Archive for the ‘Weitzman’ Category

Let`s recreate the Paleocene! Giant snakes, "fat tails", cost-benefit analysis and climate change; Weitzman replies to Nordhaus

February 11th, 2009 1 comment

Giant snakes?  What could a few colossal bones found in Colombia have to do with us now?

1.  A recent paper in Nature about the discovery of several specimens of a giant snake (“Titanoboa”) that lived in Latin America 60 million years ago captured attention last week, including among climate change bloggers (yes, “skeptics” too).  Why?  Not only because the snakes were enormous (more than 40 feet and over a ton) – making anacondas look like garter snakes – but because their size appears to tell us something about the climate about during the Paleocene.  Based on existing knowledge of the size, metabolism and temperature tolerances of  snakes, scientists believe that the size of the snake appears to indicate that not only was the world overall quite warm during the Paleocene (with palms growing at the poles), but that average temperatures in the tropics would have been from 3° to 5° Celsius (5° to 9° F) warmer than they are today in order for such large snakes to  survive.

The period in which these snakes lived was followed a few million years later by the Paleocene – Eocene Thermal Maximum (PETM) in 56 million BC, when a pulse of CO2 and methane drove already warm temperatures sharply higher (by 5° Celsius / 9° F) in less than 10,000 years. During the PETM, CO2 levels rose to about 2000 ppm, or roughly 6 times  where they are now. The PETM resulted in a massive extinction of species.

The size of the snakes and the temperatures at their time and shortly after during the PETM also tell us that climate is sensitive (on geological scales, sometimes rather short-term) to atmospheric levels of carbon and methane – and remind us that there is a “fat tail” of uncertain climate change risks posed by mankind`s ramped up efforts to release as much as possible of the CO2 that has been stored up in the form of fossil fuels, methane and limestone over millions years.  

2.  I have mentioned the issue of “fat tails” previously, in connection with attempts at applying cost – benefit analysis (CBA) to determine whether to tax CO2 emissions.  While economists like Yale`s William Nordhaus who have applied CBA to climate policy have been saying for decades that taxing carbon makes sense on a net basis, our own Bob Murphy has criticized Nordhaus`s approach on rather narrow (and decidedly non-Austrian) grounds.

But Nordhaus has also been strongly criticized by economists such as Harvard`s Martin Weitzman, who basically argue that Nordhaus has UNDERSOLD the case for carbon pricing or that the results of such CBA imply a greater certainty of knowledge (and complacency) than is deserved.  Weitzman points out basic difficulties inherent in applying CBA to policies addressing climate change, particularly where there seems to be a grave possibility that we do not understand how drastically the climate might respond to our influences.  Weitzman`s comments (scheduled to appear in the February issue of The Review of Economics and Statistics) were the focus of the lead essay by Jim Manzi in Cato Unbound`s August 2008 issue, which I reviewed.

Nordhaus has since responded to Weitzman, and this time with Bob Murphy stepped in as a defender of CBA.  Weitzman has now replied to Nordhaus, and has kindly permitted me to quote from the current draft of such reply.  It seems that Weitzman provides a compelling statement of some the limits of CBA, as applied to climate change. It seems to me that any Austrian ought to be sympathetic to Weitzman`s criticisms of the limits of CBA.

(NB:  Weitzman`s draft response is a .pdf file that I cannot upload, though I have uploaded a version convert to .txt format.  I am happy to forward the .pdf to any interested readers.)

The rest of the post sets out the most salient (for a layman) of Weitzman`s key points:

“there is enormous structural uncertainty about the economics of extreme climate change,
which, if not unique, is pretty rare. I will argue on intuitive grounds
that the way in which this deep structural uncertainty is
conceptualized and formalized should influence substantially the
outcomes of any reasonable CBA (or IAM) of climate change. Further, I
will argue that the seeming fact that this deep structural
uncertainty does not influence substantially outcomes from the
“standard” CBA hints at an implausible treatment of uncertainty.”

pre-industrial-revolution level of atmospheric CO2 (about two centuries
ago) was





about280 parts per million (ppm). The ice-core data show that
carbon dioxide was within a range roughly between





180 and





280 ppm
during the last 800,000 years. Currently, CO2 is at





385 ppm, and
climbing steeply. Methane was never higher than





750 parts per billion
(ppb) in 800,000 years, but now this extremely potent GHG, which is
thirty times more powerful than CO2, is at





1,780 ppb. The sum total of
all carbon-dioxide-equivalent (CO2-e) GHGs is currently at





435 ppm.
Even more alarming in the 800,000-year record is the rate of change of
GHGs, with increases in CO2 being below (and typically well below)





ppm within any past sub-period of ten thousand years, while now CO2 has
risen by





40 ppm in just the last quarter century.

Thus, anthropogenic
activity has elevated atmospheric CO2 and CH4 to levels extraordinarily
far outside their natural range – and at a stupendously rapid rate. The
scale and speed of recent GHG increases makes predictions of future
climate change highly uncertain.  There is no analogue for anything
like this happening in the past geological record. Therefore, we do not
really know with much confidence what will happen next.”

“To keep atmospheric CO2 levels at twice pre-industrial-revolution levels would require not just stable but sharply declining emissions within a few decades from now. Forecasting
ahead a century or two, the levels of atmospheric GHGs that may
ultimately be attained (unless drastic measures are undertaken) have
likely not existed for tens of millions of years and the rate of change
will likely be unique on a time scale of hundreds of millions of years.

the “standard”CBA of climate change takes essentially no account of the
extraordinary magnitude of the scale and speed of these unprecedented
changes in GHGs – and the extraordinary uncertainties they create for
any believable economic analysis of climate change.
Perhaps even
more astonishing is the fact that the “policy ramp” of gradually
tightening emissions, which emerges from the “standard” CBA, attains
stabilization at levels of CO2-e GHGs that approach





700 ppm. The
“standard” CBA [of Nordhaus] thus recommends imposing an impulse or
shock to the Earth’s system by geologically-instantaneously jolting
atmospheric stocks of GHGs up to





21/2 times their highest past level
over the last 800,000 years – without even mentioning what an
unprecedented planetary experiment such an “optimal” policy would

“climate sensitivity” (hereafter denoted S1) is a key macro-indicator
of the eventual temperature response to GHG changes. Climate
sensitivity is defi…ned as the global average surface warming following
a doubling of carbon dioxide concentrations. … the median upper 5%
probability level over all 22 climate-sensitivity studies cited in
IPCC-AR4 (2007) is 6.4° C – and this stylized fact alone is telling.
Glancing at Table 9.3 and Box 10.2 of IPCC-AR4, it is apparent that the
upper tails of these 22 PDFs tend to be sufficiently long and heavy
with probability that one is allowed from a simplistically-aggregated
PDF of these 22 studies the rough approximation P[S1>10° C]





1%. The
actual empirical reason why these upper tails are long and heavy with
probability dovetails nicely with the theory of my paper: inductive
knowledge is always useful, of course, but simultaneously it is limited
in what it can tell us about extreme events outside the range of
experience – in which case one is forced back onto depending more than
one might wish upon the prior PDF, which of necessity is largely
subjective and relatively diffuse. As a recent Science commentary put
it: “Once the world has warmed by 4° C, conditions will be so
different from anything we can observe today (and still more different
from the last ice age) that it is inherently hard to say where the
warming will stop.”

