Why Climate Economics Continues to Succeed

A blog post that responds to Noah Smith’s provocative piece titled Why Has Climate Economics Failed Us?.   It raises a deep question.  What is the point of climate economics research?  I will respond below.  Dr. Smith’s piece also throws some low blows.  My friend Richard Tol is singled out for reasons I don’t understand.  Go to Professor Tol’s Google Scholar webpage and read his work.

First, a preamble.  I am a microeconomist.  I do not write down Integrated Assessment Models. I agree with Robert Pindyck’s points in this tough JEL piece.  The Lucas Critique demolishes these IAM models.  My new book Adapting to Climate Change provides a microeconomic account of the underpinnings of the Lucas Critique’s causal effects.

Noah Smith argues that the Biden Administration is serious about prioritizing policies to slow the climate change challenge but that climate economists are not supplying ideas that would both increase economic efficiency and that can be implemented in a divided democracy.   He hints that economists have been too smug as some of us chant “enact Carbon Taxes” and then let the magic of the market play out such that the economy decarbonizes and new firms (the next Tesla) grow.  As new firms produce green products , learning by doing raises the probability that they will export to the rest of the world.

I agree with him that too few climate economists work on political economy issues.  Soren Anderson and co-authors have a nice paper on carbon tax voting in Washington State.     I have published a 2013 paper and a 2015 political economy paper on carbon tax voting.  My 2011 paper with Matt Kotchen on political economy of regulation was discussed by Rush Limbaugh on his radio show!

The proof that climate economics is succeeding is based on revealed preference.  Very talented young people are entering the field and are well trained in Big Data analysis and machine learning techniques. This allows them to uncover very interesting correlations that may not have been known before hand.  An example is the Heat and Learning study.   

The rise of the Big Data revolution has brought new excitement to the field.  I worry that some of the young scholars in climate economics believe that the reduced form statistical relationships they measure are “iron laws” similar to science.  Nothing we do in economics yields such stationary estimates. In fact, by estimating these relationships we help to shape the future economy. As economists play the role of “Paul Revere” in highlighting surprising connections between climate change and economic outcomes, our findings actually change future reduced form estimates of the damage from climate change.  I discuss this point in my 2020 LSE Lecture.    Put simply, our research helps to reduce the damage of climate change both by changing public policy but also by fueling private sector adaptation.  Noah Smith ignores this point.  

Another sign that climate economics is on the rise is the cross-field synergies with researchers in other fields ranging from finance to real estate and development economics.  For too long, environmental economics was intellectually isolated.  Other researchers in economics are eager to work with the young environmental economists because of the cross-field synergies.   

The one weakness that I see in climate economics is a lack of intellectual diversity and methodological diversity among the young scholars.  My guess is that 98% of climate economists are progressive intellectuals and 95% of the scholars use reduce form causal effects models.  Marty Weitzman wrote an important paper on diversity.     What further progress would climate economics make today if the field is more diverse on these margins?

Climate change is a very important challenge that we already face and my son’s generation will struggle with.  The job of the economist here is to study the tradeoffs we face as individuals, voters and members of society. It is also our job to help the public to understand the role that markets play in offsetting risk and assigning ownership decisions to those who can best handle the risk.   Skill can be built up. LeBron James wasn’t born a NBA player. Jim Heckman wasn’t born a Nobel Laureate. We build up skill in those sectors where there is a high returns to investment.  In an economy where productive firms can grown (think Amazon’s growth), more and more of the economy is insulated from threats when we grow “star power” to manage more of the economy.  Read my 2016 paper with Josh Graff-Zivin.