Accounting for Uncertainty

by Eric Ellman

In 1992, William Nordhaus published the first integrated assessment model (IAM) that reconciled investments to stem global warming with their economic consequences.  Using outputs from climate scientists’ models as inputs for economists’ models, it provided a tool for policy-makers to evaluate how present-day expenditures compared with future losses averted.   Given the enormous complexity of two systems – the Earth’s climate and the global economy – it was an exercise in dealing with uncertainties. How much would the Earth’s mean global temperature rise in response to a doubling of atmospheric CO2?  What would be the effects on global crop production, fisheries, energy demand?  How would society respond to those and inumerable other challenges?  And how well could economists use that information to predict consequences for the world’s economy to inform decisions whether or not to take action?

Two decades later the processes of climate change are much better understood.  Among scientists consensus on global warming and its anthropogenic nature is overwhelming.   For scientists, uncertainty revolves around just how warm the world will become in the next century and how temperature and hydrological changes will be regionally expressed.  For economists, quantifying the economic impacts of those changes are as challenging as ever.  Expressed in the language of statistical probabilities, it is critically important that scientists and economists understand how their respective disciplines deal with uncertainty, better integrate their models, and provide policy makers with the best tools for taking action in an uncertain future.

Ready! Fire! Aim?

Nordhaus’s newest book The Climate Casino: Risk, Uncertainty and Economics for a Warming World, offers something for everyone, as well as a view of the future.  Climate skeptics will no doubt focus on the uncertainty that the world’s best economists and scientists accept as part of that analysis.  For those in the skeptic business, incomplete knowledge justifies inaction, and Nordhaus’s prescription of a carbon tax is a case of firing before the target is locked in.  Most, however, will take his work as a warning that mankind is recklessly gambling in a way that threatens to destroy its home.

“Opponents of any kind of climate action have frequently seized upon his work,” warns Paul Krugman, writing in a review of his book for the New York Times. “Nordhaus emphasizes, although perhaps not as strongly as some would like, when it comes to climate change uncertainty strengthens, not weakens, the case for action now.” That’s because the uncertainty under discussion is not about if; it’s about how much and how soon. 

Professor Nordhaus and a panel of fellow luminaries from the world of economics meet with some of the world’s top climate scientists at a day-long workshop sponsored by the Yale Climate and Energy Institute this Thursday to discuss how their respective disciplines deal with uncertainty, and incorporate it into their respective models.  Coming as the IPCC prepares to release the next chapter of its 5th Assessment Report, and on the heels of one of the biggest storm systems to ever hit North America, the meeting comes at a time when policy makers will hopefully be attuned to the realization that uncertainty is precisely the reason we take action, purchase insurance and invest to protect what’s most precious to us.  In the words of A.E. Houseman:

…while the sun and moon endure
Luck’s a chance, but trouble’s sure,
I’d face it as a wise man would,
And train for ill and not for good.