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climate change

Yossi Sheffi, a Professor of Engineering Systems at MIT, and Director of the MIT Center for Transportation and Logistics, recently wrote an article on Project Syndicate entitled “Green Lobby’s Misdirected Anger“. He argues that our current efforts to curb carbon emissions are insufficient to keep temperature increases below 1.5°C and suggests the only real alternative is geoengineering and nuclear fusion. I disagree.

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In October 2018 IPCC published a special report on the impacts of global warming of 1.5 °C above pre-industrial levels. This report has been widely publicized in media across the globe such as BBC News, Financial Times, EURACTIVE or the New York Times. The conclusion is that there is an urgent need for a quick action. One issue that economists in general would have with this report is whether or not it makes sense to stick to the 1.5°C target from a cost-benefit point of view. So what do we know?

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In the paper “Climate Policy Must Favour Mitigation Over Adaptation”, I develop the argument that the world must prefer mitigation to adaptation at the global level. The argument rests on the observation that mitigation is a public good while adaptation is a private one. I have the feeling that the academic literature has completely missed this point, and especially the representative agent literature, but also integrated assessment models that introduce adaptation and mitigation.

Read on for more details, why I have trouble to get this published in a journal, the referees’ comments and my rebuffals.

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I am happy to announce that my article entitled “The Aggregation Dilemma in Climate Change Policy Evaluation” has been accepted for publication in the journal Climate Change Economics.

The article deals with the following question:

We show that a policy maker who ignores regional data and instead relies on aggregated integrated assessment models is likely underestimating the carbon price and thus the required climate policy. Based on a simple theoretical model we give conditions under which the Aggregation Dilemma is expected to play a role in climate change cost-benefit analysis. We then study the importance of the Aggregation Dilemma with the integrated assessment model RICE (Nordhaus, 2000).
Aggregating all regions of the RICE-99 model into one region yields a 40% lower social cost of carbon than the RICE model itself predicts. Based on extrapolating the results a country-level integrated assessment model would give a more than eight times higher social cost of carbon compared to a fully aggregated model. We suggest that these tentative results require researchers to re-think the aggregation level used in integrated assessment models and to develop models at much lower levels of aggregation than currently available.

Here is the article if you are interested: pdf

Together with a co-author of mine, Martin Henseler from the Universite du Havre, France, I have a new working paper entitled “The impact of temperature on production factors”. We believe that the results significantly update previous studies on the impact of climatic variables on production factors and GDP growth and help policy makers to more clearly understand which impacts from climatic changes are likely to matter most in the future. Furthermore, these results should help to more carefully calibrate the damage functions in integrated assessment models.

Here is the abstract:

In a recent econometric study Burke et al. (2015) find that temperature affects economic growth non-linearly. We extend their analysis by investigating the influence of temperature on the main components of production, namely total factor productivity, capital stock and employment. Our panel dataset includes observations on 103 countries for the period 1961-2010. We confirm Burke et al. (2015) assumption that the main impacts of temperature arise in total factor productivity, which is significantly negatively affected for high levels of temperature. Neither capital nor employment seem to be affected by temperature. However, we find that temperature impacts rich and poor differently, with the poor being significantly more strongly impacted for higher temperature levels. These results hold across all components of production. We find these results to be robust across different cutoff points dividing the rich and poor samples, continue to hold if we use temperature anomaly instead of temperature, and also apply for further robustness exercises. The findings provide empirical evidence for negative impacts of temperature on poor countries and support the political and scientific discussions of mitigation policies and climate change impacts.

Here is the link to the paper

In a recent piece entitled “Our Climate Future Is Actually Our Climate Present” (April 19, 2017) the New York Times discusses what Benteng Zou and myself in an article published in the Journal of Environmental Economics and Management in 2008 called Pollution Perception. We argued that individuals perceive pollution to differ from its actual level because ” consecutive generations are not truly aware of, or cannot fully relate to, the environment as it was a generation ago.” We argued that this not only leads to higher levels of pollution and lower welfare, but also that it poses problems for the most commonly used measures of intergenerational equity.

Interestingly, a psychologist had already defined this concept earlier than us, and we were unfortunately not aware of this. This shows how little interaction there is among different academic disciplines sometimes. Peter Kahn, a Psychology Professor from Washington, called this “environmental generational amnesia.”

What the NYtimes article emphasized was that “”it’s possible to adapt and diminish the quality of human life.” Adapting to avoid or cope with the suffering wrought by climate change might gradually create other suffering.” This is quite interesting and a valid point that we did not study. For example, increased carbon emissions will lead to more heat death due to warmer climates, but it could also trigger large scale shifts in ecosystems which would result from e.g. a change in the Thermohauline Circulation. If we can mentally adapt to warmer temperatures, which would arise from a change in pollution perception, then we may be less inclined to lower our carbon emissions and thereby make the shifts in the ecosystems more likely. Thus, in a sense, a limited pollution perception or environmental amnesia implies a decrease in the social cost of carbon and, while it may be argued to be an adaptation mechanism, it can have unwanted side effects.

The other point is obviously whether or not we want our future generations to adapt to a worsened environment. For example, a variety of studies “found that the reported happiness of people who lost a body part was only marginally lower than the reported happiness of population means. Therefore, people are simply able to learn to live with certain health problems.” Nevertheless, forcing our future generations to adapt to a worsened environment decreases their menu of choice, which in turn is likely to decrease their capabilities or opportunities. And if we believe philosophers like Amartya Sen, then precisely these are  to be maximized.

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