Climate Change: What is (Not) To Be Done
In my previous column, I did my best to gauge the extent of the damage done to the climate as a result of human action, as well as the likelihood of an imminent climatic catastrophe. In this piece, I intend to explore whether a spontaneous correction of impending climate tragedy is possible through the piecemeal innovations of the free market and the growth of cooperative solutions.
Russian RouletteIn his 2013 book, The Climate Casino,1 Nobelist William Nordhaus takes the marketing path rather than demonstrating the prudence he shows in his scientific papers.2 He sees the possibility of a catastrophe so grave that he indirectly owns up to the fact that he thinks a better title might have been ‘Climate Russian Roulette’.3 He then tries to justify what in essence is his catastrophism when he gives the whole of Chapter 5 to “Inflection Points”, by which he means moments when ‘good equilibria’ suddenly turn into ‘bad equilibria’ with a crash. He lists four points of climatic inflection:
- • The collapse of large ice sheets;
- • Scale changes in ocean currents;
- • Temperature feedbacks, whereby warming by itself causes more warming;
- • Continuous warming over the long-term.
What is (NOT) to be done1. Uncritically applying the precautionary principle The cost of imposing measures to fight climate change is often presented as equivalent to paying an insurance premium (in the form of prohibitions, charges, loss of personal freedom) to compensate future generations for the possible harm we may have inflicted upon them. The ‘premium’ is really a tax imposed on this generation to honour the ‘precautionary principle.’ This principle is a characteristic of the European Union, whereby some action is forbidden ‘just in case’. The decrease in economic growth caused by this ‘insurance contract’ may reduce the well-being of future generations. This premium may turn out to be very high if the restrictions we suffer do not markedly change the world temperature trend. Also, the precautionary principle by implication assumes that self-correcting forces in human society are very weak. 2. Using dual discount rates A question that goes to the bottom of how to predict in the field of economics and finance is bringing future values to the present. Money today is worth more than money tomorrow, if only because when we are paid money that is owed us some time in the future, we could invest that sum temporarily and make a gain until the agreed date. In the same way, a loss or harm expected months or years hence must be translated into today’s value by discounting it at a given rate of interest, normally the rate applied commercially to investment plans. The smaller the discount rate the higher the present value of the future sum. Nicolas Stern, in his warnings about climate change, uses an especially low discount which makes the catastrophe loom larger to the present generation (a zero rate of discount would make the present value of a future event infinite). Applying a different and lower discount rate to climate events would mean that we are hopelessly myopic—a tall assumption to make. 3. Overlooking opportunity costs The proposal that the present generation should finance climate change of future generations conceivably much richer than us seems a strange idea. True, we may leave those generations a problem for which they are not responsible; but, if we listen to the climate catastrophists and change our productive structure to zero growth so as not to pass on the consequences of global warming, those future generations may find that they inherit a stationary economy, which they may not like. In other words, we must make sure that the benefit to future generations does not turn out to be smaller than the cost of climate policies to the present. 4. Taking climate knowledge as given Prior (2008) presents a long list of known unknowns that officials think they know, such as:
- • the precise relationship between greenhouse gases and local and global climatic conditions;
- • the possible impact of solar and volcanic activity;
- • the role of the oceans
- • tipping points
- • the contribution of future technology advances
- • that the harm caused by today’s constraints will be less than the benefit to futures generations
- • how to share the costs of mitigation among sectors and among nations.4
- U.S. energy expenditures declined for the fifth consecutive year, reaching $1.0 trillion in 2016, a 9% decrease in real terms from 2015. Adjusted for inflation, total energy expenditures in 2016 were the lowest since 2003. Expressed as a percent of gross domestic product (GDP), total energy expenditures were 5.6% in 2016, the lowest since at least 1970. (Monthly Energy Review; Nov. 2019.)
My central thesisInterventionists have agreed on the need for measures that will make our lives uncomfortable and reduce our liberties. The climate problem is presented as the utmost market failure of all time and the only solution, it is said, must be putting the food we eat, the size of our families, our means of travel, the way we organise our cities, how we govern ourselves, and indeed most aspects of our lives, in the hands of unelected officials and of populist politicians.
“Very much to the contrary, I hold that: (1) climate catastrophe is not around the corner; (2) we know too little about the climate to predict it long term; and (3) imposing drastic solutions by political diktat will make the world less productive, less safe, less free, and less democratic.”
