David R. Henderson  

Henderson and Cochrane on Climate Policy

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Under my agreement with the Wall Street Journal I can now show you the whole article that John Cochrane and I had published on July 30. Here it is.

Climate Change Isn't the End of the World
By David R. Henderson and John H. Cochrane
July 30, 2017 4:24 p.m. ET

Climate change is often misunderstood as a package deal: If global warming is "real," both sides of the debate seem to assume, the climate lobby's policy agenda follows inexorably.

It does not. Climate policy advocates need to do a much better job of quantitatively analyzing economic costs and the actual, rather than symbolic, benefits of their policies. Skeptics would also do well to focus more attention on economic and policy analysis.

To arrive at a wise policy response, we first need to consider how much economic damage climate change will do. Current models struggle to come up with economic costs commensurate with apocalyptic political rhetoric. Typical costs are well below 10% of gross domestic product in the year 2100 and beyond.

That's a lot of money--but it's a lot of years, too. Even 10% less GDP in 100 years corresponds to 0.1 percentage point less annual GDP growth. Climate change therefore does not justify policies that cost more than 0.1 percentage point of growth. If the goal is 10% more GDP in 100 years, pro-growth tax, regulatory and entitlement reforms would be far more effective.

Yes, the costs are not evenly spread. Some places will do better and some will do worse. The American South might be a worse place to grow wheat; Southern Canada might be a better one. In a century, Miami might find itself in approximately the same situation as the Dutch city of Rotterdam today.

But spread over a century, the costs of moving and adapting are not as imposing as they seem. Rotterdam's dikes are expensive, but not prohibitively so. Most buildings are rebuilt about every 50 years. If we simply stopped building in flood-prone areas and started building on higher ground, even the costs of moving cities would be bearable. Migration is costly. But much of the world's population moved from farms to cities in the 20th century. Allowing people to move to better climates in the 21st will be equally possible. Such investments in climate adaptation are small compared with the investments we will regularly make in houses, businesses, infrastructure and education.

And economics is the central question--unlike with other environmental problems such as chemical pollution. Carbon dioxide hurts nobody's health. It's good for plants. Climate change need not endanger anyone. If it did--and you do hear such claims--then living in hot Arizona rather than cool Maine, or living with Louisiana's frequent floods, would be considered a health catastrophe today.

Global warming is not the only risk our society faces. Even if science tells us that climate change is real and man-made, it does not tell us, as President Obama asserted, that climate change is the greatest threat to humanity. Really? Greater than nuclear explosions, a world war, global pandemics, crop failures and civil chaos?

No. Healthy societies do not fall apart over slow, widely predicted, relatively small economic adjustments of the sort painted by climate analysis. Societies do fall apart from war, disease or chaos. Climate policy must compete with other long-term threats for always-scarce resources.

Facing this reality, some advocate that we buy some "insurance." Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. But the same argument applies to any possible risk. If you buy overpriced insurance against every potential danger, you soon run out of money. You can sensibly insure only when the premium is in line with the risk--which brings us back where we started, to the need for quantifying probabilities, costs, benefits and alternatives. And uncertainty goes both ways. Nobody forecast fracking, or that it would make the U.S. the world's carbon-reduction leader. Strategic waiting is a rational response to a slow-moving uncertain peril with fast-changing technology.

Global warming is not even the obvious top environmental threat. Dirty water, dirty air and insect-borne diseases are a far greater problem today for most people world-wide. Habitat loss and human predation are a far greater problem for most animals. Elephants won't make it to see a warmer climate. Ask them how they would prefer to spend $1 trillion--subsidizing high-speed trains or a human-free park the size of Montana.

Then, we need to know what effect proposed policies have and at what cost. Scientific, quantifiable or even vaguely plausible cause-and-effect thinking are missing from much advocacy for policies to reduce carbon emissions. The Intergovernmental Panel on Climate Change's "scientific" recommendations, for example, include "reduced gender inequality & marginalization in other forms," "provisioning of adequate housing," "cash transfers" and "awareness raising & integrating into education." Even if some of these are worthy goals, they are not scientifically valid, cost-benefit-tested policies to cool the planet.

