Tuesday, November 07, 2006

Assessing the Assessment

Last week I highlighted the publication of a UK government report on the costs of global warming and the potential benefits of mitigation efforts. I promised to revisit the Stern Report once I'd had a chance to review it in more detail, and I'm still in the process of doing that. 600 page economic studies don't make for light reading, so I'm still wading through the executive summaries and methodology. In the meantime, both the Wall Street Journal and The Economist have taken the Stern Report to task for various shortcomings, the former via an op-ed by Bjorn Lomborg, of "Skeptical Environmentalist" fame, and the latter in a couple of articles (subscription required) in their November 2nd issue, which concludes that the report is largely aimed at bringing America back into the global climate change process. My own concerns relate to my professional pursuits in scenario planning, but although they undermine my confidence in some of the specific findings of the Stern Report, they do not invalidate the entire document.

Scenario planning, which traces its origins to Herman Khan's work on "thinking the unthinkable", grew out of a general dissatisfaction with deterministic forecasting and its inherent limitations, which haven't been erased by the development of increasingly sophisticated models and faster computers on which to run them. The Stern Report's picture of economic models layered on top of climate models, all of them dealing with highly uncertain and, indeed, chaotic relationships, extrapolated 20, 50, 100 and even 200 years into the future, and then discounted back into the present, creates endless opportunities for the compounding of errors. This reminds me of numerous detailed-but-flawed efforts to predict the future price of oil.

I give Dr. Stern and his colleagues all benefit of the doubt for their expertise, seriousness, and skillful application of their chosen methodologies, but ultimately there's a world of difference between accuracy and precision, as the report acknowledges. For all the report's talk about accounting for risk, it's not yet obvious to me that this has been done in line with state-of-the art approaches that would explicitly incorporate scenario planning and/or Real Options. The "scenarios" referred to in the report's discussion on methodology look more like forecast sensitivities or "cases", which are not the same thing at all in either construction or use.

Pending a more thorough review of how the report's figures were derived, I suspect they exaggerate the likely benefits of aggressive greenhouse gas mitigation--while possibly also underestimating the worst-case impacts, the prevention of which would have nearly incalculable value for society. That's not because of a bias on my part, but due to the way extreme outcomes get blended into probabilistically-derived expected values. As a result, I regard the report as strongest not in the numerical findings that were its raison d'etre, but in its practical, common-sense recommendations about how to go about reducing the risks of adverse climate outcomes. Nor does it see investment in strategies to adapt to a warming planet as antithetical to emissions reduction, but rather views the former being necessitated by the time lags inherent in the latter.

The report also makes it clear that we can't solve this problem via the back door of energy security, because existing hydrocarbon stocks are more than ample to create atmospheric GHG concentrations consistent with the highest, most worrying temperature projections. In other words, shifting away from conventional oil and exploiting oil sands, shale and coal for transportation fuels without addressing the greenhouse gas consequences of these high-carbon alternatives will put us deeply in the soup, with no easy way out later.

Interestingly, the Stern Reports ends up being a de-facto argument for further globalization, because its prescriptions for the kind of truly international effort required to address climate change rely heavily on increasing the interconnection and transparency of global markets for climate-related financial flows, both of investments and of derivative instruments such as tradeable emissions credits, along with channels for the transfer of technology.

Unexpectedly, the greatest value of the Stern Report is probably in its effort to shift the climate debate out of the bailiwick of the physical sciences and insert it into the political economy. That doesn't mean that the science won't or shouldn't advance, or that there won't continue to be unresolved concerns about the science, such as those regarding the "paleoclimate" described in this lengthy article in today's New York Times. But while the scientists must advise on them, they aren't going to be the ones implementing the solutions. That falls into the equally complex realm of governments that must juggle the health of economies, the well-being of populations--human and otherwise--and at least in the case of the democracies do so in a manner consistent with the wishes of their electorates. Whatever the ultimate consensus might be on the "social cost of carbon", in the sense of carbon emissions to the atmosphere, it is no longer and never again will be zero. Our political systems must catch up with that fact.

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