Monday, March 08, 2010

Krugman Models the Economics of Climate Change

Ezra Klein pointed me to this note by Paul Krugman on the economics of climate change. Economics students will recognize the methods. The non-geeks among my readers will find it rather heavy going. Krugman uses a simplified "toy model" to illustrate some of the economics of climate change and atmospheric carbon. According to his model, the longer it takes the carbon price to rise, the longer it takes for action to make economic sense:
Nordhaus and other modelers, making their best possible estimates, come to the conclusion that while emissions must eventually be brought way down and carbon concentration stabilized, it’s not worth doing this until K has risen a long way above current levels. So it’s a mega-St. Augustine: O Lord, make us carbon-neutral, but not yet.
One of Krugman's equation depends on "the sensitivity of temperatures to carbon concentration, and the sensitivity of welfare to temperature." This is where concerns over accelerating change come into play:
Lately, climate models have begun suggesting a lot more sensitivity to concentration, with a number of groups doubling their predicted temperature rise. As for the welfare sensitivity: Marty Weitzman has managed to scare me, by pointing out that there’s a pretty plausible case that a rise of 5 degrees C – which is no longer an outlandish prediction – would be utterly catastrophic. You don’t have to be sure about this; just a significant probability is enough.
In economics, a significant probability of a catastrophic event creates a cost, even if the catastrophe doesn't occur. One either has to set aside reserves or buy some kind of insurance to protect against the potential damage or face catastrophic losses.

2 Comments:

Blogger Rob said...

Insurance is a great idea as a means of preparing for warming. Forcing use of alternative energy sources, particularly sources that don't exist, is very bad. The economic contraction that will occur as governments force us to reduce our use of fossil fuel to nineteenth century levels will reduce wealth by trillions of dollars. That will be hard for us but it will mean far more deaths in Africa than all but the the worst global warming foercasts predict.

9:10 AM, March 15, 2010  
Blogger TommyWonk said...

I don't know what basis you have for your assertion. Some scary numbers have been tossed around to warn us away from adopting renewable energy, but this is the most extreme I have seen.

You seem to have fallen for the fallacy that the ratio of energy input and economic output is fixed. It is not.

The ratio of energy to GDP in the U.S. have been cut in half since WW II:

http://www.tommywonk.com/2010/02/energy-efficiency-and-gdp.html

A report from McKinsey & Company projects that $520 billion in investment in energy conservation would reduce energy use by 23 percent by 2020 and return $1.2 trillion in cost savings:

http://greeninc.blogs.nytimes.com/2009/07/29/mckinsey-report-cites-12-trillion-in-potential-savings-from-energy-efficiency/index.html

Closer to home, I have studied the Bluewater Wind project in considerable detail, and not a single opponent so much as suggested that people would die because Delaware adopted offshore wind power.

9:36 AM, March 15, 2010  

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