Climate policy advocates' apocalyptic vision demands serious analysis, and mushy thinking undermines their case. If carbon emissions pose the greatest threat to humanity, it follows that the costs of nuclear power--waste disposal and the occasional meltdown--might be bearable. It follows that the costs of genetically modified foods and modern pesticides, which can feed us with less land and lower carbon emissions, might be bearable. It follows that if the future of civilization is really at stake, adaptation or geo-engineering should not be unmentionable. And it follows that symbolic, ineffective, political grab-bag policies should be intolerable.

Mr. Henderson is a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School. Mr. Cochrane is a senior fellow of the Hoover Institution and an adjunct scholar of the Cato Institute.

The piece appeared in the July 31 print edition.

John provides a welcome update, citing a working paper by William D. Nordhaus and Andrew Moffat:
A Survey of Global Impacts of Climate Change: Replication, Survey Methods, and a Statistical Analysis
William D. Nordhaus, Andrew Moffat
NBER Working Paper No. 23646
Issued in August 2017

The present study has two objectives. The first is a review of studies that estimate the global economic impacts of climate change using a systematic research synthesis (SRS). In this review, we attempt to replicate the impact estimates provided by Tol (2009, 2014) and find a large number of errors and estimates that could not be replicated. The study provides revised estimates for a total of 36 usable estimates from 27 studies. A second part of the study performs a statistical analysis. While the different specifications provide alternative estimates of the damage function, there were no large discrepancies among specifications. The preferred regression is the median, quadratic, weighted regression. The data here omit several important potential damages, which we estimate to add 25% to the quantified damages. With this addition, the estimated impact is -2.04 (± 2.21) % of income at 3 °C warming and -8.06 (± 2.43) % of income at 6 °C warming. We also considered the likelihood of thresholds or sharp convexities in the damage function and found no evidence from the damage estimates of a sharp discontinuity or high convexity.

Note that the top end mean is 8.06% of GDP. Even if it went to the top end of the top estimate, that would be 10.49% (8.06 + 2.43), making our 10% almost spot on for the extreme of the extreme.


Comments and Sharing






COMMENTS (36 to date)
Thaomas writes:

Instead of talking about what specific technologies ought or ought not to be used, we ought to set a price for net emissions and let the market work thing out.

Bill writes:

Thanks for your last paragraph. It wasn't clear from the abstract of the Nordhaus-Moffat paper that the change in GDP figures referred to projections 100 years out.

Jon Murphy writes:

@Thaomas:

Instead of talking about what specific technologies ought or ought not to be used, we ought to set a price for net emissions and let the market work thing out.

Well, that's kind of putting the cart before the horse, like Prof. Henderson was saying. We'd need to do a cost-benefit analysis of this issue, taking into account of all the relevant details (including administration and enforcement) to determine if it is worth pursuing (this would have to include, of course, studying to determine what some optimal level of pollutant is, assuming there even is one).

David R. Henderson writes:

@Bill,
Thanks for your last paragraph. It wasn't clear from the abstract of the Nordhaus-Moffat paper that the change in GDP figures referred to projections 100 years out.
You’re welcome, Bill. It’s not clear from the study either. So I took it that was a steady state calculation.

Brian writes:

It's interesting that the new paper estimates no statistically significant impact even at 3 C. I think earlier studies had generally implied that the economic impact turns negative with a 2 C rise. And as you point out, David, the economic impact remains small even with a 6 C rise.

David R. Henderson writes:

@Brian,
Yes, I found that striking also, I had always understood 2 C to be the turning point. And the 6 C was a surprise also.

NickR writes:

Your article makes important points. To which another can be added: rising CO2 has led to global greening, an increase in agricultural fertility. Ninth-grade level biology explains this, but climate change alarmists would never acknowledge that higher CO2 concentrations have substantial benefits as well as possible costs.

