11 Jul 2012

## Revisiting the Economics of Climate Change: Nordhaus, Tol, and Surprising Findings

I have a long post up at MasterResource, revisiting the issues that came up in my earlier response to Nordhaus. If you are interested in climate science, particularly the economics of climate change, I would immodestly recommend that you wait till you have a good 15 minutes and read this thing through. It’s by no means a “light” piece but I think there are some important issues that I cover.

For the economists reading, let me reproduce a large portion of one of my arguments:

In a standard economic regression analysis, we typically approach things the way one is taught in high school when learning basic statistics. Namely, you set up a null hypothesis that is the opposite of the causal relationship you (the researcher) actually think exists. Then, if there is an apparent relationship in the data (such that you get a positive value on the coefficient for a certain term in a least-squares regression, say) you can see if the result holds up at a 90 percent, 95 percent, or 99 percent confidence interval.
In this normal context, the higher the confidence interval, it means the more confident you are that the apparent relationship between two measured variables isn’t spurious….
Yet in charts of climate model projections, the “confidence interval” works the other way around. Here, the higher the number, the less confident we can be that an apparent match between the model and nature is due to the underlying accuracy of the model. To put it in other words, here the null hypothesis is that “this suite of climate models is accurately simulating global temperature.” Thus if we make it harder to reject the null (by ramping up the confidence level), then it gives more wiggle room for the models.
Specifically, the “95% range” in the second graph above comes from looking at all of the observed “runs” of the suite of climate models, and then plotting the gray boundary that captures the realizations of 95% of the runs centered around the average. Ironically then, the less agreement there is between the individual climate models, then the wider the gray zone would be, and the harder it would be for Nature to “falsify” the suite of climate models.
…Suppose for the sake of argument that one particular model accounted for 3% of the total simulated runs, and it predicted global temperature anomalies of 20 degrees Celsius from the year 2010 forward, while another particular model accounted for a different 3% of the total simulated runs, and it predicted global temperatures of minus 20 degrees C from 2010 forward.
In this (absurd) situation, the RealClimate post would show a massive gray zone covering the “95% confidence interval,” and (barring an asteroid collision or a massive change in the sun), it would be inconceivable that temperature observations would fall outside of this range. Yet that would hardly shower confidence on the suite of models.

#### 10 Responses to “Revisiting the Economics of Climate Change: Nordhaus, Tol, and Surprising Findings”

1. Major_Freedom says:

Can you remind me why we should be listening to what a kooky, and obviously misleading to his readers Keynesian “economist” has to say about the world’s climate again? Isn’t this kind of like asking Krugman about an honest correction explanation of ABCT?

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Thanks for clarifying what climatologists mean by “95% confidence interval.” I had no idea they used it in an opposite way like that. Up until now I just assumed they used it the same way natural scientists and economists used it.

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““Unrestricted GHG emissions are currently hurting some people, but benefiting others. In fact, considering humanity as a whole, the gains to the winners from a warmer planet outweigh the losses to the losers.”

I have to quibble on this point. I know you’re just summarizing and paraphrasing, and I know you said “and it’s also not nearly as obvious how to properly evaluate the “social utility” of our grandchildren against our own.”, but the above statement is assuming interpersonal comparisons of utility. It is wrong to say something like “My happiness outweighs your unhappiness, therefore “we” are net happier.”

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http://www.bloomberg.com/news/2012-07-06/who-needs-posner-when-you-have-mises-and-hayek-.html

• Bob Roddis says:

I don’t want to get off-topic either, but Posner is now a Keynesian and a neo-con.

http://www.tnr.com/article/how-i-became-keynesian

Ending the fiat funny money regime would put a crimp in our unconstrained support for the Little Socialist Sparta in the Middle East. And, of course, Barro has exposed himself as a complete and unread fool. Surprise!

• Major_Freedom says:

It’s because the right hand side of this chart didn’t go off the chart, that we’re still in the doldrums.

Come on Roddis, you gotta keep the faith alive!

I had read Barro’s article previously and it seemed pretty sensible. In fact, it’s not even clear that a good Austrian would want to disagree with much of it (after all, they do think empirical analysis isn’t necessary and they do think they don’t need Posner).

But I was curious to see what sort of devastating takedowns awaited in the comments. I read on, and found this:

Austrian economics uses logic to reach conclusions. It doesn’t take “empirical studies” to figure out that drinking battery acid is bad for you. It shouldn’t take them to figure out that setting minimum wage above the market equilibrium creates a surplus of labor, aka unemployment, for example.

Apparently whether battery acid is bad for you is not an empirical question, but is one that can be settled via logical deduction. Who knew?!

• Major_Freedom says:

I think your sense of sensibleness is a little off.

In fact, it’s not even clear that a good Austrian would want to disagree with much of it (after all, they do think empirical analysis isn’t necessary and they do think they don’t need Posner).

Read the comments. Austrians don’t reject empirical analysis per se, they just reject the method of positivism as a valid method of discerning economic laws.

But I was curious to see what sort of devastating takedowns awaited in the comments. I read on, and found this:

Austrian economics uses logic to reach conclusions. It doesn’t take “empirical studies” to figure out that drinking battery acid is bad for you. It shouldn’t take them to figure out that setting minimum wage above the market equilibrium creates a surplus of labor, aka unemployment, for example.

Apparently whether battery acid is bad for you is not an empirical question, but is one that can be settled via logical deduction. Who knew?!

Yeah, I cringed at that statement too. Not all of the comments were good.

• JFF says:

Isn’t this Posner article basically the same drivel that David Frum was hocking recently that Tom Woods wrote on?

2. Vicki B. Marshall says:

A good climate is so important to us, and the study of climate is of the same importance.

3. jjoxman says:

Major,

Thanks for a good morning chuckle. That Bloomberg writer was beaten severely (but nicely) by the commentators. Good show!

4. Nikhil says:

Thanks Robert, this is great.