‘CLIMATE ECONOMICS’: the literature and its utility
Michael Jefferson
Abstract
Despite the uncertainties surrounding the precise causes of climatic change, few ‘climate economists’ have focussed on what truly sound precautionary policies, measures and relevant technologies may best serve to avoid possible severe disruption of future lifestyles and even lives. Instead, over the past twenty years – beginning with the works of William Cline and William Nordhaus – economists claiming to specialise in the field of climate economics have seen “the economist as saviour”, assumed global climatic change between 1970 and 2000 (at least) must have had anthropogenic causation, and come forward with over-ambitious ideas and techniques.
Ignoring the implications of “the tragedy of the commons”, which in principle excludes key issues from resolution in the market place and places them uncertainly in the political and negotiating arena, they have all too often proceeded to try to value costs and benefits, make an integrated assessment of them all, pluck long-term discount rates out of the air, place scientific and economic uncertainty aside, and make challengeable assumptions about distribution between generations and nations. Economists would be better advised to be more modest in what they seek to achieve, and recall the long tradition within economics of recognising the “unknowable”. Their techniques may be better applied in assessing the respective costs and benefits of taxes or regulation, and in exposing the internal contradictions of many claims for renewable energy and the assumption that technological innovation will continue to meet human needs and aspirations. They should recall the remark of England’s King Charles II: “Things impossible do excuse themselves in not being done.” With world population continuing to grow, many resources under pressure, and widespread evidence of sub-optimal decision-making, climate economics should return to “the art of the possible”.
Introduction
Some of us have taken a close interest in weather conditions and climatic change for a very long time: in the case of this writer, for over fifty-five years. We were brought up to acknowledge that there had been considerable increases in global near surface temperature, of varying duration, long before the human species inhabited the Earth. This was certainly in the Carboniferous and Permian periods, and some others. It was widely recognised that solar variation, water vapour, clouds and albedo all played their part in shifting the climate, as could volcanic eruptions; and that climatic change could be, in part, ascribed to human activities. The impact of human actions on local climate has been noticed for over 2,500 years. Scientists and would-be scientists have been speculating on the causes of warming for over 300 years, ever since Edmé Mariotte first focussed on the issue of “chaleur de feu”. The names of Fourier, Tyndall, and Arrhenius have become familiar in recent years.
By 1962, at a UNESCO Symposium in Rome, stress continued to be placed on solar variation, clouds and albedo, and volcanic activity, but the speaker’s conclusion was that forecasts based solely upon such evidence could not be sufficiently substantiated. The speaker then referred to the carbon dioxide content of the atmosphere having risen from 290 ppm at the end of the 19th century to 330 ppm by the late 1950s. Yet, quoting Revelle and Suess (1957), he commented that fossil fuel combustion could only account for 2-4 % of this 12% increase. He stated that “there are serious objections against any over-emphasis of the CO2 theory” given that: “it deals with one single term of the global heat balance”, and the historical record. He concluded from the historical record: “Such examples seem to demonstrate that the CO2 effect cannot be considered as the single (nor even as the main) cause of climatic variations, but certainly as an essential contributing factor.” (Flohn, 1963, page 341) The idea that an increase of 104 parts per million in the carbon dioxide content of the Earth’s atmosphere over the past 250 years (or an increase of 140 parts per million in carbon dioxide equivalent) has been enough to explain the increases, and other variations, in mean near surface global temperature continues to elude many serious observers of weather conditions and climatic change.
The year before the Symposium was held, President Kennedy had appealed at the UN for “future cooperative efforts between all nations in weather prediction and eventually weather control”. Stimulated by this remark, the Global Atmospheric Research Programme was set up in 1967 with “the main aim to observe the global atmosphere in sufficient detail so as to investigate the way in which different scales of atmospheric motion are organised and how they interact, hence to determine the extent to which the larger-scale motions can be predicted by numerical models.” Houghton, J., 1984, page 3). The three decades preceding 1984 had not appeared to provide much evidence of near surface global warming but, in retrospect, in a period when global cooling concerns were being widely voiced – in the early 1970s (somewhat earlier in the Southern Hemisphere) – a renewed period of warming appears to have begun, and clearly continued for some thirty years.
The US National Research Council had been limbering up to make a contribution to the debate on global climatic change as early as 1978 (with a 1979 publication on carbon dioxide and climate), and in 1983 published: “Changing climate”. There, names of economists who have become closely associated with the climate change debate first appeared before a wider audience, including William Nordhaus, Thomas Schelling, and Gary Yohe. Nordhaus and Yohe wrote on future carbon dioxide emissions from fossil fuels (Nordhaus, W., 1983), and Schelling on the implications for welfare and policy of climate change. (Schelling, T., 1983)
Businesses, especially in the energy field, were not far behind. The Report which emerged from the 1985 World Meteorological Conference was taken to heart in some of Shell’s scenario planning work in 1986, for example, despite this being a period of recovery from the ‘oil price collapse’ which had accelerated in December, 1985. It was pointed out that:
“Much improved energy-efficiency, or a major move towards nuclear power and renewable energy, are alternative ways of reducing carbon dioxide emissions. Obviously, all of these have major problems associated with them, not least the need for concerted global action from both industrialised and newly industrialising countries alike.” (Shell, 1986, page 2)
Shell’s report concluded this section with the words: “the pro-nuclear, pro-renewable energy and pro-conservation lobbies can all be expected to cite the potential enormity of the Greenhouse Effect as a strong argument in their favour.” (Shell, 1986, page 3) Prescient words, one might have thought, twenty-five and more years ago. Yet, apart from some expansion of renewable energy and exaggerated claims thereon, what has really been achieved?