Mark Bahner writes:

"...to determine if it is worth pursuing (this would have to include, of course, studying to determine what some optimal level of pollutant is, assuming there even is one)."

It seems pretty clear (to me, anyway) that the optimum level of CO2 is somewhere in the 280-380 ppm range. Less than 280 ppm, the world's plants begin to suffer, and temperatures can drop below what anyone could call an optimum level. Higher than 380 ppm, sea level rise, ocean acidification, and summer temperatures in many areas of the world become problems.

David Friedman writes:

Putting the result in terms of the effect on global GNP leaves you open to the response that there are negative effects not included in GNP. Figure 10.1 of the most recent IPCC report gives its results in terms of estimates of the reduction in GNP which would have the same effect on human welfare as a given amount of warming. That's more relevant, and the difference is easy to miss.

For warming of up to 3°C, the worst estimate on the figure is -3%, which suggests that your 10% may well be a substantial overstatement.

Your basic point is one I have been arguing for years--that the weak part of the current orthodoxy is not the estimates of warming or of causes but of consequences. Warming can be expected to have both positive and negative effects. A priori there is little reason to expect the negative to be larger, although it could be.

I have discussed this on my blog for many years. I made the same point--that external effects were both positive and negative and the sign of the sum uncertain--in the context of the population argument about forty-five years ago.

Jacob Egner writes:

Thanks for sharing! David D. Friedman has been pretty influential on how I view the costs and benefits of our climate change; you talk to him much on the matter? In fact, I'm tempted to make a joke how he must be stuck on an island somewhere because it has been several hours and he hasn't commented on this post yet...

Tom DeMeo writes:

Please spend an hour or so googling "climate change worst case scenarios".

Citing 10% less GDP in 100 years as the extreme of the extreme worst case scenario is irresponsible.

Jon Murphy writes:

@Tom DeMeo

Citing 10% less GDP in 100 years as the extreme of the extreme worst case scenario is irresponsible.

10% less GDP in 100 years is the typical estimation of costs (the IPCC, for example, estimates between 1-5% of global GDP for 4 degrees of warming). I'm sure there are lots of doomsday predictions out there, but they are outliers. One shouldn't base policy on the tails of the PDF.

bill writes:

A carbon tax is a form of consumption tax. Its economic distortions are less than taxes it could replace. I'd like to see a modest carbon tax where the revenues are used to raise the standard deduction and lower the marginal rates for our income tax. Net net, revenue neutral. The point is that this should be an economic win even if the theory of global warming is completely mistaken.
Washington State recently had a referendum on something like this (Prop 732) and it got voted down. I think most of the resistance came from the left.

ChrisA writes:

I remember reading somewhere a criticism of the sceptical view, which went as the following;

First they deny that the warming is happening, then they deny that there is a link between warming and CO2, then they deny that the CO2 is coming from anthropocentric sources, then they deny that the impact is going to be significant economically, then they claim that there are simple technological fixes, then they deny that the world can coordinate on reductions, finally they argue that the money could be better used in other areas. The author was complaining that this continual questioning was hampering the need to do something.

But actually this seems to me to be a useful approach; each of these steps needs to be proven beyond reasonable doubt if we are going to take such drastic steps as changing the entire world economy, if just one of them is low probability then the rest are irrelevant. In addition a lot of the issues are completely non-technical and more political and economic, surely the science there can't be considered settled?

MikeP writes:

...each of these steps needs to be proven beyond reasonable doubt if we are going to take such drastic steps as changing the entire world economy...

Indeed. I've been making this argument for over a dozen years.

Advocates of intelligently addressing climate change policy should enumerate all the steps that need proving at the outset of their discussions so they (a) don't appear to be backpedaling as in the cited criticism, (b) counter the weaker points of the needed climate change debate earlier rather than later, and (c) educate the great majority who have never thought there were any steps beyond "humans are causing it".

MikeP writes:

A carbon tax is a form of consumption tax. Its economic distortions are less than taxes it could replace.

