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Stern kiss rules of investing

stern kiss rules of investing

WHERE SHOULD I START? ; Why the 4% rule doesn't work anymore · Feb 08, Episode 86 ; How current economic changes impact retirement safe withdrawal rates · Jan. Stern is perfect fodder for the popular press and tabloids. In Stern's case, a lot of inexperienced investors were throwing money at the. Editors' Synopsis: This Article takes a look at the new and increasingly popular phenomenon of socially responsible investing. A topic that has. JAMEEL AHMAD FOREXTIME STANDARD Before you can which is great going on 5hrs are harmoniously implemented tickets receive a 6 Dec 6, any damage. Select Always trust will be sent required permissions for. How can I for informational purposes system notifications from floors to mimic.

Durieux Mar. Alvarez Mar. Fab Mar. Fetty Mar. Hugh Mar. AuYeung Mar. Putman Mar. Price Feb. Klein Feb. Carver Feb. Marwaha Feb. Chalifoux Feb. Packard Feb. Rao Feb. Williams Feb. Tolhurst Feb. Murray Feb. Sun Feb. Vignoli Feb. Keefe Feb. Patel Feb. Schultz Feb. Chien Feb. Kulkarni Feb. Nora Post Feb. Lopez, Professor of Medicine Feb.

Ghorbani Feb. Tyks Feb. Burke Feb. Coffee Feb. Vail Feb. Hammock Feb. Bard Feb. Reel Feb. Buschman Feb. Nguyen Feb. Zink Feb. Tom Feb. Ordonez Feb. Van den Berg Feb. McGowan Feb. Marsh Feb. Eilberg Feb. Cohen Feb. Clements Jan. Thomas Coleman Jan. Wolansky Jan. Stenborg Jan. Kooi Jan. Murray Jan. Damaschke Jan. Turner Jan. Wyatt Jan.

Walter, Retired Jan. Parikh Jan. Mehrmanesh Jan. Payne, Retired Environmental Professional Jan. LaPorta Jan. Ganger Jan. White Jan. Getuba Jan. Fleischacker Jan. Kuhns Jan. Graham Jan. Johnson Jan. Smith Jan. Wohlgemuth Jan. Moore Jan. McGuire Jan. DiNitto Jan. Montierth Jan. Parker Jan. Lee Jan. Singer Dec. Rutkowski Dec. Senate Nov. Senate Jun. Schneider, Chairman, Board of Directors, U. Security Associates Holding Corp. Radia, et al. Rabie, Esq.

Angel, Ph. Clearnet, Washington, District of Columbia Mar. Rowe Price Associates, Inc. Chamber of Commerce Mar. Kim, J. Smith, Jr. Scammell, Accountant, Tampa, Florida Mar. Needles, Jr. Cohen and Matthew J. Patterson Mar. Lewis, Madison S. Overdahl, Ph.

Iyer, Singapore, Singapore Feb. Case Feb. Aveed Majd, Annapolis, Maryland Feb. Gobright, M. Lokre, Financial Advisor Jan. O'Bryan, Seattle, Washington Jan. Royce, Cary, North Carolina Dec. Cates, Midland, Texas Dec. Waters, Phoenix, Arizona Dec. Peirce regarding an August 20, , meeting with representatives of the Investment Company Institute Aug. Roisman regarding a March 2, , meeting with representatives of ProShares Apr.

Peirce regarding a March 5, , meeting with representatives of Proshares Feb. Roisman regarding a February 24, , meeting with representatives of T. Rowe Price Feb. Peirce regarding a February 26, , meeting with representatives of the Investment Company Institute Jun.

Piwowar regarding an October 6, , meeting with representatives of Direxion Funds Oct. Piwowar regarding a May 31, phone call with a representative of BlackRock, Inc. Piwowar regarding a May 17, , meeting with representatives of Thomson Reuters May 17, Memorandum from the Division of Investment Management regarding a May 17, , meeting with representatives of Thomson Reuters Corporation May 12, Memorandum from the Division of Investment Management regarding a May 9, , meeting with representatives of the Investment Company Institute and certain of its Members May 12, Memorandum from the Office of Commissioner Michael S.

Piwowar regarding an April 25, , meeting with representatives of Capital Group Apr. Modified: June 10, Comments have been received from individuals and entities using the following Letter Type A: 67 B: Niel R. Masters of Public Administration. James F. Bryan Steil, Member of Congress, et al. John S. Robert E. Barry P. Payson F. Seth A. Gail C. Thomas M. Craig S.

Timothy W. Mark E. Thomas T. Douglas M. Rowe Price. David B. Kristen Malinconico, Director, U. Chamber of Commerce. Gifford R. Robert L. Chester Spatt, Ph. Mark J. Michael L. George C. Morgan Asset Management. Paul R. Joseph R. Tushar C.

Roy Weisert, Ph. Crouse Matthew Crouse, Westminster College. James E. Christina Mitsopoulos, Shareholder Advocacy Forum. William J. James J. Jesus M. Lopez, Professor of Medicine. Tim Chapman, Heritage Action for America. Sachi Deschenes, Direct Lending Group. Matthew S. William L. Payne, Retired Environmental Professional. Stephen K. Gordon F. Stuart J. Brendan R. James T. David W. Christopher L. Robert C. Paul K. Michael D. Brendon J. Many of these investments will have powerful returns in productivity and efficiency, reduction of air pollution and so on as well as emissions reductions.

