Most climate scientists are calling for immediate and decisive action of the global community needed if we want to prevent global warming from devastating our world. Since they are people who have dealt with the subject professionally for years, there is no reason not to believe them. Nevertheless, distinguished economists who work on climate change (e.g. William Nordhaus or Richard Tol) are calling to slow down, claiming that immediate and decisive action not only is not necessary – it could be harmful to the world economy as well. Whom should one trust? And why the differences?
The problem is not climate science, the problem is mainstream economics. Economists, even those calling for action against climate change (for instance Nicholas Stern), are working with assumptions and methods inappropriate for dealing with this particular subject. These flawed assumptions and methods are: discount rates; the infinite growth assumption; monetization of impacts; treatment of uncertainties.
- Discount rates: discounting future costs of climate change makes them appear very small. Especially when one uses market investment rates, as do many climate economists (e.g. Robert Mendelsohn or Richard Nordhaus) – they are particularly high (about 5%). These rates express (so claim the ones who use them) the preference of market actors (us) for having something now instead of having it in the future (in the case of climate change: not spending money now to avoid damages in the future). Sounds reasonable, doesn’t it? But there are many problems with it. First: only a small part of humanity actually participates in investments markets – so why claim that the rates express the preferences of all of us? Secondly: markets aren’t perfect. They deform a lot – so why trust them so deeply? (Nordhaus, a Neo-Keynesian economist, should actually know better) Thirdly: if the market rates express anything, it is our preferences in the short run (the time horizon of a typical investment seldom is longer than 20-30 years – in the case of climate change it is more than 100 years). In my personal opinion, Nicholas Stern did the best here: he chose only a (arbitrary, one must admit) possibility of the extinction of humanity as the base of his discount rate. He also extended it by assuming that we will be richer (ceteris paribus – all other being equal) in the future, what wasn’t that right. This is our next point.
- The infinite growth assumption: mainstream economics is working under the assumption that consumption per capita will rise ad infinitum. But is that really possible? Why are they actually claiming this? Here is the reason why (it’s an example for America, but the trend looks similar for the world as a whole):Looks like they are right, doesn’t it? But does it really? No. The only thing that is shown by such graphs is that so far we were able to let our economies grow continuously. To claim that this means we could just continue, is wrong. There are already a lot of implications that the world economy have passed the limits of the Earth’s carrying capacity, which means that, sooner or later, growth will have to cease. Assuming that people will become richer and richer ad infinitum in a physically finite world is absurd. But if we assume that, there is no need for really decisive action against global warming: even Stern’s analysis’s outcome, 20% reduction of world GDP (in relation to what it would be without climate change, i.e. growing all the time) now and forever, would be more or less equal to the “lost decade” in Japan. Is there anybody eager to claim that the Japanese are really bad off? I don’t think so.
- Monetization of impacts: mainstream economists use the so called cost-benefit analysis to find out what we have to sacrifice now if we want to avoid severe damages resulting from unhalted global warming. But to compare something (costs of mitigation and adaptation now and in the near future) with something else (benefits of avoided damages in the farther future), one has to find a way to express it with the same unit – dollars, mostly. With mitigation and adaptation costs, it is not a problem. But how to monetize lost human lives? Biodiversity losses? I would claim, it is impossible. Economists use two equally flawed ways out of this dilemma: either ignoring impacts that cannot be monetized (and thus hugely underestimating the severity of climate change) or somehow, arbitrarily monetizing them (and thus, mostly, hugely underestimating the severity of climate change). After such a deformation, their analyses are garbage.
- Treatment of uncertainties: climate science is full of uncertainties. The common economic approach in assessing (and analyzing) the impacts is to use the ranges from scientific papers – what is a probable (the next arbitrary definition) outcome of global warming, will be counted, what lies beyond the range, will not. Climate economist Martin Weitzman is the one who most powerfully suggested why this approach is flawed: it omits all catastrophic events. They all are rather improbable (1%, 2%…). But so are house fires. Or sudden death. Nevertheless, people insure against these. Because if your house is burnt, it doesn’t help you to know that this was highly improbable. You’ve lost it. Definitely. So, imagine the improbable (but possible) catastrophe of Greenland losing its whole ice cover shall become reality. Millions of people’s lives would be threatened. Shouldn’t we somehow insure against it?
As one can see, climate scientists and economists cannot agree on the urgency of mitigation of and adaptation to climate change because the latter are wrong. Their methods and their assumptions are flawed, deeply inappropriate for analyzing global warming. So, what has to be done?
The best opportunity seems to be what Frank Ackerman has proposed: let the climate science find out and define the threshold (greenhouse gas concentration in the atmosphere) that we should not pass, if we want to avoid catastrophic outcomes. Meanwhile, economists should concentrate on how to achieve this at least cost.
Sometimes one must admit that he is not able to solve a task. Fortunately, in this case it is not needed: somebody already has solved it.