Economists and Climate Change – Homework Comes First

A Comment to Henderson

Aldo Matteucci – DiploFoundation, Geneva (Switzerland)

David HENDERSON (World Economics X, 1) is certainly right in highlighting the “uncritical and over-presumptive ways in which [economists] have dealt with the scientific aspects” of climate change. All of his points are well taken and deserve expeditious and thorough treatment. As the aging IBM-adage says: garbage in – garbage out. I may add for good measure Oskar MORGENSTERN’s forgotten lesson about the inevitable loss of information when data are numerically-mathematically processed [i]. Models may inherently (and inadvertedly) produce garbage as they grind good numbers. There are inherent limits to improving the data, however. Even were HENDERSON’s points implemented by tomorrow at dusk – the science would continue to provide surprises and discoveries as of the day after. Climate study is truly ‘work in progress’: and there is no end in sight, just asymptotic accumulation of knowledge. We’ll never know for sure what lies ahead: complex systems like the climate are structurally unpredictable, and talk about impending ‘tipping points’ is so much speculation – as the millions of butterflies attest, whose flapping of the wings did not create a hurricane in New York. As crucial as the demand for better data is – it is only half the task. Lord KEYNES’ gently chided all of us: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” The current predicament of the economic profession after the collapse of the ‘rational expectations’ paradigm should alert us to the danger of using simplifying assumptions, axioms and incomplete models in policy making. We may upgrade the facts; but do we verify and upgrade the underlying thinking? Or might not the opposite be true: hopeful paradigms, tentative insights, conjectures or working hypotheses are ‘stretched’ until they become platitudes or harden into dogma? This comment, therefore, aims to enlarge the discussion. When HENDERSON speaks of received opinion he is right – albeit incomplete. ‘Received opinion’ refers not just to the underlying science: it refers even more to the conceptual framework currently being used to address the issue. The following might then be seen as a preliminary and provisional list of conceptual and methodological issues that economists could usefully converse about while sitting around the campfire of reason waiting for the lumbering science train to catch up. A review of our conceptual models may have consequences beyond the better treatment of better data. It may, hopefully, help change the kind of data we use by highlighting gaps and stimulating science to look beyond its own – quite limited – conceptual framework. For all its strengths the IPCC process does not undertake or commission research, neither on its own account, nor on behest of ‘policy’. Is it not strange that ‘policy’ has no requests of its own to make to science? After all, economists, not the statistical bodies, have driven the definition and collection of economic data. Is it not somewhat anomalous that there is no institutionalised dialogue on data between ‘policy’ and ‘science’? 1. Naming the issue Mankind tells stories to itself – that’s the way we all make sense of chaotic reality. Depending on the choice of point of view – assumptions rather than findings – or which interests are foremost on the story-teller’s mind, stories may vary fundamentally[ii]. These stories vie for broader acceptance and thus social legitimacy. Whoever controls ‘the story’ also controls the framework of a negotiation and – to a good extent – the outcome. ‘Soft power’ is much about controlling the ‘story’. Tackling an issue thus begins with its proper ‘naming’. ‘Naming’ and the choice of an analytical framework for policy action are closely related. For historical reasons ‘climate change’ has been ‘named’ an ‘environmental’ and ‘pollution’ problem, which is certainly not wrong as to its origins. This kind of naming has consequences for the way the issue is tackled, however: (a) it implicitly favours mitigation and abatement policies by analogy with other pollution problems; (b) it focuses on the damage, while underplaying possible benefits of climate change; (c) it introduces an implicit element of ‘guilt’ (as enshrined in the ‘polluter pays’ principle<a href="[iii]), rather than pointing towards a common responsibility, or the most economic solution to the problem; (d) It tends to focus on ‘material balances’, while underplaying the role of social institutions and inventiveness (technology) in adapting to the impact. Not only does it hide complementarities/ competitivenesses in policies, but it might misdirect efforts away from needed social reforms. This perception of the problem, coupled with projections of irreversible environmental degradation, has led to what I might call ‘environment/climate change exceptionalism’ – the contention that the problem is so imminent and immense as to push aside all other concerns, or make them subsidiary to the solution of the core issue. On the contrary, I’d opine that climate change