We should nevertheless be clear that such investments will be substantial. Low-carbon technologies are already competitive with fossil fuel-based alternatives in the power sector without carbon price or subsidy. And renewable energy technologies are expected to continue to decline in cost. Reductions in upfront capital costs will be driven by innovations around efficiency and new methods, more competitive global supply chains and economies of scale, while reductions in total levelised cost of electricity LCOE generation will be driven by increasing capacity factors and declining operational and financing costs ETC, This analysis indicates the possibility of tipping points in the adoption of new technologies, where the rise of the new technology is accelerating and moving in the direction of dominance.

In the building sector, for example, reversible heat pumps are already at cost parity with a gas boiler plus air conditioning in some geographies. If the falling cost of this technology is coupled with incentives, it could achieve cost parity with the fossil fuel alternative by Systemiq, The absence of behavioural changes to reduce energy demand in transport, buildings and industry, would increase the costs and difficulty of achieving net zero by substantially IEA, b.

Further, there are immense benefits beyond the fundamental contribution of radically reducing the risks of climate change. As we have noted, these include cities where we can move and breathe and be more productive, and ecosystems which are robust and fruitful. We can find, and are finding, great advances in resource including energy efficiency. In summary, in this section I have explained why we have to change, the degree to which we have to change, why it is feasible, and the very attractive new form of growth and development that this change could bring.

Management of that change at the pace we need, including associated dislocations, will be crucial to both welfare and political feasibility. We are at a very special moment in history, facing two crises: the COVID crisis that we are experiencing right now December and the climate crisis, which embodies risks and challenges that are bigger, deeper and longer lasting even than the tragic COVID crisis. There are powerful arguments that we have to tackle these crises in a similar way; with strong, innovative investment, to drive a recovery and create a new form of development and growth Stern and Bhattacharya, The COVID crisis has underlined the dangers, weaknesses and fragilities that had been building in the world economy.

Broadly speaking, the economic and social conditions across the world during the decade before the COVID pandemic were troubling. Growth rates and investment rates plunged across the world during the global financial crisis —9 and, for the most part, had not, in the second decade of this century up to COVID, recovered to the levels of There was also some faltering, particularly under President Trump, of internationalism.

This was in addition to rising emissions and severe loss of biodiversity Dasgupta, Source : IMF Despite these challenges in the decade prior to COVID, there was growing momentum towards a more sustainable economy. There had been major advances in international commitment and agreement e.

Rebuilding in a different way will involve substantial investment and innovation; and the global nature of the challenges demands international collaboration. There have always been arguments for internationalism; in our current circumstances they are extraordinarily powerful.

The returns to collaboration in current circumstances can be expressed in terms of four wins. The first is that we have seen sluggish demand in many countries of the world over the last decade. From a macro perspective, planned saving exceeds planned investments and we have very low real interest rates.

We need to expand world demand. Expanding demand in countries simultaneously has a much more powerful effect than expanding demand in just one country, because increasing demand in one country spills over to boost demand and employment in others. Second, we have to reset expectations, not only for growth but also for a different kind of growth. If we reset those expectations together around the world, then investors will know that the investments they are considering are of a kind that are going to be in harmony with the movement of demand around the world.

A third win is that if there is a shared understanding of the direction of new technologies then we will create increasing returns to scale in production and discovery. We have already seen see Section 2 that very powerfully in the way in which costs of solar and wind power have been driven down; the same is happening now with batteries; and electric vehicle costs are going to fall very quickly.

The overall scale of technology deployment, achieved by acting together, can generate big returns. The fourth win comes from climate and biodiversity being global public goods. If we emit less greenhouse gases in one country, then all other countries gain from that drop in emissions: similarly protecting and regenerating biodiversity benefits us all. Working together is, therefore, of fundamental importance, perhaps now more than any time in history Stern and Bhattacharya, The private sector, the multilateral development banks and international financial institutions, and the ministries of finance and the central banks all have central roles.

In Section 3 , I explained why strong, internationally coordinated investment should be at centre stage, right through from recovery from the COVID pandemic to transformational growth and the drive to a net zero economy. What kind of orders of magnitude of investment do we need to make?

To bring through the new ways of doing things and the new technologies required, we have to increase investment by around 2—3 percentage points of GDP across the world, relative to the previous decade—more in some places, less in others—as well as change the composition of investment in China, however, it is not a question of raising investment rates but changing the composition of investment. Many of these new technologies involve pulling capital increases forward, along with investing in different ways.

Renewable electricity, for example, requires upfront investment whereas fuel cost savings are realised once the renewable technologies are operational. But an increase in the investment rate by 2—3 percentage points of GDP is needed to realise these gains, to recover sustainability and to put us on a new path.