“Exhibit C” concerns possibly disastrous releases over the long run of bad-feedback components
of the carbon cycle that are currently omitted from most general
circulation models. The chief worry here is a significant supplementary
component that conceptually should be added on to climate sensitivity
S1. This omitted component concerns the potentially powerful
self-amplification potential of greenhouse warming due to heat-induced
releases of sequestered carbon. … Over the long run, a CH4
outgassing-amplifier process could potentially precipitate a
cataclysmic strong-positive-feedback warming
. This real physical
basis for a highly unsure but truly catastrophic scenario is my Exhibit
C in the case that conventional CBAs and IAMs do not adequately cover
the deep structural uncertainties associated with possible
climate-change disasters.  Other examples of an actual real physical
basis for a catastrophic outcome could be cited, but this one will do
here.  The real physical possibility of endogenous heat-triggered
releases at high temperatures of the enormous amounts of
naturally-sequestered GHGs is a good example of indirect carbon-cycle
feedback effects that I think should be included in the abstract
interpretation of a concept of “climate sensitivity” that is relevant
here. What matters for the economics of climate change is the
reduced-form relationship between atmospheric stocks of
anthropogenically-injected CO2-e GHGs and temperature change. … When
fed into an economic analysis, the great open-ended uncertainty about
eventual mean planetary temperature change cascades into
yet-much-greater yet-much-more-open-ended uncertainty about eventual
changes in welfare.”

D” concerns what I view as an unusually cavalier treatment of damages or
disutilities from extreme temperature changes. The “standard” CBA
treats high-temperature damages by a rather passive extrapolation of
whatever specification is assumed (typically arbitrarily) to be the
low-temperature “damages function.”  … Seemingly minor changes in
the specification of high-temperature damages can dramatically alter
the gradualist policy ramp outcomes recommended by the “standard” CBA.

Such fragility of policy to postulated forms of disutility functions
are my Exhibit D in making the case that the “standard” CBA does not
adequately cope with deep structural uncertainty – here structural
uncertainty about the specification of damages.”

experiment without precedent is being performed on planet Earth by
subjecting the world to the shock of a geologically-instantaneous
injection of massive amounts of GHGs. Yet the “standard” CBA seems
almost oblivious to the extraordinarily uncertain consequences of
catastrophic climate change.”

nothing in our world has a probability of exactly zero or exactly one.
What is worrisome is not the fact that extreme tails are long per se
the fact that a meaningful upper bound on disutility does not exist),
but that they are fat (with probability density). The critical
question is how fast does the probability of a catastrophe decline
relative to the welfare impact of the catastrophe. Other things being
equal, a thin-tailed PDF is of less concern because the probability of
the bad event declines exponentially (or faster). A fat-tailed
distribution, where the probability declines polynomially, can be much
more worrisome.
… To put a sharp point on this seemingly abstract issue, the
thin-tailed PDFs that Nordhaus requires implicitly to support his
gradualist “policy ramp” conclusions have some theoretical tendency to
morph into being fat tailed when he admits that he is fuzzy about the
functional forms or structural parameters of his assumed thin-tailed
– at least for high temperatures. … When one combines fat
tails in the PDF of the logarithm of welfare-equivalent consumption
with a utility function that is sensitive to high damages from extreme
temperatures, it will tend to make the willingness to pay (WTP) to
avoid extreme climate changes very large.”

the PDF in the bad fat tail is thinned, or even truncated, perhaps from
considerations akin to what lies behind the value of a statistical life
(VSL). (After all, we would not pay an infinite amount to eliminate
altogether the fat tail of climate-change catastrophes.) Alas, in
whatever way the bad fat tail is thinned or truncated, a CBA based upon
it remains highly sensitive to the details of the thinning or
truncation mechanism, because the disutility of extreme climate change
has “essentially” unlimited liability.
In this sense climate change
is unique (or at least very rare) because the conclusions from a CBA
for such an unlimited-liability situation have some built-in tendency
to be non-robust to assumed tail fatness.”

attempts to constrict the fatness of the “bad” tail can still leave us
with uncomfortably big numbers, whose exact value depends non-robustly
upon artificial constraints, functional forms, or parameters that we
really do not understand. The only legitimate way to avoid this
potential problem is when there exists strong a priori knowledge that
restrains the extent of total damages.
If a particular type of
idiosyncratic uncertainty affects only one small part of an
individual’s or a society’s overall portfolio of assets, exposure is
naturally limited to that specific component and bad-tail fatness is
not such a paramount concern. However, some very few but very
important real-world situations have potentially unlimited exposure due
to structural uncertainty about their potentially open-ended
catastrophic reach. Climate change potentially affects the whole
worldwide portfolio of utility by threatening to drive all of planetary
welfare to disastrously low levels in the most extreme scenarios.”

from CBA [are] more fuzzy than we might prefer, because they are
dependent on essentially arbitrary decisions about how the fat tails
are expressed and about how the damages from high temperatures are
I would make a strong distinction between thin-tailed
CBA, where there is no reason in principle that outcomes should not be
robust, and fat-tailed CBA, where even in principle outcomes are
highly sensitive to functional forms and parameter values. For ordinary
run-of-the-mill limited exposure or thin-tailed situations, there is at
least the underlying theoretical reassurance that finite-cutoff-based
CBA might (at least in principle) be an arbitrarily-close approximation
to something that is accurate and objective. In fat-tailed unlimited
exposure situations, by contrast, there is no such theoretical
assurance underpinning the arbitrary cutoffs or attenuations – and
therefore CBA outcomes have a theoretical tendency to be sensitive to
fragile assumptions about the likelihood of extreme impacts and how
much disutility they cause.”

target is not CBA in general, but the particular false precision
conveyed by the misplaced concreteness of the “standard” CBA of climate
change. By all means plug in tail probabilities, plug in disutilities
of high impacts, plug in rates of pure time preference, and so forth,
and then see what emerges empirically. Only please do not be surprised
when outcomes from fat-tailed CBA are fragile to specifications
concerning catastrophic extremes.  The extraordinary magnitude of the
deep structural uncertainties involved in climate-change CBA, and the
implied limitations that prevent CBA from reaching robust conclusions,
are highly frustrating for most economists, and in my view may even
push some into a state of denial. After all, economists make a living
from plugging rough numbers into simple models and reaching specific
conclusions (more or less) on the basis of these numbers. What are we
supposed to tell policy makers and politicians if our conclusions are
ambiguous and fragile?”

