Read an Excerpt
Can We Afford the Future?
The Economics of a Warming World
By Frank Ackerman Zed Books Ltd
Copyright © 2009 Frank Ackerman
All rights reserved.
ISBN: 978-1-84813-367-9
CHAPTER 1
The status quo is not an option
NEW YORK NASA scientists today confirmed that a massive asteroid is headed for a collision with the Earth a few years from now. The impact will make our planet largely uninhabitable, killing most of the human race and causing the extinction of most species. There is barely enough time to build the rockets needed to deflect the asteroid and prevent a global catastrophe.
Fictional news items along those lines have been imagined often enough, in disaster movies and pulp fiction. The exact response to the warning varies, as does the ultimate outcome. But no one ever suggests waiting for the outcome of a cost–benefit analysis to determine whether or not it is worthwhile to build the rockets and save the planet.
This is not a book about asteroids and disaster movies. Rather, it is about another global catastrophe that is on a collision course with our future: the threat of climate change. According to real scientists at NASA and elsewhere, there is a real risk that climate change could make the planet largely uninhabitable for people and for most other species. And there is – just barely – enough time to avert the disaster.
Yet when it comes to global warming, the wisdom shown in disaster movies is often lacking. Many people worry that climate policy could be ruinously expensive; in this view, it is essential to begin with detailed economic analysis, and to ensure that we move cautiously and avoid excessive expenditure. That is, perhaps we should begin with a cost–benefit calculation to find out how much prevention of climate catastrophe we can afford to "buy." All too often, the answer has been that we should do relatively little for now.
For example, Yale economist William Nordhaus, the economist best known for his work on climate change, pays lip service to scientists' calls for decisive action. He finds, however, that the "optimal" policy is a very small carbon tax that would reduce greenhouse gas emissions only 25 percent below "business-as-usual" levels by 2050 – in other words, allowing emissions to rise well above current levels by mid-century. (In contrast, several European governments and US states have called for reductions of 50 percent to 80 percent below 1990 levels by 2050.)
A number of economists have criticized the Kyoto Protocol – the international agreement, ratified by all industrial countries except the US, which called for a first, modest round of emissions reductions by 2012. Yale economist Sheila Olmstead and Harvard economist Robert Stavins deem the Kyoto Protocol "deeply flawed" and recommend instead that we allow emissions to rise for a few decades before requiring any reductions.
And economists have lobbied and spoken against other small, initial steps toward emissions reduction. A group of well-known economists, including Robert Hahn of AEI–Brookings and Paul Joskow and Richard Schmalensee of MIT, filed a legal brief before the US Supreme Court opposing EPA regulation of carbon dioxide emissions from automobiles. That brief, funded by automobile dealers across the country, claimed that such regulation would be expensive and inefficient.
The economic case for inaction on climate change is not just an obscure academic doctrine. Economists' doubts and conclusions about climate change echo throughout the public debate; economic analysis has a major impact on the decisions that politicians and governments are willing to take. There is much more than economic theory at stake.
This book offers an alternative understanding of climate economics, one that is compatible with the warnings of impending crisis that increasingly emerge from climate science. To preview the story, this chapter begins with a look at the ways in which conventional economics is implicitly, but fundamentally, biased in favor of the status quo. Climate change challenges that bias, since the message of climate science is that the status quo – the current climate – is being undermined, and changed for the worse, by our actions.
The next four chapters examine four key aspects of climate economics. Chapter 2 introduces discounting, a much-debated process that provides a quantitative measure of our relationship and responsibility to future generations. The choice of the discount rate involves ethics and politics, not just economic technicalities; it is a choice that is all-important for the evaluation of climate costs and benefits. Chapter 3 turns to the analysis of risk and uncertainty, suggesting that worst-case outcomes, potentially sufficient to end life as we know it, may now be likely as events that people insure themselves against. Viewing climate policy as insurance leads to a different perspective from cost–benefit analysis, focusing on preventing worst cases rather than calculating average or expected values.
The following two chapters look at the benefits and the costs of climate policy. Chapter 4 explores the priceless nature of the potential health and environmental damages from climate change, along with the strange hypotheses about the benefits of moderate warming that have crept into the economics literature. Chapter 5 examines the costs of climate policy, highlighting the role of economic theory in shaping our understanding and our estimates of those costs, and the factors that promote the development of new technologies.
