Here is a long post, criticizing Marty Weitzman’s view that we should regard a small chance of a catastrophic event as reason to buy "insurance protection" against that event.
I am not persuaded by Jim Manzi’s major point of rebuttal, namely: "the heart of Weitzman’€™s paper revolves around the first point: the
probability of extreme disaster is larger than current models assume." My reading of Weitzman (which may not exactly be Weitzman’s own view) is the following: raising the discount rate doesn’t choke off our worries of future dangers. In many plausible models, a higher discount rate means a higher degree of risk aversion as well, and thus we are back to worrying.
(For one simple version of this intuition, imagine a person near starvation. That person has both a high discount rate — he wants to eat more now — and he is very risk averse, for fear of losing his remaining food and dying. A billionaire in contrast can be more patient and bear risk more readily. The discount rate and the degree of risk aversion thus often move together, admittedly there are great complications here.)
Manzi also argues that: "There is No Good Reason to Think That the Probability Distribution for Estimates of Climate Sensitivity Fits Any Functional Form." Fair enough, there is only one world and ultimately the meaning of probability is murky, Bayesian or not. But we still have to act on probability estimates in an "as if" way and indeed we all do in a personal context.
If you want to know where Manzi is coming from, here is his critique of the Pigou tax on carbon.
The most serious critique of Weitzman, in my view, is simply that governments are bad at getting people to bear large costs to insure against low probability events, especially when the costs accumulate each year and there is little positive feedback in the interim. ("Reelect me, our costly tax held back global warming for yet another four years! Things didn’t get worse!" does not thrill.) Our government does persuade its voters to support a large defense budget, but this is done in part by a) periodic conflict and invasions, and b) people holding deeply irrational views of America’s proper place in the world (e.g., "my country, right or wrong"). On other foreign policy issues these irrational attitudes sometimes become very costly. So we might get people to support a Weitzmanesque insurance policy, but to do so they probably would have to be overworried about the relevant problems, and those overworries would lead to other policy mistakes. As a general rule of thumb, when it comes to risk the alternative is public overworry or public underworry, don’t ever expect to hit that sweet spot in between or even get close.
Thanks to Reihan for the pointer.
It’s easy these days to view global warming risk through a subprime filter. We are not (as many writers have maintained) so good at risk, and we have an excellent example staring us in the face.
So given flawed humans, and flawed perceptions, we probably will have flawed attempts at “insurance.”
Is there actually anything wrong with that?
The other human answer, that we should do nuthin’ and hope it all works out, obviously has flaws of its own.
In an earlier MR thread I brought up James Annan’s work; I didn’t quite understand the technical discussion on what it meant, but doesn’t it still strongly undermine conclusions like “5% chance of climate sensitivity over 10 degrees”?
Also, this isn’t right: “For example, if this is the PDF for the cost impact of AGW, then the area under the curve is equal to the total cost I expect it to create.”
I think the best reason for a discount rate is the increasing chance that the problem will be made irrelevant by either technological fixes or the demise of civilization. How does that lead to greater risk-aversion?
Tyler:
Thanks for your detailed and thoughtful comments on my article.
I tried to make the point in the post that Weitzman’s arguments about: (1) the relationship of risk aversion to discount rate, and (2) a fat-tailed PDF for climate sensitivity, are logically separate issues. I addresses the first point in another (mercifully for readers, much shorter) post that I referenced in this one.
The short form of the argument around the second point is that unless one makes a numerical (as opposed to functional form) argument that “uncertainty† may reasonably make the “true† PDF for some risk fat-tailed, then you have merely made a trivially true statement, since it is always possible that we have incorrectly specified a PDF. In the article I then go through three reasons why I think Weitzman has not made this empirical case.