How Ronald Coase lights our wayClimate planners act as if Coase never existed. They are arrant Pigovians. Before they speak of market failures they should read “The Problem of Social Cost” (1960) and understand it as an incitement to analyse new situations of (apparent) market failure. Rather than leading us to blanket condemnations of free exchange-based self-interest, he enjoined us not to give a verdict without observing the details of the case. The counter-intuitive Coasian framework of such analyses is applicable but has not been applied to climate change:
- • Cases should be examined carefully before politically imposing a comprehensive solution.
- • It may be a mistake to make the originator of a nuisance pay for it; charging a tax on the originator of a nuisance is a Pigovian, not a Coasian solution and may be the wrong decision.
- • External effects may be optimal, given transaction costs.
- • Removing transaction costs through institutional change may be a better solution than intervention, regulation, or taxation.
For more considerations on these wide-ranging topics, see the EconTalk podcast episodes Peter Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School and Nassim Nicholas Taleb on the Precautionary Principle and Genetically Modified Organisms. See also: “Ronald Coase, the Unexpected Economist,’ by Pedro Schwartz, Library of Economics and Liberty, October 7, 2013. Also see the EconTalk podcast episode Bjorn Lomborg on the Costs and Benefits of Attacking Climate Change.
Markets and polycentric solutions v. central planningIn March 2012, Elinor Ostrom gave the 21st Hayek Memorial Lecture at the Institute of Economic Affairs. This was shortly before her death and that of her husband and long-term collaborator Vincent. The title of her lecture was “The Future of the Commons—Beyond Market Failure and Government Regulation”. The point of the lecture was that the free market worked well for goods, services, and resources that could be appropriated privately by individuals or firms; but that in the case of common pool resources in danger of over-harvesting, as is the case of the atmosphere, the best solution was not to move over to management by government. The community itself, by trial and error, could often define rules for use, access, monitoring, exclusion, and enforcement (Ostrom, 2004, table 2), and so avoid the depletion of the common resource (Booth, 2012). It was important that centres of power be dispersed, especially when, as we saw with private British lighthouses, government played a role in helping to enforce rules. Avoiding the centralisation of power and decisions of experts from above, and relying as far as possible on community arrangements are of the essence of their method. Elinor Ostrom herself specialised in cases of common waters, fishing grounds, and forests. She said at the IEA (2012) that she had not looked at questions of climate change, but found the thought intriguing. This task remains for us to do. I would say that, leaving aside the mad rush to govern the Earth’s climate as a whole, much useful work is waiting to be done on regional climates and local extreme weather problems, whether man-made or natural. The way London smog was got rid of in the 1960s could be relevant for New Delhi or Peking, duly preceded by rearrangement of municipal power; ditto for California bush-fires. In the case of Australia, it is well known that aborigines had developed a traditional system of controlled burning to reduce the amount of dry tinder in the form of eucalyptus bark on the ground. Room must be left for the spontaneous emergence or reform of institutions to tackle common pool problems.
Starting to apply polycentric solutionsJagers et al. (2019) are especially interesting because the authors start from the majority point of view that the climate problem is principally man-made. The paper presented by this group defines a problem of collective action as “a situation in which actors are motivated to take a course of action that is more beneficial than costly to them individually but is more costly than beneficial to society”.9 According to these authors, the methods used by Ostrom in local collective problems are difficult to apply to large-scale failures of collective action. Spontaneous solutions are more difficult the larger the number and the heterogeneity of the people involved; the greater the spatial or temporal distance between action and result; and the amount of uncertainty of the process: all these obstacles stand in the way of spontaneous solutions of the climate problem, to which must be added the strength of the resistance of opponents or ‘stressors’. In their view, the case of ozone layer depletion illustrates some of the conditions for a successful collective solution. They say that Montreal protocol was successful in reversing ozone depletion because the problem was easily communicated, there was a large scientific, and there were reasonable substitutes for CMF aerosols. But they discount the possibility of a spontaneous correction of the ozone hole because of unnaturally warm air in the stratosphere over the Antarctic. All this is very interesting and deserves study. In my view, they underestimate our capacity to sidestep common property problems. After all, human society is still prospering and progressing, despite the warnings of ever-present doomsayers. In general, climate alarmists do not understand the role of social institutions in the solution of negative external effects: they only understand taxes and administrative regulation. They worship Pigou and misunderstand Coase. Andrew Shotter (1981) explains that “social institutions are entropy-minimizing devices” (page 18).10 Human beings “are capable of developing trust, creating rules of the thumb, and [evolving] social institutions”. Social institutions or norms emerge to solve problems of coordination, to exit prisoners’ dilemmas, to preserve necessary inequalities, and to foster cooperation (page 22). Societies are continuously solving the external effects of self-interested private action. Given time, I say again, what was discovered to reduce possible causes of conflict and discord or the enforcement of international contracts by merchant consulates, or the use of money in place of barter, could happen again in the question of the climate.
