Reporting From the Front Lines of Economics

February 17, 2012
Rachel Cleetus
Policy Director

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: Climate Change

Tags: economics

About the author

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Rachel Cleetus is the policy director with the Climate and Energy program at the Union of Concerned Scientists. She leads the program’s efforts in designing effective and equitable policies to address climate change, and advocating for their implementation.