"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Tuesday, June 10, 2008

Uncertainty Does Not Call For Inaction

There's an array of economists expressing positions about climate policy in a special issue from 2007 of the web journal Economists' Voice.

While I fail to see any special expertise in the article by Nobelist Thomas Schelling, I find his argument cogent. It's a relief to see somebody besides myself making at least this point:
Now the critical question: what does uncertainty have to do with the question, proceed with costly efforts to reduce CO2 abatement in a hurry, or wait until we know more?

In some public discourse, and in sentiments emanating from the Bush Administration, it appears to be accepted that uncertainty regarding global warming is a legitimate basis for postponement of any action until more is known. The action to be postponed is usually identified as “costly.” (Little attention is paid to actions that have been identified as of little or no serious cost.) It is interesting that this idea that costly actions are unwarranted if the dangers are uncertain is almost unique to climate. In other areas of policy, such as terrorism, nuclear proliferation, inflation, or vaccination, some “insurance” principle seems to prevail: if there is a sufficient likelihood of sufficient damage we take some measured anticipatory action.
(Emphasis added.)

I go further than this, though. I argue that the less clear the science is, the greater the implied rational response to a credible threat. If we lack information about the safety of a particular action, typically we proceed with extra caution. It is as if the delayers want us to drive more recklessly because it's dark and foggy and the highway lights are out. After all, it's much harder to demonstrate the existence of a threat under such conditions, isn't it?

This is why defending the science is not the right way to defend vigorous policy. When someone points out to you the weaknesses in climate science, if you aren't well versed you are probably best off reframing the debate. "Look, we know there's SOME effect of all these human activities, right? So if the climate scientists are wrong, they could just as easily be UNDERESTIMATING the problems!"

I also like Schelling's argument against the "precautionary principle", the irrational argument that all activities should be based on fearing the worst, summarized as "never do anything for the first time". His concluding paragraphs:
How should we respond to that kind of uncertainty? Wait until the uncertainty has been resolved completely before we do anything, or act as if it’s certain until we have assurance that there’s no such danger?

Those two extremes are not the only alternatives!

A lot of the usual interesting questions about the uses of expertise in a democracy ensue from this conclusion, and Schelling does not take them on. In practice, though, we will continue to see a great deal of skepticism directed at climate science.

What would be the consequence if that skepticism were valid? In, short, what if rather than a factor of two, our uncertainty about the global temperature sensitivity were uncertain to a factor of ten? Then rather than looking at 1.5C to 6C per doubling we'd be looking at 0.3C to 30C. Neither of these outcomes strikes those of us familiar with the territory as plausible, but the point is that starting from an assumption of intellectually weak climatology, they are roughly equally probable. That would bring us into a world where total or near-total extinction is a substantial risk. It would dominate the calculation.

Rational behavior is risk weighted. What is widely missed is that the less confidence you have in climate science, the less the risks are constrained and thus the more you should be weighing the severe risks in your risk-weighted decisions.


tidal said...

Michael, a good topic.

In fact, I'd suggest that "action in the presence of deep structural uncertainty" or "the economics of fat-tailed catastrophes" may be the most important issue in current debates about the economics of climate change. (Unfortunately, I don't think Schelling is the guy you really want to go to for guidance. I'll commment on briefly that at the end of this post.)

Rethinking Climate Policy points to a good webcast of an event where the issues you highlight are hashed out amongst various economists and policy advisors. It was held by the AEI-Brookings Joint Center last November.

If you go to that link, you can then initiate the webcast by clicking on "video" in the "Event Materials" box in the upper right. For the "on-topic" info for your current post, tab to the Martin Weitzman presentation. Then I would suggest skipping to the Q&A after that. Weitzman gets cut off a bit in his presentation proper, but elaborates further in the Q&A which is almost all him. Some of Weitzman's line of thinking mirror Michael's post, and I really recommend the talk and Q&A.

I was simultaneously encouraged by his efforts to move the debate about uncertainty forward, frustrated with the limitations that he highlights in the existing economic models, and somewhat depressed by the complexities implicit in resolving all this.

If the discussion prompts you to read Weitzman's paper, it's here: On Modeling and Interpreting the Economics of Catastrophic Climate Change - it's actually fairly accessible with quite basic understanding of economics and climate issues. The economics math is not that daunting, but you don't need to dive in to get the gist. Here are some excerpts: "At least potentially, 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... all of this translates into placing severe limitations on the reliability of policy advice coming from standard cost-benefit analysis (CBA) of climate change; the conventional economic advice of spending modestly on abatement now but gradually ramping up expenditures over time is an extreme lower bound on what is reasonable rather than a best estimate of what is reasonable; removing the artificial limitations on conventional CBAs that comes from excluding very-high-impact disasters is capable of shifting a more inclusive economic-welfare analysis strongly away from the gradualism of a climate-change policy ramp."

