Scary stuff: the economics of climate change

Climate change and economics don't always see eye-to-eye.

According to Dr Martin L. WeitzmanDr Martin L. Weitzman, a professor of economics at Harvard University, the action needed to mitigate the effects of environmental change come up against huge problems in economics.

He spoke to a packed lecture room in Auckland on Friday, painting a pretty dark picture for the world of the future in his heavy New York brogue.

“How much effort should be put into fighting climate change at the expense of other areas?” he asked.

An essential tool in public policy is cost benefit analysis (CBA). Dollars and cents are only invested in projects if it is determined that they are sound investments and compare well with alternate projects.

So why is the application of cost benefit analysis to climate change so difficult?

Humans are poorly equipped to conceptualise the gulf of time within which the effects of global warming could occur, which could be centuries and millennia. So economic factors like the discounting of interest rates, probability, uncertainty and evaluation become a cocktail of impediments to formulating policy.

“Right now,” says Dr Weitzman, “climate change is not affecting people’s lives. The world has serious other problems. It is against human nature to take action against hypothetical events that could ‘maybe’ take place millennia from now.”

Not that Weitzman advocates for inaction. Yet his task is to explain the immense difficulty of applying cost benefit analysis to climate change and why it is so hard for states to act.

“In the economics of climate change”, says Weitzman, “uncertainty outswamps everything else”.

There is also the problem of irreversibility. There simply is not enough time to deal with the snowballing of events – if the West Antarctic Ice Sheet were to collapse, it would set in motion events that cannot be stopped, meaning that funds given to the mitigation of climate change could be in vain – another obstacle for the application of a cost benefit analysis.

Numerous scientists believe that unless we can get CO2 below 350 parts per million in the atmosphere this century, we risk reaching tipping points and irreversible impacts such as the melting of the Greenland ice sheet and major methane releases from increased permafrost melt.

Weitzman doesn’t believe parts per million in the atmosphere of CO2 will stop at less than 560. Right now it’s at 390 and rising. And without a tax on burning carbon it’s not in anyone's self-interest to use an expensive clean energy system. There must be incentives to cut emissions.

The issue of probability is another barrier.

“When people are faced with uncertain situations, especially those untrained in probability, they tend to try and reduce the probability of the occurrence of an event to 0 - meaning it probably won’t happen – or a probability of 1 – meaning that policy is planned like it will definitely happen.” Economists believe that there are other options between 0 and 1.

Given that global warming is a problem of global public goods, mitigating costs is very expensive compared to investing in economic growth. It is very tempting for states to take a free ride (think Canada) and to do the least possible.

Last but not least, there is the spectre of geo-engineering. The idea of shooting millions of sulphur particles or tiny mirrors into the atmosphere to deflect sunlight carry with them potentially catastrophic risks, but such ideas can be very cheap in comparison to trying to mitigate through emissions reductions.

Countries like India might be tempted to use the cheap option of geo-engineering instead of the costly option of mitigation at the expense of developing their economies and pulling millions out of poverty.

Can it get much gloomier? Probably not, but Weitzman is not trying to explain away inaction by governments. He presents the case from economics and “economics should be free of bias".

The solutions don’t come thick and fast, but Weitzman advocates for permits to pollute (a middle ground between a carbon tax and a cap-and-trade), the social cost of emissions being internalised by states and companies, and governments subsidising research on climate change.