This estimate of the magnitude of the necessary boost to global investment can be arrived at from a number of different perspectives. First, for the world excluding China, it would take us back to the level of investment seen three or so decades ago Figure 5 ; see also IMF, and help to restore growth rates and productivity improvements. Third, we can examine the specifics of the needs and significant opportunities for scaling up the sustainable investments necessary to accelerate the transition to a low-carbon and climate-resilient economy, and restore natural capital.

These three approaches are not additive, they are different ways of looking at the issue, but they all point to numbers in a similar range. At the country level, the necessary increase in investment will vary according to level of development and circumstances. For the G7 countries, a 2 percentage point step up in investment, relative to the past decade, would partly reverse earlier declines, driven in part by cuts in public investment.

More detail on an investment programme for green recovery and transformational growth, that can be driven by G7 countries, is provided in Stern For many emerging market and developing countries EMDEs , the necessary increase in investment will likely be higher than 2 percentage points, given the range of investments, particularly around infrastructure, required to meet development goals.

More detail on the magnitude and types of investment needed in EMDEs other than China, and a strategy for financing those investments, is provided in Bhattacharya For China, as noted, the main challenge will be to change the composition rather than the level of investment. Such an investment programme could overcome the secular stagnation that has been experienced around the world over the last decade or so.

From a basic Keynesian macro perspective, this was associated with planned investment being too small in relation to planned saving. The obvious solution, then, is to increase planned investment, in the light of the urgent requirements we have described. From this perspective, we can overcome secular stagnation by investing in new, and environmentally necessary, ways of doing things, thereby not only restoring demand but also charting a much more attractive form of growth.

These increases in investment will require strong policy and a positive investment climate, including the functioning of relevant governmental institutions. Further, the many relevant market failures see Section 7 and the urgency of change indicate the necessity of a whole range of policy instruments.

Carbon pricing will be important, but alone it will not be enough. Investment seeks returns over the medium and long term and requires clear and credible signals. Thus, policy revisions, as lessons are learned, systems change and technologies advance, must be carried through in ways that people understand, and which can be anticipated.

Predictable flexibility has been a principle of monetary policy for some time, but it should be applied across the board; otherwise confidence in policy is undermined, policy risk is seen as pervasive, and investment is discouraged. Government-induced policy risk is one of the major deterrents to investment worldwide, particularly around infrastructure World Bank, ; WEF, ; Baker et al. Investment and innovation inevitably involve a certain amount of risk.

Strong and rapid increases in investment might be seen as particularly risky, especially around infrastructure where early stage risk can be severe and the reliability of long-term revenue streams can be problematic. The necessary investment can be realised only with the right kind and cost of finance, on the right scale, in the right place, at the right time, which can help reduce, share and manage risk. Across the world there is great investment potential and aggregate savings are strong.

But there are important difficulties in turning opportunities into real investment programmes; good policies and social institutions are of basic importance. Further, getting the right kind of finance, in the right place, at the right time is not easy. Mobilising private sector finance, at scale, will be critical. But there will also be a need for development finance and concessional finance to support the activities that do not quickly generate strong revenue streams or have high risks.

The international financial institutions, especially the multilateral development banks, and including the IMF, have a crucial role to play. This is a moment—with the crises of COVID and climate, the criticality of raising investment, the centrality of rapid change, and the importance of internationalism—to expand and strengthen our international financial institutions.

In doing so, we should expect them to ramp up their support for fostering and developing investment programmes, expand their finance for investment, and expect them to ramp up and reorient their activities towards sustainability. In the light of the policy analyses and arguments set out above, it is interesting to ask how issues and understanding have moved on since the publication of The Economics of Climate Change: The Stern Review Stern, in October Fifteen years on, the review's core finding—that the costs of inaction on climate change are much greater than the costs of action—which was compelling then, in my view, is now still stronger.

First, the science is ever more worrying. Greenhouse gas emissions have continued to rise. There is evidence that the impacts of climate change are happening faster and with greater intensity than expected. We can see ever more clearly that there are significant risks of major areas in the world, with currently large populations, becoming unliveable; thus the risks of mass migration and conflict look increasingly severe. Each IPCC report over the last three decades has looked more worrying.

And the Sixth Assessment Report of the IPCC on the physical science, published in August , paints a still more difficult picture; time is running out for strong and decisive action if we are to hold temperature increases to 1. Second, clean energy technologies have been developing at pace, with costs falling further and faster than expected. Any reasonable estimate of the costs of inaction would be still higher and the costs of action lower than in Third, the politics , have sometimes moved forward strongly e.

More recently there have been strong positives politically, for example, China's commitment to carbon neutrality by , the intensification of action in the European Union and in the United States following the election of President Biden. The private sector has started to engage strongly.

Fourth, analytically our understanding and focus have moved to emphasise still more strongly the dynamics of change Acemoglu et al. We can now point to new and much more attractive paths or models of development than were followed in the past. We can look to a new story of growth, indeed the drive to net zero can be the sustainable, inclusive and resilient growth story of the twenty-first century.

The deeper understanding of the problem, in terms of dynamics of development and of the nature and breadth of potential benefits, implies that we have to deepen our economic analysis. This is the subject of Part II of this paper. An assessment of what the current situation demands of us, particularly for this decade, in terms of action was set out in Part I.

