a higher discount rate to allow for risk. The discount rate should reflect the organisations cost of capital. When you calculate the NPV of some course, you now know what that course is worth to shareholders or the organization, assuming it delivers as you have estimated.

    But, you say, risks vary. Yes, indeed they do. But they do not affect what a given future stream of cash flows is worth. They affect how likely you are to get them. So take the next step, and consider risk.

    The way you manage risk is Expected Value. You have some uncertainty, and this translates into a range of possible Net Present Values. You run a number of these and end up with several representative values. Then you take the weighted average, which is the Expected Value.

    Its a bad mistake, though a very common one, to collapse the two and to discount one particular set of possible cash flows, and then to try to allow for the risk involved by setting a discount rate higher or lower. The problem is that this avoids a real analysis of what exactly the risks are, and what exactly they cost if they come due.

    But read Brealy and Myers. The authoritative source on all these matters, clear, lots of examples, detailed explanation of the whys and wherefores, and leaves no room for argument.

    • There is no incompatibility between what I have written and the textbook, which merely explains one way in which the market sets discount rates. If there is high uncertainty about whether one will get one’s money back and make a profit, the discount rate one uses will generally be higher than if there is low uncertainty.

  30. The yellow vests stood for (or seemed to stand for) one thing when they started making headlines, but after they got Macron to back off the gas tax they continue to burn tires, break windows, shut down commerce, attack police, etc., reportedly because Macron also repealed a “Wealth Tax”. In other words, they are against a tax on the middle / poor, but vehemently in favor of a tax on the rich. I don’t understand their appeal, which is growing. I don’t think they stand for anything positive.

    Thanks for the analysis of the opening post – and any comment clarifying the motives of the Gilets Jaunes movement.

    • The yellow-jackets, as their support for the wealth tax shows, are Socialists. That is why Macron is so frightened of them that he backed away from imposing his absurd tax hikes on gasoline and diesel. Ands that is why their response to his proposal to hike the taxes is so interesting. So absurd are such attempts to make global warming go away that even Socialists are now realizing that the environmental extremists have hoodwinked them.

      • “…And that is why their response to his proposal to hike the taxes is so interesting.” … and, I would add, frightening. It should give us pause here in the U.S. to see a civilized country like France unable to handle thugs burning cars and assaulting police. I understand Macron is now considering strengthening their anti-riot laws. It would seem that horse has already left the barn.

        • France, owing to the dismal legacy of the totalitarian revolutionaries, followed by that of the ghastly little tyrant Napoleon, is the least democratic nation in Europe. Government is heavily centralized, and the people have remarkably little say at any level. That is why they have proven themselves readier to take to the streets than other nations: there is all too often no democratic outlet for their opinions.

          it is precisely because the United Kingdom wants its democracy back that the libertarian half of the nation voted to leave the EU. The totalitarian establishment is furious, of course, and it may well try to deny us our freedom. if so, expect the British worm, too, to turn.

  31. Michel has corrected one error. Sorry, Lord Monckton, but Michel is right. However there is another sentence which I believe is in error:

    “Commercial entities use the discount rate as a means to decide whether an investment is worthwhile, and they can set the discount rate in such a way as to reflect the risks to the anticipated future income stream.”

    Certainly they use the discount rate to decide if an investment is worthwhile. But they cannot “set” the discount rate. The discount rate for a Commercial entity is the rate which would apply regarding the next best alternative investment. Consider, the net present value (NPV) for investment A is such that it would return X% on the cost of the investment. This is predicated on the discount rate used in the calculation of NPV is a%. The NPV could also be calculated using 0.5a% or 1.5a%. Using the rate of 0.5% means that later returns are calculated to be more valuable than the returns in those later years using a rate of 1.5a%. This is especially relevant where the future returns will end after a defined period of years, as for purchase of a piece of machinery with an assumed life.

    This can also be done for the possible range of alternative investments. The best investment is the one which will give the highest NPV. I understand from the financial press that a common standard for commercial operations is to use a discount rate of 15% when considering investments. This is not ‘setting’ a discount rate, but ‘using’ a discount rate which reflects the organization’s view on future prospects. The Australian government used a standard discount rate of 10%, but I understand that more recently government enterprises have had to use 7% and 10% discount rates in evaluating projects. Perhaps I am being a bit pedantic, but to use one of P G Wodehouse’s examples, the discount rate for a hot chestnut barrow would be around 50%; for a long lived project such as the Inland Railway with a life expectancy of 50 to 60 years for the average life of the various components one might well suggest a figure of 4% would be reasonable.

    • Mr Horscroft says Michel has corrected an “error” in my short account of intertemporal discounting, and he now says there is another “error”. He is himself in error on both counts. As I have already pointed out, there was no incompatibility between my outline of discounting and Michel’s point. As to Mr Horscroft’s point, having set and used discount rates at a senior level in government, and having advised other governments than my own on intertemporal investment appraisal, I can assure him that governments – and, for that matter, corporations – do not confine themselves to the purely mechanistic approach he advocates.

      It is trivially true that, among other things, discounting can be used to decide whether to invest in one project or another. In government, however, the choice is usually a far simpler one: should the government interfere with the operation of the market to the extent of exercising its preemptive power over taxpayers’ billfolds, or should it leave the money in the taxpayers’ own pockets, there to be spent as the taxpayers themselves wish?

      For this reason, governments publish standard discount rates to be used in intertemporal calculations. In the United States, the Office of Management and Budget recommends 7%; the UK Government, for everything except climate change, recommends a mere 3%; etc., etc. On the whole, for prudential reasons, commercial interests use discount rates of an absolute minimum of 5%, as pointed out in Murphy (2008) and separately in Nordhaus (2008), but they generally adopt rates not less than the 7% recommended for government projects by the Office of Management and Budget.

      My own approach, when advising the UK Prime Minister, was to begin by addressing the candy-cane question (it is surprising how often this starting-point is not mentioned in the textbooks), and then, and only then, to apply various discount rates to establish at what rate the investment became unviable.

      In any event, the purpose of the head posting was to give a general account of discounting, and, above all, to explain the central importance of the candy-cane question. The moment one applies candy-cane analysis to any climate mitigation project, it is instantly clear that the do-nothing option is better by one or two – and in some extreme instances, such as London’s free bike scheme, three – orders of magnitude.

  32. The tax raised in the French example wojkd have been used to build more wind and solar which would have meant that a nuclear station would be shutdown but a gas plant would then need to be built to load follow the additional renewables, thus increasing co2.

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