Wednesday, April 02, 2008

Uncertainty Suggests We Do More, Not Less

More from Marty Weitzman:

Weitzman’s main argument is that traditional benefit-cost analysis (BCA) can’t calculate the “optimal” amount of social action to take to diminish the risks of climate change, because the calculation is entirely dominated by low-probability, high-impact events, i.e., catastrophic climate change. The upshot is that we should worry less about what is likely to happen, but we should be much more concerned about the worst outcomes.

Weitzman argues that climate change has two key features that it impossible to conduct traditional benefit-cost analysis:

1. It is a problem with “structural uncertainty”

2. It is a problem that poses “unlimited downside disutility”

Weitzman argues that any problem that possesses these characteristics is not going to be amenable to conventional BCA.** In the context of climate change the first point basically means that there are “unknown unknowns” about the science of what will happen. The second point essentially implies that the very worst outcomes of climate change could include the (effective) extinction of life on Earth. This leads to a situation where the relatively unlikely but devastatingly costly outcomes are completely dominating the cost-benefit calculation.

Paul Klemperer echos these thoughts:
Serious scientists worry that feedback effects could - beyond some unknown “tipping point” - cause runaway warming with unforeseeable outcomes that would look like bad science fiction from today’s perspective. The continuing scientific uncertainty should make us more concerned, not less.

Weitzman should calculate a BCA based on what he sees as likely events, so that we can have an accurate representation of what is potentially going to happen, and we can have a more realistic set of future scenarios to work with.

At the same time, this illustrates the problems with Benefit Cost Analysis as a tool. Remember that Economics is a tool, not a bible, for solving our problems. In this instance, maybe a BCA isn't appropriate to use because we don't know enough about the future potential outcomes (unknown unknowns). In this case, some other system needs to be established.

One way of assessing future scenarios would be to do local cost benefit analyses. This may be easier because there are less factors to consider than with a global BCA. However, there are probably too many unknowns here as well.

Instead, why don't we look at what the opportunities are for climate change preparedness--that is, what can we gain from preparing for likely scenarios? That might be a better starting point.
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