I’ve written a lot here about climate change and environmental economics, trying to point out weaknesses and blind spots in the cap and trade approach. Before I digress, then, let me say that I think getting ACES passed through the Senate would be a step in the right direction. Just like health care reform, I’m aware of the political limitations, disappointed in the state of the discourse, but realizing that right now, something better isn’t possible (unless, of course, the EPA shows it’s willing to get the job done without Congress- then, that would be preferable).
Today, though, 5 environmental groups said that the Senate bill simply isn’t good enough- it’s a step in the wrong direction. Let’s not over-interpret this. Tuesday, 31 environmental groups came out in favor, as the article notes. Nevertheless, I think opposition to the bill from the “left” demonstrates tensions between environmental groups and economists, and I find myself quite sympathetic to the environmentalists. Environmental Economics argues that these tensions should be set aside, that environmental economists are on their side:
Writers like David Roberts and Bill McKibben, who routinely characterize mainstream economics as somehow antithetical to environmental concerns, are inadvertently spreading the exact narrative that the Right wants everybody to buy into…The overwhelming majority of mainstream economists favor stronger environmental regulation on many fronts, especially climate change…The public needs to know that most of the leading minds in economics come down squarely in favor of strong climate change legislation, as well as efforts to improve water quality, clean air, and biodiversity protection.
I don’t disagree with much of what he says, but I think that the author ignores the root causes. Before I get into that, I’d like to highlight Frank Ackerman’s post at RWER about underestimating the social cost of carbon:
So far, the administration’s interagency working group that has been studying the SCC has come up with a range of values, with a “central” estimate of $21 per ton of CO2 in 2010, or roughly 20 cents per gallon of gasoline. Over time, the SCC would rise, but only to $45 per ton (in 2007 dollars) by 2050…
But this doesn’t need to be the last word. In fact, it absolutely shouldn’t be, because the analysis that led to that number is based on deeply flawed economics, omissions, and poor value judgments…
For starters, it relies on an overly narrow review of climate economics, relying on a handpicked set of models — FUND, PAGE, and DICE — that happen to produce very low SCC estimates. All three models have serious problems…
We also found that the working group was aggressive in “discounting” the value of future costs, considering rates of 2.5 to 5 percent per year that trivialize future damages…
A last and very serious concern is that the SCC calculations don’t take into account the small but hugely important risk of catastrophic climate damage…
There are too many open questions in the SCC calculation to recommend a precise alternate value based on the information now available; there is a need for more extensive research, examining the full range of available studies of climate damages and costs, and analyzing assumptions about the risks and magnitudes of potential climate catastrophes. In the United Kingdom, where carbon pricing and cost calculations have a longer, better-researched history, the latest estimate is a range of $41 to $124 per ton of CO2, with a central case of $83.
I don’t think Ackerman’s concerns can be easily explained away, and I’m willing to duke it out in the comments over each assertion. The upshot of his assertion is that there is a lot of play in these models for a number of parameters. Sure, we could take the three issues (climate model, discounting, and fat tails) and produce a 3-D table of SCCs under every permutation. We could even take the middle estimate in each parameter, get our number, and go home- it would probably end up a lot higher than $21/ton. However, that still wouldn’t get to the heart of it.
The problem is that economists, as the go-to people on this issue lately, are being asked to make “value judgments,” as Ackerman rightly puts it, on these 3 issues. And they are value judgments- I’ll argue that one too. Economists should not be deciding what the future is worth, what the value of a catastrophe is, or the relative value of a life across countries. So, even if most environmental economists got in the game because they love the environment, they’ve been corrupted by the play in these parameters, and the ease with which their assumptions can generate a nice number (I’m not trivializing their models, which were undoubtedly the fruits of hard labor of thought). They can assume whatever to generate the number that “looks” right, i.e. gets something done and is politically feasible.
But that’s not the role of economists. The role of economists is to allow the debate to center where the center actually is. By making choices they shouldn’t be allowed to make, they force environmentalists to compromise twice: once to get the number that “looks right,” and then once again when the politicians bear their claws and create a neverending set of loopholes. I suppose having written all of this, and working up quite an angry sweat, I’m something of an environmentalist. I don’t have any beef with environmental economists for the work they do- rather, it’s their place in the system, and how their work gets used, that I tend to oppose. It’s the system, man. It’s unfortunate, but that’s why environmentalists don’t trust economists.
So, what’s the alternative?
Bring in folks from other disciplines to help make the value judgments. Or, at very least acknowledge that they are value judgments, and explain very clearly why you chose that, not just arguing that the discount rate can’t be less than the growth rate of the economy by mathematical proof.
The reason environmentalists don’t trust economists is because economists thing the environment revolves around the economy.
To restate the most powerful insight I got about why economics is almost always wrong from Eco-Economy by Lester R Brown.
Economists assume physical things can materialize or dematerialize as needed to suit economy equations. Too much labor, demand less labor and the supply of labor, and people dependent on labor decreases. In the current US economy, the US population needs to fall to 280 million to balance the economist’s equations.
