Wednesday, October 10, 2018

Now that Nordhaus wins a Nobel, people are remembering Pindyck

ATTP has a post up in which he wonders out loud about an issue I've long complained about in relation to climate change impacts:
However, I do think there are reasons to be cautious about some of these economic analyses. Let me provide a caveat up front. I’m not an expert at this, so am happy to be corrected if I get something wrong, and am partly writing this in the hope that I might learn something more.

For starters, these analyses are typically linear. This essentially means that they can say nothing about the possibility of some kind of large shock. Some of these analyses actually suggest the possibility of quite small global economic impacts even for extremely large changes in climate (see links below), which would seem to suggest that there is some point at which these calculations break down.

Also, as I understand it, most of these analyses do not consider how climate change might impact economic growth itself (see this Carbon Brief Explainer about IAMs). If the global economy grows at 3% per year, then it will be about 10 times bigger in 2100 than it is today. A large economic impact in 2100, might then seem small by comparison to the global economy at that time. Equivalently, if you discount these future economic costs to today, they can also seem quite small. Is it reasonable to assume that global economic growth will be largely unaffected by climate change?

My own view, which I’m happy to be convinced is wrong, is that these kind of analyses are fine if you want to understand things like what would happen if we did something (like impose a carbon tax). They’re probably also fine if you’re interested in how the economy will response to relatively small climate and ecological perturbations, or will respond over the next few decades. Where I think we should be more cautious is when the climate/ecological perturbations are large, or when considering very long, multi-decade timescales.
 And someone in comments reminds him that Pindyck has been saying this for some years now.

I remain quietly confident that in the next decade or so, the general view will be "come on, why did we ever thing the economic modelling of climate change was realistic?" 

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