- • Humans have had an effect on the climate, but the climate also seems to be governed by natural forces, whose consequences we must learn to mitigate.
- • Cries that the climate is near a catastrophic tipping point are a marketing device to force humanity into hurried political decisions.
- • The premium proposed to insure against the climate catastrophe (in the form of either regulations or taxes) may be larger than the future pay-out.
- • Foretelling the evolution of the atmosphere demands taking account of dry land and ocean data. Vertical analyses of the atmosphere should include those of compensating horizontal currents of the seas and winds.
- • The rate at which we discount the future is critical. A very low rate of discount makes future doubtful events appear to be immediate and certain.
- • The GDP of advanced nations is becoming less material and resource bound. This explains why energy expenditures in the United States and other advanced nations have been falling at least since 1970.
- • Central planners wrongly take much of climate knowledge as given. We still know too little!
- • The possibility of technical progress, as in nuclear fusion, scarcely enters the calculations of climate alarmists.
- • Also, imposing climate mitigation policies on developing nations hinders the reduction of world poverty.
- • Applying the precautionary principle assumes that self-correcting forces in human society are very weak.
- • Malthusian prophecies assume zero technological progress.
- • Given time, market and cooperative solutions to avoid a climate tragedy of the commons could be tried and tested.
- ◦ Climate planners act as if Ronald Coase had never existed, when declaring that global warming is the greatest market failure of all time.
- ◦ The polycentric solutions proposed by Nobelist Elinor Ostrom for failures in common pool markets such as irrigation water, fishing grounds, and forests, should be seriously studied for tackling global warming and climate change.
Footnotes William D. Nordhaus. The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. Yale University Press, 2015.  See Nordhaus’ 1993 paper, “Rolling the ‘Dice’: An Optimal Transition Path for Controlling Greenhouse Gases”.  Nordhaus (2013), chapter 4 in fine, footnote 27, approvingly mentions some MIT researchers who speak of “Russian Roulette”. Compare with “Revisiting the social cost of carbon,” by William Nordhaus.  The 2008 IEA study on Climate Change Policy carries an interesting “Foreword” by Bruno Prior, a director of Summerleaze Ltd., formerly a gravel company, now adapted to waste management and renewable energy.  David Henderson (2008) has given a detailed description of some of the malfunctions of the IPCC. One should also see the more favourable view of the IPCC by Dr. Zillman in his review of Dr. Kininmonth’s book: Climate Change: A Natural Hazard?. [PHP file].  See Jones (2019).  The U.S. Government agencies calculate a yearly figure called the “Social Cost of Carbon” (SCC), “an estimate of the impact of climate change on consumption—the value of goods, services, and even environmental amenities climate change forces society to forgo enjoying”. If a measure such as a carbon tax of $40 per metric ton of CO2 is applied avoiding the emission of that given amount of greenhouse gas, so much will consumption be increased in the future: the tax today will equal the future marginal betterment of consumption. But, says Broughel, the cost borne with the tax does not include the effect of such a regulation on investment and technical progress. It should do so. Broughel (2019).  Apart from Andrew Schotter (1981) one should read Ullman-Margalit, Edna (1977, 2015): The Emergence of Norms. Oxford.  By the way, this definition of Jagers et al. is preceded by the assertion that, according to Elinor Ostrom (1997), “Problems of collective action permeate societies on all levels, from the very local to the global, and they cross both political borders and generations”. She is less holistic, for in fact she says that her reflections concern “the study of social dilemmas and collective action”, not the whole conspectus of social action. If we were so permeated it would be a miracle human society should have at all survived across the centuries.  Apart from Andrew Shotter (1981) one should read Ullman-Margalit, Edna (1977, 2015): The Emergence of Norms. Oxford.
* This a much revised and expanded paper originally read at the ECAEF Meeting of December 10th and 11th 2019 in Montecarlo. Thanks are due to Kurt Leube, the organiser of the meeting; and to Ana Schwartz and Juan Luis Valderrábano for welcome help when dealing with this fraught question. Pedro Schwartz is “Rafael del Pino” Research Professor of economics at Universidad Camilo José in Madrid. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene. He was a past President of the Mont Pelerin Society.