Friday, September 15, 2006


BY: Andrew J. Leach, HEC Montreal, Canada


The purpose of this paper is to confront economic models of climate change with the reality that limited information exists with which to form expectations about the evolution of the climate. A key element in the tension between those who believe we should impose aggressive climate change mitigation policies and those who do not is the question of if we are merely in a long period of shock-induced, above average temperatures or if observed increases in temperature are a result of carbon emissions. This paper characterizes learning dynamics resulting from the use of observations of temperature to update beliefs about two key characteristics of global climate: the persistence of natural trends and the sensitivity of temperature to atmospheric carbon levels. This paper shows that, contrary to predictions in the literature that uncertainty may be resolved very quickly, the time to learn the true processes may be in the order of thousands of years. Further, this paper shows the effects of uncertainty on the likelihood that observations from the statistical record lead to important estimate and policy errors.

1. Introduction

A large and growing literature in economics addresses the challenge of developing optimal climate change policy in the face of uncertainty and expected future learning. Both the persistence of temperature changes (whether natural or anthropogenic) and the degree to which greenhouse gas (GHG) accumulation causes temperature change will be important for policy formation. In this paper, a model is developed which captures the need to use a limited amount of information to form expectations about a complex system in order to set climate policy. While there exist reasonable data describing the recent evolution of both temperature and atmospheric GHG accumulation, separately identifying the sources of temperature change as natural or anthropogenic solely based on the statistical record leads to significant uncertainty surrounding the relative magnitudes of these effects. If we assume knowledge of the natural process which governs temperature evolutions, then the process of identifying the effect of carbon is made to appear much less complex. This paper describes the nature of the uncertainty that exists over the mechanism of climate change through an empirical exercise, and then characterizes the dynamics which are likely to arise as this uncertainty is resolved using a reduced form, learning experiment. Finally, learning and uncertainty are imposed in an optimal policy model to characterize how uncertainty is likely to affect policy choices and vice versa.

The benchmark contributions to climate change economics are Manne and Richels (1992), Manne et al. (1995), Nordhaus (1994), and Nordhaus and Boyer (2000). Each of these contain extensive reference to uncertainty, but generally treat uncertainty only through sensitivity analysis, reporting results for various parameter vectors. Pizer (1999) introduces a model where the regulator specifically accounts for parameter uncertainty in the social planning decision. Related papers on active learning to resolve uncertainty about the value of parameters governing climate change and the damages it may cause include Kolstad, 1994, Kolstad, 1996 and Kolstad, 1997, Ulph and Ulph (1997), Kelly et al. (2005), Kelly and Kolstad (1999), and Karp and Zhang (2006).

Kelly and Kolstad (1999) is closely related to the exercise undertaken here. This paper proposes a model in which a social planner uses information from temperature realizations to update prior beliefs about the temperature response to atmospheric GHG levels. The planner chooses the optimal level of savings and emissions control conditional on current knowledge of the mechanism of climate change at each point in time, updates these beliefs, and thus adjusts their actions, conditional on observations of climate data. Learning is Bayesian, and so the planner is using information in an optimal manner. A key result shown with the model is that the expected learning time (the time after which parametric uncertainty is essentially removed from the planner's problem) is 90-160 years. The results also show that there is a tradeoff between the benefits of controlling emissions and information....


7. Conclusion

This paper uses both a reduced-form, numerical experiment and a dynamic, optimal policy model to explore the effects of learning and uncertainty on the ability to set effective climate change mitigation policies. In particular, the analysis highlights the fact that it is difficult to determine the benefits of emissions control when the relative importance of natural trends and anthropogenic influences on temperature changes are unknown.

