The Importance of Economics in the Framework of Climate Issues
Professor Christopher Essex
Good afternoon it’s a pleasure to once again speak to you in the plenary
sessions at Erice. I am co-chairing this session on climate, with Professor
Zichichi and Lord Monckton. This session follows directly from the
presentation made this morning by President Klaus in which climate and
economics were central topics.
Whenever I co-chair or organize such a session I like to spend a few minutes
briefly framing it with explanations as to its broader significance. In this case,
because this session, and President Klaus’s session this morning, are both
facilitated through the climate PMP, the question arises as to why we are
discussing economics and not just climate. Economics can seem quite
remote from the physics, chemistry, or mathematics of climate, and yet there
is an entire field known as climate economics. Indeed, when I was a student I
would never have imagined that I would spend as much time with
economists as I have in recent years. Although I am not one of them, for the
most part my time among them has turned out surprisingly well. So I will
attempt to explain why economics matters on the fundamentally physical
issue of climate.
Central to popular and policy interest in the science of climate is concern over
projected deleterious changes in climate, particularly any potential deleterious
changes caused by humans that are preventable by humans. Of course there
are academics who would be interested in climate even if there were no risk
or danger, but the broader society cares more about the risk and danger and
less about the natural wonder. The obvious human response to such fears is
to alter actions, in hopes of sparing us all of the potential negative outcomes.
But, alas, it is not that simple. Not only are the negative outcomes difficult to
nail down, but so are climate and climate change highly problematic and
elusive in terms of rigorous physical thinking. I have found over the years
that if you present this unambiguous reality in detail to people involved with
this topic, many will respond by raising the “precautionary principle.”
In case you don’t know what that is, I will attempt to explain. The
precautionary principle is a policy doctrine for facing the unknown, and what
better fits into the category of the “unknown” than topics of scientific research,
of which climate is surely one. If you have two paths, where one is safe and
the other potentially dangerous, the precautionary principle calls on people to
choose the safe path, unless it can be proven that the novel one is safe too.
Pretty straightforward, isn’t it? Uncertainty, particularly scientific uncertainty,
then is faced by practicing risk avoidance.
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Of course simple risk avoidance is not a realistic, let alone effective, policy.
To illustrate how the real world can intrude I will provide a couple of
examples, not from grand policy issues, but from real individual lives:
1. Near the end of the cold war, a Canadian living on the west coast of
Canada was concerned about the risk of nuclear war. He applied the
precautionary principle to the problem (without using the term, I imagine).
He concluded that western countries were potential targets, and so
resolved to personally avoid the risk by moving as far from them as he
could. The southern hemisphere was about as far away as he could go. He
would further insulate himself from the risk by finding an island far from
potential land targets. So in accordance with his application of the
precautionary principle, he set himself up as a sheep farmer in the Falkland
Islands only to find himself in the middle of a real war and not just a
hypothetical one.
2. When I was with the Canadian Climate Centre’s general circulation
modeling group, one of my colleagues revealed that he came to Canada to
avoid military service that might require him to fight in a war. After arriving
in Canada as a young man, he wanted to become a scientist. He liked
physics but he was afraid of how physics had become embroiled with
politics. So as a precautionary measure he deliberately chose to study a
field that he could not imagine would ever be of political interest:
meteorology and climate.
While it may or may not have useful legal applications, the precautionary
principle simply cannot stand as the basis of coherent policy toward the
unknown of real events if for no other reason that it presumes to know of a
pristine road through the unknown that is risk free. That is it copes with the
unknown by presuming to know the unknown.
It is easy to decide which way to go if one path is known to be dark,
dangerous, and foreboding, while the other has only butterflies, rainbows,
sunshine, and unicorns to offer. But in the real world things can go wrong on
either path, while there may also be unique advantages to either. The only
rational way to decide which road to take is to have a way to compare the
risks and advantages.
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An engineer’s classical way of discussing risk is in terms of probability. What
are the odds, say, that a bridge will fail, or a building will collapse? The
relative risk, in this picture, between seemingly unrelated things can be
compared on a number line of the relative likelihood of desirable or
undesirable events.