You address the third (and most conceptual) of these three arguments when you say:
“Manzi also argues that: “There is No Good Reason to Think That the Probability Distribution for Estimates of Climate Sensitivity Fits Any Functional Form.” Fair enough, there is only one world and ultimately the meaning of probability is murky, Bayesian or not. But we still have to act on probability estimates in an “as if” way and indeed we all do in a personal context.†
I may be missing something, but I don’t think you are addressing the point I was trying to make. Yes, we have to act on “impure† probability estimates all the time, but Weitzman makes a much more specific claim relevant to this part of the argument: that we have evidence that we should accept a PDF as a valid method of making probability estimates for extreme values for climate sensitivity. In this third point, I review the logic for why I think this is a mistaken claim in this case. If this claim is mistaken, then we have not promoted uncertainty about the possibility of extreme outcomes to reliably quantified (i.e., probabilistic) risk about extreme events, even in the limited sense in which Weitzman agues.
Finally, the worry you describe in you last paragraph is highly related what I describe in a lot of detail in the second post of mine concerning the Pigou tax argument.
Once again, thanks for your comments.
we should regard a small chance of a catastrophic event as reason to buy “insurance protection” against that event.
Seems fine. Of course, those sorts of insurance protections can come in different ways (I highly doubt people would want to reverse the Clean Air Act in an effort to get more pollutants in the atmosphere to lower the temperature, for example) and, worst of all, can be contradictory. Some of the best insurance against one catastrophic event may well increase the severity and chance of another– to use the previous example, the Clean Air Act was at least partially motivated by worries of global cooling. It does become important to estimate the relative probabilities, naturally, of catastrophes of various sizes when deciding if, e.g., increasing the risk of a glacial period is worth decreasing the risk of ending the current ice age.
The other part of Weitzman’s argument, which I hope I am summarizing correctly as:
“The correct discount rate is lower for extremely bad events than for ordinarily bad events”
This is not entirely irrational. IE you can afford to self-insure certain types of risks, but not others.
John Thacker / JPC:
You are pointing out many of the difficulties, as I’m sure you know, with decision-making in the face of an unquantifiable risk of catastrophe.
Weitzman has made the argument that a reasonable person should accept a statement stronger than an AGW disaster COULD happen – he argues that we should believe that there is a PDF of possible AGW cost outcomes that is fat-tailed. As I mentioned in earlier comments, I go through three reasons in the long post for why I don’t think he has made his case.
To get practical about this, he claims in his paper that there is a quantifiable 1% chance that the average year-round temperature of the Earth will go to about 100F in the foreseeable future (roughly the summertime temperature in Death Valley). I’ll note that you can’t find any consensus statement of, say, actual climate scientists who believe this. If I were to accept this premise, I wouldn’t need a lot of fancy math to support fairly aggressive action to reduce emissions. If I don’t accept this premise, or something like it, his argument that he has made any progress in quantifying the distribution of possible future temperature changes falls apart (as far as I can see). That is, we end up right back where we were with the Precautionary Principle.
To argue that the distribution is **that** fat-tailed [which very few/almost no physical processes are] you need to posit a underlying mechanism that produces that type of distribution. Weitzman clearly hasn’t/can’t do that. To make his case with a straight face you can’t simply say, well it’s prudent to assume it could be possible, because it would be really bad if it happened. You need to at least posit some physical mechanism which would allow that type of extreme behavior – that would be some really strong positive feedback mechanism that I don’t think has been identified, even in principle. In fact, the actual historical experience argues otherwise.
All that being said, paying attention to “realistic” extreme events is prudent risk management. If you can’t formulate a smooth distribution you can use scenario analysis.
I am not sure what you mean by “governments are bad at getting people to bear large costs to insure against low probability events”.
If we were talking about something akin to insurance, i.e. the government sets funds aside to be spent in case of the event, then I can see the pressure on politicians to spend the funds anyway. If the government uses tax money to invest in clean energy soruces, and if those sources actually get developed, I would say the situation is very similar to current science spending through for example the NSF, but with benefits to the people that are better to explain. If the government manages to keep up NSF spending, and the people at large believe cleaner energy sources are important, I don’t see why it couldn’t also keep up the spending on clean energy for decades.
And why would a pigouvian tax be unstable in the long term? As long as people oppose the CO2 tax less than they oppose other taxes, and it is clear that it used to lower the other taxes, there will be relatively little pressure on politicians to lower it.
