The difference between the Stern and Nordhaus approaches

One of the joys of economics - as with any science, social or other - is that it is possible to draw rules from one example. Those rules are then generalisable across other examples. This means we can use the difference between the Stern and Nordhaus approaches to climate change to opine on the size of the Irish dairy herd.

Irish farmers are rebelling against a proposal to cull tens of thousands of cattle a year to help Ireland meet its climate change targets.

The Irish government wants to reduce emissions from farming by a quarter by 2030. Media reports last week suggested that one option being considered was to reduce the national dairy herd by 10 per cent – meaning a cull of 65,000 cows a year for three years, at a cost of €200 million (£170 million) annually.

When considering climate change a number of different responses are possible - it’s not happening, it’s not us, it doesn’t matter etc among them. But leaping over all of that consider the difference in construction between the Review and the Nobel on the subject.

Stern tells us to have a relatively high carbon tax now - $80 per tonne CO2-e. Nordhaus that we should have a low one now (“now” being when these plans were suggested) of perhaps $20, rising much higher, to $240, in some decades. The difference is that Stern is saying we should deliberately kick start the capital replacement cycle, Nordhaus that we should work with it.

We’ve got bits and pieces of perfectly good kit lying around the economy, it has cost money to make them, they’ll carry on working well for years to decades. We can rip those all up and replace them with non-emitting kits at some cost- Stern. Or, we can wait until they fall part, as kit does, then replace them with non-emitting kit - Nordhaus.

It will clearly be cheaper to do this the Nordhaus way. For the cost of the non-emissions part will only be the marginal costs of making it non-emittive, rather than the total cost of the kit - because we’re waiting until we’ve got to build a new one anyway. We’re doing this with cars (however badly etc) by not banning petrol cars from the road, but not allowing new ones and letting the fleet age into obsolescence.

It’s also true that within Stern’s Review is an intriguing insistence that Nordhaus is right. For Stern points out that humans do more of things which are cheaper, less of things which are more expensive. We must therefore be efficient in our approach to emissions reduction. For, by being efficient we make the change cheaper, therefore we do more dealing with climate change. Yes, this does produce the odd result that Stern should be in favour of the Nordhaus approach but then demanding an entire and perfect consistency from an economist really is asking a bit much.

So, we’ve a generalisable rule - working with the capital cycle is cheaper, more efficient, than trying to force it. Therefore it is also preferable as it means we have more resources to do more about climate change, we do more climate change dealing with.

As we understand it, admitting that our rural knowledge is pretty limited, dairy cows have a working life of 6 or 7 years in Ireland. The capital stock is therefore going to be entirely replaced by 2030 anyway. Which means that this Stern approach - let’s start reducing that capital stock right now! - is contraindicated. We should use the Nordhaus. As the dairy herd turns over simply don’t allow the full replacement.

This will cost nothing, saving the €200 million to reduce climate change elsewhere. Or even fructify in the pockets of the people.

Sounds like a plan really. Work with the capital cycle, not against it. Then again this is a suggestion that politics doesn’t pay money to farmers, something that doesn’t have a good track record.

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