policies are not a ‘separate’ issue but one of the legs of the tripod: resources, technologies, and environment (of which climate change is part), which are the long term basis of sustainable development. To state it bluntly: climate change policies are part of social and economic development policies – and we should name them correspondingly. While climate change policies are a necessary component of development, they are not sufficient, not even to save us from the impending doomsday. Three reasons in particular may be advanced: (1) Most of the ‘impacts’ of climate change (from its impacts on health to food security) concern what we define currently as ‘social and economic development’. We are confronted with the choice whether to address the issues directly (e.g. through health policies or poverty reduction) or indirectly by addressing climate change issues[iv]; (2) Climate change is intimately connected with energy policy (some say it is 80 % so) – and energy is what drives economic development. To argue for decarbonification is to argue for a major change in energy and development policies; (3) Public policies all demand resources – be they from the public purse, private firms, households, or individuals. While we all might ‘do more’, in the end it is a matter of priorities, and doing A means that C and D will not receive as much attention. One may argue then, with A. K. SEN, that “enhancement of human freedom is the main objective and the primary means of development.”[v]. This applies to climate change policy no less than any other social and development policy. There is no basis or justification for ‘climate change exceptionalism’. Sustainable development cannot be divorced from social justice. A solution that would have assets trickle up and some income trickle down would prove unworkable even before the ‘ecological limits’ were reached. Climate change policies that would advocate compression and convergence from the current worldwide or regional distribution of income would be unlikely to find approval with those large parts of humanity that have been short-changed in their development so far. The core issue facing mankind today are how to square sustainable development with resource use and environmental protection. These issues are totally intertwined. To break them out and privilege one of the tree legs is to distort our predicament. 2. The ‘precautionary principle’ – can it bear so much weight? Climate change discourse is greatly shaped by the ‘precautionary principle’. We are treated to a weekly parade of observations which, when projected into the future, portents doom: disease, famines, the image of New York’s statue of Liberty sinking under the sea – whatever. Having weighed in with such bad tidings, preventive action – de-carbonification – is presented as self-evident precaution. This scenario brooks no discussion: the case for ‘climate change exceptionalism’ rests on “better safe than sorry”. Caution, certainly a wise stance, has moved here beyond an argument from experience and hardened into principle, or even become deontological imperative – it has become a major ‘killer argument’. In some countries it has become legally binding and subject to judicial review. There are even attempts to enshrine it in international law. The inverted commas around ‘principle’ are meant to flag a logical difficulty worthy of a closer look. I’ve difficulties with a principle indiscriminately applied to justifying both mitigation and avoidance of nuclear power. This difficulty, incidentally, is far from new: Thomas Paine and David Hume at the core argued about the application of the ‘precautionary principle’ to the American and French Revolution. In hindsight, while we may usefully argue as to whether revolution is the best way to achieve liberty, we would not reject liberty out of fear that it might lead to licence. The precautionary principle is deeply conservative. By definition any change involves at least some regrets: if avoiding regrets is established as our foremost guiding light, then any change should be rejected on the grounds that we are already living in Panglossian perfection. For there will always be “known unknowns and unknown unknowns” – in the elegant formulation of a former US Secretary of Defence. Privileging ‘unknowns’ over ‘knowns’, however, debases rational discourse, while opening the field to subjective and selective bias towards catastrophism. Let’s be honest – we are more likely to believe a headline that ‘the end of the world is near’ than the prediction that ‘paradise is just around the corner’. While I may use the precautionary principle to stop my child from attempting to walk on water, I would not accept it as his excuse not to get out of bed in the morning. David RUNCIMAN[vi] and Cass R. SUNSTEIN[vii] have forcefully argued for a rational application of the ‘precautionary principle’, i.e. to replace dogma with verification of the principle in the specific context. How much of the vaulted ‘principle’ will remain, will be interesting to watch. After all, it’s this principle that got Buridan’s ass into terminal trouble. There is nothing wrong about the ‘precautionary principle’ that a good dose of common sense won’t cure. What might help, I’d argue, is to stop turning ‘an arguable argument into an obsessional fantasy’ for action. 