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Nobel Prize Winner’s Must Read … with a significant omission

April 10th, 2010 · 4 Comments

The New York Times Sunday magazine will feature a tour de force on climate economics by Nobel Prize winning economist Paul Krugman. Entitled Building a Green Economy, a more appropriate title might be Climate Economics 101 and it should be required reading of every single Member of Congress and any journalist who writes on the issue of costs and benefits of action to mitigate climate change.

Sadly, I don’t have time to do Krugman’s excellent work full justice. He examines the costs and benefits of action on climate change, tackles issues (cogently) about the science, and highlights the critical importance of ‘insurance’ — valuing the potential, in decision-making, not just of ‘Climate Change’ but of catastrophic climate consequences — the low probability but incredible serious in impact risks.

This truly excellent piece, however, has several serious weaknesses. There is, of course, the base problem that the ‘costs’ of climate change are — even in his work — seriously underestimated. But, Krugman is an economist building on the work of other economists. In that community, he is not on the optimistic side in terms of climate change’s impacts even if he is likely too optimistic against what the real impacts will be.

More importantly, the Nobel-prize winning Krugman fails to call out the economic community and economic analysis for incredibly stove-piped analysis of climate change issues and the potential positive value of climate change mitigation.

The Cost of Action

Just as there is a rough consensus among climate modelers about the likely trajectory of temperatures if we do not act to cut the emissions of greenhouse gases, there is a rough consensus among economic modelers about the costs of action. That general opinion may be summed up as follows: Restricting emissions would slow economic growth — but not by much. The Congressional Budget Office, relying on a survey of models, has concluded that Waxman-Markey “would reduce the projected average annual rate of growth of gross domestic productbetween 2010 and 2050 by 0.03 to 0.09 percentage points.” That is, it would trim average annual growth to 2.31 percent, at worst, from 2.4 percent. Over all, the Budget Office concludes, strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise.

And what about the world economy? In general, modelers tend to find that climate-change policies would lower global output by a somewhat smaller percentage than the comparable figures for the United States.

While high quality in their own way, the CBO (and many other institutions) operates with a set of constraints that lead them to do stovepiped analysis that is overly pessimistic.  Very simply, if anything, the CBO scoring of the Waxman-Markety American Clean Energy & Security (ACES) Act was overly negative since it doesn’t consider systems-of-systems implications of climate.

  • Job creation and, therefore, lowered governmental services demand: not in the calculation. (Trading imported oil for jobs building up an electrified rail network, for example …)
  • Economic implications of climate change — and the avoided costs due to reduced pollution: not included.
  • Health care benefits (to federal budget and otherwise) due to reduced fossil fuel pollution: not included.
  • Increased productivity due to better health and better working conditions: not included.
  • The analysis didn’t even include the bill’s strong energy efficiency provisions, which are direct cost savers.

In citing studies from institutions like the Congressional Budget Office, Krugman doesn’t comment that they fail to account for issues like:

  • Health Care Benefits of Climate Change Mitigation Efforts: The National Academy of Sciences published a study last fall estimating an impact to the US economy of some $120 billion … per year … in hidden costs from fossil fuels. Considering that health care costs have consistently escalated above inflation, how much money would the US economy save in 2050 if we could (nearly) eliminatate fossil fuels?
  • Intellectual quality: Fossil fuels are impacting average intelligence. Some medical research has concluded that the average IQ in the United States is roughly 1.5 points lower due to the mercury emitted by burning coal. What would the economic impact be of eliminating that drag on the American intellect?
  • Worker productivity: Study after study shows, quite conclusively, that greening workplaces improves productivity even while saving money in terms of reduced utility costs. The CBO economic analyses of climate change mitigation via the Waxman-Markety bill didn’t even account for the energy savings (but did count the costs to achieve those savings) but more importantly did not take any account of the worker productivity. The more pessimistic analyses have show a worker productivity improvement of five percent (others have show 10+ percent improvements). Well, that five percent is roughly five times the cost of the building energy and some 25 times the value of the saved energy and perhaps 50 times the value of the energy savings subtracting the costs to achieve them. What would the value be to the US economy of 2050 (and 2040 and 2060 and …) of an average worker productivity improvement of 5 percent? What about 10 percent?
  • Educational performance: Just as workers do better in cleaner, quieter, healthier, more comfortable workplaces, so do students.  Greening the School House has many (many) benefits, including significant improvements in educational achievement. (Considering just one element: daylighting vs artificial light: A study in North Carolina revealed that children in schools with more natural day lighting scored 5 percent better on standardized tests than children in normal, comparable buildings.) What would the economic value be for an indefinite bump upwards in the educational achievements of American students (at all levels of education)?

Krugman falls into the trap of discussing the costs of dealing with climate change, discussing how little it will cost to mitigate climate change and insure against catastrophic climate chaos. In falling into this trap, the Nobel-prize winning economist fails to explain (fails to understand?) that full analysis shows that in discussing the economics of climate change mitigation, a robust cost/benefits analysis would show that the discussion would not end with a calculation of the “marginal costs of action vs the larger costs of inaction” but would result in a very serious statement as to the “huge risks and costs of inaction vs the very serious benefits of action“.

Krugman’s article is a tour de force even as he missed this critical important point.

Note: See The political and practical necessity for bold action not tactical retreat.

Tags: Energy · Global Warming · catastrophic climate change · climate change

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