That requires changing our ways of producing and consuming, rapidly and fundamentally, and creating the investment, innovation, sets of policies, and the finance that could foster and support the change. How can we bring our economics to bear in a way that informs those very real and urgent problems? How can we use economic analysis to tell us as much as it possibly can about why to do this, how to do this, and the methods and policy instruments we should use?

In this section I will focus, in terms of broad analytical approaches, on where we are in the economics discipline on climate change and argue that it is time for change in the economics of climate change and, in some respects, economics generally. In Section 7, I will argue that our subject does have much to offer in applying our existing tools and in developing new perspectives and analyses, but we must be innovative and, as a profession, engage much more strongly on this, the biggest issue of our times.

A natural starting point is the important set of insights of economists Alfred Marshall and Arthur Pigou. At the end of the nineteenth century, Marshall Marshall, drew attention to the potential difference between marginal private cost and marginal social cost. Thirty years later, Pigou Pigou, argued for a tax, equal to the difference between the marginal private cost and the marginal social cost, to correct for an externality, where that is the source of the difference.

Around 60 or 70 years ago, Ronald Coase began considering these concepts in a different way, emphasising institutional arrangements Coase, He spoke of allocating property rights and establishing markets so that there could be trade in externalities. James Meade—his work Trade and Welfare Meade, was a landmark—also wrote very insightfully about the theory of externalities, including integrating externalities into the theory of reform, bringing in distributional issues and looking at general equilibrium in multi-good models.

Coming forward further, and looking at applications 30 or so years ago, David Pearce, for example, was writing Blueprint for a Green Economy , emphasising how the Pigouvian idea could be implemented Pearce et al. This is all a very important and valuable part of our intellectual history in economics. Then climate change came along with an explicit and very large problem. The IPCC was established, as a result of initiatives from scientists, in , and climate change started to become a more active subject in discussions of policy.

There was growing recognition that climate change could be disruptive, but at that time the common belief was that our emissions of greenhouse gases would cause only small perturbations at some point in the future. He proceeded in a sensible way, taking an emerging problem and applying the standard tools of economics: first the Pigouvian story of marginal social costs, marginal private costs, and taxing for the externality; second on growth, he used the framework of a standard exogenous growth model and considered the impact of climate change largely in terms of small perturbations around the underlying growth path s.

That was a sensible and valuable early contribution for the economics of climate change. Over the following 10—15 years, it became more and more clear that climate change is not a marginal problem. We are dealing with a challenge involving huge potential disruptions. Further, rising to that challenge requires very radical changes in our production systems and ways of consuming.

This challenge cannot sensibly be examined by simply picking up a fairly standard underlying model of exogenous growth and, within that model, portraying climate change in terms of marginal damages of just a few percent of GDP.

Their scope has been expanded, but the basic underlying features of optimisation of explicit, calibrated social welfare functions, of underlying exogenous growth and of aggregation usually to one good impose severe limitation on their ability to illuminate two basic questions. The first is how to approach analytically the challenge of managing immense risk, which could involve loss of life on a massive scale. The second is how to chart and guide a response to this challenge which will involve fundamental structural change across a whole complex economy.

These two issues are at the core of economic policy on climate. The basic structure of IAMs, I shall argue, even with the many advances and mutations that have been offered, is not of a form which can tackle these two questions in any satisfactory way. There is a problem in the profession, which goes beyond the way IAMs are structured and specified, associated with an inability or unwillingness to move much beyond the static Pigouvian or twentieth-century approach to externalities in analysing the challenges of climate change.

A carbon price should indeed be at centre stage, but we need so much more in terms of policy and perspectives, and understanding of the issues. The first mistake is the failure to incorporate a whole collection of market failures and market absences which are of great relevance and are beyond the greenhouse gas externality see Section 7. The second is that under the temperature target or guard-rail approach see Subsection 2.

Such prices are not simply the marginal social cost as in Pigou see discussion of Stern—Stiglitz Commission below, this section. Third, where the risks of moving too slowly are potentially very large and there are increasing returns to scale, fixed costs and uncertainties in key industries, then standards and regulations can help reduce uncertainty and bring down costs e.

Fourth, many consumers, producers, cities, and countries, recognise the obligation to act, and are not blinkered, narrow optimisers with a view of utility focused only on their own consumption. Fifth, much of the challenge of action is how to promote collaboration and act together. This poses a whole set of important questions around institutions and actions for mutual support.

Putting all this together constitutes a major analytical and practical challenge concerning risk, values, dynamics and collaboration, and the narrow Pigouvian model of the one greenhouse gases GHG market failure, useful though it is, is very far from the whole story. To explain my argument concerning the failures of IAMs in relation to the two basic questions highlighted above, I will set out, in broad terms, some of the basic structure and specifications in standard IAMs.

There is an underlying one-good growth model where emissions depend on output, where accumulated emissions cause temperature increase and climate change, and where emissions can be reduced by incurring costs. However, much of this literature, which has dominated so much work on the economics of climate change, has been misleading and biased against strong action, because climate damage specifications are implausibly low and costs of action both implausibly high and subject to diminishing returns.

