Paradigms Lost: Economists and Climate Change

Attention Conservation Notice: Excessively detailed account of a lecture entitled “Mitigating Climate Change – how and why the economists have changed their minds” peppered with snarks about the nature of mainstream economic “thought.” Potentially useful list of sites and links at the bottom. A podcast of the evening will be up by the end of the week, we’re promised. For a funnier take on the same topic, check out this on infinite planet theory. The great SS Economic Growth cartoon below belongs to Polyp.

Hosted by Adelaide University’s Environment Institute, this lecture was delivered by one Stephen Howes of the Australian National University (in Canberra. And I doubt Doctor Howes took the train). There were about 120 people in the room, markedly older and more prosperous than the crowd on Monday night. The Institute’s director, Mike Young, opened proceedings with the traditional greeting – no, not an acknowledgement of country – but a ‘switch off your mobiles’ request. He reflected that in his economics education he had been assured that the future could be very much discounted (in both senses), and mentioned that he’d recently read a “rational analysis” that the amount of money that should be spent on saving the world in 200 years is.. $14. That was the laugh last we got, but to be fair Prof Howes hadn’t promised us chuckles.

Prof Howes then took the stage. He’s director of International and Development Economics in the Crawford School of Economics and Governance at the Australian National University. His speech is based on a recent paper that he will post on his website. The focus would be on the case for Global Action, rather than about different countries acting (at different speeds) and the problems of first-movers and free-riders and carbon prices (the issue du jour Down Under).

He framed his discussion around the proposition that the old consensus on the economics of climate change, as represented by Kelly and Kolstad (1999) (I think that article is “Bayesian Learning, Pollution and Growth“) that “modest controls are generally optimal” (e.g. in my words, the Market Will Provide) has been overturned – or at least challenged – and that a new more demanding approach is gaining ground. Howes was at pains to say that there is not a new consensus, but that moves towards it exist.

He took the audience through the work of three economists. Firstly, William Nordhaus, who has been working on this stuff since the 1970s, is the poster child for gradualism, aka the ‘policy ramp.’ Secondly, Nicholas Stern, him of the 2007 Stern Review, and finally, Ross Garnaut, on whose monumental report(s) Howes himself has worked.

Nordhaus’s approach (see his book “A Question of Balance”) hinges on the ever-so-slightly hubristic notion of an integrated assessment model that can be then used to create a ‘cost-benefit analysis’ (CBA). Nordhaus is then able, via what Howes describes as “heroic assumptions” to argue for an “optimal degree of mitigation” predicated on allowing a 3.5 degree temperature rise, with a low carbon price and emissions rising into the second half of the 21st century. Howes pointed out that climate change had not figured as a risk in most economists’ models until this time, but that the view of ever-expanding prosperity is now challenged, with concern over “tipping points” and even the Centre for Strategic and International Studies worrying about large temperature rises leading to increased destablisation. (They’ve no doubt read their history, and no that empires can fall when the weather changes…)

Nordhaus has admitted that his model has ‘limited utility’ for capturing catastrophic effects, and has bolted on ‘exogenous constraints’ – which is economese for politically-defined targets at various temperature-rises-above-pre-Industrial norms. In passing, Howes said this was a useful addition, but Nordhaus never tells if we should buy into these temperature limits, and the model doesn’t show benefits of doing so.

Nicholas Stern adopted a more “eclectic approach,” Stern was expected to just do a literature review, but instead ended up arguing for strong action. Unlike Nordhaus, he didn’t try to go for an optimal mitigation scenario, just looking at whether we should or shouldn’t mitigate.
He chose an atmospheric concentration target of 550ppm (pre-industrial levels were around 280ppm) which translates (with error bars!) to a 3 degree temperature rise. Hitting that target, Stern asserted, would cost 1% of GDP (later he raised that to 2%, btw). Stern calculated the costs of unmitigated (“business as usual”) emissions as between 5 to 20% of GDP.
Howes then explained some stuff about Stern’s discount rate (a lower one based on normative rather than market rate) which you can read about here or listen to the podcast. He then quoted a couple of economists on the subject of trying to do cost-benefit analysis in conditions of huge uncertainty. The first was Harvard economist Marvin Weitzman (see Climate Progress article here). The second was GW Yohe, who said “To be brutally honest, pervasive uncertainty about the physical and economic consequences of climate change undermines the credibility of economically optimal policies that emerge from traditional benefit‐cost calculations.”

