Gernot Wagner's Blog, page 6

World Affairs Council

Climate Shock: Seeking Insurance Against a Warming Planet

March 17th, 2015, 7:00 pm – 8:00 pm

World Affairs Council Auditorium, 312 Sutter Street, Suite 200, San Francisco, CA

Further event details. Further Climate Shock book events.

We need a climate insurance policy – now

By Gernot Wagner

Q&A with Karin Rives first published on EDF Voices.

Before climate change gets so bad that we may be forced to “geoengineer” ourselves out of catastrophe, a new book—Climate Shock—suggests that we reframe the problem altogether.

Gernot Wagner, a lead senior economist at Environmental Defense Fund and co-author of the book, says we ought to look at climate change as a risk management problem and treat it as such. I had a chat with Gernot about the book he will release next week together with Martin L. Weitzman, a professor of economics at Harvard University.

Karin Rives: Many books have already been published on climate change. What’s new or different about Climate Shock?

Most everyone focuses on what we know about climate change. Our book is about what we don’t know.

Call it Nassim Nicholas Taleb’s “Black Swan,” or the Rumsfeldian “unknown unknowns”—a state of complete and dangerous uncertainty and unpredictability. Call it what you want, but it’s that tail that may yet wag us in the end.

What we know is bad. What we don’t know is potentially much worse. Climate, in the end, is a risk management issue. Just like homeowners take out insurance against fires and flooding, society needs insurance against climate change.

KR: So what do we know?

Last time the planet experienced as much carbon in its atmosphere as there is now, sea levels where up to 66 feet higher than they are today. Camels lived in Canada. That was more than 3 million years ago. The geological clock read “Pliocene.”

We certainly know enough to take reasoned action today. And almost everything we don’t know points in one and only one direction: that action is all the more urgent.

KR: Why do we need to read this book now?

The time to buy our insurance policy is now—while we still can. And I’m speaking both metaphorically and literally.

Insurance here, of course, is to avoid dumping carbon into the atmosphere. We pay to have our trash picked up instead of just dumping it for free onto our streets. We similarly need to pay to avoid dumping carbon into our atmosphere.

That’s not free, but it’s still relatively cheap to do—and much cheaper than experiencing the consequences of unchecked global warming.

KR: What should be my three most important takeaways from your book?

Scream, cope, and profit.

We need to get the right policies in place, and soon. That’s “scream.” Then there’s some global warming we can no longer avoid—and that we are already experiencing. Let’s prepare ourselves better for that.

“Profit” is, of course, what you would expect two economists to say, dollar signs in their eyes and all. All that starts with smart investment decisions. Green, clean, and lean isn’t just got for the planet. It’s also the right financial choice and we need to ensure that it is much more so going forward.

The main takeaway, in the end, is that this isn’t some artificial battle between capitalism and the climate. It’s not about sticking it to the man. It’s about sticking it to carbon.

We need a climate insurance policy – now

Q&A with Karin Rives first published on EDF Voices.



Before climate change gets so bad that we may be forced to “geoengineer” ourselves out of catastrophe, a new book— Climate Shock —suggests that we reframe the problem altogether.

Gernot Wagner, a lead senior economist at Environmental Defense Fund and co-author of the book, says we ought to look at climate change as a risk management problem and treat it as such. I had a chat with Gernot about the book he will release next week together with Martin L. Weitzman, a professor of economics at Harvard University.

Karin Rives: Many books have already been published on climate change. What’s new or different about Climate Shock?

Most everyone focuses on what we know about climate change. Our book is about what we don’t know.

Call it Nassim Nicholas Taleb’s “Black Swan,” or the Rumsfeldian “unknown unknowns”—a state of complete and dangerous uncertainty and unpredictability. Call it what you want, but it’s that tail that may yet wag us in the end.

What we know is bad. What we don’t know is potentially much worse. Climate, in the end, is a risk management issue. Just like homeowners take out insurance against fires and flooding, society needs insurance against climate change.

KR: So what do we know?