Three years later Shell raised the question what value people would really place on environmental goods, the difficulties of value measurement, and the temptation for current rather than postponed material gratification – or, to quote: “the social time preference rate of discount”. The list of environmental concerns began with “global warming”, and there was discussion of “marketable permits”, tradable or otherwise, in order to gain “credits” from reduction of emissions. One scenario was entitled “Sustainable World”, with tighter targets for carbon dioxide emissions and the introduction of carbon taxes. (Shell, 1989)
Within a year the IPCC’s first Scientific Assessment had appeared, in one chapter of which it was concluded that: “The latest atmospheric models, while by no means perfect, are thus sufficiently close to reality to inspire some confidence in their ability to predict the broad features of a doubled CO2 climate at equilibrium, provided the changes in sea-surface temperature and sea-ice are correct.” (Houghton, J. et al, 1990, page 126) However, Working Group III (Formulation of Response Strategies) of the 1990 IPCC Assessment found that, in general, “the most effective response strategies, especially in the short-term, are those which are beneficial for reasons other than climate change and justifiable in their own right, for example increased energy efficiency and lower greenhouse gas emission technologies, better management of forests and other natural resources … economically efficient and cost effective (responses) in particular those that use market mechanisms.” (IPCC, 1990, page 125)
In January, 1991, the IPCC’s Energy and Industry Subgroup reported – warning that the costs of limiting ‘greenhouse gas’ emissions were likely to be substantial although the Subgroup was “not yet able to provide informed advice on the costs associated with the measures and response strategies discussed in this report.” (IPCC Energy and Industry Subgroup Report, January, 1991, page 137) In his Foreword to this Report co-Chair Keiichi Yokobori had written:
“The report also acknowledges many uncertainties and ambiguities which prevented the production of a clear-cut emissions scenario. They include uncertainties over future economic development paths and the consequential energy requirements, the lack of data and information on developing countries and centrally planned economies, and the lack of agreement on cost-assessment methods and estimates.”
What is new, one may ask.
Meanwhile, in 1990 the World Energy Council had appointed a Commission to look into the energy and energy-related issues confronting the world, and issued its Report (written by the present writer) in 1993 as: “Energy for Tomorrow’s World – the Realities, the Real Options and the Agenda for Achievement”. Many issues of high priority were discussed in addition to climatic change, but the Report did call for: “precautionary measures to reduce the emissions of greenhouse gases since scientific evidence does not so far justify any other policy”; abatement policies based on the principle of expenditure optimisation across the globe, not just on a national basis to secure national targets irrespective of global impact; and adaptation policies “in the event that enhanced global warming and climate change due to anthropogenic greenhouse gas emissions becoming confirmed, and realistic prospects of fossil fuel demand indicate that if there is confirmation then adaptation policies are already unavoidable.” (WEC, 1993, page 239) Among the other issues covered in the WEC Report were the importance of economic growth and the scope for improving energy efficiency (the latter being the writer’s contribution – “Energy Efficiency and Sustainability” – to the 44th Session of these International Seminars).
The IPCC’s 1990 Report opened the floodgates to a surge of books and papers on ‘climate economics’. From the outset the lines of battle were drawn. William Cline considered that “social benefit-cost ratios are favourable for an aggressive program of international abatement. The difference stems in part from a longer-term perspective that takes account of much greater warming and damage.” (Cline, W., June, 1992, page 4) He considered that: “In sum, under risk aversion it appears sensible on economic grounds to undertake aggressive action to curtail the greenhouse effect”. He concluded that: “If by, say, the year 2015 progress in slowing and reducing carbon emissions seemed inadequate, it could become necessary to shift from a carbon tax regime (internationally coordinated, nationally levied) to a carbon quota regime with tradable permits …” (Cline, W., May, 1992, page 94) He contrasted his position with that of William Nordhaus who, he mentioned, had found “that only modest action is warranted.”
William Nordhaus himself considered: “The need to address the potential issues raised by future climate change is one of the most challenging economic problems of today, and it is daunting for those who take policy analysis seriously.” He did suggest at this time (1994) that “a massive effort to slow climate change today would be premature given current understanding of the damages imposed by greenhouse warming”, but went on (given the risks of catastrophic and irreversible changes):
“Economics does not rule out these outcomes. If scientific evidence indicates that calamitous consequences are likely to accompany global warming, then our economic models will not only signal that a strenuous effort to slow or prevent future climate change is necessary but help devise the time and scope of policy responses. Our future lies not in the stars, but in our models.” (Nordhaus, W., 1994, page 6)
It is time to examine this hubris more closely.
The Burgeoning of Climate Economics Literature
From the early 1990s there was a rapid expansion of books and peer-reviewed papers on climate economics. Such was the rate of expansion and the tone of many of the contributions that it reminds one of the sub-title of Robert Skidelsky’s second volume of his biography of Keynes: “The Economist as Saviour”. One is further reminded by the following words:
“Everyone agrees that Keynes was the most intuitive of men… He used to say that his best ideas came to him from ‘messing around with figures and seeing what they must mean.’ From his earliest years Keynes was fascinated by numbers, which were perhaps more ‘real’ to him than people or situations. Yet he was famously sceptical about econometrics – the application of mathematical and statistical methods to the analysis of economic data, chiefly for the purpose of explanation and forecasting. The truth seems to be that numbers were for him simply clues, triggers of the imagination, rather like anecdotes are for the non-mathematically minded.” (Skidelsky, R., 1992, page xix)