Economics does not speak with a single voice on climate change. Chapters 6 and 7 review the worst and the best of recent economic perspectives on the problem. Bjørn Lomborg, the Danish political scientist turned anti-environmental gadfly, relies heavily on conventional economic analyses to build his case for doing little if anything about climate change; his writing has received an inordinate amount of media attention. Chapter 6 shows what's wrong with Lomborg, and the economists he quotes in his latest attack on active climate policies. At the other end of the spectrum, the British government asked Nicholas Stern to review the economics of climate change; the resulting Stern Review extended the boundaries of the debate, using standard techniques of cost–benefit analysis to support large-scale emissions reduction initiatives. Chapter 7 argues that the Stern Review is far from perfect, but is much less wrong than other well-known analyses.
The last two chapters take up the questions of climate policy. Climate change is a global problem facing an unequal world; the problem of international equity is central to the issue, as seen in Chapter 8. Industrial countries not only have much greater per capita carbon emissions; they also have benefited from a history of high carbon emissions and have greater resources than other countries for solving the problem. Is it possible to create a formula for sharing the global economic burden of climate protection, which wins acceptance from all? Finally, Chapter 9 offers economic perspectives on climate policy, including doubts about the potential of some proposed technical fixes, an examination of the role and limitations of market mechanisms, and closing thoughts on the required extent and pace of change.
Much of the error and mischief described in this book rests on standard, abstract economic theory – a subject that may understandably lead some readers to roll their eyes and start flipping the pages. But hang on: there's something in there you need to know, to understand the climate change debate today. The rest of this chapter offers a very quick tour of the biases of conventional economic theory, as seen through the lens of climate change.
The new debate
Once upon a time, debates about climate policy were primarily about the science. Initially, at least in the US, an inordinate amount of attention was focused on the handful of "climate skeptics" who challenged the scientific understanding of climate change. The influence of the skeptics, however, is rapidly fading; few people were swayed by their arguments, and doubt or uncertainty about the major results of climate science is no longer important in shaping public policy.
Many summaries are available of the current understanding of climate science. Briefly, the threat of climate change includes the predictable, gradual increase in average temperatures – and much more. Continuation of current patterns of fossil fuel combustion, deforestation, and other causes of greenhouse gas emissions will, within fifty to a hundred years or less, cause massive melting of glaciers and ice sheets, extinction of many climate-sensitive species, widespread droughts in (at least) South Asia, Africa, and western North America, decline in global food production (even as the world's population grows well beyond today's levels), and more destructive extreme weather events, along the lines of the US hurricanes of 2005 and the European heatwave of 2003. And the news will only grow worse as atmospheric carbon dioxide levels continue to rise.
As the climate science debate is reaching closure, the climate economics debate is heating up. The controversial issue now is the fear that overly ambitious climate initiatives could hurt the economy. The alleged danger is that we might do "too much" to reduce emissions, resulting in costs that would outweigh some estimates of the benefits. Yet once the question is posed in these terms, a bias toward inaction is already creeping in.
Implicit in the usual framing of a cost–benefit analysis is the notion that, if costs exceed benefits, we can decline to take any new initiative. Doing nothing is the default; there is a higher hurdle for justifying action than for continuing inaction. "Only take action if the benefits exceed the costs" is a superficially plausible rule for making decisions. Yet even when the economic analysis is implemented with generous intent, it still has a built-in bias, via the presumption that the status quo prevails until and unless a policy passes a cost–benefit test.
It is here that climate science and economics appear to clash head-on. The urgency of the climate problem, the ever-increasing scientific certainty that "business as usual" will lead to irreversible, unacceptable outcomes, undermines any presumption in favor of the status quo. What the science tells us, above all, is that the status quo is not going to remain one of the available options.
Suppose that, as in some recent economic analyses, the answer is that we cannot or should not do much about climate change for now. What would it mean to conclude that the costs of avoiding a climate disaster exceed the benefits? Perhaps the future is a high-priced luxury item that we can't quite afford. Rather than investing in a sustainable world for our descendants, should we have one last party and then pull the plug?
We can, in fact, afford to create a livable future, especially if we start immediately; the longer we wait, the more expensive and difficult it will become. We can't afford to spend more time being confused by mistaken theories claiming that the logic of economics somehow calls for gradualism and delay. Thus the creation of a sensible response to climate change requires a look at what's wrong with economic theory. Climate change is not an isolated flaw in an otherwise perfect market system; rather, it is a systemic failure, requiring a new approach. The implicit assumption of a higher burden of proof for those who want change is obsolete if the world is on a collision course with disaster. Something new and different has to be done.
Conventional economic theory reflexively shuns intervention in private markets. Economists often view the world in terms of market equilibrium, a state of affairs that cannot be improved upon without hurting someone. Even though few economists would argue that the world currently reflects this utopian ideal, many do assume that we are close enough to it that only small intrusions in the market, in the nature of tidying up rather than major renovations, are required. This theory does not come close to describing the world we live in, and it arises from highly contestable assumptions about the importance of free markets to human freedom.