“It is
threatening for economists to have to admit that the structural
uncertainties and unlimited liabilities of climate change run so deep
that gung-ho “can do” economics may be up against limits on the ability of quantitative analysis to give robust advice in such a grey area. But if this is the way things are with the economics of climate change, then this is the way things are – and non-robustness to subjective assumptions is an inconvenient truth to be lived with rather than a fact to be denied or evaded
just because it looks less scientif…cally objective in CBA. In my
opinion, we economists need to admit to the policy makers, the
politicians, and the public that CBA of climate change is unusual
in being especially fuzzy because it depends especially sensitively on
what is subjectively assumed about the high-temperature damages
function, along with subjective judgements about the fatness of the
extreme tails and/or where they have effectively been cut off
Policy makers and the public will just have to deal with the idea that
CBA of climate change is less crisp (maybe I should say even less
crisp) than CBAs of more conventional situations.”

moral of the dismal theorem is that under extreme uncertainty,
seemingly casual decisions about functional forms, parameter values,
and tail thickness may be dominant. We economists should not pursue
a narrow, superficially precise, analysis by blowing away the
low-probability high-impact catastrophic scenarios as if this is a
necessary price we must pay for the worthy goal of giving crisp advice.
An artificial infatuation with precision is likely to make our analysis
go seriously askew and to undermine the credibility of what we say by
effectively marginalizing the very possibilities that make climate
change grave in the first place.

issue of how to deal with the deep structural uncertainties in climate
change would be completely different and immensely simpler if systemic
inertias (like the time required for the system to naturally remove
extra atmospheric CO2) were short (as is the case for SO2;
particulates, and many other airborne pollutants). Then an important
part of an optimal strategy would presumably be along the lines of
“wait and see.” With strong reversibility, an optimal
climate-change policy should logically involve (among other elements)
waiting to see how far out on the bad fat tail the planet will end up,
followed by midcourse corrections if we seem to be headed for a
disaster. This is the ultimate backstop rebuttal of DT given by some
critics of fat-tailed reasoning, including Nordhaus. Alas, the problem
of climate change is characterized everywhere by immensely long
inertias – in atmospheric CO2 removal times, in the capacity of the
oceans to absorb heat (as well as CO2), and in many other relevant
physical and biological processes. Therefore, it is an open question
whether or not we could learn enough in sufficient time to make
politically feasible midcourse corrections. When the critics are
gambling on this midcourse-correction learning mechanism to undercut
the message of DT, they are relying more on an article of faith than on
any kind of evidence-based scientific argument.

think the actual scientific facts behind the alleged feasibility of
“wait and see”policies are, if anything, additional evidence for the
importance of fat-tailed irreversible uncertainty about ultimate
climate change.

relevance of “wait and see”policies is an important unresolved issue,
which in principle could decide the debate between me and Nordhaus, but
my own take right now would be that the built-in pipeline inertias
are so great that if and when we detect that we are heading for
unacceptable climate change, it will likely prove too late to do
anything much about it for centuries to come thereafter
possibly, for lowering temperatures by geoengineering the atmosphere to
reflect back incoming solar radiation). In any event, I see this whole
“wait and see” issue as yet another component of fat-tailed uncertainty
– rather than being a reliable backstop strategy for dealing with
excessive CO2 in the atmosphere.

states that there are so many low-probability catastrophic-impact
scenarios around that ‘if we accept the Dismal Theorem, we would
probably dissolve in a sea of anxiety at the prospect of the infinity
of infinitely bad outcomes.’ This is rhetorical excess and, more to the
point here, it is fallacious. Most of the examples Nordhaus gives have
such miniscule thin-tailed probabilities that they can be written off.”

summarizes his critique with the idea there are indeed deep
uncertainties about virtually every aspect of the natural and social
sciences of climate change – but these uncertainties can only be
resolved by continued careful analysis of data and theories. I heartily
endorse his constructive attitude about the necessity of further
research targeted toward a goal of resolving as much of the uncertainty
as it is humanly possible to resolve.
I would just add that we
should also recognize the reality that, for now and perhaps for some
time to come, the sheer magnitude of the deep structural uncertainties,
and the way we express them in our models, will likely dominate
plausible applications of CBA to the economics of climate change

(emphasis added)

More on Manzi/Cato on climate

August 22nd, 2008 4 comments

A few days ago I concluded that Jim Manzi’s lead essay in Cato Unbound’s new climate issue exhibited rather weak “libertariarian sinews”.

Allow me to note a few additional remarks on Manzi`s arguments.

1.  It’s clear from Manzi’s essay that (i) he is actually quite concerned about the risks posed by anticipated climate change, even while he dismisses the “scare stories” and the “precautionary principle” and (ii) he believes that the risks warrant even greater investments by government in climate science and carbon sequestration/geo-engineering efforts. 

While I commend Manzi for addressing at close to face value the IPCC’s warnings (even while climate science does not provide a firm basis for precise temperature or climate change prognostications) and the advice offered by economists such as William Nordhaus and Martin Weitzman, it is puzzling that he does not see in climate change concerns the opportunity for a positive agenda of deregulation and tax reform that would liberate our economy and help to spur changes in capital investments.

2.  Manzi has underplayed both the possible degree of climate change under “business as usual”/non-aggressive policy scenarios and the absolute and relative magnitude of the concomitant risks and costs.

Manzi notes that the “current IPCC consensus forecast is that, under fairly reasonable assumptions for world population and economic growth, global temperatures will rise by about 3 °C by the year 2100.” Note that this implies a an AVERAGE global temperature increase of 5.4 °F, with even greater temperature increases in the US and elsewhere the further one gets away from the equator. The IPCC does not make “forecasts”, but has analyzed and released a number of projections based on various scenarios, most of which assume aggressive actions to deploy clean energy technologies.

As fellow contributor Joe Romm (undergrad and Ph.D. in physics at MIT, Senior Fellow at the Center for American Progress, where he writes and maintains the Climate Progress blog, and author of “Hell and High Water: Global Warming–the Solution and the Politics–and What We Should Do” ) argues, Manzi has seriously understated the risks of much higher temperatures by 2100 that the IPCC has noted.  Joe Romm notes that, in fact, the growth of actual global carbon emissions since 2000 has exceeded the IPCC’s most extreme A1F1 scenario, and argues that 

“the latest IPCC report finds that, absent a sharp reversal of BAU trends, we are headed toward atmospheric levels of carbon dioxide far exceeding 1,000 parts per million by 2100. IPCC’s “best estimate” for temperature increase is 5.5°C (10°F), which means that over much of the inland United States, temperatures would be about 15°F higher.” (emphasis in original)

Further, even using a very optimistic projection, Manzi has also seriously understated the impact and costs that the IPCC suggests may be felt in the US. Manzi, assuming that global temperatures rise “only” by 3 °C increase by 2100, refers to an IPCC summary that states that such a temperature increase would cause total estimated economic losses in the low end of a range of 1–5 percent of global GDP (and later uses an estimate of 3% of GDP). This ignores not only the much higher costs that will be faced if warming is even greater, but also ignores:

(1) that as global GDP is expected to substantially grow, the absolute magnitude of the annual GDP loss may be very large, indeed,

(2) that measures of “economic” losses include adaptation costs as a part of GDP but do not cover non-market damages, the risk of potential extreme weather, socially contingent effects, or the potential for longer-term catastrophic events and

(3) that the greatest negative effects of climate change are expected to be felt in developing countries that have a relatively insignificant share of GDP.

3.  Manzi notes that even with the low-ball assumptions, mainstream economists like Yale’s William Nordhaus have long argued on a standard cost-benefit analysis basis that the gains from implementing an escalating carbon tax would outweigh the costs (Nordhaus has for many years been at the low end of the benefits to be gained), but even so Manzi argues that “the real world of geostrategic competition and domestic politics” one leads him to greatly discount the basis for a policy the difficulties with implementing a carbon tax or similar policy.

But it looks like Manzi has put his thumb on the scale again. Manzi asserts that in order to have an effective GHG mitigation policy, we would have to agree to, and enforce, “for hundreds of years” a “global, harmonized tax on all significant uses of carbon and other greenhouse gases in any material form” that “would run directly contrary to the narrow self-interest of most people currently alive on the planet” and that “all the side deals that would be required to get this done would create enough economic drag to more than offset the benefit.” Manzi also points to the ineffectiveness of the Kyoto Protocol, the apparent unwillingness of developing nations to agree to GHG restrictions and the penchant for politicians for loading down climate change legislation with special deals as reasons to think that a globally-coordinated climate policy is not worth while.

