The NY Times has published a fun "Room for Debate" focused on climate change fiction and the role of such work in shaping public opinion.   To say something new here, let's think about this topic through the lens of the modern field experiment literature.  I will embrace the essential heterogeneity model.

Suppose that climate change authors could randomly assign their books to adults and that adults were required to read them.  Note that this is a typical field experiment research design.  The random assignment of books removes concern that readers "self select" what books to read such that a Conservative Republican only watches Fox News.  The random assignment of the book means that this selection concern vanishes.

Suppose that Mr J and Mr Q and Ms M   are randomly assigned book #3.  Do they change their worldview because of their exposure to this treatment (the book)?

Suppose that Mr J. views all of climate change as a big hoax and simply giggles as he reads a liberal Doom and Gloom climate change fiction book while Mr Q's imagination is expanded as he thinks about scenarios that never cross his mind before.   Suppose that Ms M is a lover of all things Al Gore and eagerly reads the book.

Note the essential heterogeneity here.  J Q and M are three different types of people. They know their worldviews.   To an economist, only Q matters. He is the only one of the 3 who is "at the margin".  Mr. J dismisses climate change as a hoax.  Ms. M already is a true "believer".  

To a statistician, the key issue is what % of the population resembles Mr. Q?   For this "marginal" group, how responsive are they to new information?   If this share is small and if this group tends not to update its priors, then such climate change fiction can't change the world because opinion is already set.

To really make a difference with their message, the climate change literature experts must target the Q sub-group and figure out how to offer them a price discount for reading these books.

The same issue arises for the anti-carbon tax coalition.  Mr Q. is the swing voter. They need to target such guys and get their message out to him.

Returning to the field experiment design, the book seller does not know who in the population is J, Q or M and so the seller gives out 33% to type J , 33% to type Q and 33% to type M.

The statistician observes the population change in environmentalism and this equals:

.33*change in environmentalism of group Q given that each Q read the book.

Note that for the remaining 66% of the population who are types J and M that the treatment (reading the book) has no effect on them because they have already made up their mind.

Without targeting the treatment to the subgroup who is most susceptible to its influence, the book seller has achieved a low impact because most people are not affected by the treatment.

UCLA does not have enough Ph.D. students interested in a graduate course on environmental economics.   That's a shame but I don't take it too personally (maybe I should?).   Fortunately, the University of California's Center for Energy and Environmental Economics offers a week long summer course. Ph.D. students from all of the ten campuses are welcome to attend and I have taught in this program twice before.  This summer, I will be lecturing about China and its urban pollution challenges.  A preliminary draft of my lecture notes are posted here.    In teaching in this program, I have greatly enjoyed meeting young scholars who share similar broad interests with me.   While I greatly enjoy teaching most of my UCLA undergraduates, I sometimes envision what it would be like to be part of a University with a real commitment to graduate environmental and urban studies.  The Luskin School at UCLA does not have a Ph.D program and for folks who know me you know that I"m not an "urban planning" kind of guy.  So far, I have not been able to talk my wife into moving to Asia but I know that I could teach a popular graduate class at Tsinghua University or at NUS.

This article highlights that President Obama and the Democrats are changing tactics in their worthwhile attempt to build a political coalition to reduce U.S GHG emissions.  The Green Team now wants to tell a narrative that the U.S will save money over the long run by reducing GHG emissions now.  The basic logic is that by spending money now that future disasters that will be costly will be less likely to occur and the savings from the avoided future disasters more than offsets the upfront costs of investment in low carbon technologies today.  Note that this is a different narrative than yelling;  "we are all going to die, we are all going to die". Instead, the issue is posed as one of intertemporal budget tradeoffs.

The key problem with this argument is the following.   Today, the USA produces roughly 20% of the world's GHG emissions.  With the growth of China and India, this percentage is likely to decline by 10% in a few decades.    Suppose that President Obama and President Hilary Clinton are successful at reducing U.S total emissions by 50% over the next two decades.   When I multiply .5 by .1 I get  5%.  This means that all of this effort will only reduce world GHG emissions by 5% if the rest of the world free rides and ignores the U.S effort.

President Obama must build a narrative to convince people that if the U.S leads that the rest of the world (including Russia and China) will follow.  I would like ask the very smart Jason Furman  --- what is the chain of dominoes such that if the U.S takes the lead that the rest of the world follows?  If we don't burn our coal, won't we just sell it to other nations who will burn it?  

If we anticipate that the rest of the world will Free Ride and won't follow our lead, is the U.S unilateral action today "good for us"?  Let's see President Obama's smart economists do some game theory!  Aren't there multiple equilibria in this game?