This paper extends earlier results from Kelly and Kolstad (1999) to show that when uncertainty exists over two potential causes of observed climate changes, the time to learn the true parameter values of the climate model may be on the order of hundreds if not thousands of years. Perhaps more importantly, it is shown that the probability that a particular learning path yields very poor estimates of the severity of climate change is greatly affected by the nature of initial uncertainty, and that uncertainty can be expected to be much more persistent where more parameter values are unknown. In part, the results suggest that some trade-off must be made between investments in regulation under uncertainty and investments in accelerating the arrival of new information. Further, the results emphasize the fact that temperature data represent only a single draw from a complicated system about which we have limited knowledge. In such an environment, allowing this single set of observations to over-influence our policy choices may lead to significant errors.

The results presented here are limited by computational complexity. Uncertainty clearly exists over values which are as important for the determination of effective climate policies as those explored in this paper: the extent of damages, the cost of reducing emissions, and future technological progress are but three important examples. Furthermore, even greater uncertainty may exist over the regional distribution of the effects of climate change and potential thresholds and irreversibility in the climate system, which are also not treated in this paper.

Journal of Economic Dynamics and Control, Article in Press


Ignoring global warming isn't a sign of scientific illiteracy or of ideologically induced stupidity

The typical mainstream attitude toward global warming is preoccupied with only two overriding questions: Is the earth's surface temperature rising? If so, is human activity the principal cause? Once these questions are answered scientifically - and they are indeed questions for science - elite opinion considers the debate closed. The fundamental issue is settled. Science, answering "yes" to both questions, has spoken. Global warming is a problem that we must address.

Still open to debate are subsidiary issues such as the role of command-and-control regulations versus market-based approaches like tradable emissions permits. But the Big Issue - humans' harmful effect on the climate and our consequent need to correct the problem - is settled.

Being neither an atmospheric scientist nor a former U.S. vice-president, I haven't the expertise to judge whether or not global warming is a reality or the extent to which humans cause it. Experts who I trust, however, persuade me that science does indeed show that global temperatures are rising and that industrial activity is at least part of the reason. I'm prepared to believe even the possibility that global warming will eventually kill millions of people.

But I nevertheless insist that science does not unambiguously endorse action against global warming. Put differently - and contrary to today's elite opinion - ignoring global warming is not necessarily a sign of scientific illiteracy or of ideologically induced stupidity.

First, human preferences might counsel against tackling global warming. If global warming's ill-effects won't occur for, say, another 150 years, nothing objective says that people today should sacrifice for that distant tomorrow. Such sacrifice might be demanded by ethics - or by human preferences themselves - but not by science.

Second, and more interestingly, sound skepticism of government action to prevent global warming is itself based on science. Public Choice economics offers objective theory and evidence that political institutions are so prone to malfunctioning that entrusting them with great powers courts great trouble.

Posing the greatest danger is command-and-control regulation, for not only does it aim to achieve goals defined by politicians, it dictates in detail the means to be used by private firms and persons in pursuit of these goals. Such centralized, politicized, and bureaucratized intervention has only weak feedback loops. (For example, how to tell if the mandated method of emissions reduction is better than alternative and now-prohibited methods?) And unsurprisingly, such heavy-handed regulation is especially prone to be hijacked by special-interest groups. When eastern coal producers successfully lobbied for the 1977 Clean Air Act amendment that mandated scrubbers for all coal-burning factory furnaces, the intent (and effect!) had nothing to do with cleaning the air and everything to do with undermining the market for naturally cleaner low-sulfur coal from the west and with creating a market for scrubbers produced by corporations such as Westinghouse.

Even market-based environmental regulation, however, is risky. Tradable emissions permits do give firms flexibility when deciding how much factory output to produce and by what methods, but the overall level of desired emissions is still set politically. This is not because politicians are not scientists, but because the question of what ultimately constitutes an optimal emission level is not a scientific one alone. Neither scientists nor any one else really knows what trade-off individuals are willing to accept in constraining their preferred actions and choices now for the sake of stabilizing carbon dioxide levels in the future. Furthermore, this trade-off will vary from society to society, country to country, company to company, individual to individual. For instance, a poor mother in a Third World country trying to feed her family will have fewer qualms about using cheap, polluting fuels to cook for her children now than the wealthy and environmentally conscious individuals in her own country - not to mention prosperous First World countries -- who can forego some immediate material needs for the sake of the psychic benefit of leaving a stable climate to their great-great-grandchildren. Even elected officials with unalloyed devotion to the public good don't have enough information about the particular circumstances and needs of individuals to know where to set emission levels so as to optimize their costs and benefits. Indeed, the 1990 baseline in the Kyoto Treaty was picked not for scientific reasons but political ones.