But while these are serious concerns, it is relatively easy to counter that:

– the Kyoto Protocol is no failure, but that the Europeans have been waiting for the US to agree to similar action rather than blindly biting any bullet unilaterally;

– it is clear that China, India, Brazil and other developing countries are seriously concerned about climate change, but their initial participation is not needed for the developed nations to commence a meaningful mitigation deal, and there are trade and other levers (including a desire for cleaner energy technologies) to eventually bring them on boar;

– Manzi later acknowledges this in his own plan for an agreement among developed nations to invest in technology that can then be shared with developing ones;and

– effective climate policy can be initiated and implemented domestically without external coordination, such as power market deregulation, allowing immediate depreciation of capital investments, and replacement of income taxes with resource taxes.

Further, it’s clear that Manzi`s assertion that climate policies “run directly contrary to the narrow self-interest of most people currently alive on the planet” is simply an unfounded and unjustifiable conclusion.

All of mankind shares the atmosphere, as an open-access but indispensable commons. We are approaching the point that the costs and risks of inaction (or rather, the costs of continuing free use without responsibility for costs/risks shifted to others) merit the costs of shifting to a system of shared rules (and other investments) with respect to its management – the efforts in which people and firms of many nations are voluntarily engaging in this regard are themselves evidence that even narrow self-interest justifies coordination with our neighbors (even as gamesmanship remains).

4.  Manzi next, rightly, considers the “inherently unquantifiable possibility that our probability distribution itself is wrong,” so that “the case for a carbon tax or a cap-and-trade emissions rationing system is really that it would be a hedge against the risk that actual damages from warming would be much, much worse than current risk-adjusted projections indicate,” with the primary purpose of such a tax or rationing system being “not to encourage conservation per se, but rather to induce the development of new technologies that can de-link economic growth from damaging accumulations of atmospheric carbon dioxide”.

Oddly, though, Manzi simply concludes, with no analysis, that any carbon pricing program would be “insanely expensive” and yet even then “would very likely not be high enough to successfully incentivize the creation of the desired technologies.” One would like to know on what basis he concludes that markets do not respond to incremental changes in prices – so that the governments of developed nations ought to directly make certain climate change technology investments (or incentivize them via prizes, etc.)

5.  It is also odd that Manzi then turns immediately from the dismissal of a gradualist pricing approach to a focus on “rapid, aggressive emissions abatement” that would only be justified if “the outer edge of the probability distribution of our predictions for global-warming impacts is enormously conservative, and disaster looms if we don’t change our ways radically and this instant,” in which case Manzi agrees that “we really should start shutting down power plants and confiscating cars tomorrow morning.”

Manzi seems to be as alarmist as many enviros, and to have even less faith in the market than they do.

Manzi then briefly addresses – and conflates with the table-pounding of Al Gore and others – the more sophisticated argument (advanced by Harvard’s Marty Weitzman) that “the risk that actual damages from warming would be much, much worse than current risk-adjusted projections indicate” is quite large. Says Manzi, “any rationale for rapid emissions abatement that confronts the facts in evidence is really a more or less sophisticated restatement of the precautionary principle: the somewhat grandiosely named idea that the downside possibilities are so bad that we should pay almost any price to avoid almost any chance of their occurrence.” 

Manzi believes that worrying too much about climate change is “to get lost in the hothouse world of single-issue advocates, and become myopic about risk,” while ignoring “lots of other unquantifiable threats of at least comparable realism and severity”. Well, I beg to disagree. While we can certainly deal with more than one risk at a time, why is it that conservatives like throwing trillions at “defense” and can focus on bird flu, but need to write off climate change? Could it have anything to do with what industries are in favor with Republicans and the White House?

Climate change differs from the other risks Manzi raises in that it is a risk that our own activities generate (not an “external” threat) – and one that we can manage by focussing on who is generating risk and asking them to bear some of the cost. Like the others, though, action is in some ways a collective choice problem, but unlike blowing trillions unilaterally on “defense”, climate change is a risk that other developed nations have shown they are willing to co-invest in heading off.

So why is continuing to be the spoiler in our national self-interest? Manzi provides the answer with a strawman:

“The loss of economic and technological development that would be required to eliminate literally all theorized climate change risk would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk.”

Those who are concerned about climate change have long concluded that we are already facing ongoing climate change, with further unavoidable change in the pipeline, so simply nobody is talking about “eliminate[ing] literally all theorized climate change risk”.

6.  Finally, Manzi trots out his own proposal, after against dismissing any carbon pricing policies (and ignoring all others, like deregulation) with un-established suppositions:

“IF there is a real, though unquantifiably small, possibility of catastrophic climate change, and IF we would ideally want some technological hedges as insurance against this unlikely scenario, and IF raising the price of carbon to induce private economic actors to develop the technologies would be an enormously more expensive means of accomplishing this than would be advisable, then what, if anything, should we do about the danger?”

Apparently, Manzi has introduced these suppositions to tone down the much firmer and more extensive proposals he has made and justified elsewhere:

“There is, however, massive uncertainty (rather than mere risk) in our ability to predict the impacts of AGW, and recognizing this reality should lead us to take at least two actions: (1) improve the science to better-specify these extreme risks, and (2) hedge this uncertainty by making “insurance-type” investments today that would provide protection if an extreme AGW scenario ends up happening.”

Manzi`s proposals? To avoid the “failed game of industrial policy” by creating a climate change DARPA with a “a very high-IQ staff” to make many small (but collectively substantial) investments related to “detecting or ameliorating the effects of global warming” that “serve a public rather than a private need” (viz., that provide “no obvious potential source of profit to investors if successful”). Manzi thinks investments of the following types are merited: “improved global climate prediction capability, visionary biotechnology to capture and recycle carbon dioxide emissions, or geo-engineering projects to change the albedo of the earth’s surface or atmosphere”. Does Manzi not see that carbon pricing, if structured to allow offsets, would encourage private investments in all of these areas?

Ironically, Manzi concludes that “attempt[ing] to use the government to control the evolution of the energy sector of the economy” is not a “prudent reaction” to risk, but “the opposite: an impractical, panicky reaction unworthy of a serious government”.

Well, Jim, nice try, and thanks for your impractical, imprudent and panicky reaction.

Jim Manzi/Cato on climate: with flabby "libertariarian sinews", he advocates no panic, but domestic climate science and technology investments

August 18th, 2008 4 comments

[UPDATE:  See my follow-up post.]

Cato Unbound’s new climate issue features a lead essay by Jim Manzi, who is an MIT- and Wharton-trained statistician and CEO of Applied Predictive Technologies (which uses pattern recognition and optimization models for sales and marketing).

Manzi is a newcomer to the climate commentary scene, but has made a splash in conservatives circles over the past year or so through a series of articles in the National Review and The American Scene.  Manzi’s bio at Cato states that Manzi’s position is that “global warming, while real, is a problem of limited magnitude, deserving a proportional response, not overreaction“.

