Tom Friedman Has a Standing Invitation to My Weekly Poker Game: The Abused Insurance Analogy for Climate Change

By Jim Manzi -- December 17, 2009

Editor’s Note: Jim Manzi is a Senior Fellow at the Manhattan Institute, and blogs at both National Review’s The Corner and at The American Scene.

It is amusing to watch advocates of rapid, aggressive carbon dioxide emissions reduction, when confronted with the plain facts of the consensus scientific projections for climate change and its associated damages, move from “science says we must do this or die” to “well, actually, the science is pretty uncertain, so it’s possible that we might die,” and then proceed to some restatement of Pascal’s Wager.

Friedman’s Throw

Tom Friedman’s recent New York Times column is a perfect illustration of this logic.  I’ll quote him at length, before demonstrating that his emission-cuts-as-insurance analogy breaks down once you plug in actual numbers:

This is not complicated. We know that our planet is enveloped in a blanket of greenhouse gases that keep the Earth at a comfortable temperature. As we pump more carbon-dioxide and other greenhouse gases into that blanket from cars, buildings, agriculture, forests and industry, more heat gets trapped.

What we don’t know, because the climate system is so complex, is what other factors might over time compensate for that man-driven warming, or how rapidly temperatures might rise, melt more ice and raise sea levels. It’s all a game of odds. We’ve never been here before. We just know two things: one, the CO2 we put into the atmosphere stays there for many years, so it is “irreversible” in real-time (barring some feat of geo-engineering); and two, that CO2 buildup has the potential to unleash “catastrophic” warming.

When I see a problem that has even a 1 percent probability of occurring and is “irreversible” and potentially “catastrophic,” I buy insurance. That is what taking climate change seriously is all about.

Computing the Odds

The United Nations Intergovernmental Panel on Climate Change (IPCC) is the leading bookie for this game.  The current IPCC consensus forecast is that, under fairly reasonable assumptions for world population and economic growth, global temperatures will rise by about 3°C by the year 2100 (Table SPM.3). Also according to the IPCC, a 4°C increase in temperatures would cause total estimated economic losses of 1–5 percent of global GDP (page 17). By implication, if we were at 3°C of warming at the end of this century, we would be well into the 22^nd century before we reached a 4°C rise, with this associated level of cost.This is the central problem for advocates of rapid, aggressive emissions reductions. Despite the rhetoric, the best available estimate of the damage we face from unconstrained global warming is not “global destruction,” but is instead costs on the order of 3 percent of global GDP in a much wealthier world well over a hundred years from now.

It should not, therefore, be surprising that formal efforts to weigh the near-term costs of emissions abatement against the long-term benefits from avoided global warming show few net benefits, even in theory. According to the modeling group led by William Nordhaus, a Yale professor widely considered to be the world’s leading expert on this kind of assessment, an optimally designed and implemented global carbon tax would provide an expected net benefit of around $3 trillion, or about 0.2 percent of the present value of global GDP over the next several centuries (page 84). While not everything that matters can be measured by money, this certainly provides a different perspective than the “Earth in the balance” rhetoric would suggest.

Now, in absolute terms, $3 trillion is normally thought of as an amount of money that’s worth pursuing. So why shouldn’t we implement such a tax?

Now to the Real World

To understand why, let’s move from the world of academic model-building to the real world of geostrategic competition and domestic politics. To realize this gain of $3 trillion, we would have to agree to, and enforce, a global, harmonized tax on all significant uses of carbon and other greenhouse gases in any material form. This would require the agreement of — just to take a few examples — the Parliament of India, the Brazilian National Congress, the Chinese Politburo, Vladimir Putin, John Dingell, and the U.S. ethanol lobby. Each of these entities and individuals has been known to elevate narrow, sectarian interests above the comprehensive good of all mankind through all time, to put it mildly.

