Harvard economist disses most climate cost-benefit analyses 2

Comments View as Flat

1. 

   mkayser Posted 4:47 am
   12 Sep 2007

   Interesting paperI actually posted a comment on ClimateProgress too, but the paper is worth a skim, even for the math-averse. Take this fascinating excerpt from the conclusions section:
   
   
   Perhaps in the end the economist can help most by not presenting a cost-benefit estimate for such situations as if it is accurate and objective -- and not even presenting the analysis as if it is an approximation to something that is accurate and objective -- but instead by stressing more the fact that such an estimate may be arbitrarily inaccurate depending upon what is subjectively assumed about the fatness of the tails and where they have been cut off.
   
   
   In other words, an economist who tells you precisely "how bad" the environmental future is going to be is necessarily making subjective assumptions -- and those subjective assumptions are substantially driving the result.
   This is kind of sobering. At the least it strongly suggests that we need to throw a lot of money into researching "how bad the environment might get". To try to get some objective handle on things.
   I imagine this plea, however ("let's fund more research into how bad global warming might get!") will tend to fall upon deaf ears in a place where most people are activists who are already convinced that global warming must be a very big problem.

   Permalink

2. 

   jonaanda Posted 5:11 am
   12 Sep 2007

   Joseph Romm on WeitzmanYour summary of Weitzman is excellent; but I'm not sure cost-benefit analysis gets us where we need to go.  Coming from Wall Street, where fat-tail risks are dynamically hedged daily, it seems like an options-based approach is needed.  Yes, that invloves relative varince calculations that are far from empirical...and yes, real options are still leading edge even in finance (so very tough to use with policymakers)...but pulling Weitzman's uncertainty paradigm into the world of risk management seems worth a try.
   From a piece I wrote a few weeks ago about Lomborg ("Risk Managment":
   Innovation requires linking capital to ideas; without carbon limits that process is blocked. Reducing carbon emissions by up to 2% per year from current levels, over a 40 year period, will deliver more technology and potentially at less cost than his proposal. But what if Lomborg is right and limiting CO2 now is more expensive than waiting? Well ... the choice of policy depends on the nature of the risk. Science points to climate outcomes that are statistically skewed towards worst-case, and irreversible, outcomes. (Specifically, the distributions of both the sensitivity of climate to greenhouse gas concentrations and the damage function are both lognormal.) That argues for stringency now and leniency later. If ex-post, capping emissions now turned out to be more expensive, we still made the right choice given the nature of the risk we faced.
   What my earlier piece needs are the numbers to back it up!

   Permalink