Manzi’s essay at Cato is a polished rehashing of points that he has made elsewhere, tweaked shamelessly to appeal to libertarians, as in this lead-off paragraph:

“The danger of potentially catastrophic global warming is an almost paradigmatic case of decisionmaking under conditions of extreme uncertainty.  Of course, this is just another way of saying that many of the intellectual sinews of libertarianism are central to thinking through this problem.” (emphasis added)

While the essay is worth consideration, aside from this initial mention, it is painfully evident that Manzi’s “libertarian sinews” are rather flimsy; indeed, Manzi:

  •  makes no mention of basic Lockean-based libertarian principles (rights to property in one’s own person, in the fruits of one’s own labor, and in resources taken from nature when mixed with one’s own labor; and duties to abstain from harming others, from taking property of others, and to leave enough and as good for others when taking from the commons) that are relevant to environmental and public policy issues (see Rothbard; Edwin Dolan has laid an application of Lockean principles to climate change here; );

  • fails to acknowledge “environmental” problems as cases where resources are not clearly or effectively owned, either individually or on a community basis, so that some economic actors do not bear the costs or risks of their actions, which costs or risks are shifted to others against their will (see Cordato; Jon Adler makes similar points here); and

  • provides only a rudimentary discussion of public choice issues that, while noting both the difficulties of reaching a global agreement and that government policies to prepare for climate change may be both inefficient and hijacked special interests, disregards the possibilities that effective international steps can be taken by just a few countries and completely fails to consider the role that special interests have played to date in manipulating government policies and in protecting the “GHG emissions/risk-shifting is free” status quo.

Rather, Manzi:

(1) argues that the estimates for future damages that the IPPC derives from models appear rather modest,

(2) downplays the widespread agreement by economists (like Nordhaus) and others that standard cost-benefit analysis provides ample support for carbon pricing (particularly in the form of carbon taxes) now,

(3) argues that we cannot adequately gauge the “massive uncertainties” regarding the “danger of potentially catastrophic global warming” (addressing but failing to mention Weitzman),

(4) argues that the US should not adopt “insanely expensive” measures to “force massive change in the economy” via “rapid, aggressive emissions reductions”,

(5) lumps climate change in with other, external risks (like pandemics and rogues states, which risks, oddly, we actually try to manage), and

(6) and tones down his earlier pieces by presenting an artificially weakened case that,

if there is a real, though unquantifiably small, possibility of catastrophic climate change, and if we would ideally want some technological hedges as insurance against this unlikely scenario, and if raising the price of carbon to induce private economic actors to develop the technologies would be an enormously more expensive means of accomplishing this than would be advisable,” (emphasis added)

THEN the government might be justified in investing in “improved global climate prediction capability, visionary biotechnology to capture and recycle carbon dioxide emissions, or geo-engineering projects to change the albedo of the earth’s surface or atmosphere”.

Manzi concludes with a mix of a case for a surprisingly large government climate program (even if “rife with inefficiencies”) and a bashing of the worst case, while ignoring the middle ground:

“But consider that its costs would be on the order of 1/100th of the costs of imposing a large U.S. carbon tax. It could be massively inefficient and we would still be far better off in actually developing the long–lead-time technologies that we would want if faced with a currently unanticipated emergency.

Hedging against the risk to future generations of potential unanticipated impacts from global warming is a legitimate job for the U.S. government. Ideally, it would be tackled by the governments of the small number of countries with a sophisticated technology development capability acting in some kind of coordinated fashion. A massive carbon tax, a cap-and-trade rationing system, and the attempt to use the government to control the evolution of the energy sector of the economy are all billed as prudent reactions to this risk, but each is the opposite: an impractical, panicky reaction unworthy of a serious government.

I hope to address later various aspects of Manzi’s piece, but I think it is fair to conclude initially that it is not libertarian nor, ultimately, a balanced discussion, but rather a somewhat strange conservative position that we ought to worry about climate change and so the government should throw even MORE money at it, while refusing to harness markets to accomplish the research tasks Manzi wishes to fund or to ask those who are generating climate risks to internalize or shoulder any of the burden.

While this stance might please fossil fuel interests and their defenders, it’s hard to see what, exactly, in Manzi’s analysis – other than his opposition to “massive” carbon taxes – will appeal to libertarians.

Paul Krugman: "The only way we’re going to get action … is if those who stand in the way of action come to be perceived as not just wrong but immoral."

August 1st, 2008 2 comments

Paul Krugman reaches the above conclusion in his August 1 New York Time op-ed, which asks “Can This Planet Be Saved?”, while discussing the latest work by economists on the cost-benefit analsys of taking action to mitigate potential climate risks – this time by Harvard`s Marty Weitzman, whose work I have discussed several times before).

The op-ed certainly shows the frustration of Krugman, who was one of more than 2500 Nobel Laureate and other economists who in 1997 signed  the “Economists’ Statement on Climate Change” that  acknowledged the conclusions of the preceding IPCC report (that man was having a discernable influence on climate), asserted the economic feasibility of greenhouse gas reductions without harming the American economy, and recommended market-based policies.  Key parts of the op-ed are the following:

What’s at stake in that fight [over environmental policy], above all, is the question of whether we’ll take action against climate change before it’s utterly too late.

It’s true that scientists don’t know exactly how much world temperatures will rise if we persist with business as usual. But that uncertainty is actually what makes action so urgent. While there’s a chance that we’ll act against global warming only to find that the danger was overstated, there’s also a chance that we’ll fail to act only to find that the results of inaction were catastrophic. Which risk would you rather run?

Martin Weitzman, a Harvard economist who has been driving much of the recent high-level debate, offers some sobering numbers. Surveying a wide range of climate models, he argues that, over all, they suggest about a 5 percent chance that world temperatures will eventually rise by more than 10 degrees Celsius (that is, world temperatures will rise by 18 degrees Fahrenheit). As Mr. Weitzman points out, that’s enough to “effectively destroy planet Earth as we know it.” It’s sheer irresponsibility not to do whatever we can to eliminate that threat.

Now for the bad news: sheer irresponsibility may be a winning political strategy.

Mr. McCain’s claim that opponents of offshore drilling are responsible for high gas prices is ridiculous — and to their credit, major news organizations have pointed this out. Yet Mr. McCain’s gambit seems nonetheless to be working: public support for ending restrictions on drilling has risen sharply, with roughly half of voters saying that increased offshore drilling would reduce gas prices within a year.

Hence my concern: if a completely bogus claim that environmental protection is raising energy prices can get this much political traction, what are the chances of getting serious action against global warming? After all, a cap-and-trade system would in effect be a tax on carbon (though Mr. McCain apparently doesn’t know that), and really would raise energy prices.

The only way we’re going to get action, I’d suggest, is if those who stand in the way of action come to be perceived as not just wrong but immoral. Incidentally, that’s why I was disappointed with Barack Obama’s response to Mr. McCain’s energy posturing — that it was “the same old politics.” Mr. Obama was dismissive when he should have been outraged.

(emphasis added)

I think that Krugman has a legitimate concern about pandering to voters on energy prices, even as Krugman`s a bit too close to the political struggle to acknowledge that environmental policies of course affect energy prices, and that “sheer irresponsibility” has been a winning political strategy for as long as – well, for as long as there have been politicians.

As I have noted elsewhere, there is an extremely wide array of opinion that carbon taxes would be the most effective and least damaging approach, and, if rebated or applied to reduce taxes on income or labor, would find long-term political support, yet politicians refuse to mention them, but instead present us with monstrous giveaways like those included in the Warner-Lieberman bill (which McCain`s bill resembles).  Heck, even Exxon, AEI, RAND and the American Council for Capital Formation have come out in favor of carbon taxes! 

