climate emergency economics

Climate Change, a sound risk management perspective … courtesy of a former VP of the Cato Institute (yup, you read that right)

Every now and then you read something that makes you sit up and take note. Either because of who says it, or because of what they are saying. Sometimes, someone manages to express something that was floating around your own head in an amorphous state, cloaked in brain fog, in such a clear and salient way that your own thinking on the matter sharpens abruptly.

That was precisely my reaction when reading Jerry Taylor’s piece in the Bulwark the other day. Taylor, a former director of Natural Resource Studies at Cato who climbed the ranks at the conservative / libertarian think tank to become senior fellow and vice president, delivers part conversion story, part play book for engaging those who claim “we just can’t spend all that money on climate protective measures based on some crazy computer models predicting worst case scenarios”. A claim all to frequently invoked by those who may not outright doubt the science behind climate change but still try to diminish its impact on future generations. Often with the goal of prolonging or securing the status quo, the current order of things.

While I highly, highly, highly recommend you read his article yourself and internalize his argument to effectively engage those “lukewarmers”, as Taylor calls them, where ever you encounter them, here’s a brief executive summary. Hopefully I will do his well written piece some justice.

Taylor proposes to shift the the debate about climate change risk away from what severity the most likely outcome will take. This immediately deflates the power of the “climate alarmist” slur as it no longer requires the public to implicitly adjudicate which side is right.

Then therein lies a powerful answer to the conundrum. As Taylor quite rightly points out:

“Risk management is not about discerning the optimal response to the most likely outcome, it is about discerning the appropriate response to the most likely distribution [his emphasis] of possible outcomes.”

Jerry Taylor, The Bulwark, May 21, 2019

Taylor, drawing on work by the economist Richard Tol, then explains how incorporating the possibility of climate change turning out a bigger problem than expected is not an introduction of the “precautionary principle”, often despised by those opposed to ambitious climate action. By evaluating the asymmetric, ambiguous and irreversible nature of climate risk and commensurate mitigation against the expected utility framework no disproportionate focus (a precautionary stance) on worst case outcomes is required to justify ambitious action. This approach also acknowledges that some measures will have highly positive outcomes regardless how climate change will play out (Think public health benefits for example).

Taylor uses the analogy of the “bond vs. equity” investment decision investors make to highlight this point. Equity may generate higher, but uncertain returns where government bonds pay stable lower returns regardless of the macro economic situation. Most investors will thus hedge against systemic risk by spreading their portfolio across both asset classes and thereby foregoing some potential but uncertain returns compared to an all equity approach.

Taylor’s way of focusing on and managing appropriately the most likely distribution of outcomes with regards to climate risk thus becomes a hedge against uncertainty and systemic risk. This cleverly plays to the affinity of “lukewarmers” to preserving the current mode of things. Inaction now carries much greater risks of economic upheaval and loss, whereas investment in ambitious climate action promotes systemic stability.

The beauty of Taylor’s argument is that it works even if you perceive climate action to be largely a cost factor and drag on growth. As this blog will demonstrate, I am not part of this camp.

I firmly believe that climate change may be just the ticket to free ourselves from the growth limiting shackles of a carbon based economy and present one of the greatest opportunities in human history to lift our global civilization to the next level.

Stay tuned for more…

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