All this aside, let’s imagine we actually could negotiate such a binding agreement. Isn’t it possible that all the side deals that would be required to get this done would create enough economic drag to more than offset the benefit of 0.2 percent of present value of global output? Our track record in closing and implementing such deals as the Kyoto Protocol, or even the current round of WTO negotiation — which, remember, is supposed to make the signatories richer — shouldn’t inspire much confidence that the theoretical net benefits will outweigh the costs created by the agreement. Indeed, today we are not even considering an actual U.S. carbon tax, which is preferred by almost all academic economists for this purpose, but instead a cap-and-trade system (i.e., emissions rationing) because it is more politically palatable to hide the costs to consumers this way. Yet even the staggering list of side-deals, offsets, special auctions, and so forth that were added to the ACES cap-and-trade bill were not enough to build a winning congressional coalition within this inefficient framework.

Further, even if we got to an agreement de jure, we would then have to enforce a set of global laws for hundreds of years that would run directly contrary to the narrow self-interest of most people currently alive on the planet. How likely do you think a rural Chinese official would be to enforce the rules on a local coal-fired power plant? These bottom-up pressures would likely render such an agreement a dead letter, or at least make it in effect a tax applicable only to the law-abiding developed countries that represent an ever-shrinking share of global carbon emissions.

A Summing Up

In summary, then, the best available models indicate that

1) global warming is a problem that is expected to have only a limited impact on the world economy and

2) it is economically rational only to reduce slightly this marginal impact through global carbon taxes.

Further, practical knowledge of the world indicates that

1) such a global carbon-tax regime would be very unlikely ever to be implemented, and

2) even if it were implemented, the theoretical benefits it might create would almost certainly be more than offset by the economic drag such a regime would produce. Other than that, it sounds like a great idea.  If our scientific forecasts turn out to be precisely correct, one could not rationally justify rapid, aggressive reductions in CO₂.

But climate models are, at a minimum, non-validated. Predicting the cost impact of various potential warming scenarios requires us to concatenate these climate predictions with economic models that predict the cost impact of these predicted temperature changes on the economy in the 21^st, 22^nd, and 23^rd centuries. It is hubris to imagine that these can guarantee accuracy, and impossible to validate such a claim in any event.  Exactly as Friedman says, “it’s a game of odds”.

But What About Extreme “Tail” Events?

Now, climate and economics modelers aren’t idiots, so it’s not like this hasn’t occurred to them prior to reading Friedman’s column. Competent modelers don’t assume only the most likely case, but build probability distributions for levels of warming and associated economic impacts (e.g., there is a 5 percent chance of 4.5°C warming, a 10 percent chance of 4.0°C warming, and so on).  The IPCC reports include extensive analyses of this handicapping, and in fact publish these probability distributions.  If you odds-adjust the forecasts to reflect that actual warming might be worse (or not as bad) as the expected case, you get just about exactly the same expected value of damages.  The economic calculations that comprise, for example, the analysis by William Nordhaus that I referenced earlier are executed in just this manner. In other words, this is a “game of odds” in which rapid, aggressive emissions reduction is a sucker bet.

What this of course leaves open is the inherently unquantifiable possibility that our probability distribution itself is wrong.  In econo-speak, there is always residual uncertainty, rather than mere risk, in any prediction.  (Note in passing that we have now moved all the way from “science says we will be destroyed” to “science says we might be destroyed” all the way to “the science might be wrong”.)

All that said, this is not an irrational concern.  The sophisticated version of this argument has been presented by Harvard economics professor Martin Weitzman.  Professor Weitzman’s reasoning on this topic is subtle and technically ingenious.  In my opinion, it is the most rigorous existing argument for a carbon tax or similar emissions reduction scheme.  Addressing it in detail is beyond the scope of this post, but I have previously responded to a slightly earlier version of it in a long online article.  Alternatively, you can watch a video of Professor Weitzman presenting his paper, and then my response to it in the exact same room a few months later.  I encourage anybody who is serious about the climate change debate to understand Weitzman’s logic in detail.

