Wednesday, November 14, 2012

Cost-Benefit Analysis and Chinese Political Patronage

Seth Jaffe (of Foley Hoag LLP) recently echoed a sentiment advocating for sensible economic measures to address global climate change. Mr. Jaffe questioned if anyone is paying attention to Cass Sustein, professor at Harvard Law School and a former administrator of the White House Office of Information and Regulatory Affairs, calling for cost-benefit analysis when it comes to environmental issues. Some Democrats, according to Mr. Jaffe, question the motive of economic analysis and reject its callousness towards the moral issue behind environmental concerns.

I can understand their concerns for applying abstract numbers to situations affecting real people’s lives. Just how much we can put a price on one’s life or the health of our planet is uncertain, and I’d be the last to say we can make our decisions based on how much it’s going to cost. But I also acknowledge the reality of consequential concerns for the whole of our species, I therefore must concede to action now, in the best interest for all and with the most economic incentives to encourage real change. I am simply trying to be a pragmatic, no malevolent intent here as suggested by the far left.

As to how to balance conflicting concerns for moral issues and economic reality, I refrain from pontification. I do, however, wish to offer an observation.

While we were holding our breath watching which state turned red and which blue in the recent election, one fifth of the world’s population was very much fixed on its own once in a decade election. China’s recent transition was full of intrigue of patronage, mystery of murder, and a healthy dose of standard propaganda. Drama aside, I alert you to the lasting remarks made by the out-going leader Hu Jintao calling for greater emphasis on consumption and enhancing their leverage and influence on the economy. (The Economist, Communist Party congress, Treading water, Nov. 10, 2012).

If you follow Chinese politics, you will know that “out-going” leader means a certain prestige amongst Chinese politicians (such as when Deng Xiao Peng decided to leave office, yet he wielded a controlling stock in the governance and influence of China). According to some analysts, Hu had been trading his seat on powerful committees in exchangefor military appointees for his supporters, which suggests that Hu is positioning himself for the years to come. I think counting on Hu’s influence and China’s focus on consumption and influencing the economy, then, is a sure bet.

This leads me to the observation I wish to make: China in terms of its consumers are becoming very sustainable minded; China recently enacted some very aggressive clean production and sustainability laws and will eventually come around to enforce them with some consistency. This tells me the market place in the next few decades will be shaped by a more sustainable demand. Most of the world has caught on with this sort of development and are aiming at China as its next target buyer. The United States can’t afford to ignore China as an emerging market and we can’t afford to isolate “green” market development from our long-term global economic and strategic planning.

So I think Mr. Sunstein is right in that economic benefits of reducing GHG would greatly outweigh the costs, but I think focusing on GHG alone and considering only incidental effects of environmental problems here in the U.S. misses the mark about the gravity of China and the rest of the world as a massive emerging market in terms of sustainability. The focus should be on the variety of issues: water conservation, clean energy production, waste management, food security and health standards, development community ecosystems and enhancing bio-diversity, etc., the list is long (I would also add natural disaster preparedness to that list of consideration as well). The incentive is to develop the technology and expertise here at home and then sell it to China and other nations at a later time when demand rose and market stabilizes.

I agree that we ought to look at cost-benefit analysis seriously and give due consideration to the decisions we will make that will impact our ecosystem. But I also think part of the problem on the far right is that they have not given a holistic overhaul to their cost-benefit factors. I would like to see more discussions on the future of the market and addressing our sustainability problem from all aspects—not just token-ed as a GHG problem.

I leave you with one more thought from Mr. Seth Jaffe:

“Republicans used to support cost-benefit analysis. Indeed, Sunstein opens the op-ed with a discussion of the Reagan administration’s support of the Montreal Protocol on ozone-depleting chemicals. However, for the past ten years or so, Republicans have abandoned cost-benefit analysis for something much simpler – cost analysis. Today, if regulations cost too much – whatever that means – then they are “job-killers” and thus bad, even if the benefits exceed costs, sometimes by several multiples.

Maybe four years at MIT brainwashed me into blind acceptance of quantitative analysis, but this stuff doesn’t seem that hard to me. It is profoundly depressing that a significant number of environmentalists look only to the benefits of environmental regulation, while a similar percentage of conservatives now only look at its costs.

Somehow, we’ve got to get the twain to meet.”

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