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Reporting From the Front Lines of Economics

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I recently attended the annual American Economic Association meeting, one of the largest gatherings of economists in the world. For good reason, the conference was dominated by discussions about the current global economic crisis and what it may mean for future economic growth. 

The severity and prolonged nature of this recession and its painful impact on people around the world is clearly the pressing challenge of the day.

Unfortunately, we also a face another looming challenge as real and as potentially damaging to human well-being as a severe recession might be: the risks of unchecked climate change. I went to the conference in search of new thinking on issues related to climate change and clean energy. While there were only a handful of sessions on these topics, a couple of papers grabbed my attention because they laid out important and innovative ways to think about the risks of climate change, and how this should influence policy choices.

Arctic sea ice hits its 2nd-lowest level ever in 2011, opening up the northwest passage shipping lanes. Credit: NASA

Tipping Points

The first, Tipping Points and Ambiguity in the Economics of Climate Change, by Derek Lemoine and Christiane Traeger, analyzes the effect of incorporating the possibility of climate tipping points into a model that has been the cornerstone of climate economics for over a decade.

In contrast with conventional economic models that tend to assume smooth, linear relationships between temperature and climate variables (and economic activity that depends on those climate variables), this formulation recognizes that, as global temperatures rise, we run the risk of seriously and irreversibly altering our climate—and our economic system.

The authors find that accounting for the economic risks of such tipping points would imply raising the optimal near-term carbon tax by up to 45 percent and thus lowering peak warming by up to 0.5°C.

The Human Costs of Climate Change

A second paper, On Welfare Frameworks and Catastrophic Climate Risks, by Anthony Millner, grapples with how to value the small but real risks of climate catastrophes on human welfare. Without a doubt, this is a technically challenging paper, but its main conclusion is clear: the current use of a very narrow set of traditional economic tools to evaluate climate costs and policy choices falls far short of what is required for a problem with such profound consequences.

As the author says: “Climate change is a mega-problem—it requires us to evaluate and compare market and non-market impacts, come to terms with deep uncertainty, make inter-temporal trade-offs far into the next century, divide mitigation responsibilities equitably, and contemplate potential catastrophes. Furthermore, while models must continue to be improved upon, it is vital that a parallel program interrogates the ethical and formal foundations of such models.” I couldn’t agree more! At its best, good climate economics needs to be an interdisciplinary effort, informed by the latest climate science and the science of climate impacts on health, agriculture, infrastructure, ecosystems and the economy.

These papers build on a body of serious economic research that points out that policymakers must consider strong action to confront the costly risks of climate change. Even, and especially because, some of the most serious risks are subject to scientific uncertainty. If anything, the uncertainty and the high stakes involved only highlight a greater need to act in a precautionary manner, much as we do in buying insurance. To quote Harvard economist Martin Weitzman: “I believe that the most striking feature of the economics of climate change is that its extreme downside is non-negligible.”

Many Benefits of Climate Policy

I also participated in a panel on climate and energy policy, discussing the role of EPA’s Clean Air Act regulations in helping to transform our electric system by reducing our dependence on polluting sources of energy. This will bring tremendous public health benefits but also affords us an opportunity to diversify and clean up our energy mix by increasing our reliance on cleaner sources like natural gas, renewable energy, and efficiency.

Injecting some much-needed levity into the seriousness of the conference proceedings was a comedy session (starring Yoram Bauman, the world’s first and only Stand-up Economist, and Nobel prize winner Paul Krugman, who discussed The Theory of Interstellar Trade). An evening of music included another Nobel prize winner, Eric Maskin, and the (Neo)Classical Trio.

 

Posted in: Global Warming Tags:

About the author: Rachel Cleetus is an expert on the design and economic evaluation of climate and energy policies, as well as the costs of climate change. She holds a Ph.D. in economics. See Rachel's full bio.

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  • Baird Edmonds

    I am well aware that it’s not at all cool to mention the herd of pachyderms in the room underlying all of the concerns we face. There are far too many of us on the planet, can you say totally unsustainable. It’s true the developed countries have flat to negative population growth rates but that is hardly true of the developing countries. This will be an increasing problem as everyone on planet earth strives to “develop”.

  • http://www.ucsusa.org/news/experts/rachel-cleetus.html Rachel Cleetus

    Grover N., we are faced with a stark choice of taking strong action to confront climate change now or being stuck with the costs of unchecked climate change later (costs that we are also inflicting on our children and grandchildren). Putting a price on carbon is one important policy tool to help transition us to a low-carbon economy (other complementary policies to increase renewable energy and energy efficiency, reduce tropical deforestation, and build resilience to climate change already underway are also necessary). Revenues collected from putting a price on carbon can and should be used for the public benefit — for example, through dividends or through investments in low-carbon infrastructure. Investing in this transition will bring many health and economic benefits, in addition to helping reduce the emissions that cause climate change.

    • Anne

      OK. Well, I would like it to be about 15 degrees cooler around here in the summertime so see what you can do about getting that carbon tax increased by 1350%, will you? Actually, I seriously doubt you can influence global temperature in the near future, even if you stopped us all from emitting any CO2. Your suggestion that man can control climate is absurd, as you will find out to your frustration and our impoverishment.

      • http://www.ucsusa.org/news/experts/rachel-cleetus.html Rachel Cleetus

        Anne, you are right, there is little we can do to influence near-term temperatures because near-term climate change is, for the most part, already “locked in” by our current and past emissions. That’s why we have to invest in building resilience. However, we do still have a choice about the amount of longer term climate change we put in motion due to our emissions now and in the future. We can still work to reduce or avert some of the most extreme consequences of unchecked climate change. Making deep cuts in our emissions is technologically and economically feasible, as many independent analyses have concluded including this one from UCS:
        http://www.ucsusa.org/global_warming/solutions/big_picture_solutions/climate-2030-blueprint.html
        So I am hopeful.

  • Grover N.

    Well, I must say this is the first and only time a global warming economic calculus has been so simplistically presented. How refreshing to learn simply boosting the “optimal near-term carbon tax by up to 45 percent” results in “lowering peak warming by up to 0.5°C”. Happy news! The earth can be cooled by taxing the bejeezus out of Americans!!

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