April 18, 2008

The Man Who Knew How Much (William Nordhaus and Doing Something or Nothing about Climate Change)

Prediction is famously difficult, as one wag put it, especially if it is about the future. So now that we’ve passed the five year mark in the Iraq adventure, who was in fact right about the likely costs of it? Certainly it wasn’t those proposing the invasion, some of whom proposed numbers as low as $50 billion in total costs.

Joe Stiglitz has argued that the cost is $3 trillion and climbing. I might, along with some others, think that there’s more than a fair share of kitchen sinks being thrown into that, but it does at least give us a ballpark number to work with. So who back before it all kicked off gave us an estimate that accords with our post facto accounting?

Of all that did, indeed, try to add up the costs, the only one who gave us a figure even remotely comparable was William Nordhaus. The full paper and details are here, an overview here.

The unfavorable case is a collage of potential unfavorable outcomes rather than a single scenario. It shows the array of costs that might be incurred if the war drags on, occupation is lengthy, nation-building is costly, the war destroys a large part of Iraq’s oil infrastructure, and there are both lingering military and political resistance to the U.S. occupation, and major adverse psychological reactions to the conflict. Putting the different adverse effects together adds up to $1.6 trillion, most of which come outside of the direct military costs.

Really rather prescient, don’t you think, because the Congressional Budget Office seems to be saying, under circumstances very similar to those Nordhaus assumes, that the direct costs of the war will be between $1.2 trillion and $1.7 trillion.

Now the purpose of reminding people of this is not simply to point to varied neocons and shout about how wrong they were (fun though that activity can be). Rather, to emphasise the point that prediction really is a difficult business, so much so that only one person was anywhere near getting it right about the costs of the big adventure”€”and he got it in print no less (claiming you knew but didn’t say, doesn’t, I’m afraid, count).

The point is, rather, to suggest that if Nordhaus has indeed been that one good predictor on one subject, perhaps we should be paying especial attention to his predictions on other matters as well? Like, for example, the area where his reputation really comes from, the predictions about the costs both of climate change and attempts to mitigate it through reductions in emissions. The full paper is here and at 253 pages (including notes and references), it isn’t light reading I’m afraid.

The background logic to the argument is very simple: that climate change is happening, that we’re causing it and perhaps we ought to do something about it is assumed. The figures come from the IPCC reports and thus reflect the scientific consensus (please note, these are the assumptions within which this debate is taking place. Whether they are all true is another matter, quite outside the scope of this discussion. What is at issue, if they are true, is what should we be doing?

Now please do understand that for our purposes here, I’m swallowing all the Kool-Aid. The IPCC is correct, Al Gore’s only slightly over-hyping matters, and it’s not whether we do something, it’s what do we do?

There’s two things that we really still don’t know (again, we’re following the conventional narrative here): the first is what is climate sensitivity. This is what temperature rise can we expect from a doubling of atmospheric CO2? Something that most outside the details of the debate don’t know is that the actual warming from CO2 itself isn’t in fact something we’re very worried about.The IPCC thinks that it would, directly, lead to a rise in temperature of some 1 degree C. No, we’re really not worried about that: but we are worried about second order effects. Will a 1 degree rise lead to less ice and thus less reflection of energy back into space thus increasing the warming? That would be a positive feedback. Or will higher temperatures lead to more plant growth, which when they die and rot leave some of their carbon content as humus (no, humous is the food from our Glorious Proprietor’s homeland) in the soil thus reducing CO2 levels in the atmosphere again? Thus a negative feedback?

What we do know is that there are both negative and positive feedbacks and what we really don’t know, but rather wish we did, is what is the cumulative effect of them all? Current estimates (within, again, our mainstream) range from the low end of the IPCC estimate of 2 degrees C, through a clever piece of Bayesian logic giving us 3 degrees up to James Hansen’s latest “€œprepaper“€ (that is, not peer reviewed as yet) offering 6 degrees. Really, at this stage of the game, you pays your money and you takes your choice.