Secretary Rubin recently wrote an Opinion Piece in the Washington Post.  Having read his autobiography (and having met him once at Brookings), I know that he is the ultimate prudent man thinking hard about future scenarios, their likelihood of taking place and the impacts of such scenarios.  In simple English, he walks the reader through some nasty climate change scenarios and stresses that Americans will suffer serious economic damage from future Hurricane Katrinas.  He thus argues that the prudent man now (regardless of political ideology) should  purchase some implicit insurance by supporting a carbon tax and thus reducing our GHG emissions.

Here is an example of a quote from his piece;

By 2050, for example, between $48 billion and $68 billion worth of current property in Louisiana and Florida is likely to be at risk of flooding because it will be below sea level. And that’s just a baseline estimate; there are other scenarios that could be catastrophic. 

Here is another quote:

And dramatically rising temperatures in much of the country will make it far too hot for people to work outside during parts of the day for several months each year — reducing employment and economic output, and causing as many as 65,200 additional heat-related deaths every year. That’s almost twice as many deaths as those caused by motor vehicle accidents in 2012.



Let's take a second look at each of these quotes;

First, let's start with damage to coastal property.  If we anticipate that this property will be flooded in the future, then its asset value will fall today.  The owner of the asset will suffer an income loss unless he figures out a way to protect it from sea level rise. If the property will literally be under water then the owner of that asset will lose $ but anticipating this, he will stop investing in maintenance of the asset so that when the flooding occurs the actual value of all of the flooded structures will be much less than the number that Mr. Rubin announced.  Doom and Gloomers always ignore endogenous depreciation in their asset impact calculations.   Unlike the Titanic, coastal property owners will strip out all of the valuables in their at risk assets and won't repaint their homes for years as "doomsday" approaches.  Yes, the land will be lost but the structures themselves will be heavily depreciated at that point.

 Second, Mr. Rubin ignores the element of the zero sum game. If property in coastal Florida vanishes, there is other property that is a close substitute for the submerged land that will go up in value as its competition vanishes.   (Recall that in the movie Superman that Lex Luthor recognized that purchasing Colorado land was a great investment because it would be beachfront property after he nuked California).  This windfall gain should be factored in by an asset expert such as Mr. Rubin!   A good accounting exercise examines the winners and losers from coastal climate shocks. His analysis implicitly assumes that there are no "winners" from the shock but think of this simple example.  Given that Coke and Pepsi are close substitutes, a labor strike at a Coke plant leads to more Pepsi sales.  Substitutes exist and they gain when a rival suffers.  Rubin is conveniently not looking at the two sides of the asset market and ignoring cross-elasticity effects. Bad economics for a Harvard man!!  In case, he is looking to refresh his micro skills, he could look at my 2014 paper with Devin Bunten where we discuss how emerging coastal flood risk should affect real estate prices and household locational decisions.

His second paragraph implicitly assumes that nobody in the year 2050 has access to air conditioning.  Powerful air conditioning is the reason that Singapore is a prosperous urban nation today.    Robert Rubin has been a leading benefactor of Michael Greenstone's Hamilton Project at Brookings.   Recently, Greenstone and co-authors have written about air conditioning's impacts on quality of life in India.  Here is a draft of the paper .  Here is a direct quote from its abstract:

"We find that a one standard deviation increase in high temperature days in a year decreases agricultural
yields and real wages by 12.6 % and 9.8 %, respectively, and increases annual mortality among
rural populations by 7.3 %. By contrast, in urban areas, there is virtually no evidence of an
effect on incomes and a substantially smaller increase in the mortality rate (of about 2.8%

for a one standard deviation increase in high temperature days)."

From a poor developing nation, we see that urbanization is a major adaptation strategy.  So, it is not a big reach to say that in the year 2050 that urbanized USA will have many coping strategies for the challenges that Mr. Rubin outlines.   The key issue with respect to extra heat is what will be the cost of buying and operating a high quality air conditioning unit in the year 2050?  Free trade with China and other exporters would be one way to guarantee that these prices are low so that the urban poor can afford them.

Dear Reader, please note that my skepticism about Mr. Rubin's arguments are based on logic and common sense. I share his big goal of the U.S adopting a carbon tax.  I support one but we need to be more honest about what real risks we face and how large these risks will be.  Mr. Rubin and Paul Krugman and Joe Romm have not figured out how to pitch these ideas to suburbanites who are well aware that they have locked into a high carbon lifestyle (see my 2014 paper with Holian).

Returning to Mr. Rubin's second quote let's focus on his eye-catching claim that of 65,200 deaths per year in future heat waves.

