Why is the Economics of Climate Change So Difficult and Controversial? A Max Weber Lecture by Martin Weitzman (Harvard University)

Lecture Report by MW Fellows Martina Bozzola and Jordi Teixido (RSCAS)

With an exciting and timely lecture titled “Why is the Economics of Climate Change so Difficult and Controversial?” Professor Martin Weitzman opened this academic year’s Max Weber Lectures at the European University Institute on 21 October 2015.

The lecture gave a brief general overview of the economics of climate change, with emphasis on why this particular application of economic analysis presents special – almost unique – challenges to the economics profession.

Prof. Weitzman walked the audience through some of the most important unknown unknowns, of which the field of climate change is full. By starting with one of his favourite quotations Prof. Weitzman made clear the context of this field: when you change the system (institutions, policies etc…) in one way or another, something can go (terribly) wrong, especially those things that we don’t envision going wrong. The quote, by Nassim Taleb, goes as follows: “Black Swan is a highly improbable event with three principal characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable than it was”.

This is in a nutshell the reason why the economics of climate change is such a fascinating but frustrating subject, as even the most prepared economists in this field cannot come up with answers to key questions, such as how much to spend and what exactly to do in the case of climate change.

Professor Weitzman refers to climate change as uniquely a public good problem: 1. global, 2. long term, 3. irreversible and 4. uncertain. Notably, dealing with climate change implies dealing with deep structural uncertainties and an inability to exclude catastrophes. The best way to treat those uncertainties is still an open question among economists and policymakers. Climate change implies immense time scales of centuries and millennia, which is difficult for people to conceptualize. Furthermore open questions remain, such as how, and at which rate, should economics models discount distant-future events.

Some of the most controversial questions related to the economics of climate change were discussed: how to project or predict the costs associated to dealing with climate change? This is made even more difficult by the difficulties in predicting technological change. What is the damage caused by climate change, and what is the best way to estimate it? How to calculate the welfare impact of climate change? Climate change also has irreversible elements including CO₂ atmospheric concentrations, ocean heat, etc. Once underway, climate change is very difficult to reverse by subsequent mitigation. Carbon prices are undoubtedly a very powerful tool to deal with climate change… If only the rest of the world agreed with economists…

To some, a geoengineering solution, that is large scale manipulation of the environmental process that affects the earth’s climate, may look like a tempting path to counteract the effects of global warming. Professor Weizmann also offered his view on the promises and problems of geo-engineering, which are also viewed as a “free driver problem” in contrast to the “free rider problem”. His latest book, Climate Shocks, written with Gernot Wagner, goes into these issues in depth.

At the end of the MW lecture, the audience surely had a better understanding of why it is so difficult and controversial for an economist to give sharp overall advice concerning what to do about climate change – and why there are so many differences of opinion.

After giving serious thought to these dimensions of this much controversial topic…should we hope for the best but prepare for the worst by contingency planning for bad outcomes?