Abstract
- This article by Weitzman is a key contribution to research on modeling the economics of climate change, arguing that the effect of greenhouse gases on rising temperatures is particularly nonlinear, as highlighted in the recent report published by the IPCC in August 2021 (IPCC, 2021).
- The non-linearity of climate dynamics and the uncertainties associated with extreme scenarios form a « grim theorem » which, according to the author, justifies the need for a generalized precautionary principle in the face of climate change.
» Most everything we know tells us climate change is bad. Most everything we don’t know tells us it’s probably much worse. » In his 2015 book co-authored with Gernot Wagner (Climate Shock: The Economic Consequences of a Hotter Planet), American environmental economist Martin Weitzman justified the need to take into account the most dramatic consequences of climate change in economic decision-making models. Current climate news—whether relating to the exponential rise in average temperatures (Wilby 2021), the irreversible consequences of past emissions in the atmosphere (Zhou et al. 2021) and the increasing physical effects of global warming – illustrate the urgent need for economists to confront the non-linearity of climate dynamics and the uncertainties associated with extreme scenarios (« cascade effects »). Weitzman’s article thus occupies a special place in the literature, developing a theory on how biophysical feedback loops can lead to uncertainty about the damage associated with climate change.
Broadly speaking, the economist’s work has focused on two key issues: the relevance of low discount rates for evaluating public policies in favor of the climate; and the consideration of uncertainty and irreversibility in models for assessing the economic impact of climate change. This 2009 article is fully in line with the second point of this research agenda, which has had a lasting impact on environmental economics (Stavins 2019).
1. A critique of the damage function using thefat tails argument: when economic and climate literature meet.
The causal chain from greenhouse gas (GHG) emissions to the damage caused by climate change—as well as the feedback loops between elements of the Earth system and anthropogenic elements—is characterized at each link by elements of uncertainty and irreversibility (Guivarch 2017). Among these elements aretipping points, which have the potential to destabilize the system and are irreversible once crossed (Steffen 2018).
Drawing in particular on Richard Posner’s (2004) work on disasters, Weitzman uses the uncertainties associated with climate system dynamics and extreme scenarios to demonstrate the inability of standard approaches to modeling the economics of climate change (i.e.,integrated assessment models such as Nordhaus’s DICE model) to assess the effects of widespread impacts of global warming that are unlikely to occur. The article first adopts climate sensitivity as its main variable, which is subject to uncertainty. It is defined as the indicator of the potential response of average temperature to changes in the volume of GHGs in the atmosphere (ΔInCO2 to ΔT). This factor is modeled as a function of atmospheric stocks of anthropogenic GHGs and changes in average temperature, with significant self-amplification potential (due to tipping points, including the melting of permafrost, which releasesmethanei, and the reduced carbon storage capacity of so-called « living« carbonsinksii). Weitzman’s model is therefore based on an « increased » sensitivity compared to conventional models: the self-amplification potential of climate sensitivity leads to a non-linear rise in average temperature beyond certain thresholds of greenhouse gas volume in the atmosphere.
Based on the work ofthe IPCC (AR4, 2007), Weitzman considers there to be a 10% probability that climate sensitivity will exceed 6°C compared to the pre-industrial era (under a business-as-usual scenario). At this level, he estimates that the effect of GHGs on the probability density function is particularly non-linear at its upper end (i.e., high temperatures, between +6°C and+12°Ciii): the probability distribution associated with uncertain parameters is thus a so-called « heavy-tailed » distribution » (as opposed to a normal distribution where the tails are thin, because the probability of extreme events converges to zero as one moves away from the center of the distribution) and the probability density function is polynomial (Pareto distribution), of a much higher degree.
Figures from Weitzman (2011) and Wagner & Weitzman (2015 – cited above), graphically illustrating their analyses of the distribution of the future state of the climate in the article studied here: (a) normal probability distribution and (b) estimate of the probability of warming due to a doubling of GHG concentration with a fat-tailed distribution.