Last time the planet experienced as much carbon in its atmosphere as there is now, sea levels where up to 66 feet higher than they are today. Camels lived in Canada. That was more than 3 million years ago. The geological clock read “Pliocene.”

We certainly know enough to take reasoned action today. And almost everything we don’t know points in one and only one direction: that action is all the more urgent.

KR: Why do we need to read this book now?

The time to buy our insurance policy is now—while we still can. And I’m speaking both metaphorically and literally.

Insurance here, of course, is to avoid dumping carbon into the atmosphere. We pay to have our trash picked up instead of just dumping it for free onto our streets. We similarly need to pay to avoid dumping carbon into our atmosphere.

That’s not free, but it’s still relatively cheap to do—and much cheaper than experiencing the consequences of unchecked global warming.

KR: What should be my three most important takeaways from your book?

Scream, cope, and profit.

We need to get the right policies in place, and soon. That’s “scream.” Then there’s some global warming we can no longer avoid—and that we are already experiencing. Let’s prepare ourselves better for that.

“Profit” is, of course, what you would expect two economists to say, dollar signs in their eyes and all. All that starts with smart investment decisions. Green, clean, and lean isn’t just got for the planet. It’s also the right financial choice and we need to ensure that it is much more so going forward.

The main takeaway, in the end, is that this isn’t some artificial battle between capitalism and the climate. It’s not about sticking it to the man. It’s about sticking it to carbon.

London School of Economics

Grantham Research Institute public lecture: “Climate Shock: It’s Not Over ’til the Fat Tail Zings”

9 March 2015, 6:30 pm – 8:00 pm

32 Lincoln’s Inn Fields, Room LG.04, London School of Economics, London, WC2A 3PH

Further event details. Further Climate Shock book events, including in the UK.

Climate Sensitivity Uncertainty: When is Good News Bad?

Abstract:

Climate change is real and dangerous. Exactly how bad it will get, however, is uncertain. Uncertainty is particularly relevant for estimates of one of the key parameters: equilibrium climate sensitivity—how eventual temperatures will react as atmospheric carbon dioxide concentrations double. Despite significant advances in climate science and increased confidence in the accuracy of the range itself, the “likely” range has been 1.5-4.5°C for over three decades. In 2007, the Intergovernmental Panel on Climate Change (IPCC) narrowed it to 2-4.5°C, only to reverse its decision in 2013, reinstating the prior range. In addition, the 2013 IPCC report removed prior mention of 3°C as the “best estimate.”

We interpret the implications of the 2013 IPCC decision to lower the bottom of the range and excise a best estimate. Intuitively, it might seem that a lower bottom would be good news. Here we ask: When might apparently good news about climate sensitivity in fact be bad news? The lowered bottom value also implies higher uncertainty about the temperature increase, a definite bad. Under reasonable assumptions, both the lowering of the lower bound and the removal of the “best estimate” may well be bad news.

Full text: “Climate Sensitivity Uncertainty: When is Good News Bad?” Joint with: Mark C. Freeman and Richard J. Zeckhauser.

Citation:

Freeman, Mark C., Gernot Wagner, and Richard J. Zeckhauser. “Climate Sensitivity Uncertainty: When is Good News Bad?” NBER Working Paper w20900, Harvard Kennedy School Faculty Research Working Paper Series RWP15-002, January 2015.

Climate Change Impacts at the National Level: Known Trends, Unknown Tails, and Unknowables

Introduction:

Economists attempting to evaluate the impacts of climate change are often caught between hard theory and exceedingly rocky empirics. Impact assessment models are necessarily based on highly aggregated – and sometimes highly simplified – damage functions. This study takes an alternative approach: a bottom-up, physical impact assessment and respective monetization, attempting to cover a much broader set of impact fields, feeding directly into a macroeconomic and welfare analysis at the national level. To ensure consistency, our approach applies impact assessment at the sectoral impact chain level using shared socioeconomic pathways, consistent climate scenarios, computable general equilibrium evaluation, and non-market impact evaluation. The approach is applied to assess a broad scope of climate impacts in Austria. Results indicate significant impacts around ‘known knowns’ (such as changes in agricultural yield from climatic shifts), with uncertainty increased by ‘known unknowns’ (e.g. changes in water availability for irrigation, changes in pest and diseases) but also raises the question of unknowns and unknowables, which may possibly dominate future impacts (such as exceedance of critical ecosystem function for supporting agriculture). Climate change, ultimately, is a risk management problem, where insurance thinking warrants significant mitigation (and adaptation) action today.