Krugman explores Weitzman a little more closely in a July 29 blog post at the New York Times.  That post, and the further discussions it links to, is well worth exploring.  However, one can see Krugman`s train of thought at the very end, where he asks:

The question is, can we mobilize people to make modest sacrifices to protect against low-probability catastrophes in the distant future?

He`s obviously decided over the past few days that the way to mobilize people is to let his dander fly.  While I believe that a little more sophistication is needed, I would note that Gene Callahan, at least, has argued that swinging a moral club is an appropriate weapon, even for libertarians.  I applaud Krugman for letting not only McCain but also Obama feeling some of his lash.

I note that there are some commentators already wringing their hands over Krugman`s moralizing, but they very curiously fail to comment on the very real rent-seeking (and climate risk-shifting) and PR manipulation by fossil fuel interests that lies at the core of the policy deadlock.


PS:  Some of my thoughts on the current policy deadlock are as follows:

– many fossil fuel firms want to be compensated – in the form of new pork for gigantic and iffy “clean coal” projects – for budging from their current free ride on our common atmosphere;

– fossil fuel interests, including their customer chain, have great political pull in both parties (for example, nobody is yet willing to let American car manufacturers suffer their deserved fate, and Byrd and Rockefeller have alotof pull);

– financial firms – other than insurers – all looking for a cap and trade scheme, so they can profit from carbon trading;

– many firms who see opportunities in new technologies are busy fighting for advantage in the draft legislation; 

– not least, politicans are looking for legislation that promises the greatest flow of pork and campaign contributions, and have little interest in being open or hoinest with taxpayers;

– Democrats have little stomach for leadership – at least until the American people finish hanging the Republican party over its disastrous foreign policy and obvious corruption;

– there are considerable opportunities for policies that improve our tax system and regulation of energy resources and infrastructure.  I look for Republicans to start offering them after they have completely squandered their turn at the wheel of state, and are locked again into minority status in Congress.



Bob Murphy punts on whether "Cap and Trade" is a "market solution"

July 8th, 2008 1 comment

In response to my comments last month to Bob Murphy‘s June 4 blog post, Cap and Trade Is Not a “Market Solution”, Bob has kindly noted on the blog thread his intention not to let my comments on his post remain the last word:

Just following up on an old thread here: TokyoTom, I have to pass right now on answering your (good) objections. As with Silas [aka Person], I can’t take the time to give you a really good answer, just to post on a blog.

For what it’s worth, I do plan on doing a formal response to Weitzman’s work on fat tailed uncertainty vis-a-vis climate change. And re: Silas’ objections, I might be able to justify using “work hours” to write up something for the QJAE or JLS on a free market response to AGW.

Published: June 30, 2008 2:23 PM

(link and emphasis added)

I look forward to your response, Bob.

[Updated] Bob Murphy heroically nitpicks the CBA model of reluctant carbon tax advocate, William Nordhaus

June 5th, 2008 2 comments

Bob Murphy, an economist at Rob Bradley‘s Institute for Energy Research, has posted on the main Mises Blog a link to a paper that he has submitted to an economic journal, “Rolling the DICE: Nordhaus’ Dubious Case for a Carbon Tax“.

[Update:  Bob thoughtfully copied environmental economist David Zetland on his draft paper, and while he has not returned to comment at his own Mises thread, Bob has made further comments at David’s blog and at his own shared blog.]

IER promotes Murphy’s paper as ambitiously “tackl[ing] the basic premise of pricing carbon … using William Nordhaus’ DICE model as the representative of economic orthodoxy”, but it seems to me that both his objectives and his achievements are far more modest.  Murphy:

(1) fails to attack either the fundamental premises of orthodox cost-benefit analysis as applied to climate change or the basic premises of the DICE model,

(2) focusses chiefly on various uncertainties involved in the parameters in Nordhaus’ model, while ignoring not only that such uncertainties cut in more than one direction, but that other economists have strongly argued that Nordhaus has underestimated or mishandled important damages and uncertainties (e.g., John Quiggin and Sterner & Persson) and has simply misunderstood the usefulness of CBA in the face of important uncertainties that CBA cannot easily handle (e.g., Martin Weitzman, Richard Tol, others),

(3) fails to note the point (made by McKitrick and others) that even if imperfect, carbon taxes, if substituted for income, capital gains and other taxes, will significantly lessen important economic distortions; and

(3) fails to offer much in the way of Austrian approaches to CBA, much less to the property rights and preference issues involved in economic decisions involving significant externalities or open-access common resources, fails to point to possible ways in which government policy may be inefficient, costly, and subject to the skewing effects of rent-seeking, and fails to recommend important policy changes that are needed to facilitate a transition to a lower carbon economy, by promoting economic freedom, competition in energy and power markets, easing corporate tax depreciation rules that slow innovation, and strengthening property rights and common law enforcement mechanisms (Bruce Yandle and Jon Adler have both made concrete suggestions on desirable policy changes; what is holding back people at LvMI?)

In short, what Murphy delivers is flawed and far less than billed.

[Update:  As Ludwig von Mises himself noted (see my blog post Mises on fixing externalities“), private property institutions arose in response to the economic inefficiency of older systems that did not force economic actors to bear the external effects of their actions.  We are intelligent and occasionally rational creatures – why should we not be pro-actively considering what institutions might be desirable and feasible for dealing with the effects of our activities on the atmosphere and  climate (and oceans, ecosystems and unowned species, or how to improve governance in countries that don’t recognize or protect property rights)?]

I copy below (with some typo corrections) the comments that I posted on Bob’s Mises thread; I will try to revisit later to add links and further resources:

Bob, thanks for posting this

Here are a few quick notes:

– although you note that every step in Nordhaus’ analysis involves uncertainty, you have failed to note Marty Weitzman’s recent work that tells us how strongly uncertainly serves as a factor SUPPORTING early action – an important factor that neither Nordhaus nor you take into account at all. Weitzman states, “the influence on cost-benefit analysis of fat-tailed structural uncertainty about climate change, coupled with great unsureness about high-temperature damages, can outweigh the influence of discounting or anything else.”

– while you indicate that one key area of uncertainty is that future GHG concentrations may be overstated, your observations actually suggest the opposite – that because the oceanic sink is finite, as it becomes saturated atmospheric GHG concentrations are apt to rise even more sharply.

– while you indicate that the temperature increase form a given GHG concentration may be overstated, you ignore the possibility of the opposite – that the long-term temperature impact of a given GHG level may be higher than the number Nordhaus has used. Further, given paleo evidence that Hansen has noted, it appears unlikely that climate sensitivity will be less than 3 degrees C.

– Similarly, while you note that economic damages from a given temperature increase may be overstated, you fail to address the possibility that such damages may be understated – and also fail to note that the Earth is apparently more sensitive to climate changes than has been expected, witness the rapid Arctic/Greenland melting that we are seeing at only a 0.7 C increase, and the rapid expansion of tropical zones.

– it is a distinct possibility that Nordhaus has underestimated nonmarket damages, as John Quiggin and others argue. In any case, Nordhaus does not account for the changing relative prices for various goods and services that the changing composition of the economy and climate change will induce,as Sterner and Persson have noted in a recent paper at RFF:

“future scarcities that will be induced by the changing composition of the economy and climate change should lead to rising relative prices for certain goods and services, raising the estimated damage of climate change and counteracting the effect of discounting. … [C]hanging relative prices … has major implications for a correct valuation of future climate damages. We introduce these results into a slightly modified version of the DICE model (Nordhaus 1994) and find that taking relative prices into account can have as large an effect on economically warranted abatement levels as can a low discount rate.”

