One of the curious things about climate economics is that a number of climate economists have spent considerable time and effort to try to develop a concept called the Social Cost of Carbon (SCC), but have only very recently asked whether the basic alarmist hypotheses concerning the effects of carbon dioxide (CO2) are correct. If the basic relationships are wrong, time spent guessing at SCC values is nothing more than idle speculation. The idea is that carbon prices (such as for coal or other fossil fuels) may not fully reflect the burdens indirectly placed on society by the use of these fuels.
Economists seem to have bought the idea that “climate scientists” should determine such things and economists should be left with the problem of how to ration emissions of CO2 among many possible users by raising the prices they pay. The ultimate purpose of the SCC is to set a higher price for carbon which would “correctly” ration fossil fuel use or create regulations that do something similar.
What economists have missed is that they have long had the keys to determining whether the climate science promoted by the UN and more recently by the Obama Administration reflects reality. The keys are provided by an obscure subdiscipline called econometrics, which uses sophisticated statistical techniques to analyze complicated and often conflicting data. It is used in statistically-oriented economic studies, including financially crucial marketing studies. Large corporations sometimes use it to make marketing decisions where there are often conflicting data as to what determines consumer behavior.
Why “Climate Scientists” Are Not Always the Best Group to Determine Climate Relationships
Now I know that many climate “scientists” and alarmists will immediately object that only genuine “climate scientists” can and should determine the effects of carbon emissions on climate. This was their major point when I commented on the basis for the draft EPA Endangerment Finding in 2009. They particularly prefer global climate models (GCMs). In fact, many of the alarmist “climate scientists” are GCM builders. The problem is that climate cannot be accurately modeled because climate is a coupled, non-linear chaotic system, as even the Intergovernmental Panel on Climate Change (IPCC) has admitted.
So building accurate GCMs was a hopeless enterprise which was doomed from the start. A much better approach would have been to use econometric techniques using the best available climate data sets. A well executed econometric study makes no assumptions as to what the important effects are but instead first gathers data to determine what functional relationships would best explain the data. The GCM builders instead try to impose their guesses as to the physical relationships on the data rather than letting the data tell them which are the important relationships.
If climate economists had used the techniques offered by their econometric subdiscipline and managed to get the results accepted, much of this could have been avoided. What the data show is that instead of economists spending time building SCC models based on highly uncertain data supplied by climate “scientists,” econometricians could have been much more useful by examining the basic questions on climate interactions rather than speculating as to the correct values to use for the damages avoided by reducing CO2 emissions. Fortunately one economist has recently used his econometric skills to solve the basic problem with the assistance of two climate scientists. Wallace et al., 2016, is the only such effort I know of so far, but there is nothing needed but resources to check their work or, if necessary, redo their work if problems should be uncovered. So far, no one else has done similar work, as best I know. But we need more econometricians doing so and fewer other economists engaging in endless and idle speculation on the SCC.
How the Current GCM Approach Has Failed to Make Progress
The current GCM approach has really made very little or no progress in the last few decades, as illustrated by the IPCC charts showing the uncertainty in the climate sensitivity in successive IPCC reports. This is because it was futile to begin with and never really answered the key questions, especially whether increases in atmospheric CO2 levels increase global temperatures in the real world as opposed to the laboratory.
Building GCMs based on assumed and poorly understood physical relationships was a poor approach and lent itself to capture by organized special interests, which is what has happened. The GCM builders have basically worked back from their desired answers to determine what assumptions must be made to reach their desired conclusions. The overwhelming advantage of the econometric approach is that there should be no answer to work back from. Instead the available data is used to determine what the best physical relationships are, and then to quantify these relationships. And surprise, the results are very, very different!
It is time to abandon the basic approach used by the climate alarmist “scientists” and try a different approach that does not assume the “answer” to begin with. I suspect that such an approach would lead to the conclusion that government should stay out of trying to price carbon and instead leave it to the market.