"Copenhagen Consensus 2004"
About Copenhagen Consensus in The
This page is a short presentation of the first "Copenhagen Consensus" conference held in 2004 and of the most fundamental flaws of this conference. You may read the attached pages to see the flaws explained in more detail, or you may read more about the criticism of the conference in the links below.
The text on Copenhagen Consensus may also be downloaded as a
Word file here.
The international conference, "The Copenhagen Consensus" (1), was held for the first time in Copenhagen in 2004. It was organised and led by Bjørn Lomborg and co-sponsored by The Economist. A number of "leading economists" discussed the 10 greatest problems facing humanity today. They were given the hypothetical sum of 50 billion dollars and were asked to invest this money in such a way that a maximum benefit was obtained. The 10 issues were:
- climate change
- infectious diseases, especially AIDS
- conflicts and weapons proliferation
- financial instability, including currency speculation
- poor education
- poor sanitation
- poor government leadership and corruption
- population growth
- subsidies and trade barriers
- hunger and malnutrition
During the conference, the scientists resigned from dealing with three issues, viz. conflicts, financial instability, and poor education. For the remaining seven issues, a catalogue of possible measures was made, and the panel of economists chose how to allocate the sum of 50 billion dollars among these measures. The prevention and treatment of HIV/AIDS was given top priority and was to receive more than half of the total sum. Considerable sums would also be invested in alleviating micronutrient deficiencies and fighting malaria. Taken together, these health related issues would receive practically all 50 billion dollars. In addition, the experts recommended a total liberalisation of world trade, which would cost very little.
On the other hand, four of the proposed measures were classified as "bad" investments. Three of these four dealt with the prevention of climate change, viz. the Kyoto protocol and two proposals for tax on CO2.
Altogether, the recommendation was that society should invest in the health sector, and should not invest in combating climate change.
What was wrong about the conference?
"In the conference, the panel agreed with Lomborg that the costs of doing anything about climate change exceed the benefits. And if you think something has a benefit to cost ratio less than one, isn´t it fair enough to speak out against it?"
This question has been put in the debate that followed the conference. It is a wrongly based question, firstly because two of the three climate projects were in fact deemed to have higher benefits than costs, but , more importantly, because it ignores the fact that the assessment was subjective, not objective. Although the issues were treated in such a way that fighting climate change received bottom priority, they might also have been treated in such a way that the climate issue had received top priority. And this could happen even if the experts agreed upon the precise size of the costs and the benefits (which, of course, they do not).
The point is that we are comparing costs of prevention to be met in the near future with possible damages or benefits in the far future. There is a long lapse of time from when the money is spent on the avoidance of damage, till the time when this damage is actually avoided. And the point is: What return on the invested capital do we expect during the intervening time? If we are satisfied with an annual return of 0 or 1 %, then the investment would be considered successful. But if we demand 5 or 10 %, then it would be called unsuccessful. And the Copenhagen Consensus conference chose to demand 5 %. The choice of this - or of any other interest rate - is to some extent subjective, and therefore the results are also subjective. Furthermore, it is simply wrong to demand 5 % on such long time scales, because material wealth in the world cannot grow at a similar high rate. On such long time scales, you cannot expect the return on investments to be more than 1 to 2 %, and with these more modest rates of interest, fighting climate change would turn out to be sensible. The changes in benefit/cost ratio caused by changes in the rate of interest are not just modest; they are dramatic. So with another rate of interest, the priorities might also have been dramatically different.
What is profitable, therefore, depends on the rate of interest, and when the choice of rate is subjective, then what is found to be profitable is equally subjective. The conference was free to choose, and it chose values that would ensure that short-term projects with a fast return on capital would win.
This, then, is what was basically wrong about "Copenhagen Consensus". The results are presented as objective calculations, but are actually subjective.
There are also other serious flaws. For instance, you get the impression that you have to choose between spending money either on health and nutrition in the Third World, or on fighting climate change; you cannot do both, you have to prioritise. But this is not so.
First, the sum of money earmarked for the imaginary investment was ridiculously small in relation to the needs, in relation to what is spent on other purposes (military, agricultural subsidies) and in relation to the purported benefits from removing trade barriers.
Second, what are called the costs of combating climate change, are not costs. They are revenues from green taxes, revenues that could be spent on health and nutrition in the Third World. That is, fighting climate change might provide us with more money for such purposes, not less.
Third, the project with top priority - fighting AIDS - is probably unduly optimistic. It presupposes that improvements in basic health service infrastructure necessary for implementing the anti-AIDS campaign are already in place, but does not include the costs of such improvements. And it presupposes the political commitment to carry it out, although this commitment seems to be absent in some regions. For instance, it emerged in December 2004 that none of the money promised by the Bush administration for the fight against AIDS had actually been spent.
Fourth, the so-called ranking of priorities was not made according to benefit/cost-ratios. For example, several projects had higher benefit/cost ratios than the AIDS-project, but were in spite of this given lower priorities.
In the following
pages, the whole issue is treated in more detail.
to the challenge papers in Copenhagen Consensus 2004
Summary of paper by Thorkil
Casse on ranking and benefit/cost ratios in Copenhagen Consensus
Commentary by John Quiggin (Australia) on
Commentary by H. M. Seip and P. Prestrud (Norway)
on Copenhagen Consensus