Arnold Kling  

Weitzman on Global Warming

The CEA on Exchange Rates... The Malthusian Trap...

I love Martin Weitzman's paper. From his conclusion:

On the political side of the Stern Review, my most-charitable interpretation of its urgent tone is that the report is an essay in persuasion that is more about gut instincts regarding the horrors of uncertain rare disasters whose probabilities we do not know than it is about economic analysis as that term is conventionally understood. Although it is difficult enough to analyze people’s motives, much less the motives of a 600-page document, I can’t help but think after reading it that the strong tone of morality and alarm is mostly re‡ecting a fear of (in my ponderously esoteric Bayesian jargon) what is potentially out there in the thick left tail of the reduced-form posterior-predictive probability distribution of g under greenhouse warming. I have argued here that this thick left tail of g is an important aspect of the economics of climate change that every analyst –Stern and the critics of Stern –might do well to try to address more directly.

I think that Marty's intuition about global warming is exactly right. For the policy objective of mitigating climate change within the usual range of forecasts, the costs exceed the benefits for any sensible set of discount rates.

The real issue, as Marty expresses very well, is what to do about the risk that climate forecasting models under-predict global warming, particularly in the near term. It could turn out that the best policies for addressing this turn out to be the sort of economic sacrifices proposed in the Stern report--as Marty says, the Stern report is "right for the wrong reasons." However, as Marty also says, what we really would pay a huge premium for is an option that allows us to address climate change on a "just in case" basis. To me, that favors investment in climate engineering as a better tool than trying to manage CO2 emissions.

Read his whole paper. Thanks to Greg Mankiw for the pointer.

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COMMENTS (5 to date)
Brad Hutchings writes:

The problem with the argument is that it doesn't assign any uncertainty to the assumed correlation between CO2 concentration in the atmosphere and temperature. Good old H2O in its vaporous state is also considered a greenhouse gas. Just this week, a scientist has publicly proposed [link] a theory that clouds are seeded by gamma rays from space and that when the sun is in a weak cycle, it lets more through, causing more clouds, more warming. When you think about what he's saying, it kinda explains why the winter is usually wetter than the summer further away from the equator and why in the tropics it's consistently wet year round. So maybe that accounts for some percentage of warming that we're seeing?

At any rate, global warming is political now. We can have all sorts of discussion about what a measured mitigation policy might be, but it's not gonna matter. What will matter is that in 5 years or so, global warming will be the Democrats' (and complicit Republicans') Iraq. But instead of George Clooney standing up at the Oscars and telling us how his mother died because she couldn't afford to heat her home, we'll read a million versions of that story on MySpace. I think I finally understand how pacifists feel during a ramp up to war.

Lord writes:

I agree the discussion is largely driven by fear; fear that overly drastic action will be taken in response. While this is possible, it should not be necessary, but this fear prevents us from doing what can and should reasonably be done.

Eric Crampton writes:

The models may underpredict warming; we may also be underestimating the risk of collision with an asteroid or meteor. There are a large number of high cost, low probability events against which we could expend real resources to guard ourselves; how do we know that climate change gets us the best protection per dollar of GDP sacrificed?

Peter Gallagher writes:

I agree, Arnold: the Weitzman paper is a wonderful review of Stern. As an amateur economist I found it hard-going in some places but I learned a lot from watching him do the analysis.

The (deliberately) ambiguous endorsement Weitzman gives Stern's conclusion (but not method) suggests strongly that any global framework for collaborative action on climate change (e.g. to replace the Kyoto Protocol) should abandon emission target-levels in favour of some pluralist -- that is, market-based -- way of discovering over time, and through a lot of transactions in different economies and by different economic interests, what the right level (cost) of emission controls should be.

The challenge for policy makers is to find a way to create/support transparent trading mechanisms that will progressively, and in a sort of 'discovery process', put a price on emissions without trying to allocate shares in a global good that can't be accurately priced right now (for the reasons Weitzman gives).

If we can only guess at the right discount rate for rare, low-risk disasters, then we might as well engage everyone in the 'poll'.

Do you know of the paper by McKibbin and Wilcoxen on a 'target-less' cap-and-trade process It seems to me that this is a good candidate for such a market-discovery framework.


Ronnie Horesh writes:
To me, that favors investment in climate engineering as a better tool than trying to manage CO2 emissions.
Exactly. I have argued that we need to define our goal: climate stability, say, which could be a combination of climatic and human indicators, then contract out the achievement of this goal to the private sector. The ultimate reward could be raised by government, but the allocation of resources would be done by a motivated private sector, with incentives to go for the most appropriate mosaic of diverse, adaptive approaches.
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