The Science May Be Settled, But the Economics Isn’t

(Photo: Climate and Ecosystems Change Adaptation Research University Network)

(Photo: Climate and Ecosystems Change Adaptation Research University Network)

The world’s scientists affirmed last week their increasing certainty—95% confidence—that humans are causing global warming by emitting greenhouse gases.

With human culpability all but certain and the potential for warming by 4.5°C in 100 years, economists can’t decide what should be done about it, or even whether any substantial effort should be undertaken to stop it.

In delivering a keynote address to a large group of economists this summer, Harvard’s Marty Weitzman described climate change as a hellish problem that is pushing the bounds of economics.

A year earlier, addressing an annual meeting of environmental economists, MIT professor Robert Pindyck suggested there was no strong economic argument for costly, stringent policies to halt expected warming. In contrast to the near certainty of climate science predictions, Pindyck said the economics of climate change is not well charted and that the case for aggressive climate policy relies on assumptions not supported by consensus.

Pindyck and Weitzman aren’t “denialists” and they do favor some kind of policy response, as does the veteran economic advisor to Republican Presidents and aspirants, Greg Mankiw, a Harvard colleague of Weitzman who has repeatedly taken to the pages of The New York Times to advocate a carbon tax. But with a humility not common in the profession, economists acknowledge that the cost of even 5°C warming over 100 years is uncertain, and, as Pindyck says, perhaps unknowable for the foreseeable future.

The economic rationale for government policy requires that it generate benefits to society that are likely greater than the costs it imposes. Carbon emission abatement is intended to reduce the likelihood and extent of global warming, providing benefits in the form of avoided future costs. The loss in social welfare due to global warming is difficult to measure in large part because of uncertainty about how humans (and other species) will adapt to stresses imposed by climate change.

Will farm yields inevitably decline as the earth warms, or will new plant breeds be developed to tolerate the changes? Will heat-related deaths increase, or will humans be able to migrate and innovate fast enough to keep up with climate change? If environmental capital declines as other species suffer and ecosystems collapse, can they be substituted by physical and human capital?

Even if the social welfare costs of climate change can be reasonably estimated, they are likely to occur well into the future—100 years from now or more. That means the benefits of any carbon emissions reductions today will not accrue for a long time, while the bill comes due immediately in the form of foregone economic growth.

Because of human impatience, benefits 100 years from now are worth less than benefits accruing today. Even a 2% annual discount rate suggested by market behavior, diminishes the present value of climate policy benefits to a level almost surely exceeded by present value costs. But such a discount rate suggests current generations place virtually no value on benefits accruing in the 23rd century.

That’s wrong, argues Nicholas Stern, an economist at the London School of Economics, who advocates, instead, that a much smaller discount rate—0.1%—be used to value projects that span many generations. To do otherwise supposes that the welfare of our great-great-great-grandchildren is unimportant to us, or that they are worth less than us.  That may be, Pindyck concedes, while noting that such arguments rest fundamentally on moral grounds not typically the domain of economists.

Even the moral argument is not without critique. With just a 1% real annual rate of growth, global per capita income rises from about $12,000 today to $77,000 by 2200. Even if climate change damages shrink the economy by 13% by 2200, as some have suggested, our distant descendants will be five times richer on average than we are. Are we to sacrifice our relatively modest wealth so they might be six-times richer that us?

And even if we are to value future generations as Stern suggests and morals may dictate, then are we not better off bequeathing them an economy that has grown unencumbered by carbon policy for a century or more? Thereby bestowing upon future generations greater wealth with which to battle climate change using the modern technologies of their time? Perhaps, but economists don’t even speak with unanimity in asserting that carbon regulation will slow the economy. And though they are accustomed to evaluating likely outcomes, most concede that catastrophic and irreversible global warming, possible if improbable, changes everything. An insurance policy against such outcomes may be in order.

The IPCC is due to release a report on the social costs of warming next year. Expect its authors to exhibit less certainty in their results than those who reported on the climate science last week, and don’t expect an economist to soon say, “The economics is settled.”

