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Climate Mitigation: Costs versus Benefits (reassessing Robert Frank’s call for policy action)

In a recent New York Times article, economist Robert H. Frank–“The Economic Naturalist”–argues that fighting global warming through government intervention entails a small cost and promises a large benefit. Yet to cast serious doubts on his claim, all we need do is quote from U.S. government and IPCC reports. We find that even in a textbook implementation, it’s not obvious that government mitigation efforts deliver net benefits.

Of course in the real world, if the politicians and/or EPA starts intervening in the energy sector, their actions will be far from the economist’s theoretical ideal. Then the case for such policy activism falls apart.

Frank’s Pros/Cons of Intervention

Frank’s opening paragraphs nicely summarize his views on climate policy:

FORECASTS involving climate change are highly uncertain, denialists assert — a point that climate researchers themselves readily concede. The denialists view the uncertainty as strengthening their case for inaction, yet a careful weighing of the relevant costs and benefits supports taking exactly the opposite course.

Organizers of the recent climate conference in Copenhagen sought, unsuccessfully, to forge agreements to limit global warming to 3.6 degrees Fahrenheit by the end of the century. But even an increase that small would cause deadly harm. And far greater damage is likely if we do nothing.

Frank goes on to quote a new MIT study, which paints an alarming scenario of damages from warming if world governments sit on their hands. In contrast, Frank argues that the cost to the economy of limiting greenhouse gases is not in the same ballpark. He sums up with, “In short, the cost of preventing catastrophic climate change is astonishingly small, and it involves just a few simple changes in behavior.

So if the risks of inaction are potentially catastrophic, while the costs of preventive government measures are relatively trivial, then who but a fool or a stooge for Big Oil would question the need for immediate intervention?

Why Aren’t We Consulting the  “Scientific Consensus”?

The funny thing is, in order for me to present a less frightening scenario, I don’t have to dig up a paper from Richard Lindzen or a speech by James Inhofe. All I need to do is quote from the recent Economic Report of the President and the IPCC AR4.

From the Obama administration’s Economic Report, in a chapter ominously entitled, “TRANSFORMING THE ENERGY SECTOR AND ADDRESSING CLIMATE CHANGE” [.pdf], we learn:

[T]he projected losses for the most likely range of temperature changes are relatively modest. For example, at the Intergovernmental Panel on Climate Change’s most likely temperature increase of 3?C for a doubling of CO2 concentration (concentrations in 2100 are likely to be higher), the projected decline is 1.5 percent of GDP. (Box 9-2, page 242, emphasis added)

To put that projected decline of 1.5 percent of GDP in context, note that the CBO puts the high-end estimate for the economic cost of Waxman-Markey above this figure (at 3.5 percent of GDP) for the year 2050. (Note that the two figures are measuring slightly different things, but the general point remains.)

In other words, we have the Obama administration’s own report admitting that the projected damages from “doing nothing” are lower than the high-end estimates of the cost of “doing something.” Granted, that might present a prima facie case for doing something, but it’s not nearly as open-and-shut as Frank would have you believe. Using the government’s own estimates, it’s entirely possible that government intervention would cause more damage than benefits, and that’s even with textbook policy implementation!

“Fat Tails”: The Small Chance of Catastrophe

Perhaps realizing that its admission of a likely 1.5 percent decline in the share of consumption in GDP would not inspire the public to gladly hand over the energy sector to the politicians, the president’s report went on to say:

The projected relationship between temperature changes and consumption losses is nonlinear—that is, the projected losses grow more rapidly as temperature increases. For example, while the projected loss for the first 3?C is 1.5 percent, the loss at 6?C is five times higher. And the estimated loss associated with an increase of 9?C is about 20 percent [of consumption’s share of GDP]…Overall, it is evident that policy based on the most likely outcomes may not adequately protect society because such estimates fail to reflect the harms at higher temperatures. (ibid, bold added)

Now we’re getting somewhere. A potential 20 percent hit to consumption is indeed frightening. But how likely is this outcome?

If we turn to the IPCC AR4, we have our answer, at least according to a suite of modeling teams across different emission scenarios:

To read the above chart, technically you need to integrate the curve over a range of temperature increases to find the probability that the actual warming will occur in that range. But simply eyeballing the chart shows that the Economic Report’s catastrophic 9C warming scenario has a virtually zero change of occurring.

Conclusion

I am not arguing that the MIT study is wrong, or that the CBO has correctly quantified the likely economic impacts of a cap-and-trade program. All I am pointing out is that the standard alarmist claims–as typified by Robert Frank–do not enjoy nearly as much evidence as their most vocal proponents would have us believe.

To take apart the case for climate alarmism, we don’t need to embrace the research of the “denialists.” We only need to look at the government and IPCC’s own reports.

3 comments

1 Robert Dammers { 03.15.10 at 7:35 am }

But this has always been Bjorn Lomborg’s position – in “The Skeptical Environmentalist” he, as you have, assumes that the IPCC reports are entirely accurate, but then takes apart the policy prescriptions arising from the “settled science” using his own expertise in statistics. And for that agreement with the IPCC he was pilloried. That has become, for me, the shibboleth to determine the attitude to science of AGW proponents. If they could respect Lomborg, but disagree with him, then they were interested in science. If they attacked him, there was no point looking at their arguments about science, since they were clearly unable either to read or think.

2 Andrew { 03.15.10 at 8:38 am }

The implication of comparing the potential damage from AGW to the costs of Waxman Markey is that M&W would eliminate those costs. In point of fact that’s eronneous. Think more along the lines of this, the damages avoided are about 3% of the total, meaning that you have to add the cost of W&M to the total damages minus those “avoided” and compare that to doing nothing. It turns out that with W&M we lose about 5% of GDP and without it 1.5%.

http://masterresource.org/?p=2355

3 rmurphy { 03.15.10 at 10:10 am }

Great points, guys. Andrew you’re right I probably should mention that point more often. It just cracks me up that even with their own numbers, and even if we assume that cap-and-trade would completely stop AGW, that it’s not obvious it would be a net benefit.

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