3. The conundrum of intergenerational responsibility Unlike people, societies don’t have a finite time horizon. Despite this basic difference, we intuitively apply to policy an analogy from our individual experience and demand that ‘every generation should make reasonable allowance for the needs of the future’. As self-evident as it sounds – this principle creates significant logical problems. We all save ‘for a rainy day’. Yet a rainy day might hide another, so when should we use money we have stashed away to cover such a contingency? Mostly we die before we are able to resolve this conundrum, and either the heirs or the insurance company gets rich. This conundrum is exacerbated with public policy. There always is a ‘future generation’ to provide for. This would make ‘no use’ the only legitimate one – an obvious abdication of responsibility. We should not bequeath future generations a badly diminished world, it is said[viii]. But this view is flawed: as we transform the world we leave to future generations enormous tangible and intangible assets, albeit of a different kind. True, we may be ‘mining the environment’ – thanks to our efforts, meanwhile, human knowledge doubles every five years. Is this not compensation enough? Other ethical issues emerge. Future generations cannot tell us about their wants and preferences. At best, we can apply to them the Golden Rule (“don’t impose on others what you’d not like being imposed on you”), but that implies that values remain unchanged, or that we act in paternalistic ways, as Paul SAMUELSON opined (he rejected the Golden Rule with the caveat: “they may have other tastes…”). Conversely, future generations are in no position to compensate us for the benefits they receive from us in terms of development – they’ll inherit it all for free, warts and all. If we assume a reasonable rate of growth, future generations are likely to be much better off than we are today – at 1.5% annual growth it is over four times in 100 years. The question is then: to what extent should this generation sacrifice for the future where everyone will be richer (comparatively speaking) thanks to our inheritance? This issue is further complicated by the fact that we should atone for ‘past sins’ – the accumulation of GHG that accrued ever since industrialisation (or even civilisation?) began. Is it reasonable to expect today’s world to bear on its weak shoulders the burdens of past, present, and future? Distributional justice makes the issue even thornier. We do find it difficult to arbitrate between accumulation and distribution, and many argue that ‘trickle down’ is the best our society can achieve. Meanwhile, even should the tide raise all boats, the gap between rich and poor is getting wider – and this is perceived as unfair[ix]. Favouring future generations inevitably short-changes today’s poor. This is not just an ethical issue: it is one of political stability of our societies – rich and poor, present and future ones. 4. Toward more objective benefit-cost models What is intuitively simpler than weighing benefits and costs? Much of the climate change discourse is about benefits and costs. Ever since benefit-cost analysis emerged as a policy tool over fifty years ago, what looked as a simple counting procedure has proven to be a logical minefield. I shall list a few areas of concern, without claiming completeness. (1) Bias in identifying costs and benefits. Nothing is easier than being selective in identifying benefits and costs. The larger and more complex the issue, the greater the opportunities for identifying/ignoring costs or benefits to suit one’s prejudices. When we were young and interventionists the benefits from public action easily had the upper hand – even if meant double-counting or ignoring externalities. Now that we are old and full of regrets the pendulum has swung the other way and catastrophism seems de rigeur. Here a few examples from the current climate change discourse:

• Deaths from excess heat[x] are totalled up, but ‘lives saved’ when milder winters reduce mortality from cold are ignored. Of course, they are not easily ascertained, but the inherent incompleteness of the analysis should be acknowledged and weighted.
• Desertification in the subtropics is highlighted, while the fact that wide areas in the sub-arctic regions of Canada and Russia may become available for agriculture tends to be ignored.
• False attribution of damage: increasing damage from hurricanes is e.g. shown in harrowing time series and linked to climate change. The latest IPCC Report is very cautious in linking hurricane patterns and climate change[xi]. What is obvious is that, in the last fifty years, we have been foolish enough to build in the path of hurricanes or delinquent in the upkeep of abatement measures[xii]. Should we blame climate change for our own mistakes? Are we not engaged in a convenient exercise of ‘post hoc, proper hoc’?