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  1. Daniel says:

    Even more to the point, what are the economic BENEFITS of global warming? With warmer temperatures, new landmasses will be available for development, heating costs will go down, snow removal will go down etc… Can we even reasonably conclude that there is a net cost to global warming or is there still the possibility that it might be economically beneficial in the long run?

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    • Joe J says:

      Well in looking at history, warmer temperatures, for example the Medieval Warm period was a time of economic boon to much of the world. The cooling time resulted in the spread of diseases, history now calls it the Dark Ages.
      The past 100 years has supposedly seen a temp increase, difficult to say if we did not have said increase would the economy be better or worse.

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    • James says:

      But those short-term “benefits” will be vastly outweighed by short-term costs. As for instance the “new” land area will be more than balanced by land lost to rising seas & desertification. Most of it will be bare rock instead of fertile soil. Lowered heating costs will be more than balanced by increased airconditioning costs. Decreased snow removal will be set against loss of ski revenue. And so on down the list. The bottom line is that change always costs money.

      Then, when/if you pull your head out of the short-term thinking sand dune, there are other issues. How, for instance, do you properly account for the economic cost of the extinction of all vertebrate life forms, which will happen in something on the order of 500 years under current scenarios?

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      • Paul K. Ogden says:

        James, you’re actually suggesting that reduced snow removal costs will be offset by decreased ski industry revenue? Those things can’t even be remotely comparable in terms of the dollars involved.

        Same with heating verses AC. It’s a lot cheaper to cool a building 15 degrees than the temperature is outside versus heating it 40 degrees than the temperature outside. I rarely have to run my AC in the summer. I use the heat every day in the winter.

        As far as extinctions go, animals have been going extinct throughout human history. The notion that because the temperature rises all vertebrate life will go extinct is pure silliness.

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      • James says:

        It may well be cheaper to cool 15 degrees rather heat 40 (though with properly-designed solar space heating, I wouldn’t be so sure…). However, it is not cheaper to cool 40 degrees than to heat 40. Compare apples to apples, you know :-)

        While specific costs depend on where you live, and how you design & build your dwelling, A/C costs more for the same temperature change from ambient. This is just simple science & engineering.

        Note that I did not claim that snow removal costs are exactly balanced by ski industry revenue. (I honestly don’t know what the costs are, and a bit of googling was no help.) My point was that everything you claim as a benefit has costs to be set against it. Perhaps in some instances the costs outweigh the benefits, while in other instances the reverse is true. But overall it seems pretty clear that total costs far outweigh total benefits.

        As for verterbrate life going extinct in ~500 years, that is not silliness, it is a pretty likely scenario. See for instance the Permian-Triassic extinction event, and reflect on the fact that the most likely cause – burning of large coal beds triggered by volcanic eruptions – is quite similar to what is happening with fossil fuels today.

        You may choose to disbelieve, but reality doesn’t care a whit about whether you believe or not.

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  2. Jason says:

    One only need look at Social Security and Medicare to see that, yes indeed, we do not value the situation of our descendents over ourselves.

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  3. Paul K. Ogden says:

    I don’t agree with the assumption…that it’s settled that man is culpable for global warming. Actually it is true that man is certainly culpable for SOME global warming, hence the 95% on that score is believable. But the devil is how much. Quite possibly man is but a bit player in warming and things like increased solar activity is responsible for most of it. Let’s not forget that it is undisputed even among warmists that the vast majority of the CO2 in the atmosphere is from natural sources not man made activity. Then you have the fact that historically CO2 increases follows temperature increases, not leads it.

    But this article is about economics and global warming. So sorry to go off track on my rant.

    A problem with gloom and doom of the warming theory is the assumption is that today’s temperatures are the ideal and that any warming would be bad. In fact, the Earth has been warmer than today and mankind did very well during those warmer, pre-industrial times. For example, I wish you would have focused on the facts that many areas that are now too cold, with short growing seasons will become more productive when it comes to agriculture.