Not really. A carbon tax is a resource tax, and as such it changes the way economic inputs are used and therefore imposes significant economic distortions when compared to broad-based taxes that don't change the way economic inputs are used.

The point is that this should be an economic win even if the theory of global warming is completely mistaken.

Would you argue that a tax on water should be an economic win? Or would you instead argue that by changing the incentives to use water from those that are most economically efficient to those that are most likely to reduce the tax burden, you have decreased the efficiency of the economy as a whole? A carbon tax faces the same argument.

A carbon tax may indeed be desirable for Pigouvian reasons. But it definitely isn't better than general consumption taxes or income taxes just because it's a tax on something being consumed or because it's a tax on something "bad".

Marco writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Jeff writes:
The Intergovernmental Panel on Climate Change's "scientific" recommendations, for example, include "reduced gender inequality & marginalization in other forms," "provisioning of adequate housing," "cash transfers" and "awareness raising & integrating into education."

You might think these "non-scientific" remedies have nothing to do with climate change. But it seems pretty obvious that left-wing redistribution schemes are the whole point of the global warming hysteria. How many years must "the pause" go on before you realize it's one giant fraud?

Mark Bahner writes:
How many years must "the pause" go on before you realize it's one giant fraud?

You think "the pause" is ongoing?

NASA GISS global land-ocean surface temperature anomaly

Tom DeMeo writes:

The main points of this post seem to be:

We need better 100 year GDP forecasts to quantitatively analyze economic costs

Climate changes will probably occur slowly (with some unevenness!) over the next 100 years

A review of studies that estimate the global economic impacts of climate change provides reliable insight into the range of possible impacts

Does anyone else think those ideas might be suspect? Not one comment questioning the folly of 100 year GDP forecasts?

_______


There are a lot of bad arguments going on on both sides of these issues. In many cases, government is well behind on responding to the actuarial outcomes of the most recent 20 years. Houston has a lot of public policy and land use decisions to make, like right now. Permitting massive public accommodations for fossil fuel supply chains happens on an ongoing basis. Things need to be decided today.

There is plenty of work that economists can do to help public policy decisions based on the reality of the moment without pounding away on the dog-whistle elements of these issues. Far out projections are silly and just breed skepticism.

Jon Murphy writes:

@Tom DeMeo

Far out projections are silly and just breed skepticism.

Agreed. Which is why Prof. Henderson advocates skepticism on climate change policy. You risk doing a ton of damage based on something that, in your words, is silly.

If one is going to argue for climate change policy by the government, one needs 100-year (or whatever time frame we're considering) forecasts. They may be silly, sure, but they're still important given this condition. And there are "right" ways to do them and "wrong" ways to do them. But, as they say, silly in, silly out. Any policy built on silliness will result in silliness.

Which leads us to the question: if the output is going to be silly, why do it at all?

MikeP writes:

Far out projections are silly and just breed skepticism.

I really couldn't get my head around the irony of this statement, so I am glad Jon Murphy took a shot at it.

Not one comment questioning the folly of 100 year GDP forecasts?

But here, the problem is a bit more subtle.

Economic projections are inputs to the climate forecasts. People don't produce CO2 for kicks. It is a collateral by-product of economic activity -- i.e., GDP. No growth in GDP, no growth in CO2 emission rates.

So even if you imagine the folly of 100 year forecasts is limited to economic forecasts and does not extend to climate forecasts, it must extend to climate forecasts because it is the economic outputs of the future that will drive the CO2 emissions of the future.

Tom DeMeo writes:

@Jon Murphy, MikeP

You are confusing skepticism for the limits of analysis with skepticism for the problem itself. Most public problems are not fully quantified. That doesn't mean we should do nothing about them, or think they probably don't exist.

We don't know how often Houston will flood in the next 30 years, or how much it will cost. We do know it probably will flood again, and we know it might not flood at all. We can do some stuff with that that will probably do some good.

