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Thursday, September 13, 2007

"If The Uncertainties Are Not Small, Standard Cost–Benefit Analysis As Applied To The Economics Of Climate Change Becomes Incoherent"

Partha Dasgupta reviews Cool It: The Skeptical Environmentalist's Guide to Global Warming, by Bjorn Lomborg (via email):

A challenge to Kyoto, by Partha Dasgupta, Nature: Bjorn Lomborg's The Skeptical Environmentalist created a sensation six years ago. The author offered figures to dismiss claims that the ecological-resource base in many parts of the world is deteriorating, and argued that the costs of reducing ecological losses are usually higher than the benefits. Never mind that several of the world's foremost environmental scientists expressed more than mere scepticism towards Lomborg's grasp of their science: prominent publications such as The Economist promoted the book vigorously... People learning of my own work in developing ecological economics would ask, "And have you read Lomborg?" — implying, "Why have you thrown away so much of your working life?"

Things have changed over the past year. Former US vice-president Al Gore's film An Inconvenient Truth and the Fourth Report of the Intergovernmental Panel on Climate Change have given rise to great public concern, and many now regard global warming to be the central problem facing humanity. Lomborg's latest book, Cool It, is a response to that change in public perception. He doesn't question the science...; he questions whether we should do much about it. ...

The book is a series of exercises in cost–benefit analysis, interspersed with quotes on climate change from the writings of famous people who should know better than to speak in hyperboles. Lomborg produces figures to show that it would be better to replace the Kyoto Protocol with strategies that encourage economic growth and blunt the harmful effects of climate change. Here is a sample: did you say Kyoto would result in fewer floods? Maybe, but it would reduce flood damage by only US$45 million a year, whereas building appropriate infrastructure could lower it by $60 billion a year. Didn't you also say that global warming would cause additional deaths from heatwaves? Yes, but what about the greater numbers who would not die of cold? ... What about more severe hurricanes? Well, Kyoto would reduce the increased annual damage by only 0.6%, whereas taking better precautions could lower it by 250%. And so on.

Lomborg reports that Kyoto's annual cost would be $180 billion in foregone output, whereas the smart strategies he outlines ... would cost a mere $52 billion a year. By his reckoning, those strategies would limit the rise in concentration of carbon dioxide to 560 parts per million (p.p.m.) and the accompanying temperature rise to 4.7 °C. Smart strategies would cost far less than Kyoto, deliver higher economic growth worldwide, and markedly reduce poverty. From the vantage point of Kyoto, there is a free lunch to be had wherever you look. ...

All this is spelt out in such a breezy, engaging style, it's hard not to find the arguments entirely reasonable. Unfortunately, Lomborg's thesis is built on a deep misconception of Earth's system and of economics when applied to that system. The concentration of CO2 in the atmosphere is now 380 p.p.m., a figure ... in excess of the maximum reached during the past 600,000 years. If there is one truth about Earth we all should know, it's that the system is driven by interlocking, nonlinear processes running at different speeds. The transition to Lomborg's recommended concentration of 560 p.p.m. would involve crossing an unknown number of tipping points (or separatrices) in the global climate system. We have no data on the consequences if Earth were to cross those tipping points. They could be good, or they could be disastrous. Even if we did have data, they would probably be of little value because nature's processes are irreversible. One implication of the Earth system's deep nonlinearities is that estimates of climatic parameters based on observations from the recent past are unreliable for making forecasts about the state of the world at CO2 concentrations of 560 p.p.m. or higher. ...

These truths seem to escape Lomborg. His cost–benefit analysis involves only point estimates of variables..., implying that he believes we shouldn't buy insurance against potentially enormous losses resulting from climate change. ...

The integrated assessment models of Earth's system on which Lomborg builds his case are arbitrarily bounded on either side of his point estimates. It can be shown that if those bounds are removed (as they ought to be), even a small amount of uncertainty — when allied to only a moderate aversion to uncertainty — would imply that humanity should spend substantial amounts on insurance, even more than the 1– 2% of world output that has been advocated. If the uncertainties are not small, standard cost–benefit analysis as applied to the economics of climate change becomes incoherent, even if those uncertainties are judged to be thin-tailed (gaussian, for example); this is because the analysis would say that no matter how much humanity chooses to invest in protecting Earth from passing through those later tipping points, we should invest still more.

Economics helps us to realize what we are able to say about matters that will reveal themselves only in the distant future. Simultaneously, it helps us to realize the limits of what we are able to say. That, too, is worth knowing, for limits on what we are able to say are not a reason for inaction. Lomborg's seemingly persuasive economic calculations are a case of muddled concreteness.

    Posted by on Thursday, September 13, 2007 at 02:07 PM in Economics, Environment, Policy, Science | Permalink  TrackBack (1)  Comments (35)

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    » Economists (and others) weigh in on The Lomborg from The Post-Normal Times - Putting Science into Context

    In a previous post about The Lomborg, in followup to a previous one, I had a bit of a disagreement with Michael Tobis, over whether Lomborg is just adhering to the principles and presumptions of conventional economics, and whether what... [Read More]

    Tracked on Wednesday, September 26, 2007 at 07:25 AM


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