Common Tragedies

Thoughts on Environmental Economics

Cool It, by Bjorn Lomborg

Posted by Daniel Hall on October 12, 2007

I just finished Lomborg’s latest. Several excellent reviews have already been written: I particularly commend this review from Salon, Partha Dasgupta’s thoughts, and, finally, the inimitable Tyler Cowen.

There’s so much quality there I hesitate to add anything, but I think I can provide a couple additional thoughts.

First, to my mind this is most important and interesting thing the book says:

At the end of the day, if cutting CO2 costs twenty dollars per ton, the rich world might be willing to make some — if often symbolic — cuts at high price, but it is extremely unlikely that China, India, and the other developing countries will get on board. What we need to do to tackle climate change is to make this cost drop dramatically. If we could cut CO2 for, say, two dollars per ton, it would be much easier to get everyone to cooperate on massive cuts.

This is why I suggest that a much more appropriate response to climate change would be a worldwide commitment to R&D for non-carbon-emitting energy technologies, aiming to lower the costs of future CO2 cuts. …

We should commit ourselves to spending 0.05 percent of GDP in such R&D… .

Although an emphasis on R&D is sometimes mocked as a tactic for delaying cuts in emissions — perhaps because of its association with certain current world leaders — there is actually a strong economic case for R&D subsidies. For example, see the literature review of research on R&D spillovers at the bottom of page 4 of this paper: it suggests that the social return from R&D is around 4 times greater than the private return, suggesting that there are large under-incentives for private firms to invest in the socially optimal level of R&D.

I think the other rationale for such an R&D effort is that placing a politically tractable price on emissions right now — through a carbon tax or cap-and-trade system — could likely produce emissions cuts of 10 or 20 percent. However, in the long run, if we want to make deep emissions cuts — 80 percent or more from current levels — this will happen only with either truly large, expensive, and probably infeasible emissions prices, or through some technological breakthroughs that transform how we produce and use energy in ways that are accessible and relatively inexpensive. I think Lomborg is correct to point out that it is far more likely that the increasingly important developing world will only substantially participate in emissions cuts in the latter scenario.

Here are ten more things I think I think, about the book and otherwise:

1. As all the reviews above note, in presenting why global warming doesn’t warrant all that much concern, Lomborg focuses entirely on the most likely outcome, not the expected value. This could be a severe under-estimate if there are long, fat tails. And this may be — should be? — a serious concern for society: running, say, a 5% risk of living in a world that is terra incognito may be more than we want to take.

2. Climate science is still an emerging field, and climate models are not great at quantifying the range of potential outcomes and the uncertainty. We could very likely be facing off-model risks, or unknown unknowns. This implies that we are going to have a hard time saying whether we are running a 5% or a 0.0005% chance of catastrophe. Further, my sense is that economics is still struggling to develop appropriate tools to handle strongly non-linear, high impact, low probability, and high uncertainty events (“Black Swans“, if you will). This is not to say that we should necessarily have one policy or another, but the mindset of people who think about this issue needs to move away from thinking only about the most likely scenario.

3. Many discussions of climate policy come down to weighing near-term costs against long-term risks and benefits, which implies a question of discount rates. As Tyler Cowen pointed out, this a question not just of economics but of moral philosophy. I am personally sympathetic to very low rates of time preference — why should I count for 4 times more than my grandchildren? — but I also understand that economists use discount rates because they capture the very real trade-offs we as a society face: investing in this means that we are giving up investing in that.

4. Speaking of which, the tension throughout Lomborg’s book is that the dollars we’re spending on emissions mitigation are dollars that we’re not spending on other good things, mostly aid to help the poor. I agree that there are many things which we can do to help the poor more than reduce GHG emissions — HIV, nutrition, malaria, etc. — and that these things should be done. Further, I appreciate the reality of imposing some sort of budget constraint. However, surely we can have a dialogue about all the items that we spend money on — the military, health care, Social Security, aid, etc. — and not make the comparison strictly between aid and climate policy.

5. Lomborg focuses mostly on doing good for people, a view I generally agree with — I tend to be anthropocentric (about?) myself — but isn’t there great value to many of our ecosystems as well? Being a realist (pessimist?), however, I think we should get as much visual documentary evidence of the Great Barrier Reef as we can in the next few years; hopefully it will satisfy the grandkids.

6. Lomborg’s main policy prescription for addressing greenhouse gas emissions sounds mainstream and humdrum (in a good way) to environmental economists: have a carbon tax.

7. Lomborg’s preferred carbon tax — the one that he thinks would adequately capture the externalities from GHG emissions — is $2 per ton of CO2 emissions. My sense is that this is on the low side of what most resource and environmental economists who specialize in this area would recommend. I suspect that you could find lots of agreement within a range for near-term prices of about an order of magnitude lower than the Stern Review — or $8.5 per ton CO2 — and an order of magnitude higher than Lomborg, i.e. $20 per ton CO2.

8. The policy prescriptions and the tone are at odds throughout. You could randomly flip to any page in the book and you’d probably read something about how warming is going to be good (or only very mildly bad) for humans. But the policy prescriptions, as noted, are prosaic and mainstream — a carbon tax, R&D funding — and Lomborg repeatedly states that climate change will be bad on balance. He just doesn’t talk about why.

9. Lomborg’s “opponent” throughout the book is the climate change alarmist who has apparently — in Lomborg’s view — captured the public discourse and created an impetus for extreme, expensive measures. Perhaps this breed of activist exists and thrives in the Old World (I don’t have enough European experience to say), but over here in the U.S. of A. I would not say that the patients have taken over the hospital to anything like the degree that he presents. They may get to write the draft proposals in some Congressional offices, but these are not the bills that anyone is taking seriously.

10. Many of Lomborg’s proposals for how to do more good involve strategies that could reasonably be grouped under the broad banner of “adaptation”: don’t build lots of of valuable property in the paths of hurricanes and floods, create better services for public health, etc. I very much agree. Given the uncertainties we face about what climate change will be like, investments in adaption will typically make sense because they will still be valuable under a very wide range of outcomes, from milder-than-expected impacts to all but the worst scenarios.

To bring it back to the beginning, however… adaptation won’t be worth much if the world changes so drastically that we can’t adapt. That risk may be small, but we should still take it seriously.

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