Julian Morris on ‘Fat Tails’ Climate Activism (MIT’s Pindyck reconsidered)

Some economists have objected that conventional measures of the social cost of carbon (SCC) fail adequately to account for the possibility of catastrophic climate change. However, such criticisms are based on assumptions concerning the probability of catastrophe that have no empirical basis. A recent attempt to estimate the SCC by surveying experts to find out what they would be willing to pay to avert catastrophe is so riddled with defects as to be of no utility.

Editor note” In his underappreciated analysis, “Climate Change, Catastrophe, Regulation, and Social Cost of Carbon” (Reason Foundation: March 2018), Julian Morris presented a major case against pricing or otherwise regulate the emissions of carbon dioxide (CO2).

In a 74-page painstaking study, Morris (pp. 49–53) dealt with the “fat tails” argument of MIT economist, Robert Pindyck, who sought to reframe the debate in terms of what experts thought to be the worst-case (“catastrophic”) outcome from the human influence on climate.

In other words, carbon-based energy emissions and land-use changes producing net CO2 release are guilty until proven innocent. A deep ecology, Malthusian argument, Morris argues otherwise.

The excerpt follows:

MIT economist Robert Pindyck has criticized the use of IAMs to calculate the SCC, noting in a 2013 paper that they, “have crucial flaws that make them close to useless as tools for policy analysis.” 1 More recently, he went further saying:

[C]alling these models “close to useless” is generous: IAM-based analyses of climate policy create a perception of knowledge and precision that is illusory, and can fool policy-makers into thinking that the forecasts the models generate have some kind of scientific legitimacy. IAMs can be misleading—and are inappropriate—as guides for policy, and yet they have been used by the government to estimate the social cost of carbon (SCC) and evaluate tax and abatement policies. 2

However, instead of rejecting the use of an SCC, Pindyck has proposed that the SCC be based on expert evaluation of “the possibility of a catastrophic climate outcome.” 3

Professor Pindyck subsequently elicited “expert opinions” on two questions: “(1) the probabilities of alternative economic outcomes of climate change, and in particular extreme outcomes, but not the particular causes of those outcomes; and (2) the reduction in emissions that would be required to avoid those extreme outcomes.” 4 From these expert opinions, he found:

#1 Although there is considerable heterogeneity across experts, many view the likelihood of an extreme outcome—a climate-induced reduction of GDP 50 years from now of 20% or more—as quite high (e.g., could occur with a probability of 20% or greater). As a result, the estimates of the average SCC are large, above $200 per metric ton. SCCs based on the responses of economists are lower (around $170), but those based on responses of climate scientists and residents of Europe were $300 or more.

#2 However, the SCC estimates are much smaller ($100 or less) when based on a trimmed sample that excludes outliers, and is limited to respondents who expressed a high degree of confidence in their answers regarding the probabilities of alternative impacts. But even this trimmed sample yields an SCC that is well in excess of the roughly $40 numbers that have come from recent IAM-based analyses. 5

There are several problems with this approach. First, concern about potentially catastrophic climate change should be considered in the context of concern about catastrophies in general.

[Editor note: On pp. 50–53, Morris elaborates on these six worst-case events competing with climate change: Nuclear war or terrorism; a strike by a “near earth object” such as an asteroid, meteor, or comet; a giant volcanic eruption; massive earthquakes and tsunamis; a new pandemic virus or drug-resistant bacterium; aberrant technologies]

In principle, all of these—and other—potential catastrophes are worthy candidates for investments in preventative measures. But attempting to eliminate all catastrophic threats is impossible. Potentially, all of humanity’s resources could be consumed by attempts to address any one of these threats but that is neither desirable nor possible.164 Instead, it makes sense to prioritize preventative measures based on reasonable estimates of the benefits of prevention (i.e. the likely consequences of catastrophe multiplied by the probability of that catastrophe occurring) and the costs of such measures.

Unfortunately, while the likelihood of occurrence of some catastrophes can be calculated—based on historical evidence of previous such events—the likelihood of others is unknown.

In the former category are war, impacts by near-earth objects, earthquakes, volcanoes, and pandemics. In the latter are threats from aberrant technologies. Abrupt climate changes have occurred in the past and in principle one could assign a probability to a future naturally occurring abrupt climate change. However, it is not possible to assign a probability to human-caused abrupt climate change based on evidence of past such changes, since there have been none.

Pindyck did not ask the “experts” to evaluate the threat of climate change in the context of other potential catastrophes, let alone other possible investments. As such, the responses he received were almost certainly subject to bias due to inappropriate framing (and specifically a lack of embedding).165

REFERENCES

1 Pindyck, Robert S. “Climate Change Policy: What Do the Models Tell Us?” Journal of Economic Literature 51(3). 860–872. 2013.

2 Pindyck, Robert S. “The Use and Misuse of Models for Climate Policy.” Washington, D.C.: National Bureau of Economic Research. NBER
Working Paper No. 21097. April 2015.

3 Ibid.

4 Pindyck, Robert S. The Social Cost of Carbon Revisited. Washington, D.C.: National Bureau of Economic Research. Working Paper 22807.
Available at: http://web.mit.edu/rpindyck/www/Papers/SCCRevisitedNov2016.pdf

5 Ibid. at 5.

6 In the recent novel SevenEves, Neal Stephenson imagines a scenario in which a particular threat—the disintegration of the moon—results in humanity reorienting itself entirely to address that threat; but in that case, the threat itself could not be averted and instead humanity invested its resources in ways to enable some humans to survive off-planet.

7 Kahneman, Daniel and Jack Knetsch. “Valuing Public Goods: The Purchase of Moral Satisfaction.” Journal of Environmental Economics
and Management 22. 57–70. 1992.