Underestimating the costs of climate change policy is not helpful

One of the things about blogging is that you never know what posts will be jumped on or how they will be interpreted. This post about the Suzuki-Pembina report is a case in point: both sides of the debate seemed to think that I was offering aid and succor to the cause of the climate change deniers. (I take particular exception to Colby Cosh's use of the word 'hoax'; there's nothing in what I wrote that would justify that sort of spin.)

The real problem is that the error that Jack Mintz noted - and to which I added the 'assuming a can opener' line - doesn't seem to be an isolated incident. According to this meta-study (a fancy name for a literature review), there seems to be a systematic tendency to downplay the economic costs of climate change policies:

This is best illustrated with the Summary for Policy Makers of the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2007). Emission reduction costs are reported for three alternative targets. While 118 results were available for targets in the range of 3.2 to 4.0°C warming, there were only 6 estimates of the costs of keeping warming in the range of 2.0 to 2.4°C. According to the reported results, moving from a 3.6°C to a 3.0°C target would double the abatement costs. Moving from a 3.0°C to a 2.2°C target would increase costs by 37.5% only. As the underlying models are correctly specified – that is, convexity in abatement costs means that stringent targets have higher and accelerating costs – the IPCC results can only be explained by selection bias; only models with low emission reduction costs reported results for the most stringent targets.

This may be part of a communications strategy based on the belief that an honest discussion of the economic costs of climate change policy is something to be avoided. But if Climategate has taught us anything, it is that the power of the environmentalist argument rests entirely on its intellectual integrity.

Comments

[Min]

Cutting emissions, unless we improve technology, means living within resource bounds. But what does that mean? If it means attempting to grow in the same way that we are doing now, but with less use of fuel, then we get one set of costs. But what if we change how we do things, and grow in other ways? ( See Nick Rowe's discussion at http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/10/economic-growth-the-universe-and-the-meaning-of-life.html#more .) Then do we not get a different set of costs?

Now, we dealt with sulphur emissions fairly cheaply, without really changing our way of doing things. But human use of fire predates agriculture. It is deeply ingrained in us. Reducing emissions is a real challenge.

[Nick Rowe]

Stephen: I just want to check that I understand this intuitively.

An abatement policy can be modeled as a tax on an externality. There will be benefits from reducing the externality (global warming), but also the standard deadweight costs of a tax. An optimal tax would create benefits greater than the costs, and would equalise marginal benefits with marginal costs. These studies examine and estimate the cost side only.

There are multiple studies. Some studies estimate higher costs than others (because no study is perfect). Each individual study shows increasing marginal costs of reducing temperature (which makes sense). But when you look at the results reported by IPCC, from different studies, you see falling marginal costs of reducing temperature.

Which means IPCC picked the high cost studies for small reductions in temperature, and the low cost studies for big reductions in temperature. Giving the impression that we might as well go for a big reduction in temperature.

[Stephen Gordon]

That's what it looks like - although there may be another explanation. It would seem that there's a consensus that the costs are convex (increasing marginal costs), which is why it's optimal to spread them out over time. But that consensus doesn't show up in the reported estimates for costs.

[westslope]

Meta-studies typically involve literature surveys but generally go well beyond typical literature surveys in the way data is combined from several empirical studies (or perhaps simulations in this case).

The wiki page includes some recipes. http://en.wikipedia.org/wiki/Meta-study

[Neil]

Funny. I always thought "literature review" was a fancy word for metastudy.

Different generations, I suppose.

[westslope]

Neil: Interesting. Please expand. I'm in the process of working through some of the definitions of "self enforcing" co-operative behaviour. Cournot-Nash behaviour is one but there appear to be others.

Back to the theme. Do we find historical precedent for castes or classes of priests (religious, secular) who mis-market social concerns and thus suffer a loss of credibility?

[Neil]

"Neil: Interesting. Please expand. I'm in the process of working through some of the definitions of "self enforcing" co-operative behaviour. "

Not much to expand on. In my experience, the term meta-study is both self-describing and commonly used. In discussing these sorts of studies, I've heard both the term "literature review" and "meta-study," but the latter more commonly. Thus the reference in the above article to the more common term as "a fancy name for a literature review," surprised me, since my experience had suggested the relationship went the opposite way. I would ascribe the difference in language choice as being because I'm younger, and most the people I would discuss this sort of thing with are still also younger people.

Also, while many of my friends are grad students (hence having random conversations of academic studies), I'm not, so I don't much interact with academics outside of my age group.

[Phillip Huggan]

Two AGW tangents I'm working on are an ethical portfolio that includes things like AGw grain and water shortages. Maybe a company like Viterra or an agri-chemical company for the grain, and low energy desalination R+D-ers or dam and reservoir engineering firms for water supplies.

Also, still trying to dent long term discount rate. If you break up the economy into industries, some should be more predictable over longer time horizons and/or some shouldn't have such a double-edged nature. For instance pure biotech R+D would help aging boomers but would also unleash more pandemics and weeds and stuff. Whereas low energy desalination or better grain storage techniques (still waiting on $125M Winnipeg Grain Institute Harper, tack on apiculture Wing for being late) and new Greenhouses, are safer. The morphology of the long-term discount rate changes by industry. I'm not too sure what you do for double-edged applications. If you ignore them or if you still try to assign them an ROI.

[Phillip Huggan]

Stephen, I'd bet you could model more than half the economics costs by factoring in later century infrastructure inflation (lost port cities). Also mid to late century (as early as 2025 maybe) famines, which could maybe be modelled by costing Mao's or Ukrainian forced famines. And more expensive frashwater would result in higher water price tags (water is even more correlated with economic growth than oil). That other less-than-half of the costs might be more important though because of catastrophic risks or cheapness etc. It includes things like lost crustaceans (would having no new sand affect long-term sicilon-oxygen climate self-regulating cycle that has kept us out of snowball Earth?), lost fish, lost Amazon, and hundreds of other potential effects and ramifications of playing god.

[Colby Cosh]

Sorry if "hoax" bothered you (nobody brought this to my attention until now). It's a strong word I impressed into service solely for the sake of cheap joke--but I did understand you to be saying that the modelling procedure had deceptive implications and that "no economist" would have used it sincerely. Is the problem that I didn't leave open the possibility of mere incompetence? You yourself are making pointed remarks about "honesty" and "intellectual integrity" here, so what am I missing?

[Stephen Gordon]

I didn't (and don't) believe that the authors of the Suzuki-Pembina study willfully distorted their results; they used an inappropriate model.

This second bit is more troublesome.