Climate Shock-the economic consequences of climate change: a book review
Climate Shock: the economic consequences of a hotter planet, published in 2013, is a book about the view of economists on climate change. The authors are Martin Weitzman, a professor of economics at Harvard University, and Gernot Wagner, a senior economist at the Environmental Defense Fund. Their book starts with the discussion of the uncertainties associated with climate change and its consequences. They use the phrase “fat tails” to describe the catastrophic events such as temperature rising by 6 degrees centigrade and sea level rising by 20 meters and emphasizes that climate policy should be centered on the purpose of minimizing the probability of these extreme events. Possible ways to tackle climate change including reducing emissions and geoengineering are carefully discussed in the book. The authors conclude that the reducing emissions rather than geoengineering should be utilized as climate policy instrument. They point out that free-riding is the major challenge for current climate policy.
In the book, the authors quote the Intergovernmental Panel on Climate Change (IPCC) reports and compare the descriptions of the possibility of man-made global warming. In 1995, IPCC declared it was “more likely than not” the case that global warming was caused by human activity. By 2001, it was “likely”. By 2007, it was “very likely”. By 2013, it was “extremely likely”. The authors think that “this talk of certainty does not convey what it ought to convey”. Indeed, as they say, it provides a false sense of security. “What happens at the very extremes-the tails of the distribution-may dwarf all else”. This is where the term “fat-tails” comes from. Unlike the bell curve distribution (see Figure 1), with “fat-tailed distributions”, extreme events can be quite possible. Wagner and Weitzman argue that catastrophic temperature increase can happen at substantial possibility (perhaps one in ten) under current climate policy, therefore, it is essential to design climate policy to minimize the possibility of the extreme events.
Figure 1 Illustration of Fat-tailed Distribution of Temperature Response [1]
There are two ways to deal with climate change i.e. reducing emissions and geoengineering to offset anthropogenic warming. Wagner and Weitzman introduce the view of economists on emissions reduction. Economists utilize carbon taxes and cap-and-trade systems to mitigate the externalities of carbon emissions. They say that “most economists would be fine with either carbon taxes or caps” in spite of the hot debate about which is the better approach in practice. However, the authors show a conservative attitude towards geoengineering. They quote the report of National Academy of Science and conclude that it is too risky to implement geoengineering because of its potentially devastating side-effects. They further create a term called “free driving”, a terminology parallel to “free riding”, to describe the externalities of geoengineering. An illustration for free driving by Wagner and Weitzman is one country being able to pay for the costs of geoengineering the entire planet-all potentially without consulting the other seven billion people on the earth.
The authors eventually jump to the conclusion that we should “stick it to carbon” and rely on the modified market mechanism to tackle climate change. By the word “modified”, they mean that carbon taxes/cap-and-trade should be implemented in order to correct the market failure and internalize the externalities of carbon emissions. Either carbon taxes or cap-and-trade requires a price for carbon emissions, which should be exactly equal to the social cost of carbon emissions. In spite of the large uncertainties in the estimates of social cost of carbon by different models including DICE, FUND and PAGE, it is the uncooperative international relations that cripple the efforts for climate change mitigation. The authors use the following example to illustrate this situation. The US federal government estimates the social carbon cost to be 40 dollars per ton of CO2, however, the actual carbon price around the world is 1 dollar per ton. They argue that such low carbon price is “nowhere near any serious climate policy would require” and “these countries have made essentially no efforts for carbon emissions mitigation”. Wagner and Weitzman think that the uncooperative situation is caused by free riding of these countries. That is to say, the total costs of carbon emissions are large, “but no one has the right incentives to try to do something about them”. Therefore, as concluded by the authors, some suitable strategies need to be designed to promote the collaboration and compromise between countries in terms of global climate change mitigation.
References:
[1] Nordhaus W. A new solution: the climate club [J]. The New York Review of Books, June 4, 2015.