– in looking at damages, you tend to focus on the US picture alone, without regard to other nations – largely poorer ones – in which greater net losses are expected to be felt. You also completely fail to address, even in the case of the US, that benefits and impacts will not be uniformly shared, and that those with net benefits presently have no obligation to compensate those shouldering losses.

– while you fairly note that Nordhaus’ analysis can be helpful in comparing the relative net costs and benefits of different proposals, you fail to note that with changed assumptions, even using Nordhaus’ model as is, much higher estimates of “optimal” levels of carbon taxes can be derived.

– You point to Nordhaus’ remarks on how free-riding be various countries will drastically affect the benefits to be derived from any carbon taxes, but argue that this itself is a justification for the US to free ride, rather than for us to work to coordinate compliance by others.

– You also seem to be very worried that a coordinated approach would actually result in heavily distorted worldwide production, when widespread noncompliance by the various Kyoto parties indicates how ready nations are not to unilaterally assume burdens that other nations will not share.

– You also express concern that any coordinated approaches to climate change may be difficult to unwind as information changes, when it is clearly that various nations (and their industries) are acutely aware of comparative advantage and quite ready to react to what others are or are not doing (in the fact of the easy movement of capital).

– Further, you have confused measures like possible geoengineering and carbon sequestration approaches – which would be incentivized by carbon taxes and are a form of “mitigation”, with what is properly considered as “adaptation” to unavoided temperature increases and climate changes.

There are of course many other points that one would like to see Austrians making – such as the benefits of freeing up the economy from burdensome regulations (while strengthening property rights and private litigation remedies), adding greater degrees of freedom and competition to energy markets to drive greater energy efficiency, allowing immediate depreciation of capital investments, and the desirability of avoiding government-directed investments and subsidies – but perhaps these are things you intend to address in another paper spelling out a truly Austrian approach, rather than nitpicking at a single conventional CBA argument?



(I apologize that this is link-poor, but it seems like the best way to actually have this comment posted.)

Published: June 12, 2008 7:49 AM

Bob, allow me to suggest that you (and others) may also wish to consider taking a look at addressing also the recent short pieces by Joe Stiglitz, Tom Schelling and Ken Arrow others in last year`s The Economists’ Voice; they are as relevant as Nordhaus, and much more accessible to the average reader:

Joseph Stiglitz, A New Agenda for Global Warming

Kenneth J. Arrow, Global Climate Change: A Challenge to Policy

Thomas C. Schelling, Climate Change: The Uncertainties, the Certainties and What They Imply About Action

Published: June 12, 2008 9:41 AM

Comment to Bob Murphy on whether "Cap and Trade" is a "market solution"

June 5th, 2008 1 comment

I copy below comments I made on June 11 (Tokyo time) on Bob Murphy‘s June 4 blog post, Cap and Trade Is Not a “Market Solution”, that have apparently been held up for moderator approval (perhaps because my three links triggered the blog’s spam defenses?):

Bob, I thank you for posting your piece from IER, which has stimulated a relatively even-tempered and productive discussion.

But allow me to express a little disappointment.  Even as I agree fully with the gist of your post (the largely self-evident and unsurprising point that politicians prefer, as an alternative the more honest, open and politically less-palatable approach of direct Pigouvian taxes of the type supported by a wide range of mainstream economists, to address the concerns of scientists, economists, business leaders and others about man’s contribution to ongoing climate change by dressing up such taxes as a “market approach” involving a cap and trade program), I think that:

(1) you unfairly conclude that, since it will be government that will be implicitly pricing carbon emissions, such pricing “won’t reflect genuine economic scarcity” at all, when Austrian approaches do not deny that lack of property rights will result in economic actors ignoring external costs, but simply indicate the government pricing of resources can only imperfectly reflect economic factors;

(2) you’ve gone to a bit of unjustified rhetorical excess with your statements that:

“[t]his is no more a “market price” than if the government decided to sell people permits giving them permission to sneeze”:  rather, it’s more like the government trying to price grazing rights, resources extraction rights or other user fees on “public lands”– yes, such prices are not market prices (and are perhaps more likely to be underpriced rather than overpriced), but that does not mean that they do not represent or at all reflect valuable resources.

“Cap and trade is not a market-based solution” – while not a true market solution, a cap and trade approach is clearly one that makes use of markets.

– “Cap and trade … can therefore be justly viewed as a tax, stealthy or otherwise, on energy – the lifeblood of our economy” – this not only overbroad, as it would only tax certain types of energy, and overdramatic, it completely ignores the point that certain activities (a wide array not limited to combustion of fossil fuels, including release of other GHGs) are perceived as adversely affecting (now and in the continuing future) many within the country as a result of externalities involving an open-access and unowned and unmanaged commons, which is precisely what expressly motivates (actually or allegedly) so many – including many in your profession – to support Pigouvian approaches;

(3)  surprisingly, you failed to take the opportunity to add to the discussion by informing your readers of Austrian concerns, including the following:

– the calculation problem;

– whether, as you note it posting here, there is any reasonable basis to “trust governments around the world to implement the scheme ‘properly'” (by exploring problems with rent-seeking and bureaucratic incentives);

– whether it is desirable for the government to presume that it should act as the owner of the atmosphere in creating emissions rights (as opposed to citizens generally or long-standing/homesteading users of fossil fuels), and the related ethical issue of creating rights to emit that cut off those who may be harmed from any direct remedy (such as a share of the proceeds of the sale of rights); and

– the underlying institutional problem of lack of clear or enforceable property rights (for which past interferences by government have some responsibility); and

– whether growing concerns (and private responses) regarding the shared global issue (affecting nations with different circumstances and legal systems than ours) of increasing GHG emissions might be addressed less expensively and more rapidly by voluntary actions and national and international litigation rather than by coordinated action by various governments and implemented by individual nations.

None of these points is easily addressed, but they would help to provide a Austrian framework that may be useful to your readers. 

(4)  Finally, it is disappointing that you completely failed to take on any of your mainstream colleagues (such as those in Gregg Mankiw’sPigou Club” who support either carbon taxes or cap and trade approaches. 

I understand that you’ve got a paper in the works addressing Nordhaus, but he’s hardly the only one writing specifically on climate change; I hope you will also be looking at Marty Weitzman at Harvard, Richard Tol and a few others noted here and here:



Richard Tol and Marty Weitzman on The Costs of Ignoring Carbon

December 15th, 2007 No comments

There is a new paper out by economist Richard Tol that summarizes all of the economic work on climate change over the past two decades, in light of recent analyses, particularly the ground-breaking new work by Harvard’s Marty Weitzman on how the “fat tail” of climate risk affects cost-benefit analysis.  Tol is attached to the Economic and Social Research Institute (Dublin), the Institute for Environmental Studies, Vrije Universiteit (Amsterdam), and the Department of Engineering and Public Policy, Carnegie Mellon University.


 Tol`s conclusions?

There are three implications.

