The Climate Surprise

Rethinking climate economics
by Bruce M. Everett
Climate policy is primarily a scienfic
issue, but economics has an important
role to play, too. To climate acvists,
economic analysis means cataloguing the
inevitable disasters of an increasingly unlivable
planet. The best available science, however,
suggests that carbon dioxide in fact
contributes to human well-being.
If economics is to make a useful contribuon
to the climate discussion, economic analysis
should be aligned with science by following two
principles: first, establish the appropriate base
case for analysis and, second, reflect honestly
and accurately the costs of carbon reducon.
The key parameter in the scienfic discussion
is climate sensivity, defined as the
temperature increase that would result from
doubling the atmospheric concentraon of
CO. Carbon dioxide is a greenhouse gas, and
basic physics indicates that the sensivity of
CO by itself would be about degree Celsius.
In its Fih Assessment Report from ,
however, the UN Intergovernmental Panel
on Climate Change () esmated equilibrium
climate sensivity in the range of . to
. degrees Celsius. The hypothesis of high
climate sensivity was established several
decades ago by climate models that incorporate
feedback effects that amplify warming,
oen with higher humidity assumed to occur
at higher temperatures.
The essence of science, however, is the testing
of hypotheses against data. Climate models
have been making high sensivity predicons
for a long me, but actual experience to date
shows a sensivity below the boom of the
range. In other words, the models have
consistently overpredicted temperature.
Nonetheless, much of the economic analysis
currently available is not only based on the
range but on the high end of the range. Using
an extreme case as a starng point supports
the narrave of climate acvists, but severely
distorts the analysis.
Macroeconomic forecasts are naturally
subject to a wide range of uncertainty, but it
is important to center the analysis on the most
reasonable and likely set of assumpons. For
example, we do not do our economic planning
on the basis of worldwide depression or nuclear
war. Assuming catastrophe effecvely eliminates
the discipline of cost-benefit analysis. If we are all
going to fry and drown from man-made climate
change, we don’t have to worry about the costs
of reducing carbon or the impacts of climate
policies on peoples’ lives. Yet economic policy
is about costs and trade-offs.
Consider the case of Germany. Among climate
acvists, Germany and Chancellor Angela
Merkl are nothing short of rock stars. In ,
the noted author and columnist Thomas Friedman
wrote in The New York Times that Germany
would be Europe’s first “green solar-powered
superpower.” Naonal Geographic magazine,
always a reliable supporter of climate acvism,
seconded Friedman’s claim, telling its
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