A brief word about Thomas Schelling, who makes the "concluding remarks" presentations at the conference. I find him underwhelming in this case. Further, he makes some rather bizarre assertions towards the end that tip his hand. From notes I made last fall, starting at 4:31:00, Schelling ~ "I think it is very hard to find dangers to US productivity due to future climate change... Almost everything - manufacturing, electronic transmission, healthcare, education - all of these things can be done in any state of the union, whether it is Alaska, or Louisiana, or Florida or Massachussets. Even a lot of professional sports have gone indoors the way turkeys and chickens have gone indoors recently. It's really only farming, fisheries, forests and outdoor recreation that are going to be seriously affected by climate change in the United States. Outdoor recreation will very likely to be improved. A lot of people worry about what to ski on when the snow melts, but who knows what we will be skiing on anyhow in 50 years, snow or not... Farming - the US portion of GDP represented by the value food and fiber as it comes from the farm is only 3% of our GDP. And that's true of almost all of the developed countries - Japan, Israel, France. Farmers have a political influence way beyond their participation in the economies of their countries... We have every advantage - the rich..." I wish I could say I am making these quotes up, but that is basically exactly what he rambles on about at that juncture. If you listen, you can confirm these quotes. Yeah, he makes some decent points elsewhere in his talk, but I don't think this is the guy you want leading the charge on what action we need to take under uncertainty!

More Schelling: He ~suggests that "there is not much hope in trying to change the way 6 billion people cook their food and transport themselves and warm themselves" - and puts a lot of hope in geoengineering and CCS. The second question he fields after his talk begins: "Beyond geoengineering and beyond carbon capture and storage, assuming the world went down the misguided path of mitigation as you've just been describing..." He doesn't attempt to "correct" the questioner... Anyway, like I said, he makes some ok points, but I was underwhelmed - very underwhelmed...

Michael Tobis said...

Thanks. Not terribly surprising.

I am sure my middle counts for a lot more vigorous action than his middle.

I'm mostly arguing that increased uncertainty implies increased action, though, so the arguments from naysaying about climate science to naysaying about climate policy simply don't hold water.

Stating that uncertainty is not reason for inaction is a good start. I am going further. Those who argue we are most severely uncewrtain should be arguing for a more vigorous policy.

You could, for instance, call Joe Romm a skeptic (if the word hadn't been so abused, anyway). He thinks there are big risks unaccounted for by the consensus, and so he is especially adamant about action.

That makes vastly more sense than saying the models are worthless, and so we should do nothing! If the models are worthless, we could equally be in much bigger trouble.

This ties back to what economists think. It's so foolishly linear, as if we were talking mostly about the plight of ski resorts!

tidal said...

Are you focussing more on the "Schelling" part of my comment? I don't know if you listened to the initial Weitzman lecture. I hope you do because when you say "I'm mostly arguing that increased uncertainty implies increased action" - I think that is just a succinct way stating Weitzman's conclusion...

Michael Tobis said...


It's a risk of making two points in one article. I need to learn that one myself :-)

First glance at Weitzman looks promising.

Steven said...

Admittedly I'm skimming.

Are you saying that you daily act as if you are preparing for the least likely actuarial possibilities that your insurance covers?

Do you assume that a comet will fall on your house, you will get hit by a car, and get cancer in the same day?

We pay less for the distributed risk of things that are less likely, or uncertain.

Uncertainty, if you want to apply a multiplier could make likelihood half just as well as it could double.

If we think the possibility is 100, and we're uncertain, the possibility (real) could just as well be 50 as 200.

I don't know anyone who lives their daily life according to the least likely and least certain possibilities. that would be bizarre.

Michael Tobis said...

Steven, it would be bizarre, and that is not what I am saying at all.

I suppose one could make a case that this is exactly what the "precautionary principle" is saying. It doesn't work, essentially making any progress illegal.

There is a middle ground though that accounts for severe risks without being dominated by them. That middle ground accounts for people buying insurance policies.

I've thought of a way to elaborate on this. Stay tuned.

Steven said...

I will, this is definately an area I'm interested in.

Aside from Surowiecki's book, I've already been thinking along lines of macro-economic concepts, betting pools and markets, insurance and actuarial data.

The precautionary principle doesn't seem to make sense to me as Chrichton and Lomborg have articulated very well. (Whether or not you grant any of their other points)

Speaking of Lomborg. You mentioned that a better way to critique the pro-AGW side, would be to produce a better model. I think BTW that's and excellent point and worth doing. (I think Spencer says he is actually doing this. Though he worries me with his constant talk of "God".)

In that same vein; I would offer that a better way to criticize Lomborg would be to provide an economic model that you think is more accurate. I think Al Gore's "scale" picture is just silly. And this is why I pointed out all your slanted language in a recent post. All this vocabulary about the planet just going poof is absurd.

In whatever worst case scenario, real, acute physical phenomena will happen. Lomborg picked a middle ground and tried to put a price tag on those phenom. I think that's a worthwhile approach.

I'd rather hear new arguments that "Lomborg is wrong by XX amount, and here's why" than any more talk that the earth is going to blow up like the Death Star.

Michael Tobis said...

I cannot help the facts that 1) I think Lomborg is using the wrong metric and 2) I don't know what the right one is and 3) even if I did I'd have a hard time convincing anyone to believe me.

I can't produce a better model because I don't know what he is measuring.

Steven said...

Did you try reading his book?

I know it sounds too obvious.