November 04, 2006

Stern's Prescription & Dirty Harry's Question

Both criticism and praise have greeted the Stern Review on the Economics of Climate Change, which forecasts the possibility that preventable climate change will cause economic harm like that of a global depression or a world war, and calculates that the cost of preventing it is a better economic bargain. Press Release re Stern Review on the Economics of Climate Change (Oct. 30, 2006). See also: Unintended Consequences: Stern Report "Optimistic" IF Governments Act (Nov. 1, 2006). Stern's prescription is controversial and criticisms like that in the Wall Street Journal find support in the economic literature, but the Economist concludes it doesn't matter. They argue that investing in prevention is an insurance premium that needs to be paid. Dirty Harry asked the same question in a different context.

(read more below the virtual fold)

Despite widespread praise of Sir Nicholas' report, especially in Europe, editors at the Wall Street Journal chose to publish and adopt the critical remarks of Bjørn Lomborg (Wikipedia, the free encyclopedia), a Danish statistician who is one of the more controversial climate skeptics around. In a 11/2/06 piece for the Journal, Lomborg agrees that climate change is real and human caused, but disagrees that it makes economic sense to focus resources on changing consumption patterns. As an example, he points to economic studies that cite likelihood of increased agricultural productivity in places like Sibera due to global warming.

As an editorial in the Economist notes, many economic analyses agree with Lomborg, and assess the cost/benefit of climate change using negative impacts in the range of 0%-3% of global output. Those studies suggest that the industrialized world populations might tend to come out neutral or gain, with the developing nations (more dependent on subsistence agriculture) being hurt. See "It May Be Hot in Washington, Too" (Economist, 11/2/06, p. 69).

This is consistent with studies such as those mentioned in today's New York Times Magazine, in Dubner & Levitt, "The Price of Climate Change : What Global Warming Might Do To Us" (p. 26). Dubner and Levitt are the authors of the popular book "Freakonomics," and more information about their article is on their website at Freakonomics in the New York Times: The Price of Global Warming - by Steven D. Levitt and Stephen J. Dubner (Nov. 5, 2006)

According to Dubner and Levitt, academic papers authored by Olivier Duschenes (U.C.S.B.) and Michael Greenstone (M.I.T.) examined the future of agriculture in the U.S., using long-range climate models to look out at the impact of climate change through the end of this century. According to the article, the 2004 paper forecast a net gain of about $1.3 billion in annual agricultural profits. The benefits, however, would not be uniform. Some states (New York, for example) will benefit at the expense of others (California, for example) who will suffer. You can read it yourself at: SSRN-The Economic Impacts of Climate Change: Evidence from Agricultural Profits and Random Fluctuations in Weather by Olivier Deschenes, Michael Greenstone (SSRN, July 2004)

But the whole story, even for the U.S., is not positive. Dubner and Levitt point out that Deschenes and Greenstone are just now polishing up a more recent article that looks at the likely effects of climate change on mortality in the U.S. toward the end of this century. They see a 1.7% increase in the death rate for American males and 0.4% increase in death rate for American females, totalling some 30,000 deaths a year. Most of this will be due to cardiac and respiratory problems made worse by hotter weather. The economic loss, they calculate, will be about $31 billion per year, according to the Times article. For more, see: Michael Greenstone : Papers

These conclusions about disparate impact even in the U.S. are consistent with other studies released just in the last year.

In February, the California Climate Change Center released a study commissioned by the California Energy Commission and the California EPA. It forecasts "serious risks" in the form of increased fires, floods and agricultural damage that can be moderated by prompt reduction in greenhouse gas (GHG) and other global warming pollution emitted by human use of fossil fuels. See: Unintended Consequences: Serious Risks to California from Climate Change: White Paper (October 16, 2006).

An October report from the Northeast Climate Impacts Assessment (NECIA), included a similar conclusion about the impact of heat, especially to vulnerable urban populations:
"While summer heat affects us all, extreme heat is a particular concern in big cities. Hot temperatures intensified by the urban heat island effect can create dangerous conditions, especially for the elderly, infants, the poor, and other vulnerable populations. * * * These projections show that conditions dangerous to human health could become commonplace in most of the region’s major urban centers over the course of this century." See: Unintended Consequences: Hotter Cities Will Endanger Health in Northeast States (October 6, 2006).

In his 2004 book, "Catastrophe: Risk and Reward," Richard Posner brings the Chicago school of law and economics perspective to the questions of how to respond to the threat of the sorts of catastrophes that threaten the survival of the human race: big asteroid hits, sudden global warming, terrorist-spawned pandemics and the like. Although remote, such events are possible; even a once-in-a-million-years event could happen tomorrow. There are measures that can be taken to prevent or protect against them. In this book, Professor Posner analyzes the cultural, psychological and economic factors that may explain what action is taken (or not taken).

Those cultural factors include what Posner calls "scientific illiteracy" and the problem of "limited horizons" by which politicians cut their own throat if they propose to raise taxes today to reduce the possibility of catastrophes in the far distant future. He points to the "economy of attention," the fact that the human brain can stay focused on only so many things at a time. This may justify disregarding the least likely risks, or the most complicated, as distractions from those more immediate or more understandable that face us daily.

According to Posner, "global decentralization" adds to the challenge. For example, while the wealthy industrialized countries are the biggest contributors to global warming, the poor countries near the equator are likely to be the principal victims. Yet the latter lack the financial ability to compensate the former for the costs of reducing greenhouse gases. Hence the refusal of the present U.S. administration to ratify the Kyoto Protocol.

He points also to Public Choice Theory, the body of scholarship "that tries to explain public policy as the outcome of rationally self-interested behavior." (Id. p. 133) He suggests that "(h)aving a limited time horizon, politicians prefer policies that yield tangible benefits for constituents in the near term." (Posner, Catastrophe, p. 137). To that, he adds the significant public doubt about the global warming threat, and the inertia of public policy, reminding readers: "Think of how, for many years, even slight scientific uncertainty enabled the tobacco industry to issue plausible denials that smoking was hazardous to health." (Id. p. 138). (For more about Posner's book, see Unintended Consequences: Reading: Posner, 'Catastrophe: Risk and Response' (2004))

In a page 12 editorial today, The Economist notes the widespread controversy over Sir Nicholas' report, and acknowledges that economists can dicker with Sir Nicholas' warning and prescription. They conclude that it does not matter, because the possibility that Sir Nicholas is right, and that Lomborg is wrong presents a risk of catastrophe that merits response in the nature of an insurance premium. The Economist closes their editorial by restating Sir Nicholas' central thesis:
"that governments should act not on the basis of the likeliest outcome from climate change but on the risk of something really catastrophic (such as the melting of Greenland's ice sheet, which would raise sea levels by six to seven metres). Just as people spend a small slice of their incomes on buying insurance on the off-chance that their house might burn down, and nations use a slice of taxpayers' money to pay for standing armies just in case a rival power might try to invade them, so the world should invest a small proportion of its resources in trying to avert the risk of boiling the planet. The costs are not huge. The dangers are."
Economics of climate change | Stern warning | (Nov. 4, 2006).

Clint Eastwood's roughshod cop Dirty Harry Callaghan (1971) put it more concisely, to the armed bad guy he'd cornered after a hot pursuit:

"I know what you're thinking. 'Did he fire six shots or only five?' Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you've got to ask yourself a question:
..... Do I feel lucky?

..... Well, do ya, punk? "

Posted by dougsimpson at November 4, 2006 02:18 PM