Jon Murphy writes:

@Tom DeMeo,

Yes, we can determine a lot of things under uncertainty. But that uncertainty means making forecasts (if, for nothing else, then the probabilities). And those forecasts need to be done well so we can do a proper cost-benefit analysis with given probabilities.

That's Prof. Henderson's whole point.

Tom DeMeo writes:

@Jon Murphy

This call for 100 year forecasting is a red herring. You forecast as long as it tells you something of value, then you stop.

There will be no 100 year responses to climate change. We don't need 100 year forecasts. We can see scientifically that things are going in a negative direction right now, and without forecasting, we know that human populations are rising, and millions of new people are joining the middle class each month.

We have a general sense of the dilemma right now and don't need more granular insight than this to decide to take some steps, especially if that insight is largely just someone's wild guess.

Would we view a carbon tax differently today depending on 100 GDP projections?

Jon Murphy writes:

@Tom DeMeo,

I don't think I understand you.

Prof. Henderson's point is real cost-benefit analysis needs to be done for climate policies. If 100 years is too far in advance (even though that is the current goal of most policy, including carbon taxes), then do CBA on 50 years. Or 10 years. Whatever you want.

Mark Bahner writes:
Would we view a carbon tax differently today depending on 100-year GDP projections?

I don't know about "we"...but I certainly would.

Isn't the whole point of the carbon tax to reduce CO2 emissions so people in the distant future are less burdened by the ill effects caused by higher atmospheric CO2 concentrations?

So doesn't it matter how well off those people of the distant future will be if government does not impose a carbon tax on the present population, versus if government does impose a carbon tax on the present population?

Mark Bahner writes:
If 100 years is too far in advance (even though that is the current goal of most policy, including carbon taxes), then do CBA on 50 years. Or 10 years. Whatever you want.

It's hard to imagine how carbon taxes evaluated with a CBA period of 50 years--let alone 10 years(!)--would show benefits that exceed costs.

Tom DeMeo writes:

@Mark Bahner

"Isn't the whole point of the carbon tax to reduce CO2 emissions so people in the distant future are less burdened by the ill effects caused by higher atmospheric CO2 concentrations?"

That is one of a number of important benefits, but you are implying this won't help people who are alive right now. It will.

Fossil fuels became the backbone of industrial growth because they were the first scalable technology to come along. But to achieve that scale, massive supply chains and extraction strategies that required huge political and public accommodations and huge infrastructural commitments were required. This didn't happen because a neutral marketplace chose it. It required a huge political commitment in order to get here.

What would happen if we stopped using foreign policy and the military to protect sources? What if we stopped permitting gigantic LNG terminals and refineries and pipelines and storage facilities? What if it wasn't OK for thousands of gas stations to put tanks in the ground that rot and almost always leak? Prices would probably go up quite a bit.

Other technologies don't compete against fossil on anything resembling an even playing field. We wrapped our society around fossil fuels because it was the only thing that could scale. It has formed an economic dead end. A carbon tax provides a small measure of counterbalance to this so other technologies that could be cheaper if scaled can compete.

This is a long winded way of saying that energy technologies are not really market choices. They require broad forward thinking infrastructural support, so the winners are chosen politically rather than through natural competitive processes.

"So doesn't it matter how well off those people of the distant future will be if government does not impose a carbon tax on the present population, versus if government does impose a carbon tax on the present population?"

I don't know why there is so much pushback on this, but there is no point to forecasting when it stops providing any reliable information. Your question is unknowable. We are making an educated guess.

LK Beland writes:

"Five scientists analyzed the article and estimated its overall scientific credibility to be ‘low’ to 'very low'. A majority of reviewers tagged the article as: Biased, Misleading."

https://climatefeedback.org/evaluation/wall-street-journal-op-ed-economic-consequences-climate-change-found-naive-scientists-david-henderson-john-cochrane/

Mark Bahner writes:
Five scientists analyzed the article and estimated its overall scientific credibility...