In very short form (recognizing that I will write somewhat loosely for purposes of brevity in this setting), Weitzman’s central claim is that the probability distribution of potential losses from global warming is “fat-tailed”, or includes high enough odds of very large amounts of warming (20⁰C or more) to justify taking expensive action now to avoid these low probability / high severity risks.

The big problem with this argument, of course, is that the IPCC has already developed probability distributions for potential warming that include no measurable probability for warming anywhere near this level for any marker scenario.  See, for example, WG1 SPM Figure SPM.6.  Even the scale on these charts — never mind actual predictions for the high end of the probability distributions — doesn’t go past 8⁰C.  That is, the best available estimates for these probability distributions are not fat-tailed in the sense that Weitzman means it.

Now, one can responsibly question the probability distributions developed by the IPCC.  A modest version of this is simply to recognize that we are not certain that they are correct.  But this is just a sophisticated restatement of one predicate of the Precautionary Principle.  Of course, this is true in principle for all probability distributions, and therefore for all risks.  As Weitzman himself clearly recognizes, in order for him to distinguish climate change dangers from other dangers in this matter, he must therefore show not only that it is possible that the true probability distribution of potential levels of warming is actually much worse than believed by the IPCC, but that a reasonable observer should accept it as likely that this is the case.  In order to do this, he is forced to do his own armchair climate science, and argue (as he does explicitly in the paper) that he has developed a superior probability distribution for expected levels of warming than the ones the world climate-modeling community has developed and published.  As noted above, this probability distribution is radically more aggressive than anything you will find in any IPCC Assessment Report.  I don’t think that it is credible to accept Professor Weitzman’s climate science in place of the IPCC’s.

You Can’t Prove a Negative

The only real argument for rapid, aggressive emissions abatement, then, boils down to the point that you can’t prove a negative. If it turns out that even the outer edge of the probability distribution of our predictions for global-warming impacts is enormously conservative, and disaster looms if we don’t change our ways radically and this instant, then we really should start shutting down power plants and confiscating cars tomorrow morning. We have no good evidence that such a disaster scenario is imminent, but nobody can conceivably prove it to be impossible. Once you get past the table-pounding, any rationale for rapid emissions abatement that confronts the facts in evidence is really a more or less sophisticated restatement of the Precautionary Principle: the somewhat grandiosely named idea that the downside possibilities are so bad that we should pay almost any price to avoid almost any chance of their occurrence.  This is Friedman’s update to Pascal’s wager, though he throws around the pseudo-quantification of “1%”, even though the scientific consensus he waves at doesn’t quantify anything like a 1% chance of what he describes.

But to force massive change in the economy based on such a fear is to get lost in the hothouse world of single-issue advocates, and become myopic about risk. We face lots of other unquantifiable threats of at least comparable realism and severity. A regional nuclear war in Central Asia, a global pandemic triggered by a modified version of HIV, or a rogue state weaponizing genetic engineering technology all come immediately to mind. Any of these could kill hundreds of millions of people. Scare stories are meant to be frightening, but we shouldn’t become paralyzed by them.

What Then Should Be Done?

In the face of massive uncertainty on multiple fronts the best strategy is almost always to hedge your bets and keep your options open. Wealth and technology are raw materials for options. The loss of economic and technological development that would be required to eliminate literally all theorized climate change risk would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk, not to mention our ability to lead productive and interesting lives in the meantime. The Precautionary Principle is a bottomless well of anxieties, but our resources are finite — to extend Friedman’s metaphor, it’s possible to buy so much flood insurance that you can’t afford fire insurance.

Hedging against the risk to future generations of potential unanticipated impacts from global warming is a legitimate job for the U.S. government. Ideally, it would be tackled by the governments of the small number of countries with a sophisticated technology development capability acting in some kind of coordinated fashion. A massive carbon tax, a cap-and-trade rationing system, and the attempt to use the government to control the evolution of the energy sector of the economy are all billed as prudent reactions to this risk, but each is the opposite: an impractical, panicky reaction unworthy of a serious government.