Firstly, greenhouse gas emission reduction today is justified. The median of the Fisher-Tippett kernel density for peer-reviewed estimates with a 3% pure rate of time preference and without equity weights, is $20/tC. This compares to a future price of carbon permits of $8/tC in the European Union (and a spot price of ¢3/tC).  The case for intensification of climate policy can be made with conservative assumptions. One does not have to rely on dodgy analysis as in Schneider et al. (2007) and Stern et al. (2006).

Secondly, the uncertainty is so large that a considerable risk premium is warranted. With the conservative assumptions above, the mean equals $23/tC and the certainty-equivalent $25/tC. More importantly, there is a 1% probability that the social cost of carbon is greater than $78/tC. This number rapidly increases if we use a lower discount rate – as may well be appropriate for a problem with such a long time horizon – and if we allow for the possibility that there is some truth in the scare-mongering of the gray literature.

Thirdly, more research is needed into the economic impacts of climate change – to eliminate that part of the uncertainty that is due to lack of study, and to separate the truly scary impacts from the scare-mongering. Papers often conclude with a call for more research, and often this is a call for funding for the authors or a justification for further papers by the authors. In this case, however, quality research by newcomers in the field would be particularly welcome.

Tol drew these conclusions from the principal results of his research, which were as follows:

Besides more data and more advanced statistical analysis, this paper offers four results.

Firstly, there is a downward trend in the estimates of the social cost of carbon – even if the IPCC (Schneider et al., 2007) would like to believe the opposite.

Secondly, the Stern Review (Stern et al., 2006) is an outlier – and its impact estimates are pessimistic even when compared to other studies in the gray literature and other estimates that use low discount rates.

Thirdly, the uncertainty about the social cost of carbon is so large that the tails of the distribution may dominate the conclusions (Weitzman, 2007) – even though many of the high estimates have not been peer-reviewed and use unacceptably low discount rates.

Fourthly, if everyone were to pay a carbon tax equal to the social cost of carbon (but not reduce emissions), there is a fair chance that annual taxes would exceed annual income for many people.

(emphasis added)

The recent Marty Weitzman paper that Tol refers to is here:

Marty Weitzman: “On Modeling and Interpreting the Economics of Catastrophic Climate Change”, December 5, 2007 [Update: Weitzman has revised; the latest version is dated Februaru 8, 2008];

Categories: AGW, carbon pricing, climate, CO2, Tol, Weitzman Tags:

"Heroic" contrarians, proven wrong on AGW, make another slick cry for relevance at Bali

December 14th, 2007 No comments

On the main blog, Sean Corrigan posts the latest missive of what he considers the brave dissenting voices on climate science.

The letter nods briefly at the concerns summarized by the IPCC reports about warming and the role of human economic activity, and raises good issues about how global society should react, including the respective merits of public policy and private measures directed towards mitigation and adaptation.

But Sean does not examine any of these issues, but simply (i) touts the supposed “heroism” of the dissenters, (ii) complains about the supposed unfairness of the Bali conference sponsors (the 180+ states that are party to the UN Framework Convention on Climate Change) for not providing them a soapbox, (iii) cries about the supposed hysteria of the UN Secretary General (Mr. “Barking-at-the” Moon”!) [okay, points for being clever, anyway] and (iv) finally, for good measure, tries to sweep away the undeniable and rapid climate change in the Arctic with a link that tells us about a possible localized factor but nothing about the wider scale changes, which just MIGHT be due to the fact that air temperatures over the Greenland ice sheet have increased by about seven degrees Fahrenheit since 1991

Interestingly, while Corrigan seems to think his ongoing rants on “carbolic socialism” helps to clarify the issues and the interests of all parties, he constantly fails to note how a large and powerful group of rent-seekers packages the items that he swallows whole. In this case, only a modicum of research shows that these brave dissenters have been smoothly packaged by yet another new “grassroots” organization established to influence policy for the benefit of energy interests.

The whole issue deserves much better discussion, but it seems that many Miseseans are fundamentally not interested, either in conducting a serious analysis or even in being taken seriously.  Instead, they would rather be taken in, either by one group of rent-seekers or by themselves, by swallowing all manner of uninformed science (see my preceding post;  This kind of cantankerous self-delusion and naivete is hardly the best way to show the strengths of Austrian analysis to the world.

I`m getting tired of what I see as the Mises blog fundamentally counterproductive approach to this and related problems – which surely will NOT go away until some sort of management regimes are extended to important global and regional open-access “commons”.

Below is a copy of my initial response on Wrong-Way Corrigan`s thread: [snark on]

Heroes, Sean? Really?

This is an eclectic group (weighted towards social sciences and others outside of climate science) but still more like a bunch of grumpy emerituses who have been wrong time and again over the past thirty years (and don`t even agree with each other) but now wish to assert relevance by reluctantly conceding that change is in the cards and arguing that, given our long delay, sunk costs in current infrastructure and long lead times to change changes, our best course is to simply start getting ready for the ride.

Well, if even these folks think we need to start getting ready, then perhaps even the most skeptical should admit some slight concern. (I note that climate science “skeptics” John Christy and Pat Michaels didn`t sign on; can you guess why?)

 – Our most respected scientific bodies have been stating unequivocally that global warming is occurring, and that human economic activity is a significant factor. The U.S. National Academy of Sciences, which in 2005 the White House called “the gold standard of objective scientific assessment,” issued a joint statement with 10 other National Academies of Science saying “the scientific understanding of climate change is now sufficiently clear to justify nations taking prompt action. It is vital that all nations identify cost-effective steps that they can take now, to contribute to substantial and long-term reduction in net global greenhouse gas emissions.” (Joint Statement of Science Academies: Global Response to Climate Change [PDF], 2005);

I know; they and all of the other scientists who participated in the IPCC process are all hysterical misanthropes, whom freedom-loving rationalists can sweep away, in favor of this hero`s lot, who are now clearly changing tactics to argue adaptation instead of mitigation. (The lack of stomach in this second group is enough to make one wonder whether we might be better off without ALL scientists, isn`t it?)

– You and others are good at pointing out evil and rent-seeking motives on the part of everyone you disagree with – practically everyone now, it seems – but do you ever to trouble to notice how you`re being played by this letter? Like a string of others (this is the fourth in the past five years), it was started in Canada, organized and pushed by smooth PR professionals via a sophisticated vehicle (that are designed to provide “balance” while conducting “grassroots” campaigns) that clearly has significant backing from energy interests; this campaign differs in that it was perhaps more polished – for example, though the core signers remain the same over all four letters, this one was “by invitation only”:;;;

While energy firms have entirely legitimate interests, they too are rent-seekers and it behooves one to note that when they speak they certainly have their own interests in mind. Even more so when they try to hide who they are and pretend to be impartial, grassroots groups concerned only about the pubic interest.

– The letter itself argues that we’d be better off adapting to/managing the effects of climate change rather than trying to prevent it. This is no slam dunk, but clearly there are more iummediate returns from investments in adaptation than in trying to mitigate future climate change. But serious standard cost-benefit analysis has clearly shifted in the past two years to the conclusion that investments in mitigation also make sense:


Marty Weitzman/Harvard: “On Modeling and Interpreting the Economics of Catastrophic Climate Change”, December 5, 2007;

Richard Tol: “THE SOCIAL COST OF CARBON: TRENDS, OUTLIERS AND CATASTROPHES”, August 9, 2007;; Yohe, G.W. and R.S.J. Tol (2007), Precaution and a Dismal Theorem: Implications for Climate Policy and Climate Research,

These are the papers that the policy crowd is reading.