This crazy estimate of 65,200 extra heat related deaths a year would be horrible if true but I would ask the person who created that number the following;    who are these people at risk?  Why weren't they aware of the outdoor temperature?  Why don't we cloth them in "spacesuits" if they must work outside on such a day?  Why haven't such heat resistant clothing been invented and mass produced?  Capitalism evolves to solve our quality of life problems (look that up on your cell phone, my grandfather didn't have one in 1950).  In places such as Phoenix where it is 110F each day for weeks during summer, how many people die of heat related deaths?  How has Phoenix adapted in the year 2014?   By the year 2050, won't our strategy set be even larger?

I would ask Mr. Rubin why he is so pessimistic about the potential for human ingenuity to address many of the challenges listed in Risky Business?  Human ingenuity made Goldman Sachs into a powerhouse.  What's the difference between financial management and climate change risk management?   He would correctly say that it better to manage risk ex-ante versus letting it build up and facing its consequences ex-post. I agree with him but I think his group needs to be more honest about the potential for adaptation and who bears the losses from climate change.

As I walk the streets of Berkeley, CA,  I hear many chickens clucking away.  Today, the NY Times presents a video profile of my Hamilton College classmate Robert McMinn.   I see that after 26 years he hasn't changed!  He has his hair and his chickens.  Time has not been so kind to me.   I have neither.   

In this blog post, I'd like to highlight an exciting research agenda that investigates how human capital helps to reduce pollution externalities and then I will turn the discussion around and discuss how environmental externalities affect human capital accumulation.

Human capital is the investment in skills and problem solving.  A flexible person can solve a wide range of problems and such capacity helps a person thrive in the modern capitalist economy where employment sectors are constantly being hit by new shocks and face shifting competition and market conditions.

A few years ago, Nick Bloom and co-authors wrote a paper using data from UK manufacturing plants that those plants whose managers were of higher quality were more energy efficient.   I interpreted their findings to mean that more skilled managers are less likely to leave $20 bills on the ground and to achieve the efficient allocation of resources. These guys are able to read quickly and keep up on trends and to talk to a large number of experts to keep up on cutting edge energy savings technology. They are likely to be patient and willing to make long run investments that require upfront costs but yield long term energy efficiency gains.   Such skilled managers are less likely to suffer from what Frank Wolak terms the "cost of action" problem.

This discussion is relevant for an article in the NY Times today about the pollution created by the U.S  military in Afghanistan.   Our troops have been burning garbage there in open fire pits that have exposed our troops to high  levels of toxic emissions.

Camp Leather Neck spent $11.5 million on incinerators, but, during several inspections in 2013, the vast majority of its waste continued to be thrown into the two-story-high flames of the burn pit on the edge of the base because there was no contractor to run the incinerators. “As a result,” a previous report said, “possible long-term health risks to the camp’s personnel continue.”

The contractors had the human capital and skills to run the incineration equipment that would have reduced toxic exposure by some amount but since these guys were not around the troops were exposed to extra pollution. This is a simple example of how human capital protects us from pollution externalities. Another example is well trained nuclear engineers. The risk of another Chernobyl from nuclear power shrinks sharply if we have well trained nuclear engineers.

Now let's turn the argument around; how does pollution affect human capital?   Start with Jim Heckman's dynamic complementarity model of skill development.  A child who is sickly  learns little as a young student and may never catch up.   Janet Currie and co-authors have extensively examined how child health is affected by pollution.  A healthy child is more likely to successfully launch to grow up and achieve her full potential.  Similar work is now being done in developing countries. Authors such as Paulina Oliva are conducting important research at the intersection of labor and environmental economics.

Ice melts when temperature exceeds 32 F.  Many Canadian kids have practiced hockey on frozen outdoor ponds and lakes. If climate change warms winters, will the quality of NHL hockey suffer?  This article says "yes".    An economist might posit that indoor hockey rinks are a close substitute for outdoor frozen lakes. While it will be more costly in terms of time in travelling to an indoor rink, players will gain from learning how to play on a "real regulation size" rink rather than on some piece of outdoor ice.   No NHL arenas are outdoors. In the big leagues everyone plays inside.

This hockey example raises a key issue for climate adaptation optimists.  In the near future, how much time will we spend outside versus inside?  How close substitutes are the two activities?   In cities such as Houston where it is hot and humid, how much time do people spend inside versus outside in summer? As we reallocate our time to cope with new climate conditions, do we lose pleasure or do we learn that walking at night and in the early morning outside is fine while during the heat of the day one spends it enjoying indoor air conditioning?

Similar with hockey, who are these Canadian rural hockey players who lose their chance to play hockey if the ice melts early?  What adaptation strategies do they have? Will their parents move closer to cities where there are indoor rinks?  The pessimists are afraid to admit that we have a large number of coping mechanisms for facing the new challenges we have unleashed.

