I’ve been traveling so much I just realized I haven’t blogged about this yet. I have two IER posts summarizing some of the key points from a forthcoming paper (in the September issue of the Journal of Economic Literature) that is surprisingly scathing in its treatment of the “social cost of carbon” estimates coming out of Integrated Assessment Models (IAMs).
Now the author–Robert Pindyck of MIT–is a supporter of a carbon tax. I made sure to say that upfront in both of my articles. (I can’t speak for other groups; don’t know if they exercised such care.) So you can read this objection from Pindyck to be sure you have the full story.
Pindyck’s paper is titled, “Climate Change Policy: What Do the Models Tell Us?” Here is his shocking answer, contained in the abstract:
Very little. A plethora of integrated assessment models (IAMs) have been constructed and used to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies. These models have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g. the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models’ descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading. [Bold added.]
This is my favorite part of Pindyck’s paper…:
The question is how to determine the values of the parameters [used in the computer models’ damage functions]. Theory can’t help us, nor is data available that could be used to estimate or even roughly calibrate the parameters.
As a result, the choice of values for these parameters is essentially guesswork. The usual approach is to select values such that L(T) for T in the range of 2°C to 4°C is consistent with common wisdom regarding the damages that are likely to occur for small to moderate increases in temperature…Sometimes these numbers are justiﬁed by referring to the IPCC or related summary studies….But where did the IPCC get those numbers? From its own survey of several [Integrated Assessment Models]. Yes, it’s a bit circular. [Pindyck pp. 12-13, bold added.]
Pindyck’s point is so important—and so hilarious—that I want to make sure the reader understands it. There is no underlying economic theory and we have no empirical data by which to estimate the impacts on humans coming from even moderate (let alone large) increases in global temperatures. Thus when economists design computer simulations of the global climate and economy, going centuries into the future, they literally just make up relationships between hypothetical temperature increases and the corresponding percentage decrease in the global GDP. Then, in an excellent illustration of “groupthink,” the creators of these made-up damage functions justify them by pointing to third-party summaries done of their own (made-up) damage functions.