• Epidemics: will climate change spread malaria? This prediction is repeated quite often. Malaria was once endemic in Europe, when it was colder than today. Meanwhile malaria has been eradicated in the course of economic development and is unlikely to return even with higher mean temperatures. There is no reason to believe that this process will not continue.
• Famines: As A. SEN has shown, famines are not so much a matter of physical shortages as of lack of entitlements. In rich countries crop shortfalls are routinely compensated for with imports. True, climate change may regionally lead to crop failures – the best insurance against such famines, however, is not mitigation, but economic development with consequent enhanced entitlements. Even global shortfalls can be met adaptively, by storage, or changing food patterns.

(2) Opportunity costs: Mitigation will save lives and avoid costs. In economic terms, however, the value of a mitigation strategy is not the full benefit that might accrue from this policy but just the savings differential with respect to the best alternative yielding the same result. More generally, when using indirect methods to deal with a problem, we should not count full, but only differential benefits over direct methods.

• Epidemics: malaria might be eradicated with a targeted programme that costs say, 40 billion US$[xiii]. If climate change were to increase the total incidence of malaria by say 10%, the benefits from mitigation would be no more than the 4 billion saved from not having to treat additional instances of malaria.
• Flooding of islands: the value of mitigation in such instances might be no more than the costs of relocating the population, or the building of protective dams (e.g. in Venice).

Costing but one strategy is an engineering job. Economics is about comparing choices. The economic profession has failed to force the comparison between strategies, in this case e.g. mitigation vs. adaptation. The IPCC is quite reserved on adaptation[xiv]. The reason for this lack of discussion over strategies is the engineering approach emanating from science that economists have bought, thus abdicating their essential and proper role. A target concentration of greenhouse gases (GHG) is established, more or less scientifically. It is easy to calculate from this value the mitigation requirements, while it is difficult to gauge the contribution of adaptation to the control of GHG. So the mitigation strategy is selected by default – not because it is superior, or more economic: it is the only thing that can be handled easily. Having set mitigation as the strategy, the discussion can be channelled along the path of least conceptual resistance: tax vs. cap and trade, and other conventional solutions. (3) Consequentialism[xv]: We might need to evaluate public actions by their consequences for mankind in terms of utility – and eschew any ‘deontological[xvi]’ or ‘rights-/duty based’ (absolute) morality. This view is not uncontroversial, for it implies fungibility between qualitatively different realities like life, health[xviii]: we all recoil instinctively from putting a price on life, even tough we act so routinely. On the other hand, the deontological approach tends to create moral dilemmas that paralyse decision-making. (4) The poverty of projections: all projections have an implicit conservative bias – while they may approximate quantities, they signally fail to quantify qualitative change. Even ten years ago, it was impossible to grasp or quantify the impact of internet[xviiii]. With knowledge doubling every five years or so, it is simply not possible to imagine what technological means the next generation or so will have at its disposal to adjust to climate change. If anything, we are likely to underestimate change – either way[xix]. (5) Discount rate: Learned papers have been written on the appropriate social discount rate, some of them in World Economics. It is not my intention to belabour the technical aspects of the field, but to put the discussion in a larger framework. All public policies need to be assessed consistently with the same social discount rate, in order to obtain proper and consistent ranking. Following this line of argument, were all extant policies, from health to economic development, to be re-assessed with the social discount rate Lord STERN has used for climate change policies, the outcome might disappoint him. TB kills one million people per year – right now. Fulfilling the Millennium goals means 250 million people will die unnecessarily before 2015. If I were to use Lord STERN’s social discount rate to assess the economic value of such health programmes, they might come out on top. Fundamentally, benefit-cost analysis is about policy choices. The poverty of current economic discourse in the realm of climate change is highlighted by the fact that the broad discussion about strategy choices has degenerated into a ‘go – no go’ discussion of a single strategy: mitigation. Maybe we’ll end up with a mitigation strategy in the end: at this stage of the discussion, however, mitigation just enjoys the status of a foregone conclusion. This being said, much could be gained by a methodological review along the lines of what Otto ECKSTEIN did for water management projects[xx] or LITTLE and MIRRLEES for development projects[xxi]. 