The U.S. government’s new consensus estimate of the social cost of carbon (SCC)—around $43 per ton CO2 from a 2020 baseline—has met with some approval in academic and other circles (as we discussed yesterday). But some of the harshest criticisms, at least insofar as the blogosphere would interpret them, have come from MIT economist Robert Pindyck (short article and working paper). Pindyck’s critiques are important, though we do not agree with all the conclusions he draws from them—conclusions that have been misinterpreted by those opposed to climate policy based on the SCC.
Climate policy critics focus, not surprisingly, on the blunt title and first two words of the abstract of Pindyck’s working paper: Climate Change Policy, What Do the Models Tell Us….”Very little”. The models Pindyck references are integrated assessment models (IAMs), like Bill Nordhaus’ DICE model, on which the SCC is partly based. These models integrate a huge amount of information and science to estimate how much a change in CO2 emissions will affect global warming and the damages it causes. But Pindyck argues IAMs “have crucial flaws that make them close to useless as tools for policy analysis…[they] create a perception of knowledge and precision, but that perception is illusory and misleading.” This statement has been taken to imply that one should throw out the SCC estimates, as well as the models upon which they are based.
Critics, however, ignore Pindyck’s conclusion: “My criticism…of IAMs should not be taken to imply that because we know so little, nothing should be done about climate change right now. . . Quite the contrary.” In our belief, he then ends up basically (we hedge here because he says “some have argued” rather than “I argue”) endorsing the SCC estimate on precautionary grounds, imposing a carbon tax of that amount and revising this later as we learn more. Hardly a condemnation of the SCC! Indeed, a closer parsing of his statements suggests that his point is to stop overselling the precision of IAMs while pressing ahead with a SCC to get the process started. Beyond these broad points, is Pindyck providing something new here and, in particular, is he overselling the overselling of IAMs?
They go on to critique the three points of the Pindyck's critique:
- Integrated assessment models are ad-hoc
- Integrated assessment models do not consider catastrophic climate change
- Choice of discount rate
Here is what I said about a month ago on this topic:
Integrated assessment models tell us more than nothing. But, like all sorts of research, the uncertainty inherent in the estimates needs to be presented as well. This is usually done in the fine print and is not what is communicated to the general public. So, my sense is that critics of climate change economics read the fine print and harp on the uncertainty in the results as if the researcher is trying to bury it. I suggest taking the uncertainty out of the fine print and putting it front and center so that we can avoid the red herring criticism.
I think it would be much better if the SCC was reported $43 [12, 65] instead of $43, where the numbers in the brackets are error bands. I took the lowest and highest values from EPA's table for 2020 as a simple example of showing the range of uncertainty (over the discount rate). Many other types of sensitivity analyses could be displayed in those brackets.