Thursday, July 19, 2007

Arrow & Schelling on global warming

Economists’ Voice publishes two short articles on climate change by Nobel Prize Laureates in economics, namely Kenneth Arrow (Nobel Prize 1972) and Thomas Schelling (Nobel Prize 1995). Both are good reading.

Kenneth J. Arrow "Global Climate Change: A Challenge to Policy". (try here).

Arrow is an economist I admire. He writes quantitative economics beautifully and, like so few modern practitioners of this technical art, always sets out clearly the problem he is addressing so that non-specialists can appreciate the main idea. He also picks good problems to address.

Interestingly Arrow had a background in meteorology and worked as a weather officer in the US military. He first became aware of the influence of people on global temperatures in 1942!

In this article Arrow explains why something must be done to limit global warming even if (I don’t think it did) the Stern Report inadequately discounted future costs. He shows that the present value of benefits from mitigation of the ‘high climate’ outcome in the Stern Report – the outcome he considers most plausible - exceed costs even for very high rates of time preference – up to 8.5%. Action to deal with climate change is robust with respect to choice of discount rate.

Thomas C. Schelling "Climate Change: The Uncertainties, the Certainties and What They Imply About Action". (try here ).

Schelling argues although the uncertainties regarding climate change are many, the certainties create certain urgencies and inaction is an extreme position; he emphasizes technological advance and governmental sponsorship.

Schelling is the one of the leading game theory and strategic thinkers of the twentieth century. Like Arrow he is again excellent at expressing technical ideas in language – indeed unlike Arrow he often uses no mathematics at all. I heard him speak on the Iraq war earlier this year.

Schelling outlines all the uncertainties that plague the analysis of climate change effects but emphasizes the things we do know. We do know that warming is occurring but not how fast. This implies a strong case for R&D programs and for providing economic incentives that encourage a shift away from fossil fuels. The R&D will necessarily involve multiple government since the benefits will not be internalized by private firms and benefits/costs accrue to all nations. Schelling favours research into ‘geoengineering’ of the atmosphere by implanting sulphur particles in it to offset the effects of warming.

Schelling rejects extremism. Both the precautionary principle (act now regardless of costs) and the idea that we should postpone action until damages are certain don’t make sense. Instead look at costs, benefits and probabilities as best known and act in most cases on the basis of taking a sensible insurance policy.



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