Judith Curry on Taylor’s “Fat Tails” Argument for CO2 Pricing

By Robert Bradley Jr. -- June 5, 2019

“Weitzman’s fat tail, with 10% chance of climate sensitivities out beyond 10C are circa 2007 (AR5); these extreme values have been pretty much debunked by the AR5 (not to mention Nic Lewis’ recent work…. Jerry Taylor’s argument for a carbon tax doesn’t really hold up.” (Judith Curry, below)

In her May 2015 piece, “What Would It Take to Convince You About Global Warming?,” Judith Curry tackles the “fat tails” argument for pricing carbon dioxide (CO2) emissions. She also considers Jerry Taylor’s argument for his conversion. (Taylor said: “… as each rebuttal was issued to Weitzman, they were just shredded. And then Litterman comes along and marries that analysis to the financial markets…. So my position fundamentally switched at that point.”))

Curry works from the IPCC consensus to question fat-tails as a basis for policy activism. Her thoughts remain relevant today as Taylor has recently re-emphasized this argument for his conversion (which I dispute on other grounds).

Here is the excerpt from her full post.

David Roberts (now at Vox) has an interesting article on Jerry Taylor, long time veteran of Cato, who recently founded his own libertarian organization, the Niskanen Center.

Until about 5 years ago, Taylor’s position on climate change was essentially Pat Michaels + Bjorn Lomborg.  About 5 years ago, his position switched,after a series of discussions with other right-leaning thinkers. In March, he released a new policy brief, “The Conservative Case for a Carbon Tax.”

Sure, he’s convinced by the ‘consensus’ and thinks that the scientific arguments have become stronger (for a reality check, see my recent Congressional testimony, plus the essays by Spencer et al. linked to above).

[Curry quotes Taylor in four points]

I.  But what really changed things for me … it began with an essay by Jon Adler [JC note: Adler’s perspective was discussed previously on CE here]. Libertarians tend to compare the cost side of climate change [mitigation] to the benefits. They say, when [person or company] A harms [person or company] B, if the gains to A are greater than the harms to B, then fare thee well. No! If you believe in property rights and individual liberty, it simply does not matter if aggression from A gains more than is lost by the victim. I just never thought of it that way. And I thought he was exactly right. So that was the first thing that changed for me.

II.  Bob Litterman laid out what I thought a very powerful argument. In brief it went like this: the issues associated with climate change are not that different from the risk issues we deal with in the financial markets every day. We know there’s a risk — we don’t know how big the risk is, we’re not entirely sure about all of the parameters, but we know it’s there. And we know it’s a low-probability, high-impact risk. So what do we do about that in our financial markets? Well, if it’s a nondiversifiable risk, we know that people pay plenty of money to avoid it. [Litterman’s] point was that if this sort of risk were to arise in any other context in the private markets, people would pay real money to hedge against it. He did it every day for his clients. Even if Pat Michaels and Dick Lindzen are absolutely correct about the modest impacts of climate change as the most likely outcome, it’s not the most likely outcome that counts here. Nobody would manage risk based on the most likely outcome in a world of great uncertainty.

III. At this time, it was nagging at me what [economist] Marty Weitzman had come up with. This was another big intellectual development, his long-tail [risk] argument, how these long-tail risks are accounted for in cost-benefit calculations. And as each rebuttal was issued to Weitzman, they were just shredded. And then Litterman comes along and marries that analysis to the financial markets. That was very powerful stuff. So my position fundamentally switched at that point.

IV. And about that same time was Mass v. EPA [the case in which the Supreme Court authorized EPA to regulate carbon emissions] — the baseline was no longer non-intervention. It was no longer a conversation about whether we should do something, but a conversation about how we should do something. And with the endangerment finding at EPA, and the Clean Power Plan going forward, the regulatory drumbeat is banging. It’s pretty hard to argue that a carbon tax is a less attractive answer than, say, EPA regulation.

 JC’s critique of Jerry Taylor’s argument

For the sake of argument here, lets grant the ‘consensus’ position on climate science (WG1) as a starting point. Does Jerry Taylor’s argument for a carbon tax hold up?

• I.  Adler’s arguments on property rights and climate change are interesting, but require an attribution of adverse consequences to human caused climate change.  This is the weakest part of the whole UNFCCC/IPCC argument.  In the context of cost-benefit analysis, when values such as property rights and individual liberty and social justice become dominant considerations that trump cost-benefits, then that is a signal that you are operating under conditions of deep uncertainty.

• II.  How to deal with a low probability high-impact risk is at the heart of the problem.  Climate change is definitely a non-diversifiable risk. However, the climate risk is different from risks in financial markets, since financial risks are bounded, and there is no question of paying more to avoid the financial risk than the amount of assets that are actually at risk.  In essence, financial market risk is a relatively tame problem, whereas the climate risk is a wicked problem – we don’t know how to bound the climate risk, and we don’t have a hedging strategy that will actually protect us from the most adverse possible outcomes.  We are fooling ourselves if we think a carbon tax is up to the task of protecting us from the possibility of truly adverse climate outcomes.

• III.  Weitzman’s fat tail argument.  I have followed only some of the literature responding to this, but the bottom line is this. Weitzman’s fat tail, with 10% chance of climate sensitivities out beyond 10C are circa 2007 (AR5); these extreme values have been pretty much debunked by the AR5 (not to mention Nic Lewis’ recent work, see Climate sensitivity: lopping off the fat tail; see also Tall tales and fat tails).

• IV.  The EPA has changed the baseline – the baseline is no longer inaction.  This will be a main topic of the forthcoming Richard Epstein post.  The EPA endangerment finding is not a firm legal basis for regulating energy policy and CO2 emissions, and this will probably become a political football if a Republican becomes the next President.  But the bottom line is that these regulations will not change the climate in any significant way (see my recent Congressional testimony).

JC reflections

So . . . it is interesting to see Libertarian arguments about climate change policy  they don’t seem overly caught up in the UNFCCC/IPCC ideology, or its antithesis ideology. The Climate Hawks (e.g. Dave Roberts) love this kind of libertarian ‘conversion’ story.  But to my mind, Jerry Taylor’s argument for a carbon tax doesn’t really hold up….