It is true that probability in the real world is not quite like the clean probability
you may have learned about it school, where you select, say, black or white
marbles from a bowl. In the real world probabilities are hard to know formally,
and they are conditional in complicated and devilishly subtle ways, leading to
many famous paradoxes like the prisoner’s paradox or the Monty Hall
problem. I have seen knowledgeable people get into huge disputes over such
things. I would love to tell you about the look on the face of a classically
trained probabilist meeting a Bayesian probabilist for the first time. I have
seen this. There are also some great jokes about probability that arise from
such things. But in the interest of time, we will not pursue these things today.
I will of course be willing to share probability jokes with anyone who is
interested at another time.
So then, assuming that probabilities can be well-defined and determined, we
can compare the risk of getting struck by lighting to the risk of being bitten by
a dog, to a dam breaking or even to the likelihood of winning a prize. But
what this picture lacks is a sense of magnitude. A dam breaking is in a
different league of calamity than being bitten by a dog, although you may be
less affected personally in a particular realization of the former than the latter.
We say these things have different “magnitudes” but different magnitudes of
what? These events are not one-dimensional in a common physical quantity.
They are qualitatively different from each other, and yet at the human level
we have an intuitive sense of rank ordering. Fortunately humans long ago
devised an index to compare the human significance of things that may be
physically qualitatively quite different from each other. And that index is of
course known as money.
At the human level for every event we may assess a value in terms of money.
That means that every event can be assigned a positive or negative
monetary value and a probability, placing all events in this context into a twodimensional space rather than a one-dimensional number line. This is
depicted in figure 1.
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In this case the probability, p, of a deleterious event is along the horizontal
axis while the cost represented as L, for losses, is along the vertical axis.
Lines of constant risk in the classical engineering picture would be vertical
lines. But if we bring the issue of cost into the picture, the lines of constant
risk look qualitatively quite different.
Risk in this picture is measured in terms of total dollars paid out, or received.
Thus it’s clear that a rare but costly event, A, can actually be riskier in terms
of losses than a common, but less expensive, event B. Risk becomes the
product of the probability and the cost. Lines of constant risk then become
hyperbola’s rather than vertical lines. It makes an event in the upper left of
the diagram equal, in terms of risk, to events in the lower right. It also
means that risk increases upward and to the right rather than horizontally. I
think it’s fascinating how introducing the valuation of an event completely
changes the shape of lines of constant risk. That shows us that how one
determines the meaning of the various quantities involved has a significant
effect on how we will make decisions.
And that is exactly what economics concerns itself with: not just the costs of
doing something but also the costs of not doing something. You may feel
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safe hiding in a closet, but you lose out on all of the benefits that you might
gain by going out into the world from your closet. You may also find
unanticipated risks from staying in the closet. Making a full assessment of
these, such as may be possible, is the kind of thing that economists do. In
this framework the precautionary principle is completely superseded for the
purposes of sound policymaking. So while economics is not primarily
concerned with climate, the importance of climate for humanity must
ultimately involve economics. And that is why we find ourselves talking about
climate economics today.
We may worry about the consequences of producing carbon dioxide in large
enough quantities to affect climate change. But it is not correct to presume
that there are no consequences to not producing carbon dioxide. Rational
decisions about what we should do ultimately then have to weigh the
economic consequences against the climatological consequences that we
may imagine. Among economists there is more than one school of thought on
this as one might naturally expect. We have attempted to represent this to a
limited extent. We did invite Lord Stern, who is a well-known protagonist for
one pole of the spectrum of views, but as you can see he is not present
today. I am grateful to our own Dr. Bruce Stram who has kindly agreed to
represent that side of the picture.
What I hope you’ll pay close attention to in all of the talks is that we are not
dealing with the case of action versus doing nothing, as contemporary
demagoguery continues to offer us, but the relative costs and benefits of
different scenarios. I would also like you to bear in mind that extreme
(implausible) economic scenarios are not trivial. They can be every bit as
apocalyptic as extreme (implausible) scenarios for climate change. In either
case extreme scenarios call for narrow focused efforts which tend not to be
robust against the unknown.
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