Monday, October 13, 2008

Valuation

Suppose I tell you that buying a car with side-impact bags improves you survivability in a crash by x%. Crashes are low probability, high cost outcomes. The cost is high enough so that when you multiply it by the probability, it likely still outweighs the price of the side-impact bags. So it would seem to make sense for everyone to buy them. Not so fast! If I am really poor, suppose that money may be what I need to a health insurance policy. And, fair or not, having a health insurance policy will be important not just in a crash (unless it is fatal) but other times I get sick as well. When you take into account scarce resources, the calculus begins to look less obvious. As with cars, so with climate. Here is an argument I heard recently in India from a prominent government climate negotiator: if there is a trade off between economic growth and limiting climate change, being better off, if you are really poor, may put you in better shape to deal with climate change – even if the change is worse than it would have been without that growth. There has to be a limit on this argument – it could not be right for extreme climate change where survival in imperiled. But short of that, is there a range on climate change in which it does apply – say a 550ppm world as opposed to a 450ppm world? You might complain that this is a false polarity – if the Developed World cuts back on carbon output there would be lots of room for the Developed World to grow economically within safe limits. But as I discussed in an earlier post (on July 7th below), that is far from obvious.

No comments: