No “right” response to global warming

The mainstream acceptance of both thescientific consensus on global warming and the need for a globally binding capon carbon emissions does not by itself indicate that we are close to reaching asatisfactory solution to climate change.   The optimal policy response is stillsubject to massive uncertainty from three sources: risk around our centralforecast of climate change costs, uncertainty about the cost of reducingemissions, and uncertainty about how we should share the cost burden.

The so lution to the textbook case ofenvironmental pollution is a tax equivalent to the cost to society of cleaningup (or adapting to) the pollution.   That principle is now being applied to the problemof global warming through the application of a carbon tax (or the theoreticallyidentical cap and trade system).

However there is an important differencebetween the textbook case and climate change – our estimate of the costs ofclimate change come with wide error bands.   Even if we accept that theInternational Panel for Climate Change’s scenarios remain the best assessmentof current scientific knowledge, it remains the case that there is substantialuncertainty around that "best" forecast.  

A review of the IPCC methodology by twoforecasting experts was uniformly scathing about the process used to produceconsensus forecasts, and it is well-documented that experts tend to overestimatethe precision of their predictions.   (As an analogy, the current globalfinancial crisis stems in part from outcomes that fell far outside the predictedrange.)  

In simple terms, this means that the impactof climate change could still be much better, or much worse, than we areassuming.   Of course, the costs of alternative outcomes are not necessarily balanced:the good news scenario is that we’ve spent money for nothing; but the worstcase is that even drastic measures can no longer prevent catastrophic climatechange.

What does this uncertainty mean for ourtextbook response of a carbon tax?   With an uncertain cost, it is no longersure that setting the carbon tax equal to our best forecast of cost isoptimal.   It is more appropriate to think of a carbon emissions target (andcorresponding carbon tax) as like taking out a form of insurance policy.   Whatwe are really buying is protection against a range of outcomes, but not againstall possible outcomes.  

Suppose are current target gives us an 80%chance that global warming will be within an acceptable limit.   For an extracost we could be 90% sure – but the point is that we quickly hit diminishingreturns in terms of the extra safety we get for our dollars.

This kind of analysis produces objectionsfrom those that believe that the worst-case scenario for global warming, evenif only a miniscule probability, is severe enough to justify spending any sum toavoid.   However, this position is difficult to reconcile with the rather smallsums we spend to protect ourselves from other extremely nasty but rareeventualities – bird flu spreading to human populations for example – or therelatively small sums spent on improving life expectancy in the third world.

Since global warming is a collective actionproblem, the world as a whole has to choose how much insurance to buy.   Thisleads to our second problem: our forecasts for how much greenhouse gasabatement will cost are also subject to tremendous uncertainty (and theuncertainty increases the more ambitious our target becomes).  

"Climate change insurance" is like anyother good: if it is cheap we will be happy to buy a high level of protection, butif it is expensive we become more prepared to take our chances (and at somelevel of expense adaption to climate change becomes cheaper than prevention).      

There might be some cause for optimismhere: attempts to reduce sulphur dioxide emissions in the US via a market mechanism were ultimately much cheaper than initially predicted.   However,a larger proportion of carbon dioxide emissions are from energy, for whichthere is already a price incentive for conservation.   And recent increases inoil prices have produced little in terms of reduced oil demand (so far).  

Even if we settle on an acceptable cost,the question remains of who will pay?   This means allocating the cost bothbetween rich and poor countries, and between current and future generations.  Equity arguments cut both ways here: it is unfair to expect developingcountries to do too much (although they are quickly becoming the major sourceof emissions growth).   It also seems unfair to place most of cost burden on thecurrent generation to the benefit of future, richer generations.

One of the more heated economic debates onclimate change response has actually concerned the appropriate interest rate withwhich to discount future costs – too high a rate leads us to ignore the distantfuture costs of global warming, but too low implies a concern for the futureout of proportion with the amount of saving and bequeaths actually observed.

No matter what we resolve to do in responseto global warming, there will remain reasonable and informed debate as towhether we are doing enough or too much, and whether we are spreading the costsfairly.   And it seems inevitable that the policy response we ultimately settleupon will still leave us with a greater than negligible risk of drastic climatechange.

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