When Marty Weitzman speaks in a room full of environmental economists, people tend to listen. His talk at today's NBER environmental economics summer institute was no different. They had to listen. Weitzman used all but two slides, and they only had figures on them -- one "straight from Wikipedia."
It helps that Weitzman has a compelling story to tell: Climate change is fundamentally a problem about uncertainty. We are conducting an experiment with our planet by doubling CO2 levels in the atmosphere from pre-industrial levels. Concentrations have not been this high in hundreds of thousands of years. By and large, we don't know much about the implications. Tackling this uncertainty is crucial. Extreme outcomes -- fat tails -- matter and should be at the heart of much of research.
These statements seem innocuous enough. Yet extreme events are sidelined by 99% of economic research on this topic. Marty Weitzman's recent work On Modeling and Interpreting the Economics of Catastrophic Climate Change falls in the other 1%.
He argues compellingly that the majority of economic research on the topic fundamentally misses the point. And his conclusion is clear enough: We have to act now to prevent catastrophic consequences.
Fair enough. McCain and Obama are on board. But that still leaves the fundamental question: What should we do? How much should we spend now?
Taken to the extreme, one could -- wrongly and unnecessarily, I might add right away -- interpret the results as saying that we should spend 100% of current GDP on tackling climate change. After all, there's a small chance that life as we know it might end. Stop reading this post now, turn off your computer, and use as little energy as humanly possible to survive at a bare subsistence level. That would be both stupid and, it turns out, unnecessary to solve the problem.
MIT economist Robert Pindyck took his role as official discussant of the presentation laudably serious and took the trouble of calculating one possible solution to the Weitzman conundrum. (Pindyck used a displaced gamma distribution, in case your inner nerd's curious.) He came up with rough estimates that would justify spending anywhere from 1 to 6 percent of current GDP to tackle climate change. That's higher than most economic studies, which ignore these extreme events, but it chimes with numbers from the Stern Review.
Many economists have criticized Stern for coming up with his large estimates by essentially fudging the numbers (for example, by using unusually low discount rates). Weitzman (and now also Pindyck) say that does not have to be the case. All that's necessary is taking the possibility of extreme events seriously.