Draft of a book review of Gernot Wagner & Martin L. Weitzman, Climate Shock: The economic Consequences of a Hotter Planet, Princeton University Press, Princeton, 2015. Comments very welcome.
This is a brief, non-technical and rather witty introduction to the economic implications of global warming. It will be easy reading for resource economists but taxing, given the density of some arguments, for the general citizen. It was a fun read for me because I fall into the former category and appreciated the basic messages.
The core premise is that anthropogenic climate change raises serious risk management problems because of potential catastrophic effects linked to climate change. These management issues are difficult to resolve because switching from traditional carbon-based fuels is not straightforward. High carbon taxes are viewed as essential and energy transitions may not be smooth unless technologically optimistic forecasts pan out. The problem of climate change will however be even more difficult if left unaddressed. On balance, there is a convincing case for immediate decisive action. Without substantive action we will likely face a more hostile and erratic climate with, at non-negligible probability, dramatically adverse implications for all human and non-human life and particularly for agriculture and human use of the oceans.
These issues are not severe yet but may become inevitable if we wait until they become severe before we take action. A conceivable way out of this dilemma is use of geo-engineering technology that pumps reflective particles into the atmosphere to quickly cool it. Such technologies are a key focus of this book. However such technologies have considerable risks because of potentially harmful side effects. Mitigating emissions is by far the safer response though one that may eventually need to be supplemented by geo-engineering should emissions controls be ineffective.
Climate change issues are, analytically, the “problem from hell”. They are global and long-term. They involve significant irreversibilities: Once things change it is difficult or impossible to restore the status quo. They also involve high uncertainty. Climate change arises globally with policy responses involving intractable “free-rider” problems because there is no effective global governance of greenhouse gas emissions, a global “public bad”. Furthermore there are problems of motivating action: The climatic changes that are occurring are gradual, at least over human time scales, but almost instantaneous over geological scales. Wait-and-see policies may fail simply because greenhouse gases are stock pollutants which, in the absence of yet attainable technological fixes that successfully remove CO2 from the atmosphere, are irreversible. Uncertainties mean that a focus on expected effects is inadequate. “Fat tails” at the high end of the future temperature range distribution raise non-negligible possibilities of catastrophic effects that would devastate planet earth.
These “fat tails” arise from underlying probability distributions of climate sensitivities – the measures of how global temperatures reacts to a doubling of CO2 equivalent emissions. Using imperfect but available estimates based on expert opinion, the authors argue that eventual temperature increases will exceed 6oC with a probability of 0.1. With 6oC plus of warming there would be a global disaster of a dimension impossible to calibrate in terms of GDP losses. This argument and the detailed numbers structure so much of the book’s discussion that an appendix setting out precisely and systematically how this estimate was obtained would have been useful.
A key viewpoint of this book is that, given these immense costs of climate catastrophes that occur with non-negligible probability, CO2 equivalent prices need to be set much higher than envisaged in models that focus only on average long-term temperature responses to greenhouse emissions. Perhaps prices may need now to be $100 per ton rather than, as the authors propose, $40. Certainly carbon prices need to be significantly positive and much higher than the global average $15 per ton subsidy paid via global average fossil fuel subsidies. Discount rates too need to be low given high, implied risk premia associated with catastrophic climate outcomes. Lord Stern’s famously low rate of 1.4% (Stern, 2007) may turn out to be too high not excessively low.
There are intriguing problems in addressing climate catastrophes of the “Pascal’s Wager” type or, as the authors term it, “Dismal Dilemmas”. In short, why risk any infinitely large catastrophic damages, however remote their probability, when there are safe alternatives? At first sight no level of spending to avoid climate change appears to be adequate. Sensibly resolving “Dismal Dilemmas” requires making concerted efforts to assess both the catastrophic risks of very substantial climate change (we do know something these and these probabilities are not negligible) and the associated costs to our planet (which are non infinite though large but difficult to calibrate). It also involves ranking the other types of catastrophes that might compete for climate control resources (e.g. an asteroid strike that would nullify interest in climate catastrophes). The latter agenda has been partly implemented recently by Martin and Pindyck (2015).
Because this book is focused on catastrophe issues there is much discussion of geo-engineering as a “last ditch” policy. Making decisions on such policies will involve major global governance issues since different countries are impacted differently by climate change. The advantage of such policies is that they have immediate short-term effects and are comparatively cheap: Perhaps the global costs are of the order of $1-10b annually. Moreover, while different countries may have different views on the desired extent that such measures should be taken, one country alone – even perhaps a relatively poor developing country – can implement them at low cost. The free rider problem has been replaced by the “free driver” problem. Since many agencies can initiate actions at low cost some may downplay risks, for moral hazard reasons, and ignore the need for mitigation. Countries, particularly those threatened by climate change, may search for a quick fix.
Geo-engineering is popular among scientists not because they like it but because it may be the only way to preventing a catastrophe given failures in conventional mitigation and adaptation policies. It is risky and could be pursued to excess, for example, if several countries that did face facing severe climate-induced problems, took excessive action. Indeed issues of risk associated with geo-engineering are more important than those of costs. Overshoot could even drive another ice age. Even without such apocalyptic possibilities the use of sulfur-based atmospheric treatments is a temporary measure since such compounds do not remain permanently in the atmosphere. Repeated treatments would be necessary which will therefore increase global mortality through increased air pollution. Nor will geo-engineering address ocean acidification and the resulting destruction of marine biodiversity and the marine food chain. Finally, dramatic short-term climate shifts could follow discontinuing such treatments.
A comprehensive review of the potential and risks of geo-engineering published after the book under review is Morton (2015).
This book is somewhat propagandist. It seeks to motivate intelligent action and there is an underlying sense of exasperation because there are many who seek to deny the core science of climate. According to the authors individuals need to improve their understanding of the issues, to vote intelligently, change their energy consumption habits skillfully and (for reasons of self-interest alone) divest their stock holdings in firms producing carbon-based energy. The direct effects of motivated individual action are limited but a virtuous circle of civic engagement may be produced provided “crowding out” does not occur. The latter is taken to imply that the substitution of non-essential actions, such as individual recycling, must not substitute for essential actions such as voting for parties that encourage sensible recycling.
The overall message in this book is not alarmist although it does point to possible severe future problems. It simply augments the standard case for climate action by incorporating risk management policies that protect against empirically plausible risks of catastrophe. In some respects the analysis seems somewhat pessimistic in the light of the subsequent 2015 Paris Climate Change agreement and other events. Many countries are now being attracted to carbon pricing partly because their treasury coffers were depleted during the aftermath of the 2008 financial crisis. Countries like China are moving to price carbon because of domestic pollution concerns. Solar energy is enjoying a boom in many countries because of a dramatic decline in photovoltaic cells and through the emergence of new battery-based energy storage devices. Perhaps carbon prices will not need to be high to encourage switches to non-polluting energy technologies.
In addition, while it is reasonable to strongly emphasize the need for carbon pricing it is clear from the history of climate policy that such measures will not be sufficient. Clean technology incentives in particular are also important as are issues of compliance with the smorgasbord of carbon control promises made at the Paris meetings.
The issues of climate policy extend beyond the determination of the optimal level of carbon pricing alone.
Ian W. R. Martin & Robert S. Pindyck, “Averting Catastrophes: The Strange Economics of Scylla and Charybis”, The American Economic Review, 105, 10, 2015, 2947-2985. 2015.
O. Morton, The Planet Remade: How Geo-Engineering Could Change the World, Princeton University Press, Princeton and Oxford, 2015.
N. Stern, The Economics of Climate Change: the Stern Review, Cambridge University Press, Cambridge, 2007.