5. The Fallacy of the Commons Garrett HARDIN[xxii] first spoke about ‘the tragedy of the commons’, arguing that there is a presumptive relationship between problem and institutional framework in which the solution is to be found: a ‘global’ problem necessitates a ‘global’ solution. The current global institutional framework of choice – the UNFCCC – follows closely HARDIN’s suggestion. Garrett HARDIN argued that where exceedingly numerous ‘rational and economic’ agents exploit a finite resource, only mutual coercion mutually agreed upon can stop the overexploitation of the ‘commons’. He states: “The only kind of coercion I recommend is mutual coercion, mutually agreed upon by the majority of the people affected.” HARDIN denies that ‘the invisible hand’ – individuals acting locally – can in any way solve the problem, for the root of the ‘tragedy of the commons’ lies in ‘situational ethics’. Individuals acting ‘rationally’ (his definition!) to exploit a resource would have to change their behaviour to take into account the emerging scarcity. It is not in the individual interest to switch unless all (or a majority) does, hence the consequent inevitable destruction of the common resource. In 1968, based on such assumptions, HARDIN advocated a global and coercitive solution for population control. No one took HARDIN’s plea seriously. 50 years later, population trends world-wide are edging toward equilibrium despite the absence of any global solution in HARDIN’s sense. Education, as embodied in literacy, is doing the trick[xxiii]. Millions of individual decisions, unrelated, unselfish, yield the desired result of stabilising the population. Not perfect, for sure, but possibly ‘good enough’[xxiv] – too early to tell. HARDIN’s ‘tragedy of the commons’ has become established policy consensus – his prescriptive error has been overlooked. From today’s perspective his argument would then seem to be closer to ideology than fact – and a caveat to all those that pretend to predict human behaviour. In an ideal and timeless world, HARDIN might be right. Pragmatically, a timely ‘global solution’ might just be beyond our grasp. Global solutions are notoriously hard to achieve – as the fate of the Doha Round attests. Meanwhile, ‘coalitions of the willing’ (akas Free Trade Agreements) are flourishing and supply chains have learned to avoid the worst trade barriers. Maybe there is a lesson to be pondered here. And I should not discount current voluntaristic efforts either – they may be harbinger of political change. The current climate change policy discourse – the UNFCC process – focuses on global solutions, and tends to downplay alternatives. There is nothing wrong with pursuing the high road. But pragmatically I’d look beyond ‘global approach’ for ‘anything that works’ as complementary or replacement policies. True, the good is the enemy of the best, but can we truly afford to be so selective, or ideologically minded? 6. Waiting for better science While waiting for better science – and this better happen soon, lest it become discredited – there is much to be done better to equip decision-takers with the degrees of freedom they need to find viable and politically acceptable policies. They are facing huge tasks, ranging from raising awareness of the issue to legitimising solutions. They need better and more inclusive – if not coherent – arguments. If politics is the art of the possible, we need to make sound politics possible, not to narrow the options through conceptual fundamentalism. There might be wisdom in ‘good enough’ policies. I do not expect to find essential truths: at best increased depth of understanding, at worst ‘to be wrong in sufficiently interesting ways’[xxv]. At the moment, however, such a wider dialogue looks quite fragmentary. It occurs at the fringes of the ‘global mitigation framework’, and thrives as long as it is not perceived as threatening to ‘received opinion’, as HENDERSON would formulate it. We should be bolder, and worry that our principles and axioms might in fact be blinkers. We should remember that much of Western philosophy built on dichotomies – tertium non datur – until GÖDEL came along[xxvi]. We