2. A « grim theorem » justifying a generalized precautionary principle and strong climate change mitigation measures
Would a « classical » cost-benefit analysis of the Cuban missile crisis in 1962 have led to policy recommendations that were sensitive to assumptions about uncertain probabilities and the harmful effects of nuclear war? Martin Weitzman answered in the negative (Weitzman 2009): » I think we were right at that time to be concerned about how to avoid a low-probability extreme-impact situation whose structure is highly uncertain, and I think we are right now to be concerned about how to avoid a low-probability extreme-impact situation whose structure is highly uncertain. » Similarly, this article aims to show that a policy of radical action against climate change could therefore be considered an « insurance premium » against an extreme scenario.
In his article, Weitzman sets out what he calls a « dismal theorem, » which he believes invalidates a cost-benefit approach based on median damage scenarios (invalidated by the high uncertainties raised in the previous section). The model is based on a concept similar to the value of statisticallife, representing it as the substitution rate between consumption and the risk of mortality from a catastrophic extinction of the natural world or civilization. His theorem states that the uncertainty of certain parameters—such as climate sensitivity—associated with high damage functions increases risk and therefore the precautionary effect. This significantly affects the outcome of cost-benefit analyses: the rate at which society would be willing to trade current consumption for future consumption (expected utility) could in fact be infinite (i.e., any marginal investment that increases future consumption is desirable, regardless of the sacrifices this entails for present generations), a point also developed in Weitzman (2007). This theorem is therefore « gloomy » because, given that scientific knowledge about the tail of the damage distribution cannot be deduced from past observations, agents are thrown into the realm of subjective uncertainty, where no market mechanism can induce rational behavior.
3. The article concludes that a generalized precautionary principle is necessary
The significant probability of scenarios arising that fundamentally challenge society’s ability to adapt to climate change should in itself justify radical action against GHG emissions ( » The key economic questions here are, what is the overall cost of such a tail-slimming weight-loss program and how much of the bad fat does it remove from the overweight tail? »). Therefore, a generalized precautionary principle must be applied in a situation such as this, where exposure to a potentially unlimited risk exists. Because it is impossible to rely solely on past data (the climate economy is forward-looking and remains characterized by uncertainties), economists must delve into the realm of subjective uncertainty. According to Weitzman, it is concern for the well-being of future generations that can lead to appropriate mitigation policies.
4. Conclusion on Weitzman’s contribution to environmental economics: discount rates and the integration of extreme scenarios into mitigation and adaptation policies
This article by Weitzman is interesting in tworespects:
- First, because it is a key piece in the debate on intergenerational discounting, most recently highlighted by the publication of the Stern report on the economics of climate change (Stern 2006): Weitzman considers that uncertainties about long-term growth rates should lead to discount rates that decrease overtime;
- Second, this article sparked a key debate among climate economists on the integration of extremes into climate models (Botzen & van den Bergh (2012), Nordhaus (2009), Weitzman (2009)). For example, Nordhaus believes that current climate system trends do not correspond to the trajectories predicted by extreme scenarios, and therefore considers radical action to be unjustified, although it does warrant periodic reassessment. This discussion remains highly topical, concerning the integration of climate into macroeconomic models (Grandjean & Giraud 2017) and the impact of climate change on gross domestic product by 2100 (Keen 2020).
- Greenhouse gases with a global warming potential nearly 36 times greater than CO2 over a 100-year period.
- Forests, peatlands, soils, oceans (Functioning of biospheric and oceanic carbon sinks — Planet-Earth)
- According to Weitzman, a threshold of +15°C compared to the pre-industrial era is incompatible with any economic activity (Howard & Sterner 2017)
- See Kimble & Tawney (2009)
- For the record, Sten uses the formula r = δ + ηg, where δ is the pure preference rate for the present, η is the marginal elasticity of consumption per capita, and g is the growth rate of consumption per capita.
- Over time, the states of the world resulting from a low-growth scenario carry more weight than the states of the world at the same date resulting from a high-growth scenario, in that the latter implies a high discount rate and thus « crushes » the corresponding states of the world (Weitzman 1998).