For some pessimism about quality of life in the year 2393 read this blog entry by Joe Romm.  He indicts free markets ideology with encouraging an individualism that chips away at collective action solutions. In the absence of a collective solution such as a global carbon tax, he argues that we we will face nasty days of pain caused by cruel climate change.  I agree and I disagree with Dr. Romm.

1. I agree that if we could overcome the global free rider problem, we could commit to a global rising carbon tax that would defuse the threat of climate change.   I continue to hope that small ball experiments such as California's AB32 Cap & Trade will teach the world that carbon trading can be introduced without large economic costs imposed.  Such experimentation and learning offers a possible optimistic path forward.

2. I disagree that capitalism is the sole source of the free rider problem. In poorer nations, their poverty is the cause of their unwillingness to tackle the issue and capitalism has a causal effect on reducing poverty.  In richer nations, Romm ignores issues  of political economy that some key voting blocks make their $ selling fossil fuels (think of Russia and Texas) while hundreds of millions of people live in suburban areas and have locked in to a lifestyle that is high carbon at least in the short run and thus would face higher costs in the short run from adopting a serious carbon tax.

3.  I agree that it is a deep shame that the world has not built up better global institutions for hammering out mutually beneficial treaties that embody incentive compatible terms so that every nation agrees to sign as it tradeoffs the new incentives it will face and the transfers it will receive.

Romm and the historians he favorably quotes  have a very active imagination in predicting how the world will look like in over 350 years.  Let me offer a counter-narrative that involves the power of free markets;

1.  Water pricing to reflect its rising scarcity
2.  Insurance pricing for real estate structures that reflects changing probabilities of natural disasters and other shocks
3.  improvements in air conditioning technology
4. improvements in food refrigeration technology
5.  increased international migration
6. economic development
7.  urbanization
8.  innovation in agricultural production to find robust ways to grow food across space and time in the face of volatile climate conditions
9.  rising labor market opportunities for women in cities (and thus shrinking families)

The 9 of these factors together will offset much of the doom and gloom that Joe Romm and friends sketch in their narrative.

The key feature of capitalism that Joe Romm and friends are unwilling to acknowledge is freedom of choice. The ability of individuals to express themselves through markets offers a very wide set of adaptation strategies that will only grow larger over time.  Yes, there is a role for government to provide public goods and to charge taxes to provide those goods. Yes, government should provide a basic safety net for the poor but at the end of the day --- each household makes it own choices about its conception of the "good life".  Suppliers evolve over time to deliver those products that offer them a profit. If households need more market goods to help them to adapt to climate change, the market will supply it.  Businesses in this Big Data age have strong incentives to rationally plan for emerging future demands. I would argue that Joe Romm's doom and gloom helps us to adapt to climate change by waking up entrepreneurs to dream about what new products will be in demand in the coming days of pain.  Such products will go a long way to offsetting the punch. How far will they go? That's an empirical question that merits careful study.

Don't forget what I had to say several years ago about Jared Diamond's past doom and gloom.

"“Expectations of future scarcity create incentives to innovate now. Implicit in Diamond's work is a type of mass-behavioral-economics myopia where he and a few other "wise men" are the only ones aware of the coming day of scarcity. I am more democratic and optimistic that if there is a future arbitrage opportunity that a few ambitious young capitalists will seek out the profit opportunities and be ready with the next "Toyota Prius" that will help to mitigate future scarcity challenges. (Environmental and Urban Economics)”

NBA basketball players know their age, their contract's terms and the likely length of their playing career, and they can form a good guess of their post-career earnings.  Why isn't this information sufficient for planning one's lifetime consumption so that one saves while earning the high salary and lives off the savings when the player is retired and middle aged? Wouldn't Milton Friedman view such players' upfront earnings profiles as offering a good test of his permanent income/life cycle theory of consumption?

There are investment markets that allow for income smoothing over time such that if you earn a lot of $ while young and will earn nothing while old that you can have  a very good lifetime consumption flow.   When we see cases such as the consumption dynamics of Allen Iverson,  what do we conclude?  Does the NBA self select a set of people with hyperbolic preferences?    What share of NBA players have consumption paths that resemble Iverson?   We know we can augment the consumption model to include altruism for one's extended family (his 50 person entourage) or to include Keeping up with the Jones (showing off "bling") --- must these factors be included to explain NBA player spending patterns?   What % act as if they are following Friedman's standard consumption rules?  

On July 5th and 6th, Ed Glaeser and I participated in a large Shanghai conference at a very elegant Howard Johnson Hotel.   Throughout the conference, a Lamborghini sports car was parked in front of the hotel. It did not belong to me.  Here my slides for my Shanghai 2014 talk.  

Here is a photo of Ed Glaeser and myself and many of our new friends.