Economics of Climate Change: A Problem from Hell

The economics demigod Martin Weitzman recently published a review of William Nordhaus’ The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, where he provides the following characterization of the climate change economics problem:

The economics of climate change is a problem from hell. Trying to do a benefit-cost analysis […] of climate change policies bends and stretches the capability of our standard economist’s toolkit up to, and perhaps beyond, the breaking point. First and foremost, disconcertingly large uncertainties are everywhere, including the most challenging kinds of deep structural uncertainties. The climate change problem unfolds over centuries and millennia, a long intergenerational human time frame that most people are entirely unaccustomed to thinking about. With such long time frames, discounting becomes ultra-decisive for [benefit-cost analysis], and there is much debate and confusion about which long-run discount rate should be chosen. Irreversibilities abound, including the very long residence lifetime of atmospheric CO2. To add to the challenge, costs of new carbon-free technologies are uncertain. More importantly, for global mean temperature changes much above about 2 [degrees] C, estimating damages is mostly educated guesswork with a distressingly wide error cone. The evaluation and aggregation of such damages add yet another significant layer of uncertainty; we are even unsure even about what form the “damages function” should take. Climate change due to high [greenhouse gas] levels involves nonnegligible tail risks of low-probability catastrophic outcomes, ranging from “known unknown” tipping points to the “unknown unknowns” of black-swan bad-feedback events that we cannot even imagine today.

Striking. The review was published in the Review of Environmental Economics and Policy.

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