Nor will it do to argue that democratic voting offers reliable (or even reliable-enough) feedback to elected officials to set optimal limits, as is generally claimed. Geoff Brennan's, Loren Lomasky's, and Bryan Caplan's recent contributions to the theory of "expressive voting," along with Kenneth Arrow's earlier research on the arbitrariness of majoritarian outcomes, provide solid scientific reasons to doubt both the meaningfulness of preferences expressed in voting booths and the legitimacy of electoral outcomes as reflections of these expressed preferences. Not only, as Arrow proved, are the results of majoritarian voting unavoidably sensitive to the specific rules governing elections, but - as Brennan, Lomasky, and Caplan argue - the fact that each voter bears little personal consequence of casting a ballot one way or another means that each voter, effectively, gets to vote for free. A voter gets to express in the voting booth his or her policy preferences without being constrained to reckon seriously the consequences of how he or she votes.

But if democratic decision-making doesn't offer a cure for the real possibility of negative externalities - that the gain pursued by rational individuals might generate an overall outcome in which everyone is worse off than if each person been constrained to follow an available different course of action - what should be done about the kinds of activities that contribute to global warming?

It is hard to admit, but unless solutions are realistically available that do not themselves pose serious risks of unleashing other problems worse than the one sought to be solved, the externality is best left alone. Public Choice reveals the risks of seeking such solutions from government. More general economics reveals yet other risks: stifling, if not killing, the goose laying our golden eggs, namely industrial capitalism.

Political manipulation to encourage investments in the most environmentally correct - as opposed to profitable - energy technologies, for instance, would simply mean less overall investment in the energy sector. Worker productivity in this sector would fall over the long run, as would overall output. Living standards would decline. Indeed, if investors ever come to believe that Al Gore's demand to "drastically change our civilization and our way of thinking" would become a reality, they would surely liquidate much of their stakes in the economy. The resulting destruction of capitalism's capital will throw us all into the dark ages.

We mustn't forget that industrial capitalism is history's greatest life-saver. Over the past two centuries it has more than doubled life-expectancies and made our bodies cleaner, taller, stronger, better clothed, and more disease-resistant. Capitalism has also made available to us rich experiences and knowledge - including most of science itself - that were simply out of reach before the industrial age. Any heavy-handed assault on capitalism might well impair this magnificent institution and lead to human suffering worse than will be wreaked under worst-case global-warming scenarios. As economists J.R. Clark and Dwight Lee argue, "government regulations that undermine both information flows and adjustments of the market process in an effort to reduce greenhouse gases, even if successful, run the serious risk of increasing the long-run damage of any global warming that does occur."

Indeed, until the science of economics, especially that of Public Choice, is brought more fully into the discussion, the science of global warming will remain perilously incomplete.



Asian leaders rebuffed European pleas for tighter curbs on greenhouse gases, refusing to shackle their fast-growing economies to future limits on energy use. At a summit in Helsinki today, the heads of Asia's main developing economies balked at the European push for new binding targets for air pollution cuts once the Kyoto Protocol runs out in 2012. South Korean President Roh Moo Hyun instead called for new technologies to fight global warming, telling a news conference that ``we hope we will be able to contribute to reduced greenhouse gases.''

