Thursday, October 30, 2008

Climate economics

As SAGE is preparing a new encyclopaedia on green politics, I have been commissioned to write the article on “sceptical environmentalism”. With a maximum word count of 1500 and a deadline in early February, it is not an urgent task, yet I have spent the last days doing some preliminary research. Only a few months ago, the journal Environmental Politics published an extensive literature survey of the topic, revealing that of 141 environmentally sceptical books published between 1972 and 2005, 92 percent were linked to different conservative think tanks.

That being noted, I would nonetheless maintain that there is room for a valid criticism of mainstream green thinking, not to mention its more radical incarnations. However, unlike the junk science espoused by so called “climate sceptics”, the issue should not be whether the environmental problems are real, but rather what we are to do politically about them.

Most cost benefit analyses of global environmental change, such as the ones championed by Bjørn Lomborg, assume a known probability distribution for each uncertain outcome or parameter. However, as Martin Weitzman has argued in a recent contribution to the economic theory of climate change, we are inferring these probability distributions from a limited amount of empirical information. Instead of assuming a normal distribution with thin tails we should assume one with fat tails, including some truly ominous estimates. With no firm upper bound on the possible damages, it seems as if we have not correctly valued the risk of catastrophic climate change. On the other hand, given the technological advances of the last centuries, mainstream economists may also incorrectly have underestimated the “other side of the equation”, as in what exactly can be achieved by (democratically guided) scientific and technological progress over time.

It is uncontroversial to say that technological change is poorly understood in economics. Though economists may (perhaps) be able to estimate how a new cell phone model may contribute to economic growth in one country they can say nothing of how “breakthrough technologies” such as nuclear fusion would impact our civilization. Yet, given the deep uncertainty of both risks and possibilities in the century ahead, it seems urgent to “insure” ourselves against the worst possible outcomes, arguably by investing sufficient resources to open up advanced technological paths to environmental sustainability.



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