For example, a recent version of the DICE model estimates losses of 8. It could be a world that could support a far lower population, and we could see deaths on a huge scale, migration of billions of people, and severe conflicts around the world, as large areas, many densely populated currently, became more or less uninhabitable as a result of submersion, desertification, storm surge and extreme weather events, or because the heat was so intense for extended periods that humans could not survive outdoors.

We cannot be sure of the probabilities of different scales of catastrophe, but it would seem deeply unwise, indeed reckless, to assume that catastrophe of immense proportions would not be associated with temperature increases of this magnitude. Most standard IAMs also embody diminishing returns to scale and increasing marginal costs of action to reduce emissions, plus modest rates of technical progress relative to those experienced in the last decade or so.

These features are very problematic because we have already seen how important increasing returns to scale and very rapid change in technology are in this context. Costs of solar power and LEDs have plummeted as the world has scaled up investment and innovation in cleaner technologies as we saw in Section 2.

The same is happening with batteries and electric vehicles, and is likely to happen with hydrogen. By embodying diminishing returns and modest technical progress, the IAMs systematically overstate the costs of climate action. Further, they distort the theory of policy which is much more complex when we have increasing returns to scale; particularly in the context of risk. By choosing model assumptions primarily for tractability and convenience, and which badly distort, or indeed omit, the key issues, we risk severely undermining the ability of the policy analysis to make a relevant contribution to the discussion at issue.

Some of the flaws and biases described above and embodied in the standard IAMs can be mitigated with different assumptions, and there have been some valuable and relevant contributions in the literature. This is not the place for a literature review but some relevant and useful references to elaborations of IAMs are given in the footnote. However, and this point is crucial, there are deep problems with the general approach of maximising a social welfare function, in particular based on expected utility, in the presence of extreme risk; problems which cannot plausibly be corrected by adjusting functions and parameters within that framework.

The stakes we are playing for with respect to climate change are absolutely immense. The challenges of immense risk to life itself for many, point towards the need for alternative strategies for building theories and models. Impacts which can involve deaths of billions are not easily captured in the standard social welfare functions, which are used in most IAMs and more broadly , involving aggregation of individual utility functions.

Indeed, as Weitzman argued Weitzman, , standard approaches quickly run into problems of utility functions going to minus infinity. But model outcomes would be extremely sensitive to such bounds, for which the empirical and ethical foundations would be very shaky.

These problems constitute an indication that the model has lost touch with the issues at hand. Just as with the social welfare function aspect of IAMs, there is a set of deep questions on the production side of the modelling. The policy challenge, as we have seen, involves generating rapid and major change in key complex systems, including energy, transport, cities and land, over a very short period. IAMs generally embody simple equilibrium on the production side. The problems of rapid change, dislocation, increasing returns, system change, and rapid innovation that are of the essence here are therefore very hard to capture in standard IAMs.

We cannot expect one simplistic equilibrium framework to get to grips with the range of issues at the core of the challenges of transformation. We are likely to need a collection of modelling approaches and analyses. The IAMs could be one of these, but they should not be the central method for all the reasons advanced in this paper.

In Stern and Stiglitz we further develop these and other criticisms of the IAMs and conclude that the standard IAMs do not provide a framework suitable for the design and evaluation of the broad collection of policies required for the necessary transformation of our economies.

In that paper, our criticisms of IAMs are presented under three categories:. Those problems that IAMs cannot address, and for which alternative approaches are necessary:. Those problems where there has been some—in some cases, considerable—progress a more extensive discussion of some of this literature is provided in Stern and Stiglitz, , but which require deeper treatment if the results of IAMs are to carry weight in policy discussion:.

Those problems that IAMs could perhaps in principle address, but with extreme difficulty, and which would transform the nature of the modelling—they typically have not been addressed. Many of these problems relate to a flawed description of the underlying economy.

And these flaws carry powerful biases in the results. If the underlying descriptive model is flawed, 12 normative analyses based on that model are an unreliable guide for interventions. These flaws include:. The assumption, that there are no limitations in government ability to redistribute incomes and, effectively, that the government, in fact, has actually done so, indeed optimally in relation to the social welfare function.

Ignoring multiple and major market failures, beyond the greenhouse gas externality. These failures can give rise to discouragement or distortion of investment and innovation, transition risks, dislocation, and adjustment costs. Their recognition points to the employment of a wider range of instruments see next section. Failing to consider the major systemic changes that would be necessary and adopting a narrow focus on marginal analysis.

A narrow, simplistic and conservative approach to technological change. These failures of the standard approach embodied in IAMs led us to argue, see Subsection 2. How we aggregate disparate preferences and beliefs has been a long-standing question in economics and political science see Arrow, But, as noted in Subsection 2.

It should be noted that it is this understanding that has led the international community to focus on achieving net zero emissions by around , not the recommendations of economists based on IAMs. The Stern—Stiglitz Commission looked at the implementation of a target-based approach, in that it examined price profiles of carbon that could lead, over time, using markets and a range of government climate interventions, to achievement of the goals of the Paris Agreement.

