When is a Nobel Prize truly useful?
When you’re confronted in your field by something you don’t understand, and need to say: I don’t get it.
Recently a famous economist named Martin Weitzman of Harvard released a paper on "the economics of catastrophic climate change" that has experts around the world scratching their head in puzzlement.
Much discussion has ensued, but our understanding of the economic risk of climate change does not seem greatly advanced. It’s generally agreed that sudden, irreversible climate change has the potential to devastate our way of life, but no consensus has emerged on how to assess that risk. No one has experience with it, except perhaps some insurance companies.
Certainly major reinssurance companies such as the venerable Munich: Re are alarmed by global warming, and have made substantial investments in research into mitigation and other means by which we can protect against climate risk. In a statement issued two years ago they declared:
The extremely pronounced warming that has been observed
particularly in the past three decades cannot be explained simply by
natural influences. The scientists of Munich Re’s Geo Risks Research
Department are therefore certain that this global warming is man-made
and that it will have massive repercussions.
A survey of the years 1950-2005 reveals a massive
increase in major weather-related natural catastrophes during that
time. Between 1994 and 2005 there were almost three times as many
weather-related natural catastrophes as in the 1960s.
The trend is even more
distinct with regard to losses. Economic losses increased by a factor
of 5.3 in the same period, insured losses by a factor of no less than
9.6. The main causes in both cases were floods and windstorms. The
majority of fatalities, more than three-quarters, were caused by "wet
storms".
Weitzman’s paper begins with the admission by the IPCC that changes in the climate by greater than the consensus figures cannot be narrowed to the vanishing point.
To put it another way: it is generally agreed that global warming will melt the ice caps, but as leading expert Richard Alley put it at the last AGU meeting in December, the timing is still estimated in centuries, not decades.
Weitzman asks the question: What if those changes were not as far away as we thought?
In this paper I am mostly concerned with the roughly 15% of those "values substantially higher than 4.5C" which "cannot be excluded" [according to IPCC analysis].
In other words, there is a perhaps one in six or seven chance that global warming could be substantially worse than is usually estimated with a doubling of CO2 in the atmosphere: perhaps as much as 6-7 degrees Fahrenheit of warming averaged globally.
Sounds worth some thought, wouldn’t you say? But when Wietzman presented his paper, according to observer Common Tragedies, "Nobel prize winner Tom Schelling, one of the discussants at the
event, noted that he read the paper 5 or 6 times without ever feeling
that he was sure what it was saying."
It’s a difficult paper mostly written mathematically, with concepts about the bounding of the risk of catatrophic change difficult to absorb. (Find it here: On Modeling and Interpreting the Economics of Catastrophic Climate Change.)
Occasionally it does break into blunt, apparently understandable English:
I can’t know precisely what these tail [remote] probabilities [of disaster] are, of course, but no one can — and that is the point here. To paraphrase again the overarching theme of this example: the moral of the story does not depend on the exact numbers or specifications in this drastic oversimplification, and if anything it is enhanced by the fantastic uncertainty of such estimates.
Or, as phrased/translated by Paul Klemperer of Oxford:
…if our understanding of climate systems is flawed, our best guess about
the dangers we face may be less pessimistic, but extreme outcomes are
more likely.
Next question: What economists have worked with insurance industry figures on risk estimation, and what have they learned, if anything?
Kit Stolz 