Developing countries in Asia are counting on rapid economic growth to lift millions of people out of poverty, making it politically difficult to impose a clampdown on energy use. Asia's emerging economies didn't sign up to the original Kyoto targets, which obliged industrial countries to reduce emissions of carbon dioxide and other heat-trapping gases to 5.2 percent below 1990 levels by 2012. China's economy, now the world's fourth largest, is likely to grow 10.4 percent this year, dwarfing Europe's 2.3 percent, the Asian Development Bank said last week.

French President Jacques Chirac pressed for Asia to accept emissions targets as part of ``our collective efforts to reduce greenhouse gases.'' He said it was unfortunate that EU and Asian environment ministers haven't met since 2003. Two Europeans who spoke in the opening session -- European Commission President Jose Barroso and Finnish Prime Minister Matti Vanhanen -- put climate change at the heart of their concerns. ``Climate change is happening and our future is in the balance,'' Barroso said. ``Borders are meaningless and we must develop a concerted response.''

The two Asian speakers -- Chinese Premier Wen Jiabao and Vietnamese Prime Minister Nguyen Tan Dung -- left global warming off their list of priorities, focusing on industrial development, trade, fighting terrorism and disease. ``One dividing issue is the role of developing countries and developing markets and how big of a burden they should take on scaling down unhealthy output,'' said Markus Lyra, a Finnish Foreign Ministry deputy.

The meeting ended with a broadly sketched pledge to fight climate change ``based on common but differentiated responsibilities and respective capabilities,'' with no mention of numerical goals.


Desalination advance

It's long been an Australian dream: turning the country's unforgiving deserts into lush tracts of green, capable of sustaining communities and crops. However, proposals ranging from diverting rivers into the dry interior, to building canals, to blasting a giant lake in central Australia have never proved feasible. But advances in nanotechnology - engineering materials on a microscopic scale - could finally make creating an enormous oasis in the desert a reality.

South Australian researchers believe a filter they are developing will be able to produce fresh drinking water from salt water with minimal power input and cost. A team working out of Flinders University say the individual components of the system are already in existence and hope to produce a workable filtering device within three years.

The cheap fresh water could be used to irrigate arid areas close to the sea or, if economically feasible, piped inland. ``It could be used in areas like the Great Australian Bight or the mid-west coast of Western Australia where the desert impinges right up to the coast,'' said researcher Professor Jani Matisons.

Nanotechnology involves working with matter on an ultra-small scale. A nanometre is one-millionth of a millimetre. A human hair is around 80,000 nanometres in width. Traditionally desalination has involved a process called reverse osmosis. Salty water is pumped up against a membrane through which water molecules can pass but the constituents of salt cannot. Under high pressure some of the water passes through the membrane, leaving the salt on the other side. The water that does not pass through the membrane becomes briney due to the increased salt content and is discarded. Because of the amount of power involved in pushing the water through the membrane, the process is often regarded as too costly for large scale desalination. The Flinder team will test two types of nanotechnology to see if they can reduce the amount of pressure needed for reverse osmosis and therefore reduce the cost. One involves shaping a matrix of minute carbon nano-tubes into a membrane while the other would see chemical nanotube molecules used as a filtering mechanism. While the team declined to reveal the exact process, their system is expected to create a more porous membrane that would allow water to pass through under far less pressure. Nano engineering will be used to create structures which traps salt molecules and prevent them passing through.

Matisons said it was expected the proposed process would cut the power required for desalination by more than half, greatly reducing costs. Fresh water removed from seawater could be used to irrigate arid areas adjacent to the coast. If transportation costs were low enough, the water could theoretically be piped further inland, helping to green Australia's dry interior.



Many people would like to be kind to others so Leftists exploit that with their nonsense about equality. Most people want a clean, green environment so Greenies exploit that by inventing all sorts of far-fetched threats to the environment. But for both, the real motive is to promote themselves as wiser and better than everyone else, truth regardless.

Global warming has taken the place of Communism as an absurdity that "liberals" will defend to the death regardless of the evidence showing its folly. Evidence never has mattered to real Leftists

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