The only thing that would be really difficult to keep up for a long period would be, in my opinion, a pigouvian tax ( or some auction system) where the proceeds are exclusviely earmarked to be spend on CO2 reduction, instead of being used to lower other taxes.
At first this makes it unclear that these taxes are primarily meant as incentive for industry to increase efficiency.
Second, it would limit the amount of CO2 tax to the amount that people think reasonable to spend, by the goverment, on CO2 reduction. This amount can be much lower than the amount that would lead to the needed CO2 reductions.
Third, it would put CO2 heavy industries in direct conflict to the government-funded research programs. After all, if they can discredit those, the CO2 tax is likely to get lowered. A good policy on the other hand would make especially these industries in favour of CO2 reducing technology development.
The only thing certain is uncertainty, and even that’s uncertain. – Joe Nye, 2007
What Weitzman’s extraordinary paper has done is simply to show that there is NO plausible economic model which allows us to exclude bad fat tails in the analysis of potential catastrophes; and that in a wide range of such situations (including anthropogenic global warming)fat tails are probable in the economic analysis. The onus is therefore on anyone who excludes the low probability very high impact outcomes to provide valid reasons for excluding these cases.
This is a general result, not limited to climate change. Weitzman’s remarks on climate change policy can only be treated as possible implications of his approach. Any worthwhile challenge to the paper must focus on the general result, not the policy asides.
I’d be able to better answer that question if I knew by what mechanism the food would run out. But I assure you that a wealthier world would be better able to handle whatever the mechanism is — caused by global warming or not — than a poorer world would.
Wealth means opportunity. Wealth means choice. Wealth means robustness.
Wealth apparently also admits the alchemy required to hold up a three-ton truck on rims made of solid gold.
Jim:
You are right that Marty goes beyond anything in the IPCC’s Fourth Assessment Report (FAR) in modeling catastrophic climate change. In fact, Marty is quite explicit that he is going behind the Report to look at the 18 or so climate sensitivity studies on which the IPCC itself relied in compiling the FAR. His close reading of those 18 studies, in the aggregate, leads him to his determination of a 5% chance of GMT increases of 7 degrees C or higher.
Dan
Thanks to everybody for the thoughtful discussion. Let me see if I can take some of the questions directed to me one at a time, and go in an order that makes the answer for each issue relevant to everybody.
Nick:
Your point 4 is exactly the problem one has in applying the Precautionary Principle, and why it doesn’t really work. If there is no meaningful probability distribution of outcomes, then all we can say is “X might happen†.
The most critical point that Weitzman tries to demonstrate in his paper is the claim that he can make a meaningful statement about the probability distribution of utility losses for AGW: specifically, that it is fat-tailed (which embeds the assumption that the probability distribution exists in a functional form that can be integrated, i.e., a PDF).
Barkley:
Climate sensitivity is a physical phenomenon. It has a reality independent of our ability to analyze it. At a practical level, it is a quantity like the gravitational constant G (recognizing the complexity that climate sensitivity is conditional on other specifiable parameters). The probability distribution under discussion is a distribution of our error in specifying this value; it is not some inherent property of the phenomenon. (In Bayesian terms, the actual Earth doesn’t represent a “draw† from a super-population of possible Earths with various climate sensitivities.) This probability distribution represents some complex accumulation of systematic and random error in matching the specification of climate models to the physical reality of the planet. There is no good reason to think that some mathematical function that can be integrated has anything to do with this distribution of measurement error.
Therefore, even if we assumed that we had derived a estimated distribution of probabilities for climate sensitivities within some range using physical measurements or reliable models, and if we further assumed that some fat-tailed PDF were a better empirical fit than the normal distribution to this data in this range, there is no good reason to conclude that the fat-tailed PDF would be a better method for projecting the likelihood of extreme climate sensitivities than any other distribution or no distribution at all. Either we could extend the range of the reliable distribution of likelihood of various more extreme climate sensitivities through further experimentation and/or modeling, or we would have to treat these more extreme possibilities as purely uncertain.
I go into all this in much more detail in the post.
