Flash forward to the year 2015 and two friends of mine have released a new book "Climate Shock". In Wagner and Weitzman's new book, they present a well written analysis of the tradeoffs we collectively face as we unintentionally unleash climate change. They argue that a risk averse person or nation should buy insurance to protect itself --- especially when the losses from climate change are ambiguous and fat tail risk could be huge. The book is well argued and I highly recommend it. The economic approach to discussing climate change offers a new prospective relative to the issues that climate scientists focus on.
What is missing in their book is a reasoned discussion of the economics of climate change adaptation. They devote a chapter to geo-engineering but to my surprise, they are not willing to engage on the topic of adaptation. In Weitzman's famous work fat tail risk and climate change, for which he already has roughly 3000 Google Scholar citations, he always writes down a one sector model of the world economy. Such a macro model implicitly assumes that there is no potential for adaptation because it rules out spatial substitution. In his setup, there is no "higher ground" to move to. The whole big world is equally at risk. To zero out so many margins of adjustment is a modeling assumption but it also affects your thinking about the real issue.
The world is a big place featuring hugely different geographic conditions and many different opportunities for where and how we build our cities. Cities insulate us from climate risk. This is the main thrust of my Climatopolis work. I'm disappointed that these scholars have not been willing to engage me in a debate on this topic. In my "model" of adaptation, even under severe climate change --- we can identify pieces of land that are on "higher ground" and are relatively safe in the face of new risks. We move there and build our cities there. If specific places are under siege, then our engineers build with materials that can "take a punch" and that have option value. Consider Lego Pieces. Kids build them and then dissemble them. I can imagine that future cities will have an infrastructure more like Lego such that if a specific geographic area is at risk, we remove the capital and the people and move to higher ground. Consider Wall Street, if it is below sea level -- then Wall Street can reconstitute in the higher ground of Hedge Fund Connecticut. Climate Shock chooses not to discuss these issues. Of course, poor nations will face greater challenges in adapting but South Korea and now China show how nations can grow quickly. Climate Change creates an imperative to accelerate economic growth in the developing world. With higher incomes, individuals and their nations are better able to adapt (purchasing air conditioners , cell phones and a variety of other products that help them to adapt). Wagner and Weitzman could do a better job following Ehrlich and Becker and considering Ex-Post adjustment to what we have unleashed. For some technical writing on this issue see my paper. For an easy version read this.
I agree with Wagner and Weitzman. We should buy the climate insurance now and sharply decarbonize but the median voter is a suburbanite and is currently living a high carbon lifestyle.
Environmental economists have been wary of considering the micro economics of climate change adaptation. Why is that the case? Which parts of Julian Simon's core arguments do they reject? An issue that I would like to see debated among the leading environmental economists is the rational expectations hypothesis versus behavioral theories of expectations formation. Do we model individual households as forward looking and risk averse? Or do we model them as "idiots" who just ignore the climate science and place themselves at risk and do not take Becker style pre-cautions to be ready for the shocks that we have unleashed?
In 2015, are Becker and Lucas correct about how they model households or do Akerloff and Thaler have a better model of human behavior in the face of emerging, ambiguous risks?
UPDATE: The University of Chicago giant (Becker and Lucas) viewed adults as forward looking and self interested. The Rational Expectations hypothesis was a big part of my late 1980s Ph.D. education. Today, many scholars want to drop this hypothesis and introduce a myopia assumption on forecasting that one might learn in a UC Berkeley behavioral economics class. Note the contrasting hypotheses here on how people form expectations. Perhaps in a diverse world, different shares of people form Rational Expectations while another share of these people form myopic expectations of the future. In this case, we need smart structural econometricians to use the Heckman and Singer style models of two type heterogeneity to recover what share of economic agents have each of these respective preferences. If we could have profiled which demographic attributes (such as education?) are correlated with being a behavioral forecaster then a new generation of jobs will be available for climate consultants to work with these Homer Simpsons to help them plan for their risky future. The key here is that the Rational Expectations subset "know that they don't know" what climate change will do and this increases their demand in options to allow them to re-optimize in the future and this insulates them from risk. The Berkeley agents "do not know that they do not know" and this places them at risk. But, if there are Rational Expectations "Social workers" who " know that the Berkeley agents don't know" then these Rational Expectations "Social Workers" can advise the Homers. Will the Homers listen? If they are Bayesian updaters, they soon will as they slowly realize that they under-estimated the threat of climate change.
As this quick verbal sketch highlights, there are plenty of frontier research topics here related to heterogeneous risk perception and the role that cities play in protecting all of their residents. If the coasts are beautiful but risky, what will be the pricing of this real estate? Who will take the risk of living there? Should we allow them to do so or will flood plain zoning laws tighten to not allow Homers to take "bad risks"?
Wagner and Weitzman choose not to spend much time discussing how the "climate shock" affects different people and different urban places and how the spatial general equilibrium is affected. They should write a sequel investigating these topics. It would resemble my Climatopolis book.