Bryan Caplan  

The End of Doom and Cost-Benefit Methodology

Incomes, Spending, and Saving... Zywicki on Debt...
Like all useful tools, cost-benefit analysis is flawed.  After surveying cost-benefit analyses of global warming and warming abatement, Ron Bailey's The End of Doom turns to methodological objections.  From his section on "How Much to Insure Against Low Probability Catastrophic Warming?":
How much should we pay to prevent the tiny probability of human civilization collapsing?  That is the question at the center of an esoteric debate over the application of cost-benefit analysis to man-mind climate change.  Harvard University economist Martin Weitzman raised the issue by putting forth a Dismal Theorem arguing that some consequences, however unlikely, would be so disastrous that cost-benefit analysis should not apply.

Weitzman contends that the uncertainties surrounding future man-made climate change are so great that there is some nonzero probability that total catastrophe will strike.  Weitzman focuses on equilibrium climate sensitivity... As has been discussed, the IPCC Physical Science report finds that climate sensitivity is likely to be in the range of 1.5° to 4.5° C and very unlikely to be greater than 6°C.  But very unlikely is not impossible.

Weitzman spins out scenarios in which there could be a 5 percent chance that global average temperature rises by 10
°C (17° F) by 2200 and a 1 percent chance that it rises by 20°C (34°F)... Surely people should just throw out cost-benefit analysis and pay the necessary trillions to avert this dire possibility, right?

Then again, perhaps Weitzman is premature in declaring the death of cost-benefit analysis.  William Nordhaus certainly thinks so, and he has written a persuasive critique of Weitzman's dismal conclusions...  Weitzman's Dismal Theorem implies that the world would be willing to spend $10 trillion to prevent a one-in-100-billion chance of being hit by an asteroid...

Nordhaus also notes that catastrophic climate change is not the only thing we might worry about.  Other low-probability civilization-destroying risks include "biotechnology, strangelets, runaway computer systems, nuclear proliferation, rogue weeds and bugs, nanotechnology, emerging tropical diseases, alien invaders, asteroids, enslavement by advanced robots, and so on." 
Deja vu.  Bailey's Nordhaus digest continues:
Weitzman's analysis also assumes that humanity will not have the time to learn about any impending catastrophic impacts from global warming.  But midcourse corrections are possible with climate change...

At the end of his critique of Weitzman's Dismal Theorem, Nordhaus investigates what combination of factors would actually produce a real climate catastrophe.  He defines a catastrophic outcome as one in which world per capita consumption declines by at least 50 percent below current levels...

Nordhaus ran a number of scenarios through the Dynamic Integrated Climate-Economy (DICE) model... DICE would produce a catastrophic result only if temperature sensitivity was at 10° C, economic damage occurred rapidly at a tipping point of 3°C, and nobody took any action to prevent the catastrophic chain of events.  Interestingly, even when setting all of the physical and damage parameters to extreme values, humanity still had eighty years to cut emissions by 100 percent in order to avoid disaster.
Bailey closes with a spot-on challenge:
Why has no one ever applied a Dismal Theorem analysis to evaluate the nonzero probability that bad government policy will cause a civilization-wrecking catastrophe?
I fear climate activists will dismiss Bailey's challenge as a debating trick.  But I see no way around it.

P.S. Anything important Bailey's treatment misses on methodological objection to cost-benefit analysis?  If so, please share contrary sources in the comments.

COMMENTS (19 to date)
Nathan W writes:

And yet how many people question spending trillions to avoid fairly low risks of terrorism, which are not threatening to civilization in general, and are also willing to give up cherished civil liberties in order to protect against such risks? If we approached insurance against climate change and insurance against terrorism with a similar calculus, energy supply would probably be over 50% renewable by now.

Josiah writes:

Why has no one ever applied a Dismal Theorem analysis to evaluate the nonzero probability that bad government policy will cause a civilization-wrecking catastrophe?

They have. One of the arguments you hear against geoengineering, for example, is that if it gets screwed up it could have civilization ending consequences.

On the other hand, if the policy in question is a revenue neutral carbon tax, then it's hard to see how that could end civilization.

The Original CC writes:
On the other hand, if the policy in question is a revenue neutral carbon tax, then it's hard to see how that could end civilization.
That one's easy. A carbon tax will just cause carbon-intensive industries to move to other countries. People will quickly realize that we need a worldwide taxation scheme for this to work. (I've heard of international tax "harmonization" in the past.) Calls for a strong world government could follow.