Analysis of the study result indicate that the current welfare damage of climate and weather induced extreme events in Austria is an annual average of € 1 billion (large events only). This has the potential to rise to € 4 to 5 billion by mid-century (annual average, known knowns of impact chains only), with an uncertainty range of € 4 to 9 billion. When extreme events and the tails of their distribution are included, even for a partial analysis focused on extremes, damages are seen to rise significantly, e.g. with an estimated increase to € 40 billion due to riverine flooding events alone by the end of the century. These highlight the need to consider the distribution of impacts, as well as the central values.

Full text: “Climate Change Impacts at the National Level: Known Trends, Unknown Tails, and Unknowables” (December 8, 2014)

Citation:

Steininger, Karl W., Gernot Wagner, Paul Watkiss, Martin König. “Climate Change Impacts at the National Level: Known Trends, Unknown Tails, and Unknowables.” In: Steininger, Karl W., König, Martin, Bednar-Friedl, Birgit, Kranzl, Lukas, Loibl, Wolfgang, Prettenthaler, Franz (Eds). Economic Evaluation of Climate Change Impacts, Springer (2015).

Brief German summary: Wagner, Gernot. “Versicherung und Klimawandel.” In: Steininger, Karl W. (Ed). “Die Folgeschäden des Klimawandels in Österreich,” Cost of Inaction (COIN) Broschüre (2015).

Linking sound economics with global politics

Introduction:

Stabilizing the world’s climate entails a massive, global policy push. That, in turn, implies coordination at an unprecedented scale. Progress on such a coordinated, global, ‘top-down’ solution has been slow, to put it mildly. It’s no wonder then that emphasis has shifted toward a more ‘bottom-up’ solution. Policies, after all, are enacted at the national, regional, or local level. And each country or jurisdiction needs to find its own, ideal policies before then linking up with others.

There’s a lot to that logic. In particular, basic economics shows how linking of domestic emissions trading systems can only be good: it allows for more ambitious climate action at lower cost than separate domestic policies. That reasoning is sound. However, it does not absolve us of thinking hard about the political dynamics that have made a global climate deal so difficult. The need for coordination does not go away in a bottom-up approach to climate policy. It merely moves to a different plane.

Full text: “Linking sound economics with global politics” (December 31, 2014)

Paper written for the 2014 Upton Forum at Beloit College, Wisconsin, in honor of the 2014 Upton Scholar Robert N. Stavins. This essay is based on joint work with Jessica F. Green and Thomas Sterner, published in Nature Climate Change as: “A balance of bottom-up and top-down in linking climate policies.”

Citation:

Wagner, Gernot. 2015. “Linking sound economics with global politics.” Forthcoming in Annual Proceedings of the Wealth and Well-Being of Nations in honor of 2014 Upton Scholar Robert N. Stavins.

Comments on the U.S. Social Cost of Carbon

Full text: “Joint Comments on the U.S. Social Cost of Carbon.”

Citation:

Ceronsky, Megan, Rachel Cleetus, Frank J. Convery, Peter H. Howard, Laurie T. Johnson, Nathaniel O. Keohane, Richard L. Revesz, Jason A. Schwartz, Thomas Sterner, and Gernot Wagner, “Joint Comments on the U.S. Social Cost of Carbon.” In response to Docket ID No. EPA-HQ-OAR-2013-0602, Clean Power Plan (December 1, 2014).

