Climate Tail Risk

Climate Tail Risk

Climate Tail Risk

Moneybox
A blog about business and economics.
Dec. 2 2011 2:00 PM

Climate Tail Risk

I see that Karl Smith's insouciance about climate change has driven my former colleague Brad Johnson to the brink of total despair, so I'm going to try to stay calm and say why I think Smith is wrong even if he's more or less right about everything he says. The basic Smith take is that it's foolish to make present-day sacrifices of economic well-being to avoid even serious problems in the future, because in the future we'll be richer than we are today. I have two problems with this argument.

The first is that if you think about a probability distribution of possible outcomes in a future of climate change, there's a profound assymetry. There are lots of lurking feedback loops like permafrost melting and releasing new greenhouse gases into the atmosphere. The most likely future scenario may well be of a world that's more prosperous in 2111 than it is in 2011 despite negative impacts from climate change. But it's possible that failure to control greenhouse gas emissions will lead to a dystopian nightmare and the total collapse of industrial civilization. Climate change mitigation is ultimately less about the central tendency than it is about trying to buy insurance against really awful scenarios.

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The second is that I genuinely see no reason to think that a well-designed program to cap and reduce greenhouse gas emissions should entail any meaningful growth sacrifice. We will continue to have taxes in the future, and a tax code that relies more heavily on pollution charges would be more economically efficient than the current tax code even if climate change were a total non-issue.