The second thing we really don’t as yet all agree upon (although I would say that the science is probably clearer than the climate sensitivity part, even if that science is economics) is what exactly it is that we should do about it all: and the disagreement here depends upon the costs and benefits of the various possible courses of action.

Clearly, if the damage is going to be X, then we don’t want to cause more damage than X to avert it. Yes, economists do put a $ sign in front of X, because they do indeed reduce everything to a financial number, so as to be able to compare things, one with another. The value of polar bears, of Bangladesh, of floods and famines, the Stern Review even included the possibility that we’re all wiped out by an asteroid on Thursday week. So we end up with a number for the damage done by climate change. We clearly do not want to pay more than that number to avoid said damage. That would be the cutting of the nose to spite the face thing, not a sensible move. 

The basic idea then, one shared by all of the people discussing what we should do”€”yes, Al Gore, the signatories to Kyoto, the people discussing post-Kyoto actions and so on is”€”if the damage is going to be $40 trillion then we should be willing to spend up to, but no more than, $40 trillion to avert said damage. If $20 trillion then up to $20 trillion and so on. This is a simplification, yes (there are things like discount rate to complicate matters, but I’m ignoring them here to keep things simpler) but it is the basis upon which we are trying to make our decision about what we do.
So what is suggested is this (from Nordhaus):

The first major point is that an ideal efficient climate-change policy would be relatively inexpensive and have a substantial impact on long-run climate change. This policy, which we have labeled the “€œoptimal”€ one, sets emissions reductions to maximize the economic welfare of humans. The net present-value benefit of the optimal policy is $3.4 trillion. Our estimate is that the present value of global abatement costs for the optimal policy would be around $2.2 trillion, which represents 0.11 percent of discounted world income.

That is, in slightly more detail, that we should simply impose a carbon tax of around $7 per tonne CO2. If we go much higher than that then we’ll be causing more damage than the climate change itself will do. Further, we get a very gloomy reading of the more extensive proposals from some others:

Clearly, meeting these ambitious objectives would require sharp emissions reductions, but the timing induced by excessively early reductions makes the policies much more expensive than necessary. For example, the Gore and Stern proposals have net costs of $17 trillion to $22 trillion relative to no controls “€“ they are more costly than nothing. The emissions target of the German proposal is close to that of the Stern Review analysis, and the cost penalty is likely to be similar.

That Stern’s and Gore’s proposals will cost more than doing nothing at all is certainly a surprising statement. But what if it is actually true?

Now no, I’m not insisting that Nordhaus is correct here in each and every particular. Nor am I claiming that Stern and Gore with their proposals will impoverish us and our descendants to no very good purpose. Only that we’ve got a number of people here making those very difficult predictions about the future.

And only one of them has a track record of actually being correct on previously made such predictions about that very difficult future.

So why aren’t we and policy makers paying more attention to his predictions?

Just to hammer this point home: we’ve got the Republican (yes, I know, he says he doesn’t know very much about economics but really….) nominee saying, “€œIf Global Warming is happening, then action taken now is necessary; if it’s not, then action will make us more efficient anyway,”€ or muttering something to this effect. Which is, unfortunately, drivel. It’s terribly simple to make us more efficient: simply bulldoze all cars that do less than 40 mpg. When stated like that, it’s obvious that the cost will be higher than any benefit that we might get from it. The aim isn’t to make us more efficient, it’s to make us as efficient as possible without the move to said efficiency costing more than any benefits we get from the move. Yes, certainly, a world not dependent upon fossil fuels would indeed be a nice thing to have, as would a pony in every Christmas stocking: we could tell a number of odious political regimes to go hang for example. Yes, more efficient use of what energy we have would also be a lovely and desirable thing: but as above, the really important question is how much is it going to cost us to have those things?

And if the costs are going to be higher than the benefits, then we’re simply making ouselves and our descendants poorer for no clearly and obviously good reason. Another way of describing such actions is “€œdumb”€.

All of which is really rather why I’d like to see people taking more note of the Nordhaus calculations on the costs of mitigating climate change: he is, after all, the only person out there with a track record of successful predictions about the costs and benefits of future actions.

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