The Precautionary Principle and Global Warming

I am a fairly cautions guy. I drive close to the speed limit; I don’t tailgate; and I have a AAA membership. This cautious approach to life carries over to my political views. Unlike most of my libertarian friends, I believe in a strong national defense, to be ready for wars unlikely to happen. And this same aversion to risk carries over to global warming. I’m not 100% sold on the scarier scenarios, but I’d rather be safe than sorry -- as long as the cost of insurance action is reasonable.

In the beginning of this series on how to stop global warming, I said that insurance actions are justified if the cost of the actions are less than the possible costs of inaction times the probability of inaction costs. To be comprehensive, we should look at all potential dire scenarios and multiply cost times probability and take the highest figure. This is a simple approach to risk management and it is also simplistic. The results of such analysis are crude, and if the net costs of insurance were high, I’d be quick to say let’s be more precise. But my overall thesis is that the net costs of the first rounds of global warming solutions are small, even negative. Nonetheless, let’s look at why my simple formula is incorrect.

1. Sometimes it pays to be over cautious. Suppose terrorists have a one in a million chance of causing $100 billion dollars worth of damage. Do you limit your precautions to $100 thousand or less? I don’t think so. Life is pretty good, and we can afford to pay extra to keep it that way, even at the cost of life being not quite as much better in the future for the likely scenarios. (Were we a struggling civilization, this might not be the case; see below.)

2. Many of the costs of global warming are sunk costs. Beach houses wear out or get blown away by hurricanes. Climate varies even without extra carbon dioxide being added. Farmers experiment with new crops. Homeowners upgrade their landscaping. People move to new homes with different climates. Economist David Friedman makes that case that climate change fails the giggle test based on this argument alone. That is, given the IPCC projections, expensive action to stop global warming is unwarranted.

3. My simplistic formula ignores time value. Suppose for example we have a 10% chance of $100 trillion dollars worth of damage from climate change in 100 years. Does this justify spending $10 trillion dollars now? (Or over the next ten years, to spread it out a bit?) An MBA would say no! It might make more sense to invest the money today and spend more in the future. MBAs have a tool for comparing costs over time: present value. Suppose you could average a 5% return on investment over the 100 years. $10 trillion would become:

$10 trillion * (1.05 ^ 100) = $1,315 trillion

Wow! It pays to wait, it would seem. My original formula appears to be off by a factor of 130. Let’s run the formula in reverse to figure out the present value of a $10 trillion cost 100 years hence:

$10 trillion / (1.05^100) = $760 billion

So, a 10% chance of a $100 trillion cost in the future can justify some action now, but far less than many environmentalists would like. (That $760 billion is a total, not an amount per year.)

So my simplistic formula overlooks some rather major factors. But they aren’t as major as it looks above. I’ll rebut each in turn.

Who can Afford to be Overcautious?

The United States and other wealthy nations can afford to be overcautious. We have a lot to lose so it makes sense to pay extra to keep what we have. We don’t need to eke out every bit of possible economic growth. As a nation we are already rich. And we have lots of slack elsewhere. We could fix our inefficient welfare system, get rid of some subsidies for the rich, simplify the tax system, end the drug war and/or stop attempting to nation build in multi-nation countries. We could find the money to do our part to stop global warming if put to it.

But most of the world is still poor. Economic growth is imperative in places like India and China, where carbon emissions are increasing today. They have less to insure, so it makes sense for them to do the equivalent of self-insuring. (For an individual it can make sense to insure against lesser risks by saving and investing vs. buying an insurance policy for each little risk.) For them, it makes sense to limit climate action to that which is potentially profitable.

And that’s why we should be stingy too. The major threat of future global warming is not continued emissions from the U.S. and other current energy hogs. The threat comes from the rest of the world catching up. Our challenge is not merely to burn less carbon, but to set an example that the rest of the world can follow.

The Sunk Cost Argument Reviewed

The sunk cost is a stronger argument. In fact I would grant that we should subtract some of the sunk costs when calculating the potential cost of doing nothing. But I still think the threats of climate change pass the giggle test. Friedman’s giggle test argument overlooks several factors:

  • Farmers and beach house owners can react quickly to climate changes. Indeed, they can even anticipate change as the models get better. Animals and plants adapt more slowly.
  • Ocean acidification is neither natural nor a sunk cost. If acidification from carbon dioxide is the cause of coral bleaching, it is a serious problem, one that will grow worse without prompt action.
  • The developed nations are flexible. Traditional societies are less flexible. Climate change could be devastating to parts of Africa, for example.
  • The IPCC temperature changes that Friedman uses for his argument are averages. Global warming is not expected to be uniform.
  • Even if the total damage in 100 years is relatively manageable, what of the rate of subsequent changes? Populations and economies are growing. The rate of change is increasing. (Maybe fossil fuel shortages or unsubsidized alternative energy sources will mitigate this trend, but what if they don’t?)

