Fat Tails and Predicting our Environmental Future

Steven Chu is a Nobel Laureate and our new Energy Secretary. He has been quoted as saying that climate change could make water so scarce in California that agricultural production may grind to a halt there by 2100. Today in John Tierney's NYT Article fumbles the ball. He asks a good question. Why is this really smart guy (Chu) making statements that sound extreme? Tierney spends his whole article quoting Roger Pielke. I would have suggested a more diversified academic portfolio. He should have also talked to Marty Weitzman.

Is Dr. Chu simply trying to scare the American people to stop being complacent in order to mobilize political support to take costly anti-greenhouse gas emissions actions today? While this is possible, consider the following.

Climate change may impose some states of the world where our economic and quality of life losses are very large. Given that we know that we do not know the probabilities of these scary states of the world, we face fat tail ex-ante uncertainty about future scenarios. We do not have a "symmetric loss function" with respect to future states of the world. We lose more from extreme weather events and it is important for somebody to make us aware of the possible future states of the world and how little we know about their probability of taking place.

If we sat down with Chu, I doubt that he would say this his "best" modal guess of our future in California is no more water but he is saying that there is some positive probability that this will occur and a rational populace should take steps today to get ready for these potential tough days ahead.