    You kind of suggest that in your article, but “Daniel” below outlines it extremely well. A warmer climate will have enormous benefits that the warmists never want to quantify. It’s bad, bad, bad…I tell you all bad, is what we constantly hear. There is a reason why retired people flock to Florida and not Minnesota. Most people like warmer climates. It’s not insignificant that major plagues that have mankind have almost all occurred during periods when the climate cooled signficantly.

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  4. RHolt says:

    Hidden due to low comment rating. Click here to see.

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  5. Adam says:

    My read of this is very troubling.

    Economists need not tell us whether to care about our grandchildren. And I have zero-confidence in their ability to predict the wealth of those kids. Someone told me that predictions are not very reliable.

    We need to decide as a society that we’re going to fix the problem and use the economists to help us figure out the most efficient way of doing that.

    There may be some benefits to climate change, Daniel, but I think most will suffer more with the changes. Trashing the environment for our generation’s gain and the next’s loss seems like a crappy thing to do, why can’t these economists figure that out?

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    • emw says:

      “Someone told me that predictions are not very reliable. ”

      And that includes what will happen as the earth warms. From this vantage point, we really can’t tell if the bad will outweigh the good, or vice versa. And since we don’t know what is going to happen, it is hard to tell exactly what a good fix is, or even to know for sure what the exact problem is.

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  6. J1 says:

    ” In contrast to the near certainty of climate science predictions”

    Climate science predictions are all over the place; they can’t all be nearly certain.

    “Will farm yields inevitably decline as the earth warms, or will new plant breeds be developed to tolerate the changes?”

    Or will farm yields increase?

    “To do otherwise supposes that the welfare of our great-great-great-grandchildren is unimportant to us, or that they are worth less than us”

    The welfare of things that may or may not exist in the future, that most likely will adapt to the changes we’re trying to regulate, is not worth greater economic hardship now which we know will kill people.

    “catastrophic and irreversible global warming, possible if improbable, changes everything”

    Baloney. It’s possible but not probable our ancestors will face a “Planet of the Apes” world too, but that doesn’t justify measures now to actively prevent such an outcome. There’s no outcome that has zero likelihood; trying to protect against all of them is foolish and unrealistic. We don’t even know whether the worst case global warming scenario will have a net positive or negative effect. We’d be better off spending our economic output on any number of other risks such as fighting against new disease, poverty or defending a against a meteor strike, things that are either happening already or almost certainly will, and will definitely have a negative effect.

    “The world’s scientists affirmed last week”

    How many scientists are actually qualified to pontificate on this subject, and how many of them believe the science is settled? Bear in mind, expertise in predicting the likely effects of global warming is not expertise in predicting whether global warming will actually happen, and vice versa. Groupthink can occur even in the highly educated (in fact I think Keith Stanovich determined that it’s actually more likely in that demographic), and it can certainly affect acceptance of various premises advocated by your peers. Well, except when it conflicts with your politics. Virtually every PhD I know who scoffs at the idea that the earth was created by God 6000 years ago nevertheless believes that collectivist economic systems can work. However ridiculous you may find the former, the case against the latter is considerably stronger. Is either belief any less religious than the other? Maybe the apocalyptic assumptions associated with global warming are religious too.

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  7. Kevin P. says:

    The Holy Consensus of Settled Science rears it haloed head again…

    Top MIT scientist: Newest UN climate report is ‘hilariously’ flawed

    Read more:

    A top climate scientist from the Massachusetts Institute of Technology lambasted a new report by the UN’s climate bureaucracy that blamed mankind as the main cause of global warming and whitewashed the fact that there has been a hiatus in warming for the last 15 years.

    “I think that the latest IPCC report has truly sunk to level of hilarious incoherence,” Dr. Richard Lindzen told Climate Depot, a global warming skeptic news site. “They are proclaiming increased confidence in their models as the discrepancies between their models and observations increase.”

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  8. Adam says:

    How does economics deal with risk?

    Not by putting it’s head in the sand and saying it can’t do anything about it.

    Climate Insurance is an option, but we saw how well that marked worked in the case of AIG.

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