Robert S. Pindyck in his own words (and yes, he read and agreed with this blog)
Posted August 26, 2013
"It is sad to see how much my article is being misquoted, misinterpreted, and misused." Robert S. Pindyck, personal email correspondence August 26, 2013.
Opponents of the President’s climate plan recently seized upon an article (subscription required) by Robert S. Pindyck, an eminent economist at the Massachusetts Institute of Technology, as a full-proof indictment against the administration’s “social cost of carbon,” or the SCC. The SCC estimates the economic damages per ton of CO2 emitted, and is used to calculate benefits (i.e. avoided damages) of carbon pollution reduction. The government’s “central estimate,” or the most likely value, is $33 per ton of CO2.
Ironically, by latching on to the author’s strong words of the SCC as “close to useless,” opponents have unwittingly set themselves up for a pyrrhic victory. Had they bothered to read the paper, they might have discovered that the author believes a carbon tax starting at the administration’s SCC would make sense; that the author viewed denying the need for a carbon price as a sign of ignorance and perhaps irresponsibility; and that the author’s critique suggests a higher SCC might be needed:
- “My criticism of [the SCC] should not (Pindyck’s emphasis) be taken to imply that because we know so little, nothing should be done…[using the administration’s SCC] would help establish that there is (Pindyck’s emphasis) a social cost of carbon, and that it must be internalized [in] prices... (Yes, most economists already understand this, but politicians (emphasis added) and the public are a different matter).”
The author’s primary concern is that, while a central estimate like $33/ton of CO2 might be reasonable for small temperature changes, the measure doesn’t adequately capture the fundamental threat climate change presents—a small but real possibility of very high damages or catastrophic events:
- “The usual approach is to select values…consistent with common wisdom regarding damages that are likely to occur for small to moderate increases in temperature…The problem is that [the economic damage estimates the government had to rely on] tell us nothing about what to expect if temperature increases are larger than [the most likely increase]…”
- “Another major problem…is that the models ignore the possibility of a catastrophic outcome. The kind of outcome I am referring to is not simply a very large increase in temperature, but rather a very large economic effect.”
- “Why do we need to worry about large temperature increases and their impact? Because even if a large temperature outcome has low probability, if the economic impact of that change is very large, it can push up the SCC considerably (emphasis added)…The case for stringent abatement would have to be based on the (small) likelihood of a catastrophic outcome in which climate change is sufficiently extreme to cause a very substantial drop in welfare.”
Contrary to text taken out of context by opponents, the author notes that the government relied on external analysis (i.e. it didn’t “make up” its own estimate to justify stringent climate policy), that this analysis was conducted conscientiously by economists, and that the results were used responsibly by the government:
- “The problem is not that the [model] developers were negligent and ignored economic theory. There is no economic theory that can tell us what [extreme] damages look like.”
- So…“Given the limited available information the [administration] did the best it could…”
The author closes by asking what can be done. It’s not an answer climate deniers would like:
- “Given how little we know…perhaps the best we can do is come up with a rough, subjective estimate of the probability of a climate change sufficiently large to have a catastrophic impact…The problem is analogous to assessing the world’s greatest catastrophic risk (emphasis added) during the Cold War—the possibility of a U.S.-Soviet thermonuclear exchange.”
Hardly helpful words for politicians and the fossil fuel interests filling their campaign coffers whose only “alternative” is to do nothing.
In an interview (subscription required) with Pindyck, the author conceded that his paper does not offer details on how to improve carbon damage estimates. This is not surprising, and shouldn’t be taken as a fault of his analysis: uncertainty is so pervasive, he argues, that rigorous estimates may be impossible.
Pindyck minced no words against those who (ab)used his work: "I've never even heard of the Institute for Energy Research," he said. "Obviously, they are upset about the whole idea of having an emissions abatement policy.” He added that others skeptical of global warming or carbon controls, including the Cato Institute, have picked up on his paper as further justification for their resistance to carbon emissions limits. "That is unfortunate, that is not what I intended to say.”
Hopefully the irony of the opposition’s attack on Pindyck won’t be missed. Rather than abandoning the administration’s SCC altogether, the author thinks it makes sense to use it in the absence of a better measure, one that would ideally include catastrophic damages. This is a story that can’t end well for the opponents.
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