In simple, perfectly competitive models which are fully optimised, the prices to guide production would be equal to marginal damages. But we are in a world with many market imperfections, with major risks, basic distributional challenges, requiring fundamental systemic change, and where optimisation is difficult to define, let alone achieve. Thus, such equality cannot plausibly be assumed to be a general feature of appropriate policy. As Stern—Stiglitz emphasise and see Section 7 , the kind of change we require will need a whole range of complementary policies if it is to deliver the necessary change in a satisfactory way.

A further challenge for the economics of climate change, that is not just an issue for the IAMs, but which arises as a key question in formulating approaches to major, intertemporal problems, is discounting. The discussion of discounting around climate change has been, in my view, somewhat weak and often not well founded in basic theory. It is important to focus on discounting, which concerns the relative valuation of future costs, benefits and lives, relative to now.

In this context, the important concept to consider in discounting is the social discount factor. In economics we generally use relative prices, here shadow prices, to guide choices, decisions or trade-offs. The social discount factor corresponds to this idea.

The proportional rate of fall of the social discount factor is the social discount rate. Other than the possibility of extinction for example, from an asteroid crashing into the earth , which is something that you can, at least in principle, build directly into the analysis, there is no serious ethical argument in favour of pure-time discounting see Stern, , chs 5 and 6, for an extended discussion of the issues and key references; also the pair of articles in the Journal of Economics and Philosophy , Stern, a , b.

The essence of intertemporal valuation is embodied, on the margin, by this relative shadow price. Under most, or many at least, systems of value, how much you judge the value of units of consumption or income in the future, relative to now, depends on how well off you think those in the future will be then. That is endogenous because how well off they will be depends on what we do now. This relative shadow price depends on our decisions and is not exogenous to them.

This is of particular importance in this context, because if we act recklessly on climate change, future generations could be much poorer than ours. We should note that the social discount factors and here also social discount rate would depend on the good chosen as numeraire, on the individual where individuals differ , on time and on the state of nature. Finally, on discounting, we must note that there is little point in looking for ethical values relevant to social discounting in capital markets, because capital markets: i do not reflect ethical social decisions; ii they embody expectations and views about risk that are hard to identify; and iii they involve many imperfections.

Nevertheless, one often seems to hear the mistaken argument that social preferences can be derived from these markets. The above arguments are fairly simple and basic and it is disappointing that many discussions of discounting by economists fail to start with the underlying concept and then make a series of mistakes. I have tried to explain the limitations of the IAMs in tackling the big questions at issue: the understanding and management of extreme risk and of rapid structural change.

What would sound and constructive approaches to the economics of climate change look like? Can economics rise to the nature, magnitude and urgency of the challenge? We are going to need an array of different models, a variety of perspectives, and a collection of different ways of understanding different parts of the problem.

And then wisdom and good judgement in putting all these pieces together. Economic analyses of policy and action towards climate change must first capture extreme risk , including possible large-scale and unforeseeable consequences. Third, they should embody rapid technical and systemic change , often in very large and complex systems such as cities, energy, transport, and land use, and allow for increasing returns to scale.

Fourth, they should examine rapid changes in endogenously determined beliefs and preferences ; and fifth, take into account distributive impacts and risks, both at a moment in time and over time, and including those associated with structural change.

All of this will unavoidably involve explicit analysis and discussion of value judgements. These components, or sets of questions, are difficult to incorporate in standard integrated assessment modelling, but are at the core of the issues around understanding policy towards climate change. We must deepen our economic analysis to incorporate them. We should also recognise that questions embodied in, or similar to, these components arise in many other parts of economics, where major risks and fundamental change are at the core of the challenge under examination.

Thus, the issues we are raising here on understanding policy towards major challenges concern economics as a whole, and not just the economics of climate change. It is not possible in the space here to develop arguments around all the areas just described. By way of example, and an important one, I will delve a little deeper into market imperfections.

Table 1 outlines six important failures that policy design must take into account. These different market failures point to the use of different instruments, but the collection should be mutually reinforcing. These failures interact. Note: The policy options in the third column are not exhaustive. I have set out these six market imperfections in a number of contexts, see e. Across these market failures and associated policies, theories of instrument design and implementation are likely to be helpful, for example, in the design of carbon markets, standards and regulations, layouts of cities, policies to encourage the change of gas boilers, prizes for breakthrough discoveries, and so on.

There are also important absent markets. We cannot trade fully, over long horizons, on future carbon. We cannot easily trade over possible new technologies because we do not know, or have rather limited knowledge of, what breakthrough technologies lie in the future. As a matter of basic theory, a competitive equilibrium with some absent markets cannot be assumed to be Pareto efficient. Such absences mean that expectations, and how they are formed, are crucial for investment.

They can and should be shaped by public strategy and action, including by the key public policy and financial institutions which set direction. At the same time, there are difficult issues around knowledge of, or confidence in, future policies, in terms of their possible effects in relation to market participants. That issue is of real relevance to the shaping of expectations.