This could get catastrophic very quickly. Certainly a non-zero probability event.

ThaomasH writes:

Which "other countries?" Probably not the EU and if the EU and the US applied a carbon tax equivalent on imports from countries that did not go along with the tax, I think there's a good chance they would.

I think a lot of the disagreement lies in the costs of carbon taxation. If you have a lot of faith in the free enterprise system, as I do to innovate an find low cost solutions, your estimate of the deadweight loss of a carbon tax are just not that great, as less if some of the revenue were used to reduce truly distorting taxes such as the wage tax and the corporate income tax.

Ben H. writes:

There are a whole raft of bad assumptions and bad inferences in the passages you quote. Wow, what a mess.

"tiny probability", but then below, a "5 percent chance" and "1 percent chance" are cited. Those are not tiny probabilities. Bailey then compares those risks to "a one-in-100-billion chance of being hit by an asteroid". Um, do you see a problem with that comparison?

Then we get a list of low-probability civilization-destroying risks that we might want to worry about, apparently intended by Nordhaus and Bailey to sound ridiculous and thus to tar worries about climate change with ridiculousness by association. Maybe this is news to Bailey, but we do, in fact, spend a decent amount of money on monitoring for near-Earth asteroids that might hit us, as well as on issues such as nuclear proliferation and emerging tropical diseases. Most of the other items on his list are more distant-future worries that may be quite legitimate, but that we don't yet know enough about to do anything about (nanotechnology, enslavement by advanced robots, etc.). Some of the items are indeed present concerns; for example, biotechnology: we are rapidly approaching the day when an ordinary person could easily synthesize the smallpox virus, for example. If that doesn't scare you, you're not thinking. Nordhaus and Bailey's ridiculing of such concerns is both foolish and irresponsible.

Then we get the claim that "midcourse corrections are possible with climate change". I assume that by that he is referring to geoengineering? There are deep problems with geoengineering, and a blithe hand-waving away of the risks of climate change by saying that we can always geoengineer later is really just idiotic. There's quite a bit written about this, so I won't belabor the point.

And then we conclude with some claims about how if bad things happen we can always cut our carbon emissions later. This appears to completely ignore the fact that present CO2 levels commit us to considerable future warming; even if we cut our CO2 emissions to zero today, global temperatures would continue to rise for quite a long time, because the system is not presently in equilibrium. As time goes by, and we emit more and more CO2, we drive the system further and further out of equilibrium, and thus we will be committed to even more future warming. The analysis presented also seems to ignore the concept of "tipping points", which involves the very real possibility (supported by empirical data of past climate swings on Earth) that at some point we will push the Earth system into a new regime, such that it will not return to its prior state even if we subsequently cut our emissions to zero. We don't know exactly where such tipping points might be, but we have good reason to think they are out there. If we cross one, we will then be committed to very large changes to the Earth system – the melting of all of the ice in Antarctica and Greenland, for example – and will find it difficult or impossible to return the system to its previous state even with geoengineering.

All in all, another catalogue of dumb denialist nonsense. My previous comments about incorrect priors on the trustworthiness and validity of denialist writings would again apply. I hope that at some point you choose to broaden your reading on these topics beyond biased sources like Bailey.

Swami writes:

And so the issue of global warming pivots around those believing government "solutions" are more likely to cause problems than the warming itself and those seeing central government as the cure.

I agree that there is a non zero percent chance that climate change could be catastrophic. But I also see that there is an extremely large, possibly even a likelihood, that strong centralized government unification would be catastrophic.

Charlie writes:

"Interestingly, even when setting all of the physical and damage parameters to extreme values, humanity still had eighty years to cut emissions by 100 percent in order to avoid disaster."

Umm, isn't cutting emissions by 100% the disaster.

Charlie writes:

Also, it just isn't true that Weitzman's analysis doesn't incorporate learning. This author doesn't seemed very informed about the economics. Why not just read Weitzman directly?

On Modeling and Interpreting the Economics of Catastrophic Climate Change

"With climate change as prototype example, this paper analyzes the implications of structural uncertainty for the economics of low probability, high-impact catastrophes. Even when updated by Bayesian learning, uncertain structural parameters induce a critical “tail fattening” of posterior-predictive distributions. Such fattened tails have strong implications for situations, like climate change, where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages."

wd40 writes:

Nuclear winter would be a government created catastrophe. The fear of a devastating nuclear war was on many people's mind and resulted in a number of international agreements and changes in policy.