are still suffering from this ‘black and white’ view of reality, or Platonic idealism. Essentialism, aggressive judgentalism and Manichaeism are unlikely to be useful guides. In the same vein, curtailing freedom through centralised planning is a dangerous temptation. I would not argue philosophically or politically – that is on principle. I’d argue pragmatically: if the bounty of life is based on trial and error we might be humble enough as to remain sceptical of our abilities to progress by ‘intelligent design’. I might conclude on a personal and prejudiced note: is there anthropogenic forcing? Certainly – and quite likely on a major scale. What will happen next? The only thing I know is that the ‘perverse milkmaid’ projections that are so much the fashion today are unlikely to eventuate. Nature will play many tricks on us, and so will mankind. Should we go for mitigation? I’d be quite wary of working through long chains of causation. After all, we are not after climate change per se, but its effect on our daily life. On the long way to the final outcome, many unexpected things may happen – and the effect may be lost[xxvii]. I’d stick close to adaptation as more practicable, testable, and verifiable. In particular, I’m not sure of the potential of the ‘global mitigation framework’ that is so much the fashion today. 20 years after the creation of the UNFCCC cooperative progress has been excruciatingly slow. Meanwhile, it was mostly economic development that has driven the decline in greenhouse gas intensity – measured as metric tons of carbon dioxide equivalent (MTCO₂e) emitted per million dollars of GDP[xxviii]. We are not missing something, by any chance, are we? On the other hand I’m seriously concerned that climate change policy may crowd out other, and more immediate, development priorities, which are not necessarily complementary. Education, health, and more generally poverty reduction are our foremost task – Lord STERN notwithstanding. Whatever the role of economic development in creating the problem, I am sceptical that we can get out of the predicament without it. Appropriate and sustainable technologies, together with significant alleviation of poverty to stabilise our societies, would seem to be necessary part of any solution. The worst straight-jackets are those we sew for ourselves: they fit so well, we hardly notice them. I’d plead at this stage for a great measure of institutional flexibility, pragmatism, and creativity[xxix]. We have spent the XX^th century trying to ‘make our own reality’ in accordance with ideologies and models. I’m not convinced that the outcome justifies the human costs that went into the experiment. The great advantage of pragmatism is that we may lower our expectations – it only has to be ‘good enough’ for us to survive – even if only by the skin of our teeth.

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[i] Oskar MORGENSTERN (1955): On the accuracy of economic observations. 2^nd. Edition. Princeton University Press, New Haven; 322 pp. [ii] A current example concerns opposite ‘stories’ vying to describe the conflict between Western and Islamic worlds. See Clifford GEERTZ (2003) Which way to Mecca? Parts I and II, New York Review of Books, June 12,/July 4. [iii] In his seminal paper: The problem of social cost, Ronald H. COASE points out that efficiency is obtained as soon as the market recognizes the effect. It is a matter of distributional justice who pays whom. See: Ronald H. COASE (1990): The firm the market and the law. Chicago University Press, Chicago, 217 pp. [iv] A good example of distortions in the current discussion of the issues may be gleaned from the fact that ‘famine’ is now being classified under ‘environment’. See: Lester R. BROWN (2009): Could food shortages bring down civilisation? Scientific American, May. It is noteworthy, incidentally, that the article, while mentioning biofuels, fails to consider change in dietary habits as a strategy for famine prevention/reduction. If poverty reduction is the best protection against regional famines one may add that global grain scarcity should lead to destocking of domestic animals first, not famine – if the income distribution is right. [v] A. K. SEN (1999): Development as Freedom. Anchor Books, New York, N.Y.; xvi + 366 pp. Pg. 53 [vi] David RUNCIMAN (2004): The Precautionary Principle. London Review of Books, 1 April. See also: Jeremy WALDRON (288): Reality check. London Review of Books, 10 April. [vii] Cass R. SUNSTEIN (2005): Laws of fear. Beyond the precautionary principle. Cambridge University Press, Cambridge, UK, xii + 234 pp. In particular, he argues for three steps: a narrow Anti-Catastrophe Principle, designed for the most serious risks; close attention to costs