This is a draft of a proposed review.
Richard S. J. Tol, Climate Economics: Economic Analysis of Climate Change and Climate
Policy, Edward Elgar, Cheltenham UK, 2014.
This is a text on climate change and its
economics. It is written in a brisk,
lecture note format with much material tersely presented. It contains
exercises, reading lists and utilizes a supplementary website which contains
lecture notes, quizzes, lecture slides and supporting databases. As someone who teaches classes on climate
economics I found this useful. Particularly those early parts of this book
that involve describing the science and in establishing a conceptual policy setting.
Early chapters summarize the physical
science basis of climate science with a emphasis on the physical uncertainties,
the difficulties of projecting climate trends and of devising future emissions
scenarios. Then abatement costs are discussed. They are
seen as low provided adjustments are given enough time to be implemented.
Carbon taxes work best if they are implemented broadly and double-dividend
benefits are utilized.
The choice of market-based policy
instruments – taxes, subsidies, tradable permits - for emission reduction is then
analyzed in both static and dynamic contexts. The dynamic efficiency conditions are presented
tersely assuming that the carbon price equals a costate variable from an
optimal control task reflecting the shadow price of emissions. With respect to
choosing between taxes and tradable permits under uncertainty the standard
Weitzman result is provided. Since costs depend on stocks of emissions not flows,
using a tax instrument will outperform tradable permits. Tol rejects the realist political argument
that “grandfathering” permits admits greater political feasibility than
subjecting emitters to taxes. He also
discusses problems of making permits internationally tradable and discusses the
EU scheme and the CDM mechanism.
Technological innovation in the energy sector is best driven by a
credible abatement policy. These are all
sensible views and well argued.
Approaches to valuation of various climate
impacts are then provided along with a useful discussion of willingness-to-pay
and willingness-to-accept compensation for climate changes. This binds the way climate policy discussions
are formulated and impacts on the way climate impacts are valued.
Chapter 6, which looks at empirical
estimates of climate impacts, is more problematic. This is the start of a sequence of chapters
that downplay the need for a stringent activist climate policy. The claim is that moderate climate change is
most likely which will have small aggregate impacts mainly in poor countries
where limited adaptation capacity creates extra costs. Hence, it is argued, economic
development is the best means of addressing climate issues since it best
improves this capacity. The
probabilities of severe climate events are minute so such events can be
disregarded. The unstated hypotheses
here are that economic development will occur in time to prevent extreme climate
change and that the probabilities of “fat tail” extreme climate change are
low. These hypotheses are rejected by
many, for example, by the 4th IPCC Assessment Reports.
This type of argument is developed further
in Tol’s view of “optimal” climate policy which is seen as involving a modest
emissions reduction that will not end use of carbon-based fuels anytime soon. Tol correctly points out that climate policy
objectives should be posed in terms of emission stocks in the atmosphere not
emission rates. To make this clear, the
world could emit at maximum rates for a hundred years and then cut emissions
significantly – hitting any pre-assigned emissions target but still leaving a
devastated environment. This is
a confusion of the UNFCC and many policy makers (including those in Australia).
It is a straightforward stock/flow confusion. But it is a long step from endorsing this view
to asserting the case for limited action to address climate change. Tol’s case is
based entirely on his interpretation of the Nordhaus DICE model. It is a strong, controversial argument
derived from such a narrow ideas base.
Tol goes further. Climate change only
matters at all if you care about the distant future, faraway lands and remote
probabilities. Some nice economics is
exposited as a precursor to these claims – the Ramsay rule for discounting, the
role of equity weights, Weitzman’s dismal theorem and so on - but I could find
no empirical or theoretical justification provided for the claims. Of course the Stern Review using low discount
rates came up with a strong presumptive case for addressing climate change
decisively and now.
Indeed in a subsequent chapter, Tol shows
himself how risk and irreversibility intensify the case for a more stringent
climate policy. This is a major practical policy concern.
On the strategic issues involved in climate
policy, Tol asserts that game theory and “free riding” explain why cooperative
agreements such as Kyoto have not yet had a large impact and why future
attempts at negotiation will also be futile.
The implication Tol draws is that most policies will, of necessity, be
nationally-based, adaptation policies that do not require international
agreements. This seems an overly
pessimistic assessment given current initiatives world-wide (in Europe, China
and the United States) to mitigate emissions.
Tol provides an Excel-based integrated
assessment model that can be numerically explored by students. Although highly aggregative this is a useful
way of illustrating how the various science and economic components of
modelling need to be put together to determine policy impacts.
In a final brief chapter Tol sets out his
bottom line on policy. The climate issue
is seen as a minor problem that can be efficiently resolved with a limited
carbon tax. Views that the problem is more
serious than this are identified as climate “alarmism” fostered partly by the
self-interest of politicians and bureaucrats.
The potential for international action is limited by right-wing
conspiracy fears and the free-riding issue.
Domestic actions are expensive but politically sought even though they
have relatively high cost compared to a cooperative global response. These views can be debated but what is non-debatable
is that these views do not reflect the worthwhile discussions of climate
science and climate economics that lie elsewhere in this book. There is much
sound analysis in this book but this analysis does not seem to drive the
author’s policy views.
Harry
Clarke
La
Trobe University and the University of Melbourne.
January
2015.
Harry: As far as I know, we have never met. I am therefore surprised that you claim to know my views on things, let alone that something would be inconsistent with those views.
ReplyDeleteIf instead you want to say that (a) a particular conclusion does not follow, or (b) a particular assumption is unrealistic, then please do so.
Hi Richard, I know very little of your views other than in this book. I don't think your analysis or evidence presented backs up the policy view that climate change is a minor problem that can be dealt with mainly by adaptation measures. I'd be interested in clarifications as to where in your book you establish these views. Or I have mis-judged your policy bottom line. I did try to be careful.
ReplyDeleteHarry
ReplyDeleteI had hoped that the book clear lays out that the optimal policy mix consists of adaptation, mitigation and R&D; and that the composition of the mix depends on many assumptions about which reasonable people can disagree.
If we use the received wisdom about these parameters, then we find mitigation that is lower than the political rhetoric but larger than the political reality (with perhaps an exception for Australia where rhetoric and reality seem to have swapped roles).