Those who believe in the free market are highly resistant to the idea of man-made climate change, let alone to arguments for government action to halt emissions of greenhouse gases. Is this resistance rational? Or is it another case of the human desire to believe true what is merely convenient?

On one point these sceptics are correct: the man-made climate change hypothesis appeals to believers in environmental limits to growth, the evils of capitalism and the need for government regulation. Lord Lawson, the former British chancellor of the exchequer, makes that point well in a recent assault on the activists.* But what should matter is not the emotions that drive the people on either side of the debate, but rather whether the arguments advanced are persuasive.

Sceptics start by arguing that the science behind the man-made warming hypothesis is flawed. Some even argue that it is a fraud, in which case it would be the biggest and potentially the costliest ever.

Scientific knowledge is indeed provisional. But those who attack an emerging consensus have often been proved wrong: even Albert Einstein was mistaken about quantum mechanics. In this case, as a recent paper from the Royal Society makes plain, the strength of the consensus is evident.** To bet everything on the assumption that the hypothesis is false would be irrational.

The sceptics add that the Stern report has vastly exaggerated the costs of unmitigated climate change. Bjorn Lomborg, Denmark’s “sceptical environmentalist”, argued in the Wall Street Journal (November 2 2006) that Yale’s William Nordhaus, the most respected economist in the field, sets the costs at only 3 per cent of world gross domestic product. So how, he asked, did the Stern report reach costs as high as 20 per cent?

The answer, as Sir Nicholas has explained in the Financial Times (November 7 2006) is three-fold: first, his report takes into account possible increases in average temperatures of 5°C or more by the 22nd century; second, it takes into account a wide range of possible outcomes and builds in aversion to risk; finally, the report adds rough and ready estimates of the monetary equivalent of health and environmental impacts (see chart). These changes greatly increase costs in the 22nd century.

Critics also argue that the report has grossly underestimated the costs of mitigating the build-up of greenhouse gases. Its central case is of a modest cost of just 1 per cent of GDP, although with a range from minus 1 per cent (a gain) to 3.3 per cent, or minus $50 to plus $100 per tonne of carbon dioxide in 2050. Learning-by-doing and innovation consistently lowers costs. As a result, past improvements in energy efficiency have been large. Nobody believes they have yet been exhausted (see charts).

At this point critics raise the most difficult question of all: the discount rate. The costs of mitigating the build-up of emissions occur largely in the 21st century, while the benefits of doing so are postponed mainly until the 22nd century. So how do we relate costs and benefits?

Market costs of capital, for example, reflect possibly myopic choices of this generation. Equally, the target social return on capital for standard public investment projects is designed to ensure efficiency of the marginal project. But deciding the state of the world 100 or more years hence is no such project. Standard theory suggests that we need, instead, to determine three things: the pure rate of time preference; the nature of the relationship between changes in consumption and welfare; and the prospective rate of growth of consumption.

The Stern report suggests, persuasively, that there is no compelling reason to value the welfare of future generations much below our own. The only reason to do so, it argues, is the possibility of extinction. It suggests, accordingly, that the pure rate of time preference should be 0.1 per cent a year.

The report assumes, in addition, that a doubling of consumption halves marginal value (so-called “unit elasticity”). If we assume a rate of growth of consumption of 1.5 per cent a year, the discount rate would then be just 1.6 per cent a year. With 2 per cent consumption growth, it would be 2.1 per cent.

Because the rate of growth of consumption is itself affected by the mitigation scenario, this is not exactly the approach taken in the report. Instead, welfare is compared directly across all scenarios. The conclusion is that the so-called “balanced growth equivalent” of the losses caused by “business as usual” are between 5 and 20 per cent of consumption.

Now suppose that one objects, as critics do, that these assumed discount rates are far too low. The implication is that we should care less about the impact of climate change on the standard of living of future generations because they are expected to be vastly richer than we are today. This, of course, is a distributional judgment. Its implication is that we should care far more about the distribution of income across the globe today than we do. I wonder how many sceptics accept that implication. Few, if any, I imagine.

The final argument against making climate change a priority comes also from Mr Lomborg. It is the view that spending just $75bn a year (0.2 per cent of global income) might give everyone clean drinking water, sanitation, basic health care and education now. In accordance with his “Copenhagen Consensus”, this, he suggests, is a far higher priority than lowering the remote risks of climate change.

I agree. But why is this the alternative? The question is not whether dealing with climate change (at a cost, on the report’s estimation, of $450bn a year) is less valuable than eliminating destitution. It is rather whether it is less valuable than all the other things we do with our resources. I suggest it is not.

Some of the points of the critics, particularly on discount rates, have force. But the low estimated costs of reducing emissions justify action. I agree that lowering the risks of climate change should not be undertaken regardless of the cost. But it is a sensible goal, all the same. Policymakers should try to discover the true costs of reducing this risk, by imposing a global carbon tax. Will they dare to do so? I doubt it.

Source for charts: The Stern Review

*The Economics and Politics of Climate Change: an Appeal to Reason, www.cps.org.uk, November 2006;
**A guide to facts and fictions about climate change, www.royalsoc.ac.uk