Only economists can save the planet

Economist Ed Dolan has reviewed Gernot Wagner’s book But Will the Planet Notice? Given that Martin Weitzman is coming in a couple of weeks to give the 7th Annual Condliffe Memorial Lecture I thought this piece in the review interesting:

He [Wagner] is especially devastating in his critique of the Endangered Species Act. The ESA is perhaps the least economically inspired piece of environmental legislation on the books, allowing for no tradeoffs or optimization at all. Under the act, everything is all or nothing. If the barred owl is not on the endangered list, it fends for itself until it qualifies. If the spotted owl is on the list, there is, literally, no limit to how much is too much to spend on protecting it. Ten million dollars to save a single bird? Sure, it’s been done. Never mind that the largest expenditures often go to species that are beyond saving while other conservation needs, like habitat protection to keep other species off the list in the first place, are underfunded.

What would be better than dumb regulations? Smart regulations, of course. Wagner likes an idea advanced by his one-time Harvard professor Martin Weitzman: Use DNA testing to measure the genetic distance between species. Adjust the amount of money and effort spent of protecting the spotted owl depending on its genetic distance from its cousin the barred owl. Pursuant to the goal of maximizing genetic diversity, genetic outliers would become the top priority. Measure, maximize, optimize. That’s the economic way of thinking at work.

Weitzman’s work appears elsewhere in the book, as well. Wagner spends a whole chapter elaborating the reasons for thinking climate change is the planet’s number one threat. At first that might seem like overkill, since, for the most part, he seems to address the book to readers who already share his concern for the future of the planet. But it turns out he has more to say than simply to reiterate the findings of the Intergovernmental Panel on Climate Change. Following Weitzman, he explains why conventional climate change research, which focuses on mean values and normal distributions, misses the point.

The risk of climate catastrophe, he argues, is not like the risk that your house will burn down, a case where normal distributions work just fine. Instead, it is more like the kind of systemic financial risk that shook the world after the collapse of Lehman Brothers. Why so? Financial and climate risks both have fat-tailed distributions. That makes it worth taking serious precautions against “black swan” events that are very far from the mean—events that, although not especially likely, would result in huge losses if they did occur.

The consensus among mainstream climate scientists is a mean expected warming of 2 to 4 degrees Celsius by the end of the century. Adapting to such an increase would be costly and disruptive, but it would not mean the end of life as we know it. Instead of the mean, Weitzman and Wagner (who have worked together on the issue) argue that we should be focusing on the 5 percent probability that warming will end up way out in one of those fat tails, say, 12 degrees or more. That would put half the world’s population in areas so hot that a few hours out in the sun would be fatal—even for a person soaking wet, with light clothing and a strong breeze.

The Weitzman-Wagner approach puts the precautionary principle on steroids. With no change in the mean expected rate of warming, fat tails triple the amount we should be willing to invest in climate change now. To put it in dollars, if were willing to tax carbon at $20 per ton based on conventional analysis, then we should be willing to tax it at $60 or more based on fat tail math.

So don't miss the Condliffe Lecture!