Diversity:
Consider three generic types of predictions: deterministic predictions (“If I let go of this pencil, it will fall†), probabilistic predictions that employ a probability distribution (“If I flip this coin, it has a 50% chance of coming up heads and a 50% chance of coming up tails†), and uncertain predictions, for which we can not specify a reliable distribution of probabilities (“There will be a military coup in Pakistan in 2008†). The economists in the house will immediately recognize the distinction between probabilistic and uncertain predictions as, in essence, Knight’s classic distinction between risk and uncertainty.
Strictly speaking, all predictions are uncertain, but as a practical matter we treat different predictions differently based on the observed reliability of the relevant predictive rules used to generate them.
Consider the deterministic prediction about what happens if I let go of a pencil. Writers often like to show off by making the point that the statistical laws of quantum mechanics actually state that there is some infinitesimal chance that a lot of particles will bunch up beneath the pencil and push it upward. Without getting into the fine points of quantum mechanics, this is a probabilistic prediction. But there is a yet-further layer of doubt that they typically don’t recognize. What if the laws of quantum mechanics are wrong, so that the PDF that it generates is incorrect? All scientific findings, and hence predictions, float on such a sea of doubt.
In principle, it is always possible for the PDF that we use to make a probabilistic forecast to be wrong (e.g., my coin-flipping probability distribution of 50% chance of heads and 50% chance of tails doesn’t consider the possibility that the coin may land on a edge and stay there). If history is any guide, it’s actually very safe to assume that any PDF is “wrong† in that it is an imperfect representation of reality. A subset of the ways in which any PDF can be wrong is that I think it is thin-tailed but it is really fat-tailed. So, in order for Weitzman to argue that he is making anything other than a trivial statement, he must provide evidence not just that it is possible for the distribution of losses to be fat-tailed, but that a reasonable observer should accept it as likely in the case of AGW. We must move from the world of a debate over functional forms and formalism, to a data-driven argument about actual numbers.
I go into a detailed analysis in the post of why I don’t think he makes the numerical case well.
Dan:
Just as you say, Weitzman averages (roughly speaking) the 95% CI bound for studies cited in AR4 to come up with the estimate you describe. This is a method that the IPCC did not use, by the way. But then, critically, Weitzman goes on to say that this is not really the 95% CI bound. He asserts that there are long-term potential climate feedbacks that the IPCC has not considered that lead him to assert much higher potential values for temperature increases.
I review this is in detail in the post, as well as my reasons for rejecting his armchair climate science.
That governments are short-sighted for political reasons and therefore unlikely to carry out or sustain a policy recommended by Weitzman is quite different from saying what he is proposing is unwise.
The problem arises not from failing to carry out a good recommendation — that just returns us to the status quo. The problem arises from various possible side effects from government attempts to set up large-scale “insurance policies” stringent and complete enough to mitigate the wide variety of possible risks in the global warming fat tail. These economic and political effects, like the global warming effects, are nonlinear in nature and the resulting risks thus have fat tails holding many possible catastrophes.
Weitzmann has pulled a typical trick — impliedly comparing a market imperfection (in this case the creation of global warming with a fat tail of possible catastrophes) with an imaginary perfect government intervention (impliedly containing no fat tail and thus no possible catastrophes). Tyler was recognizing this paper as another instance of this old and tired thought gimmick.
We must also apply fat tail analysis to government intervention to properly account for catastrophic risks to the economy: Hyperinflation (triggered by high energy prices). Recession or depression (with consequent acceleration of pollution including global warming). Greater poverty from lack of fuel could cause greater population growth and thus greater pollution (poor people have more kids). Etc. etc. — a very wide variety of catastrophic economic outcomes are possible.
Then there are the many possible catastrophic political risks: loss of civil liberties due to stringent global warming regulations and the intrusive monitoring needed to enforce them, warfare triggered by CO2 treaty negotiations, warfare where oil-using “defector” nations conquer weakened green nations, high regulations leading to returns of fascism or communism, etc. etc. Might not we need to conquer the Middle East and Russia to enforce a global warming treaty, and might that not trigger a nuclear war? This is just the tip of the melting iceberg of possible catastrophic political outcomes.
It’s highly unbalanced to let our imaginations run wild with the paranoia of one fat tail and not the other.
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