Brown has been posting an essay regularly with the following theme, but economists don’t seem to pay attention because he’s not an economist:
Our Economic World View Needs a Copernican Shift
In 1543, Polish astronomer Nicolaus Copernicus published “On the Revolutions of the Celestial Spheres,” in which he challenged the view that the Sun revolved around the Earth, arguing instead that the Earth revolved around the Sun.
:
Today, we need a similar shift in our worldview, in how we think about the relationship between the Earth and the economy.
The issue now is not which celestial sphere revolves around the other but whether the environment is part of the economy or the economy is part of the environment: Economists see the environment as a subset of the economy; ecologists, see the economy as a subset of the environment.
Like Ptolemy’s view of the solar system, the economists’ view is confusing efforts to understand our modern world. It has created an economy that is out of sync with the ecosystem on which it depends.
:
Although the idea that economics must be integrated into ecology may seem radical to many, evidence is mounting that it is the only approach that reflects reality.
When observations no longer support theory, it is time to change the theory. If the economy is a subset of Earth’s ecosystem, the only formulation of economic policy that will succeed is one that respects the principles of ecology.
:
— http://solveclimate.com/blog/20090517/our-economic-world-view-needs-copernican-shift
Economists need to incorporate some principles into the core of economic theory, like conservation of people and needs. Just because GDP goes down, the population doesn’t, and more importantly, neither do their minimum needs. After all, people are part of the environment and the environment ignores every law the economist invents. Environment trumps economy every time.
Yea- I think economics is unique in it’s drive to subsume other disciplines into it’s paradigm, and that’s a real problem. Everything is embedded in the economy, not vice versa, they argue. They should read Polanyi, and Brown too.
Economics is the science of figuring out how to ignore externalities.
Environmentalism focuses entirely (and sometimes too much) on externalities.
There are no externalities. The is one world, one system.
As a physicist I can study a portion of nature using one set of theories, but I must constantly keep in mind the limited domain of the set of theories I am using. If dealing with light, in one domain it is like a wave, but in another domain it is like a particle.
As a computer scientist, I can represent in computer language the behavior of light within one domain. But as a computer engineer I must consider the constraints of the computer system in representing number.
As a control system engineer developing the hardware and software in a GPS unit, I deal with the particle and wave properties of light, crossed with the hardware signal processors ability to extract the particle pulse for timing refined by the wave crests of the radio spectrum light from the satellite. And I must adjust the Newtonian properties of the time and speed giving distance by the time dilation of Einstein’s general relativity.
There are no externalities.
In intro to physics, a good classical mechanics class, one of the basics learned is measurement error, and how it is represented. In the simplest of physics there are no externalities. We work with simple models of part of the behavior of nature, but we do so by grounding it in the natural world, and recognizing the constraints of nature in our study of nature to develop and test theory.
There are no externalities.
A GPS satellite might be disabled by a meteor, or suffer a clock circuit failure and lose time or go through a solar storm, but those are not externalities, but merely conditions that must be accounted for in arriving at the answer, an answer that includes a position and time with an error estimate.
There are no externalities.
Everything is explained by the laws of physics, each applied in their appropriate domain and combined with the other laws of nature including those of the human designed hardware and software systems.
You can view economics as a field that defines the rules for SimCity with no relevance to the natural world, but in that world, there are no externalities.
If you intend to apply economics to the world we live in, the economics must integrate human behavior including war and pollution, and also incorporate the limits of nature as well as the disasters that nature brings from storms to earthquakes to volcanoes.
There are no externalities.
Just as the U shaped supply curve is draw in over simplified terms as a straight line, it is possible to simplify theory with in a limited domain. Slight changes in demand will result in the quantity and price falling on something that can be thought of as a straight line. But that line is not straight, but a U in the theory and you can simplify it to a straight line only for a limited domain. Move down in quantity, and supply-demand is unstable because you have moved outside the domain where the theory works,
The U shaped supply curve is trying to represent the natural world in simplified fashion. But many other aspects of the natural world are too often ignored by economists. They make economic theory complicated in that it is no longer possible to say, to simplify, greed is good because it delivers the best result, or government is evil because it restrains greed which always works.
Economics must incorporate human behavior including the lizard brain greed response with creates asset price bubbles. And economics must incorporate the physics of limits on resources, limits on pollution, decay from wear and nature, and many more things of the natural world. Pricing pollution is one way to include nature, as is depreciation of capital, the Hotelling rule an early attempt at limits of resources, expanded on by Solow in his study of growth and limits to growth.
There are no externalities, but only lazy economists who hand wave failures of economic theory in the real world.
[…] Why Environmentalists Don’t Trust Economists (Open Economics) […]
I liked this post a lot.
I think another reason environmentalists don’t trust economists that may have been implied here but not specifically addressed was the fact that economists discount the future. Main stream economists generally discount the future by quite a bit. By definition environmentalists need to be concerned deeply about the future, and would probably be against discounting it much.
This post reminds me of this interview with Herman Daly:
http://www.iisd.org/didigest/special/daly.htm
[…] to do a proper review of it in a couple of weeks, but the first chapter struck me in light of my post from two weeks ago about why environmentalists don’t trust economists. In the book, […]