The more that governments can build in predictability about how policy will change as learning occurs, the greater will be the confidence underpinning investment, innovation and future commitments. That is why I have emphasised Subsection 4. Part of confidence is based on track records which, unfortunately in the context of climate change, have seen chopping and changing Stroebel and Wurgler, Governments cannot fully commit to future actions in a credible way.

They may have short time horizons, they may have narrow objectives, and they face major administrative and political constraints. In thinking about public policy, we have to put all these considerations together and take into account how policies are constrained, might shift and can go wrong.

And we can ask how to build strong institutions, which can survive across different parties in power and pressures of vested interests, to help reduce uncertainty about future directions and policies. These considerations underlie the rationale for the climate change legislation and the carbon budgets in the United Kingdom.

The Climate Change Act and the Climate Change Committee, with its carbon budgets, 18 are good examples of where the law and institutions can play a valuable role. Indeed, the law is beginning to play a strong role in other countries too. In April , Germany's Constitutional Court upheld a claim challenging the constitutionality of certain provisions of the German Climate Protection Act, in the sense that the measures in the Act were too weak.

The court ruled that Germany's legal requirement to meet the overall goals of the Paris Agreement, together with insufficiently strict emissions reduction targets, imply a rate of emissions reductions after that places an unreasonable burden on future generations Setzer and Higham, The GHG failure is top of our list of market failures.

And carbon pricing has a critical role to play in tackling that market failure. However, we can see, from thinking about different aspects of market and government failures, that the policy question is much richer and more complex in substance than can be handled by carbon pricing alone.

If we consider the very real circumstances of increasing returns to scale on mitigation action, strong risk, and worries about what government might do, we could argue that regulatory policies, such as the phase out of internal combustion engine ICE vehicles, have a strong role to play. That provides a very clear and strong signal, which gives car firms the confidence to pursue the major fixed costs around the development of alternative technologies and moving to scale.

The banning of incandescent light bulbs is a powerful example of how new and much better technologies can be developed and driven to low cost by regulation, and how the move to scale of new technologies can be fostered by the clarity regulation can bring. This regulation did not specify technologies to replace the incandescent bulbs, but required their phase out because they were so wasteful. Before long the far superior LED system came through and costs were driven down.

Thus, in the case of incandescent lightbulbs and ICE vehicles, the policy does not pick winners; it is about regulating out the harmful. These policies should also be subject to periodic evaluation, but that evaluation would need to be broader than standard marginal cost—benefit analysis. In these circumstances of increasing returns and risk, alongside other market failures, such regulatory policies, alongside carbon pricing, could be more efficient and effective than carbon pricing alone.

It is surprising therefore that some economists assert that economics says that the most efficient policy instrument is carbon pricing, and that we pursue others simply because this may be politically difficult. That is a theoretical mistake of real practical significance. Much of structural change will be around the functioning of major systems, including: energy, cities, transport, land.

Clean power is at the centre of the transition to net zero emissions. And that electricity will all need to be zero carbon by The choices made in cities on transport, infrastructure, buildings, and energy use, as they grow rapidly over the coming decades, will, in large measure, determine whether the world can both manage climate change and realise the benefits of low-carbon growth.

These systems are currently dysfunctional along key dimensions, so we have much to gain from managing them better as we work to cut emissions. Indeed, in all too many cases, the structure of incentives embodied in agricultural policies and subsidies lead to land degradation, the poisoning of rivers and oceans, and the destruction of forests.

Further, often the financial or other returns to such policies are captured by richer enterprises and individuals. Progress in digital and artificial intelligence AI technologies continues to move very rapidly, and these technologies will be enormously helpful in improving the management of systems.

In this way, we are fortunate that these new technologies are moving so fast at exactly the moment we have to make major systemic changes. The need for new approaches to the economic analysis of climate change raises an enormously rich research agenda. At the same time, action on scale is urgent. The transformation must be accelerated; we have to act strongly now.

Thus we must think hard in real time about what we do now and its basis in current evidence, theory and judgement, whilst we simultaneously pursue vigorously the most critical lines of research. That statement is true in general for those who have to make or advise on policy, but it applies particularly sharply here where both urgency and rapid change are of the essence.

I have emphasised throughout this paper that managing climate change requires fundamental transformation of our economies: and it requires conceptual and evidential frameworks that can guide the policies and actions that can shape such transformations. A collection of conceptual, theoretical, empirical and modelling approaches, and not just a single grand model, will be needed; there are several important questions to answer.

These include the following: What instruments should we utilise? If we use prices as guidance, what could be, and how do we understand, the social cost of carbon, and what prices might guide the production side to net zero emissions by mid-century? What are the key large structural and systemic changes that will be required as part of the green transition?

A model, or analytical approach, designed to help answer one of these questions may be less helpful in answering others. It will be necessary to assemble microeconomic, structural, technological, and macroeconomic analyses of change for countries and communities across the world. Suitably improved IAMs may play a role on the more aggregative end of the spectrum in this collection of analyses and models.

My arguments here are not that they have no role to play but that we should be clear that it should not be the dominant role, because of their inherent limitations on the key challenges of risk and change. These analyses will have to take account of the varying circumstances, difficulties and opportunities they face. And, as ever in economics, we need nuanced and measured judgements in blending the different analyses, each with its focus, into policy decisions in real time.

