Market Forces

This blog post was co-authored by Gernot Wagner and first published on EDF Voices.

Put Republican Hank Paulson, Independent Mike Bloomberg, and Democrat Tom Steyer together, and out comes one of the more unusual – and unusually impactful – climate reports.

This year alone has seen a couple of IPCC tomes, an entry by the American Association for the Advancement of Science and the most recent U.S. National Climate Assessment.

The latest, Risky Business, stands apart for a number of reasons, and it’s timely with the nation debating proposed, first-ever limits on greenhouse gas emissions from nearly 500 power plants.

Tri-partisan coalition tackles climate change

The report is significant, first, because we have a tri-partisan group spanning George W. Bush’s treasury secretary Paulson, former mayor of New York Bloomberg, and environmentalist investor Steyer – all joining forces to get a message through.

That list of names alone should make one sit up and listen.

Last time a similar coalition came together was in the dog days of 2009, when Senators Lindsay Graham, Joe Lieberman, and John Kerry were drafting the to-date last viable (and ultimately unsuccessful) Senate climate bill.

Global warming is hitting home

Next, Risky Business is important because it shows how climate change is hitting home. No real surprise there for anyone paying attention to globally rising temperatures, but the full report goes into much more granular details than most, focusing on impacts at county, state and regional levels.

Risky Business employs the latest econometric techniques to come up with numbers that should surprise even the most hardened climate hawks and wake up those still untouched by reality. Crop yield losses, for example, could go as high as 50 to 70 percent (!) in some Midwestern and Southern states, absent agricultural adaptation.

The report is also replete with references to heat strokes, sky-rocketing electricity demand for air conditioning, and major losses from damages to properties up and down our ever-receding coast lines.

Not precisely uplifting material, yet this report does a better job than most in laying it all out.

Financial markets can teach us a climate lesson

Finally, and perhaps most significantly, Risky Business gets the framing exactly right: Climate change is replete with deep-seated risks and uncertainties.

In spite of all that we know about the science, there’s lots more that we don’t. And none of that means that climate change isn’t bad. As the report makes clear, what we don’t know could potentially be much worse.

Climate change, in the end, is all about risk management.

Few are better equipped to face up to that reality than the trio spearheading the effort; Paulson, Bloomberg and Steyer have made their careers (and fortunes) in the financial sector. In fact, as United States Treasury secretary between 2006 and 2009, Paulson was perhaps closest of anyone to the latest, global example of what happens when risks get ignored.

We cannot – must not – ignore risk when it comes to something as global as global warming. After all, for climate, much like for financial markets, it’s not over ‘til the fat tail zings.

This open letter, co-authored by Gernot Wagner and first published on EDF Voices, was written in response to a New York Times article citing Dr. Roger Bezdek’s report on “The Social Costs of Carbon? No, The Social Benefits of Carbon.”

Dear Dr. Bezdek,

After seeing so many peer-reviewed studies documenting the costs of carbon pollution, it’s refreshing to encounter some out-of-the-box thinking to the contrary. You had us with your assertion that: “Even the most conservative estimates peg the social benefit of carbon-based fuels as 50 times greater than its supposed social cost.” We almost quit our jobs and joined the coal lobby. Who wouldn’t want to work so selflessly for the greater good?

Then we looked at the rest of your report. Your central argument seems to be: Cheap fuels emit carbon; cheap fuels are good; so, by the transitive property of Huh?!, carbon is good. Pithy arguments are fine, but circular ones aren’t.

First off, cheap fuels are good. Or more precisely, cheap and efficient energy services are good. (Energy efficiency, of course, is good, too. Inefficiency clearly isn’t.) Cheap energy services have done wonders for the United States and the world, and they are still doing so. No one here is anti-energy; we are against ruining our planet while we are at it.

The high cost of cheap energy

Yes, the sadly still dominant fuels—by far not all—emit carbon pollution. Coal emits the most. Which is why the cost to society is so staggering. Forget carbon for a moment. Mercury poisoning from U.S. power plants alone causes everything from heart attacks to asthma to inhibiting cognitive development in children. The latter alone is responsible forestimated costs of $1.3 billion per year by knocking off IQ points in kids. All told, coal costs America $330 to 500 billion per year.

Put differently, every ton of coal—like every barrel of oil—causes more in external damagesthan it adds value to GDP. The costs faced by those deciding how much fossil fuel to burn are much lower than the costs faced by society.

None of that means we shouldn’t burn any coal or oil. It simply means those who profit from producing these fuels shouldn’t get a free ride on the taxpayer. Conservative estimates indicate that carbon pollution costs society about $40 per ton. And yes, that’s a cost.

Socializing the costs is not an option

As someone with a Ph.D. in economics, Dr. Bezdek, you surely understand the difference between private benefits and social costs. No one would be burning any coal if there weren’t benefits to doing so. However, the “social benefits” you ascribe to coal are anything but; in reality they are private, in the best sense of the word.

If you are the one burning coal, you benefit. If you are the one using electricity produced by burning coal, you benefit, too. To be clear, these are benefits. No one disputes that. It’s how markets work.

But markets also fail in a very important way. The bystanders who are breathing the polluted air are paying dearly. The costs, if you will, are socialized. Society—all of us—pays for them. That includes those who seemingly benefit from burning coal in the first place.

Your claim that what you call “social benefits” of coal dwarf the costs is wrong in theory and practice. In theory, because they are private benefits. As a matter of practice because these (private) benefits are very much included in the calculations that give us the social costs of coal. What you call out as the social benefits of coal use are already captured by these calculations. They are part of economic output.

Our indicators for GDP do a pretty good job capturing all these private benefits of economic activity. Where they fail is with the social costs. Hence the need to calculate the social cost of carbon pollution in the first place.

So far so bad. Then there’s this:

Plants need carbon dioxide to grow, just not too much of it

In your report, you also discuss what you call the benefits of increases in agricultural yields from the well-known carbon dioxide fertilization effect. It may surprise you to hear that the models used to calculate the cost of carbon include that effect. It turns out, they, too, in part base it on outdated science that ought to be updated.

But their science still isn’t as old as yours. For some reason, you only chose to include papers on the fertilization effect published between 1902 and 1997 (save one that is tangentially related).

For an updated perspective, try one of the most comprehensive economic analysis to date, pointing to large aggregate losses. Or try this Science article, casting serious doubt on any claims that carbon dioxide fertilization could offset the impacts on agricultural yields from climate change.

Farmers and ranchers already have a lot to endure from the effects of climate change. There’s no need to make it worse with false, outdated promises.

Coal lobby speaks, industry no longer listens

It’s for all these reasons that, to borrow the apt title to the otherwise excellent New York Times story that ran your quote: “Industry Awakens to Threat of Climate Change”. And it’s precisely why the U.S. government calculates the social cost of carbon pollution. Yes, sadly, it’s a cost, not a benefit.

To our readers: Want to get involved? The White House has issued a formal call for public comments on the way the cost of carbon figure is calculated, open throughFebruary 26. You can help by reminding our leaders in Washington that we need strong, science-based climate policies.