The invisible hand, and other fables
The customary starting point for economic theory, the basic model to which other situations and policy options are compared, is a system of perfectly competitive markets. This imagined economy is populated exclusively by small producers and individual consumers, all possessed of very broad information and very narrow motives and desires. In such an economy, under long lists of traditional but unrealistic assumptions, economists have proved that there is always an "equilibrium" – that is, a set of prices at which supply equals demand for every commodity. The invisible hand of market competition, in Adam Smith's famous metaphor, ensures that every resource is used wherever it will produce the greatest value for consumers. Any deviation from the free-market outcome will make someone worse off, so there is no possible change to a market equilibrium that could win unanimous support.
In this model economy, environmental problems appear only as an afterthought, in the form of "externalities": unpriced damages imposed by one party on another. Externalities, it is assumed, can be given prices and incorporated into the calculations of the marketplace, whether through taxes, negotiations, or the invention of markets for pollution rights. With externalities correctly priced, the optimal properties of market equilibrium are restored.
No one, presumably, views this as an accurate description of any large part of our twenty-first-century world. For some economists, the optimality of an abstract, perfectly competitive market economy is an ideal worth striving toward. More common is the claim that this apparatus is analytically useful: the implications of the perfect-market model can be worked out with mathematical precision, and then reality can be understood in terms of its (minor) deviations from the model.
The centrality of equilibrium to economics is emphasized by a leading textbook on microeconomic theory:
A characteristic feature that distinguishes economics from other scientific fields is that, for us, the equations of equilibrium constitute the center of our discipline. Other sciences, such as physics or even ecology, put comparatively more emphasis on the determination of dynamic laws of change.
Ironically, the "equations of equilibrium" in economics arise from models borrowed from the physical sciences of the nineteenth century. The theoretical equilibrium of a system of perfect markets bears more than a passing resemblance to the theory of an ideal gas, which you may have encountered in a physics class. In the course of the twentieth century, economics developed intricately mathematical versions of this classic theory of equilibrium. At the same time, the physical sciences moved on to extend and modify their nineteenth-century equilibrium models, developing subtle and powerful analyses of complex, potentially chaotic systems, such as the earth's climate, where disequilibrium can easily arise.
The greater commitment to equilibrium theories in economics may reflect the political significance of the subject matter. Thermodynamic equilibrium and disequilibrium are states of nature, with, presumably, the same neutral, apolitical meaning to physicists of widely varying political views. In contrast, the market equilibrium of economic theory maximizes efficiency, a desirable social goal. It has become bound up with advocacy of laissez-faire policies, seen by some as the route to political as well as economic freedom. In the words of the influential conservative economist Milton Friedman, "[T]he central feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities. ... Underlying most arguments against the free market is a lack of belief in freedom itself."
There are at least two problems with Friedman's claim. First, the theoretical realm of perfect markets, with every industry made up exclusively of small, competitive businesses, bears little resemblance to the reality of Microsoft in software, Wal-Mart in retailing, Boeing and Airbus in airplane production, and the giant corporations that dominate the media, finance, and many other fields. Replacing them all with numerous small, competitive firms is clearly out of the question.
Advocates of laissez-faire, like Friedman, tend to take it for granted that any movement toward an unregulated competitive market is desirable, since it brings the real world closer to the ideal. However, the "theory of the second best," developed long ago by Richard Lipsey and Kelvin Lancaster, proves that if one of the requirements for an ideal outcome cannot be achieved, the best attainable (or "second best") outcome may require a major deviation from the ideal. Informally, if the fastest route for driving through a city is blocked by construction, the next-fastest option may involve a completely different main road, not the side streets that stay as close as possible to the preferred route. The theory of the second best undermines the significance of the competitive market model as a goal; if the goal is not, in its entirety, attainable, there is no guarantee that getting a little closer to it is on balance a good thing.
Second, Friedman's vision is of a world without important externalities: in his view, the normal operation of the market "prevents one person from interfering with another" in most of life's activities. The climate crisis, however, implies that market activities and the resulting greenhouse gas emissions are going to interfere on a grand scale with other people's lives. This is not a single, easily internalized externality; rather, climate change is a pervasive consequence of modern market activity, which ultimately threatens to undermine the continued existence of the market economy itself.
(Continues...)
Excerpted from Can We Afford the Future? by Frank Ackerman. Copyright © 2009 Frank Ackerman. Excerpted by permission of Zed Books Ltd.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
