Tuesday, October 25, 2011

Only Economists Can Save the Planet

Gernot Wagner’s But Will the Planet Notice? is the book I would like to get my neighbors to read. The ones who use canvas shopping bags, take short showers, recycle, and think that is enough. The ones who think “environmental economics” is an oxymoron. The ones who think concepts like markets, incentives, and property are the roots of our planetary problems, not the keys to solving it.

Wagner can speak to these people as a member of the same club. He is careful to point out that he, too, pays his dues—no plastic bags, no meat, no car, and a day job with the Environmental Defense Fund. But he also has a Ph.D. in environmental economics. That means that even though he may live like your average green progressive, he thinks differently. He thinks recycling is nice, but not enough, and that only economists can save the planet.

Actually, I took the bit about economists saving the planet from the jacket, not from the book itself. Wagner’s real argument is not that economists, but markets offer the best chance of saving the planet. Markets don’t guarantee success, but trying to work against them is a sure recipe for failure.

Wagner is a firm devotee of the idea that the polluter should pay. His tool of choice for putting a price on pollution is cap and trade, but he has no objection to gasoline taxes, parking fees, highway tolls, property rights for lobster fishers, and other incentive mechanisms as the specifics of each case dictate. He is dismissive of the objection that “making pollution into a commodity” removes the moral stigma associated with it. “From a moral perspective that’s all well and good,” he says. “Too bad it doesn’t get us anywhere.” (It’s also too bad he doesn’t expand on this point.. It is worth more than a one-liner.)

This book is much more than just another plea to put a price on pollution, however. For Wagner, environmental economics isn’t only about prices and markets, but also about broader issues of tradeoffs and optimization. What offends him even more than polluters who don’t pay are dumb regulations that do more harm than good.

He is especially devastating in his critique of the Endangered Species Act. The ESA is perhaps the least economically inspired piece of environmental legislation on the books, allowing for no tradeoffs or optimization at all. Under the act, everything is all or nothing. If the barred owl is not on the endangered list, it fends for itself until it qualifies. If the spotted owl is on the list, there is, literally, no limit to how much is too much to spend on protecting it. Ten million dollars to save a single bird? Sure, it’s been done. Never mind that the largest expenditures often go to species that are beyond saving while other conservation needs, like habitat protection to keep other species off the list in the first place, are underfunded.

What would be better than dumb regulations? Smart regulations, of course. Wagner likes an idea advanced by Harvard professor Martin Weitzman: Use DNA testing to measure the genetic distance between species. If an endangered bird or fish (say, the spotted owl) has a close but flourishing cousin (the barred owl), its loss would not have much impact on overall genetic diversity. Genetic outliers should be the top priority. Measure, maximize, optimize. That’s the real economic way of thinking at work.

Weitzman’s work appears elsewhere in the book, as well. Wagner spends a whole chapter elaborating the reasons for thinking climate change is the planet’s number one threat. At first that might seem like overkill, since, for the most part, he seems to address the book to readers who already share his concern for the future of the planet. But it turns out he has more to say than simply to reiterate the findings of the Intergovernmental Panel on Climate Change. Following Weitzman, he explains why conventional climate change research, which focuses on mean values and normal distributions, misses the point.

The risk of climate catastrophe, he argues, is not like the risk that your house will burn down, a case where normal distributions work just fine. Instead, it is more like the kind of systemic financial risk that shook the world after the collapse of Lehman Brothers. Why so? Financial and climate risks both have fat-tailed distributions. That makes it worth taking serious precautions against “black swan” events that are very far from the mean—events that, although not especially likely, would result in huge losses if they did occur.

The consensus among mainstream climate scientists is a mean expected warming of 2 to 4 degrees Celsius by the end of the century. Adapting to such an increase would be costly and disruptive, but it would not mean the end of life as we know it. But instead of the mean, Weitzman and Wagner (who have worked together on the issue) argue that we should be focusing on the 5 percent probability that warming will end up way out in one of those fat tails, say, 12 degrees or more. That would put half the world’s population in areas so hot that a few hours out in the sun would be fatal—even for a person soaking wet, with light clothing and a strong breeze.

The Weitzman-Wagner approach puts the precautionary principle on steroids. With no change in the mean expected rate of warming, fat tails triple the amount we should be willing to invest in climate change now. To put it in dollars, if were willing to tax carbon at $20 per ton based on conventional analysis, then we should be willing to tax it at $60 or more based on fat tail math.

Despite these forays into high-octane theory, Wagner comes across as neither a wonk nor a purist, but rather as pragmatic and even a bit eclectic. Consider his spin on reducing pollution from automobiles. Economists (myself included) have long argued that an increase in gasoline taxes would do more good at lower cost than the current U.S. approach that features Corporate Average Fuel Economy standards. Wagner accepts the argument in principle, but points out that people don’t always respond rationally to price incentives. His recommendation? Gasoline taxes plus CAFE standards.

The bottom line? What I like best about the book is its potential to deliver a plea for good policy in a way that penetrates the factional divisions that have arisen within the environmental community. Property-rights environmentalists from Montana, equation-scribbling Harvard academics, West coast locovores  and subway-riding New York vegetarians sometimes seem more interested in their differences of rhetoric, ideologies, and life styles than in their shared goals. I hope they all take notice of this book even if the planet does not.

Originally published on Economonitor.com

No comments:

Post a Comment