I found the quote, and it continues “Since there is good evidence to suggest that getting the “optimal policy” wrong could be extremely expensive, it follows from straightforward economics that a complementary approach aimed at managing/reducing risk is required. It is important to recognize that hedging policies that emerge from the risk management approach would sacrifice a little in expected utility, but the payoff would be reductions in the likelihoods of unacceptable declines in general welfare – declines that would result if the optimal policy should fail.”
(Economese for “let’s not put all the chips on the roulette ball coming down on the number 15, eh?”)

Garnaut was portrayed by Howe (who pointed out that he was not disinterested at this point) as even more “radical” than Stern, opting for a 450ppm/2 degree target (the temperature target is now accepted – in words if not deeds – at Copenhagen). Garnaut looked at three options – no mitigation, moderate migitation (550ppm) or “stringent” (the quote marks are mine) mitigation (at 450ppm), and used a cost-benefit analysis, but qualitative rather than quantitative.
Garnaut’s take on the unmitigated scenario is that it will lead to a high temperature increase and this will have catastrophic rather than marginal impacts. He then compared the moderate and so-called stringent scenarios, finding the latter more expensive, but worth doing because of the insurance value (less likely, on his reading, to lead to tipping points) and less likely to cause “non-market damages”, which is economese for “the loss of the Great Barrier Reef and irrelevant stuff like that.”
Howes then threw in some IPCC SRES figures for laphs, sorry, grauphs. (A1F1 versus different folks’ models). Garnaut, bless him, had spotted that everyone had underguesstimated Asia’s growth (they burn a lot of coal making our tchotchkes, after all)
Howes didn’t point out that Stern hadn’t even used the official data (CDIAC) for his report, but instead erroneous WRI stuff.
Nordhaus has apparently now revised his temperature target from 3.5 to 3 degrees, which is real daring of him, and is calling therefore for steeper cuts. Stern is now arguing for a 500ppm target (2 to 2.4 degrees rise, allegedly) and arguing for a risk management approach.
At this point in the speech, Howes was laying out his convergence hypothesis
* the discount rate is no longer divisive
* the temperature target is converging to a “narrow range”
* their 2020 emissions reductions targets are similar (though grossly inadequate according to the, um, scientists; an inconvenient fact Howes didn’t mention.)
* Nordhaus and Garnaut arguing a similar-ish carbon price (with Stern silent on this)
* Cost-benefit Analysis no longer a shibboleth, with a “risk management approach” coming up on the outside.
He framed this as “methodological pluralism” moving towards a consensus for more “radical” action (again, the irony quote marks are mine).
Howes pointed out that the more-rapid-than-anticipated emissions growth had closed off the ‘luxury of time’, and then, in true academic style, offered two qualifiers; he’s only looking at 3 economists (there are still those holding to the pre-Stern consensus) and that there is not complete consensus.
As was tweeted by the Environment Institute “The real problem is the case for climate change [action] has evolved much quicker than the action being taken. ”
Sadly they missed the next soundbite – “It’s not an exaggeration to say that we are on a collision course with catastrophe.”

Question and Answer session

The first (and only one from a woman) was IMHO the best. “I thought there was a consensus around 350ppm as the safe target? What would that cost? Has it been modelled?”
Howes conceded that there were some people who held to that line, and maybe even some economists (presumably it will become more real once more economists are on-board with it?). He didn’t know if any work had been done, but opined that saving the world would be “very expensive”. (Considerably more than $14, I wonder?)

The second was about whether Peak Oil was a factor. Howes talked about how if that kicks in, that may make renewables more attractive.

The third was on whether economists had looked at non GDP metrics of damages. Nordhaus has tried this, but “modelling catastrophic change is very difficult.” (Just like living through it, I suppose).

The fourth pointed out that we have lots of other ecological problems related to resource extraction and the limits of the planet to cope with our waste products, and focusing on carbon misses the point. Howes felt this unfair, saying that all these models were trying to estimate/internalise the costs. (Um, the hubris of ecological modernisation, much?)