Finally, what of positive feedback? What of state changes? For example, suppose warming permafrost causes a massive release of methane? I took this point out of the bullet list because Friedman did not overlook this point. His post did conclude that action could be warranted in the face of predictions more pessimistic than those of the IPCC report.

Time Value and Climate Change

The time value argument is stronger yet, but nowhere near as strong as my initial example would indicate. A savvy investor might average 5% or better over 100 years, but societies do not. And governments definitely do not! So let’s not go near the idea of the government investing in a sinking fund for future climate mitigation! Economically backward nations can experience greater than 5% growth for quite a few years when their governments allow the market to do its thing. Previously constrained entrepreneurs get to work, rich countries invest, and the more advanced countries provide a huge backlog of unexploited technology. So a high discount rate may be reasonable to apply to China and India for the near term. But over the 100 year term we can expect a slowdown.

But part of economic growth can be population growth. The cost of future mitigation scales at least with population, possibly more. Unless this is figured into projected future costs, we should use per capita economic growth, not total economic growth. Using the calculator at Measuring Worth, I get 2.3% average U.S. per capita economic growth from 1950 to 2000. However, I wonder how much of this GDP growth is real increase in per person prosperity. When more women moved into the workforce, more countable goods and services were produced. Childcare centers, packaged foods, and restaurants show up in GDP; homemaking does not. Moreover, GDP counts all government spending outside of transfer payments as either consumed goods or investments. This can be spurious. Doubling the public school payroll does not necessarily double the amount of education produced. Finally, the government and the nation as a whole have gone deeply into debt since the Great Society began. Still, let’s be optimistic and use that 2.3% figure as a long term projection into the future.

1.05^ 100 = 131.5; 1.015^100=9.7 BIG DIFFERENCE!

Ten is a much smaller discount factor than 130! But is even it too big? Economic growth correlates significantly with increased energy use. If that energy use is fossil fuels, cost of quitting goes up with benefits of economic growth. (Once again, we must be careful not to over count on the pessimistic side, since projections of future costs may already account for this factor.)

Just how much is relevant technology really growing? When I was a child, popular culture projected the early 21st century to be a time of flying cars, space stations, robots, and sleek body suits. Instead we have SUVs, the space shuttle, Roombas, rampant obesity, and teenagers with baggy pants falling off their butts. My car has a lead acid battery little different from those I remember as a kid. Alkaline batteries are decades old technology, still in use. B-52 bombers have been in service for half a century! Many solar home owners use Edison cells for nighttime batteries. Not all technologies keep pace with computers and medicine. Batteries and spaceships are both constrained by the available elements on the periodic chart.

This is not to say we have zero progress in useful energy technology or space travel. Solar cells are getting cheaper and better. Lithium ion batteries are a cool addition, albeit expensive. It’s just that we might want to be a bit pessimistic when projecting advances in alternative energy in the absence of subsidies. And even with subsidized research, we may not reach the point where solar or batteries can compete with fossil fuels until after it’s too late. We may need a carbon tax to make the economy factor in the cost of carbon emissions and make alternative energy competitive.

Finally, even though the alternative energy technology economy may be growing, and may continue to grow even without government help, the ecology is shrinking. We are losing biodiversity. Many of our remaining large wild animals have limited gene pools, and are thus less adaptable than they would have been a few hundred years ago. When it comes to nature, perhaps we should apply a negative discount rate.

And if ocean acidification from carbon dioxide is what’s causing coral bleaching, fossil fuels are causing a serious problem now.

Crude and Simplistic may be Good Enough

So, to my thinking many of the factors above offset. When doing the insurance calculation I simply look at what would be the cost would be in current dollars using current technology with the current state of nature if the earth were to heat up x degrees or weather patterns were to shift y amount. Discount by the probability of these scenarios and that’s a reasonable net cost to fight global warming now. Professional economists in the audience may do better if they take a holistic approach and fully take into account the arguments above, and I invite all to do so.

Meanwhile, I’ll focus on the cheap and easy ways to fight global warming. A carbon tax is a wonderfully simple tax. I’d love to use it to replace the income tax or replace FICA. Actually, given our headlong rush towards national bankruptcy I’d even go for a carbon tax just to balance the budget. So I figure a properly levied carbon tax to have a near zero or even negative insurance cost.

And I’ve got plenty more near zero cost ways to reduce carbon emissions in my notebooks. Stay tuned.