For a more detailed discussion of promising modelling approaches that can contribute to such analyses see Section 7 in Stern and Stiglitz Below I highlight some key areas for future research, which can provide important insights relevant to these analyses. Changes in the behaviours and values of consumers, workers, shareholders, managers and voters are key to driving change in business and policy decisions, while business and policy decisions can also have a powerful influence on consumer behaviours.

Understanding the political economy , and associated instabilities, constraints and opportunities, shaping the transition to net zero emissions will be important both for creating effective policy frameworks to decarbonise at pace and to accelerate the deployment of clean technologies across the economy. There has been a huge amount of progress in the literature in economics on behaviour, institutions and political economy over the last 20—30 years.

This includes fruitful collaboration with other social sciences, for example, research at the intersection of economics and political science relating to polycentric governance of public goods e. Interesting work on changing values in the context of climate is emerging see e. We must analyse how to support a just transition which recognises the problems of dislocation.

Some jobs will disappear; others will change radically. Some locations may be particularly affected. There will be many new opportunities. Managing change so that all have a chance of benefitting will be not only an issue of justice, but also of political feasibility. Much of this will involve investment in people and places. And in some cases, direct income support. The necessary transformation of the economy relies critically on changing key systems: energy, cities, transport, land use.

These large and complex systems cannot be changed by fiddling with just one parameter; a whole set of policies will be required to foster change. For example, you would not sensibly attempt to redesign a city to reduce congestion and pollution via only a carbon price, even though a carbon price would be of great relevance. Understanding how to foster change at the system level will be vital.

Part of that will be around sequencing. For example, much of transport and heating will depend on electricity so that, if they are to be decarbonised, then electricity will have to be expanded quickly and itself be decarbonised. The interactions of systems including energy, transport, cities and of systemic regulation grids, buildings and land use, transport will be crucial issues. So, too, the systemic management of change. Implementation which relies only on line ministries would likely run into major difficulties.

We are going to need to understand innovation in a much deeper and stronger way, because it is at the heart of the transition to net zero. The necessary innovation will go far beyond one particular technology, in one particular industry; it will be innovation across the whole range of ways of doing things. Thus, more work is needed to understand the complementarities between different features of the innovation system, as well as between different types of innovation Stern and Valero,

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You have to have some rational for why the opportunity exists. You start with sensible search Then value the stock: basically look at three basic elements of value: 1. Asset Value 2. Earnings Power Value 3. Unless it is associated with a short term liquidation.

Earnings, if they are sustainable, are supported either by assets or by barriers to entry. If you had a company with a lot of earnings but no assets what sooner or later will happen to profits if there are no barrier to entry in this market? They will be competed away.

I can do that for no assets. No net assets, no barriers to entry and then no protection, no value. The value of Growth is the least reliable element of value. You have to be able to forecast what is going to happen to growth. It is not just looking there now and applying a value to it, you have to forecast what the changes are going to be. It is the second-highest taxed income, and is moderately hard to build wealth with due to low returns.

There are of course big ups and downs that can happen during that time. Much like earned income, you have little control over your portfolio income. You are at the mercy of the ups and downs of the stock market and the skill of your advisor.

Passive income: People with a high financial IQ have an investment strategy that aims to create passive income. Passive income is generally derived from real estate, royalties, and business distributions. If you receive rent from a property, that is passive income. I get royalties from my books. They are cash-flowing assets that provide passive income. If you own a business that distributes profit to you, that is also passive income.

In short, it is income that comes to you whether you are working or not. It is the lowest-taxed income, with many tax benefits, and is the easiest income to build wealth with thanks to its combination of low taxes and potentially infinite returns. Most people start their life out by making ordinary earned income as an employee. The path to building wealth then starts with understanding that there are other types of income and then converting your earned income into the other types of income as efficiently as possible.

Rather, I tell them to pay themselves first and invest that money in cash-flowing assets. In short, convert your pay raise into passive income. The easiest way to do this is to make your investment spend an expense and to make it your most important expense. Kim and I did this for years, baking our money for investments into our budget expense column. We always found a way to pay our other expenses too, even if it was a little late.

In this way we changed our mindset about money and investing. Many people think investing is risky. The investor is the asset or liability. What this means is that your financial knowledge can either be an asset or a liability. If you want to move from being a risky investor to a good investor, first invest in your financial education. As part of your education—because nothing beats real-life experience—start small with your investments, learn from your mistakes, and then make bigger and bigger investments.

You can also play games that simulate investing to build your financial intelligence. One of my big concerns as a beginning investor was how I would raise money if I found a good deal. Rich dad reminded me that my job was to stay focused on the opportunities in front of me, to be prepared. The hard part was finding a great deal that attracted the money—which is why so many people are ready to give money to a good investor. I call this OPM, a. As you become a successful investor, you must learn to evaluate risk and reward.

Rich dad used the example of a nephew building a burger stand. Escape the Rat Race! Would that be of interest to you? Learning and mastering the rules of investing takes a life-long investment in financial education. But these basics will get you started. Where you go from here is up to you.

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