The fifth and sixth questions, as befits an economics lecture, were focussed on the nature of modelling and whether ‘real’ carbon prices could be extracted from the inevitable horse-trading that will precede their introduction, and whether the models could back-cast. By this time your correspondent had lost the will to live.

Conclusion and modest proposal

The historian of science Thomas Kuhn wrote a wonderful (if somewhat hard to read) book called The Structure of Scientific Revolutions. In it (and it’s late, so I am going to steal from wikipedia, is that

“Kuhn challenged the then prevailing view of progress in “normal science.” Scientific progress had been seen primarily as a continuous increase in a set of accepted facts and theories. Kuhn argued for an episodic model in which periods of such conceptual continuity in normal science were interrupted by periods of revolutionary science. During revolutions in science the discovery of anomalies leads to a whole new paradigm that changes the rules of the game and the “map” directing new research, asks new questions of old data, and moves beyond the puzzle-solving of normal science.”

What Nordhaus, Stern and Garnaut represent is a rearguard action for the existing paradigm, patching up the problems and plugging the leaks. The new paradigm, when it comes, will – if our inability to solve this problem at the rate we are causing it persists – be very helpful in understanding a femur-based economy.

So, in closing, I have a modest proposal aimed at concentrating the minds of these academics and economists. We tie their pay to the reduction of the atmospheric concentration of carbon dioxide. That may ‘incentivise’ them to break out of the neat little intellectual bar graph prisons that they’ve made for themselves, eh?

P.S. Expecting economists to have useful contributions to climate change is a bit like the drunken man searching for his lost keys under a lamp-post. A passer-by stops to help. The search is fruitless. The helper says “are you sure you dropped them here?” The drunken man gestures down the dark alley – “No, they’re down they’re somewhere.” “Well why are you looking here?” says the confused Samaritan. “Well, the light’s much better for looking here” comes the reply.

P.P.S. When I was still involved in Climate Camp, many moons ago, just after the Stern Review came out, I remember doing a brief spiel about how can be difficult to root out the programmed respect and deference to men in limousines who ooze confidence and powerpoints, but that we must because they don’t know what the hell they are doing and have no plan to get us out of the mess we are in. I’ve not changed my opinion. The very fact that lectures like tonight’s could be delivered with a straight face in 2011, over 20 years since the first IPCC report, is a sign that our lords and masters are incompetent.

P.P.P.S. Garnaut is speaking on June 1st, his first public event after the release of his final report on May 31. I tried to blog his March talk in Melbourne, but found myself falling asleep as I wrote it. I shall dose up on the NoDoz and try again…

P.P.P.P.S. Words and phrases I wasn’t expecting to hear, and so wasn’t surprised when I didn’t: Academic silos, Hubris, non-linear change, over-confidence, credibility, capitalism, over-consumption, inequalities, social justice, sanity, extinction, cosmic vandalism, steady-state economics

P.P.P.P.P.S. The climate scientists have realised their models don’t reflect reality (i.e. the changes we are seeing in the natural world are coming not just faster than expected, but faster than had even been thought possible) They are at least trying to deal with that empirical and ontological train wreck. The economists seem still besotted with their physics envy.

Further Reading

K. Anderson and A. Bows (2008) Reframing the climate change challenge in light of post-2000 emission trends Philosophical Transactions of the Royal Society A 13 November 2008 vol. 366 no. 1882 3863-3882
Herman Daly – the father of Ecological Economics
My First Little Book of Ecological Economics (pdf of short booklet)
Centre for the Advancement of the Steady State Economy
Index of Sustainable Economic Welfare (courtesy, in part, Mr Nordhaus)
Leaving Babylon – excellent blog about what next
Ecological Modernisation
Stop crying poor and fix this mess” Ross Gittins in the Sydney Morning Herald May 26 2011

About dwighttowers

Below the surface...
This entry was posted in climate, competence, economics, framing, natural world, religion and tagged , , , , , , , , , . Bookmark the permalink.

2 Responses to Paradigms Lost: Economists and Climate Change

  1. Paul Dalby says:

    Very funny review Dwight.

    Did anyone think about modelling the “muddle through” scenario where we stuff around while we wait to see what happens and then invest very heavily when it is already too late?

  2. dwighttowers says:

    Most of the comedy was provided for me.

    No-one did model as you’ve suggested, but probably should…


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