August 5, 2012

The economics of global warming

Colin Read, Everybody's Business

---- — The Koch Brothers, two of the wealthiest capitalists in the world, and the owners of one of the world’s largest private companies, have been funding research into global warming.

Their contention, and the thesis that received their funding, is that global warming is not a human-made phenomenon. They have been sponsoring a physicist from Berkeley, who has recently recanted and concluded that humans have contributed to global warming over the past two centuries.

Skepticism in science serves an important role. It challenges conventional wisdom, which is often hijacked by populism. Scientists, too, are prone to populism, so those who challenge the results of others keep everybody honest.

Such challenges force the methodologies used to assess global warming to meet the highest rigor. Now, the skeptical scientist, Richard A. Muller, has had his climatological epiphany. Once the leading opponent of the conclusion of human-induced global warming, Muller has now recanted.

His reconsideration was scientific rather than political. Muller, like all humans, is concerned about our footprint on the earth. Nature is maintained in a constant and dynamic balance that can be shifted by human activity. This seems increasingly certain.

This perturbation of nature’s equilibrium creates uncertainties. It also raises economic issues.

An uncertain future is not always bad, even if it is typically destabilizing. An uncertain future just as often produces improvements as hardship. However, humans are risk averse, and would rather maintain the status quo than flip a coin for better or worse. People also invest in the status quo and will go through great lengths to protect their investment and resist change, even if change may be better overall for the economy and society.

For example, we build along Lake Champlain based on an average high water mark of around 100 feet, not 96 feet or 104 feet. When a flood approaches 104 feet, there is much damage to human property.

Some may argue that we should not be building based on a 100-foot-high water mark. However, we must inevitably choose some number, or not build at all. Any number we choose will seem inappropriate if lake levels change dramatically.

The same calculations happen with ocean levels that are affected by global warming. Areas that are built just beyond high tides become vulnerable and risk damage. Property is lost, while other land a bit farther away from high tide suddenly becomes waterfront property.

Global warming forces us all to adapt. Some pay to merely preserve what they have, and others pay to invest in opportunities that would not have existed in the absence of global warming. Some land is lost to a rising ocean and to drought, while other land becomes more productive. Here in the North Country, we have gained perhaps half a gardening zone. Our region, once one that regularly experienced 30 below temperatures, is suddenly able to grow grapes productively.

The Arctic, once covered by an ice cap, is increasingly accessible. In 2007, the Northwest Passage opened, which allowed ships to navigate directly from Europe to Asia via the Arctic Ocean. By the time you read this, the Northwest Passage through Canadian waters and the Northern Passage along the Russian coast, will be open, and will open regularly for a few months each year for the foreseeable future. See for an interesting graphic of the extent of arctic sea ice. Panama Canal’s loss is the gain to shippers that can shave many days and tons of fuel off their cargo budget.

It is an open question whether those who gain from global warming experience net gains that exceed the losses from those displaced. We are certainly very aware of those who lose from any calamity, but we are often less cognizant of those who gain. If the gains exceed the losses, the winners could compensate the losers. Such Pareto improvements, named after a famous Italian economist, guide many economic conclusions.

I don’t know the answer to the question whether global warming is Pareto improving. Certainly, the resulting tally of gains and losses must also include costs to species other than humans and to future generations. The equation is obviously very complex and induces many to conclude that to mess with Mother Nature is fraught with risk.

It is hard to deny that the planet is warming. Most now accept that humans have contributed to, even if they may not have completely precipitated, this recent trend in rising temperatures and ocean levels. It will be difficult to determine whether an adapted humanity will benefit or suffer from global warming, on net. We know, though, that hundreds of millions and perhaps billions of people, and myriad other species, will be displaced by climate change that was not broadly foreseen even a couple of generations ago, even if many others may benefit. Who these winners and losers are, and by how much, will remain an open question for decades.

Colin Read chairs the Department of Economics and Finance at SUNY Plattsburgh. Continue the discussion at