Economics of Climate Policy

OK, I'm not really going to talk about the economics of climate policy but about people who talk about the economics of climate policy - mostly William Connolley, AKA, The Stoat. Dr. C is fond of complaining about the weak grasp global warming alarmists (like me) have of economics.  I, on the other hand, tend to think that his economics is sometimes crackpot tinged, and I notice that when backed into a corner he tends to disavow relevant expertise.  His latest is entitled "Why Liberal Media Need Conservative Columnists."  He cites an example, but but from what I can tell, his example doesn't seem very typical of conservative columnists I have seen, who mostly are either denialists or are utterly untypical of the current American right.

What are the supposed gems these conservative columnists might unearth?  Number one seems to be the discount rate - the idea of evaluating the costs of current policies in terms of the present value of money and its hypothesized value at some future time.  When the future time is, say, a hundred years away, any current expenses seem enormously costly compared to what the same money, invested at a nice interest rate, would be worth in 100 years.  If your distant ancestor had invested 5 cents at 4% interest back in the year 1018 it would now be worth more than 5 quadrillion (5.4 x 10^15) dollars.  If you can see what's wrong with this, you should be able to see what is wrong with trying to apply discounting to time spans of 100 years.  This kind of discounting isn't really economics, it's a financial technique for estimating the value of investments.  So far so good.  The problem is that uncertainty rapidly destroys the coherence of such calculations.  Oops, William the Conqueror, doubtless an ancestor as well as namesake of our hero, confiscated the account back in 1067.

The trouble with applying standard short term financial discounting to something like climate change is that it necessarily neglects similar catastrophic effects, which might just be occasioned by climate change.

For some reason Dr. C. also trots out Ricardo's theory of comparative advantage.  Despite some subtleties related to absolute vs. comparative advantage (see link), the basic idea goes back to Plato and Aristotle: if each person does what he does best, more stuff will be produced.  Ricardo was a very clever fellow, and he seems to have been more aware of the limitations of his principle than his less clever followers.

If one looks at the real world, one can see that Japan, China and Korea did not get where they are today by blindly producing what they had comparative advantages in.  Instead, they invested heavily in mastering the technological skills that would permit them to compete across a wide range of products.  Meanwhile, the countries like the US that put blind faith in naive economics got their industrial economies gutted.

So what does that have to do with climate change?  Eat coal dust India?  Beats the heck out of me.  Maybe The Stoat or his bud Tim Worstall can explain it.

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