ThaomasH writes:

@ Ben

I think the criticism is (or at least should be) of the recommendation to ignore cost benefit analysis and "just do something," not that low probability outcomes should be ignored completely. I think it is a huge advance if Libertarian-leaning scientists and economists are willing to engage in a cost benefit discussion of which policies need to be adopted when and with what parameters. That is not "denialism."

ThaomasH writes:

The front cover blurb:

Ronald Bailey set out factually and simply the unassailable if inconvenient truth that if you care for the planet, technological progress and economic enterprise are the best means of saving it.

I think that this position is not unassailable, although too much assailed, but not at all "inconvenient," unless one is discomfited by the idea that public policy (or public policy beyond what is already in place) has a role in the saving.

Josiah writes:

A carbon tax will just cause carbon-intensive industries to move to other countries.

You can deal with that by doing border adjustments.

MikeP writes:

You can deal with that by doing border adjustments.

Yep. Now we're back to...

Why has no one ever applied a Dismal Theorem analysis to evaluate the nonzero probability that bad government policy will cause a civilization-wrecking catastrophe?

I think that carbon-tax induced trade blocs and trade wars are a very real hazard, likely to cost more than the CO2 emission such taxes are trying to address. That this probability doesn't enter into the cost-benefit analyses of advocates of such taxes is really telling.

Andrew_FL writes:
On the other hand, if the policy in question is a revenue neutral carbon tax, then it's hard to see how that could end civilization.

I'm almost certain Bailey had other government policies in mind. He's not arguing that climate policy has a chance of being civilization ending. He's arguing that if we take the arguments for it seriously, these kinds of arguments in particular, then it leads in a direction he doesn't think advocates of government policy, or indeed the vast majority of people, would like. We can't risk having a government, for example, because government might start a nuclear war. Suddenly these arguments for carbon taxes, more generally applied, become arguments for anarchism.

But, it's not hard to imagine environmentalists causing civilization to collapse. In fact it's quite fun and easy! People have written very entertaining books about it. See for example Fallen Angels by Niven, Pournelle, and Flynn.

ThaomasH writes:

Trying to deal with CO2 accumulation in the atmosphere with a collection of regulation and subsidies could be just the sort of civilization destroying government policy that Bailey mentions. Climate change policy is too serious not to discipline with cost-benefit analysis.

Unlearning writes:
I fear climate activists will dismiss Bailey's challenge as a debating trick. But I see no way around it.

The obvious 'way around it' is to reject the estimates based on the DICE model, which as the quoted passage shows only define 'disaster' in economic terms and thus rests on the extensively critiqued logic of assigning economic values to massive environmental catastrophes, usually based on trivial valuations from things like surveys or risk differentials between jobs.

The Dismal theorem is really just an attempt to argue with CBAers on their own terms; I don't think it should be taken literally. The much more important alternative is to look at targets which are decided based on physical criteria, then decide how many resources to devote to them (a decision for which CBA can be used as an input).

This also answers the other potential disasters put forward: yes, if these things are calculated to pose a threat to mankind based on the physical damage they will do, we should try to avert them. But CBA-style calculations of 'expected damage' etc. are just meaningless.

Once more, you're just accepting CBA as a starting pointing rather than engaging with the very good reasons people put forward for rejecting it outright and endorsing physical targets. The fact that you preface your post with 'CBA isn't everything' doesn't change the content.

Josiah writes:


The argument is based on climate risk being fat tailed, not on what's "likely" to be more costly.


I don't think the case of nuclear war supports anarchy for the reasons David Friedman laid out in Machinery of Freedom.

Andrew_FL writes:

@Josiah- I don't either, but I was more outlining my understanding of Bailey's point with an extreme example. These arguments are fallacious, that's the point.

Daublin writes:

Here's another counter-point I would add. Human knowledge is in large part built by trial and error. Thus, knowledge about low-probability events tends to be really bad.

Applied to the present topic, note that a CO2 catastrophe is such a low probability event that it's never been observed before. Any resources spent on addressing it have a high probability of being wasted effort.

As such, the proper response to low-probability events is to have a large safety net that can address lots of different kinds of low-probability events. Don't buy 100 different kinds of insurance to cover different kinds of events.

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