In February 2014, Environmental Defense Fund, together with the Climate Reality Project, Organizing for Action and Sierra Club delivered more than 120,000 citizen comments to the White House Office of Management and Budget (OMB) in support of a strong Social Cost of Carbon (SCC).

A balance of bottom-up and top-down in linking climate policies

Abstract:

Top-down climate negotiations embodied by the Kyoto Protocol have all but stalled, chiefly because of disagreements over targets and objections to financial transfers. To avoid those problems, many have shifted their focus to linkage of bottom-up climate policies such as regional carbon markets. This approach is appealing, but we identify four obstacles to successful linkage: different levels of ambition; competing domestic policy objectives; objections to financial transfers; and the difficulty of close regulatory coordination. Even with a more decentralized approach, overcoming the 'global warming gridlock' of the intergovernmental negotiations will require close international coordination. We demonstrate how a balance of bottom-up and top-down elements can create a path toward an effective global climate architecture.

Full text: "A balance of bottom-up and top-down in linking climate policies."

Citation:

Green, Jessica F., Thomas Sterner and Gernot Wagner. "A balance of bottom-up and top-down in linking climate policies." Nature Climate Change 4, 1064-1067 (2014). doi:10.1038/nclimate2429

Reconsidering the Rebound Effect

By Gernot Wagner

By Kenneth Gillingham, David Rapson, and Gernot Wagner.

The rebound effect from improving energy efficiency has been widely discussed—from the pages of the New York Times and New Yorker to the halls of policy and to a voluminous academic literature. It’s been known for over a century and, on the surface, is simple to understand. Buy a more fuel-efficient car, drive more. Invent a more efficient bulb, use more light. If efficiency improves, the price of energy services will drop, inducing increased demand for those services. Consumers will respond, producers will respond, and markets will re-equilibrate. All of these responses can lead to reductions in the energy savings expected from improved energy efficiency. And so some question the overall value of energy efficiency, by arguing that it will only lead to more energy use—a case often called "backfire."

In a new RFF discussion paper, "The Rebound Effect and Energy Efficiency Policy" we review the literature on the rebound effect, classify the different types, and highlight the need for careful distinction between causal links—which are indeed worthy of the “rebound” label—and mere correlations, which are not. We find, in fact, that measures to improve efficiency, despite potential rebound effects—are likely to improve welfare, generally.

Among the key questions about the rebound effect are a) whether the net benefits of energy efficiency increases are positive (for a costless improvement, the answer is almost certainly "yes"), and b) whether the increase in demand for energy services uses so much additional energy that it leads to greater, rather than less, demand for energy itself (the answer is almost certainly "no").

Our findings are clear: while it is possible for rebound effects to be large in some settings, there is no reliable evidence supporting rebound effects so large that improving energy efficiency leads to more energy use. Backfire is theoretically possible, but even the theoretical predictions rely on channels that are either a) second-order in magnitude (and thus unlikely to overwhelm primary effects), or b) lacking in empirical evidence of their existence and magnitude. Globally, we have little reason to worry about backfire. While there is much uncertainty about the size of the so-called "macroeconomic rebound" (how re-equilibration of markets and such hypothesized effects as induced innovation from the energy efficiency improvement may lead to a rebound), we consider a plausible upper bound of the total effect to be in the range of 60 percent (that is, 60 percent of the potential energy savings will be lost to rebound), with most studies pointing to a smaller effect.

Regardless of its size, we find that the rebound effect is very likely to be welfare-improving. In fact, in the extreme, energy efficiency improvements that come about from innovations or otherwise have no cost are unequivocally welfare-enhancing. If the improvements come with costs, such as air pollution from more driving or more expensive technology, those need to be weighed against the energy savings, emissions savings, and welfare benefits from the policy.

In short, undue emphasis on backfire is a mere distraction. Or as we put it in a recent letter to the editor of the New York Times: energy efficiency improvements such as "LEDs alone won’t solve global warming or global poverty, but they are a step in the right direction for both."

Published on Common Resources. The RFF Discussion Paper is here: "The Rebound Effect and Energy Efficiency Policy."