An analysis of the analysis:

Legitimate economic analyses have put the costs of climate change at 2100 to GDP at several percent to more than 20%[1], with the variability largely due to different discount rates.

Absolute rubbish. There is no relationship between the estimated costs of climate change in the year 2100 and "different discount rates." On a scientific credibility scale of -2 to 2, that's about a -6.

The higher acid content in the world’s oceans has already begun to interfere with marine life, including fish reproduction. Research has just begun to explore the reverberations of ocean acidification to human nutrition...

Humanity gets very few of calories from fish consumption. Per the WHO, "The proteins derived from fish, crustaceans and molluscs account for between 13.8% and 16.5% of the animal protein intake of the human population."

And that's *protein* intake. I'd expect carbohydrate intake to be virtually entirely land-based. And that 13.8% to 16.5% includes farmed fish as well as wild fish. Acidity conditions for farmed fish could be adjusted. On the -2 to 2 scale, that's about a -1.

If we underestimate climate damages, we won’t simply have a costly externality kicked down the road for our children to deal with. We might not have a viable planet,...

Statements like this prove that Michael Crichton was right...climate change is a religious subject, not a scientific one. I would love to have Aaron Bernstein give an estimate of what he thinks human life expectancy will be in 2100 with climate change, and what it would be without climate change. And I'd love to have him point to a single peer-reviewed scientific study that indicates that Earth could be "unviable" in 2100.

We must, of course, make trade-offs in where we put our money but doing so based on the face value of current economic evaluations—especially those based on GDP which is generally regarded as a poor measure of economic health...

Does this mean GDP per capita is "generally regarded as a poor measure of economic health"? By whom? By people who say things like GDP effects in 2100 vary depending on discount rate assumptions?

David R. Henderson writes:

@LK Beland,
Thanks for the link.
@Mark Bahner,
I hadn’t been aware of this, but I’m not sure I could have done as good a job as you. I did find interesting, though, the one guy’s attributing variability in 2100 to different discount rates. Maybe there’s some connection but it’s hard to see it without knowing his reasoning.

Mark Bahner writes:
I did find interesting, though, the one guy’s attributing variability in 2100 to different discount rates. Maybe there’s some connection but it’s hard to see it without knowing his reasoning.

I don't think he had reasoning. (That's why I gave his claim a -6 on the -2 to +2 scientific credibility scale. ;-))

I think he's heard that assumed discount rates are important in climate change cost analyses. What I don't think he knows is that discount rates are important only in bringing distant future costs back to present-value costs. He doesn't know that discount rates aren't relevant when comparing estimates of the costs impacts of climate change in the year 2100 as a percentage of the year 2100 GDP. I wonder if he even read the paper he referenced? (I haven't read it, but I would be very surprised if it mentioned discount rate as being important to the analysis.)


David R Henderson writes:

@Mark Bahner,
What I don't think he knows is that discount rates are important only in bringing distant future costs back to present-value costs.
I’m inclined to agree. I just didn’t want to assume.
I read the abstract of the cited article and it certainly does not help the reader understand how Aaron Bernstein reached his conclusion.

Mark Bahner writes:
I read the abstract of the cited article and it certainly does not help the reader understand how Aaron Bernstein reached his conclusion.

Searching the paper for the words "discount rate" also reveals that the phrase is not used in the paper. You'd think the authors would at least mention the phrase if it was important to their analysis. ;-)

Like I wrote before, I'm very confident that Aaron Bernstein had simply heard somewhere that discount rates were important to cost analyses for climate change, but he had not paid attention to whether discount rates were important to various estimates of the costs of climate change as a percentage of GDP in the year 2100.

It's really terrible that the Climste Feedback website would solicit opinions from scientists, and then a scientist would demonstrate that he has no knowledge of the issue in question...variations in estimates of the cost of climate change in the year 2100. Why even bother asking scientists to analyze a piece, if the scientists don't know what they're talking about?

David R Henderson writes:

@Mark Bahner,
Thanks. If “discount rate” doesn’t even show up, that IS strong evidence.

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