Read Greg Ip's WSJ piece talking about his new book.  He appears to believe in a "lulling hypothesis" that ignorant urbanites will continue to live in increasingly risky cities below rising sea level (think Miami and NYC) because they have been lulled by big government mega projects into feeling safe.  This argument suggests that public investment in protection crowds out private self protection. Kousky et. al. discuss this point in their 2005 paper and Leah Boustan and Paul Rhode and I discuss this point in this paper.   I like his emphasis on spatial moral hazard but I believe that he is over-stating his point.

Ip is working on ideas that I sketched out five years ago (I would like a citation from him!). For the shortest (and ungated version of my thinking) read this 5 year old document I wrote for Vox Eu.    Superstar cities compete against each other.  As has been shown in the IO literature, rival products have strong incentives to point out the flaws of their rivals. If Manhattan is at risk while Chicago is at less risk, Chicago's land owners and Mayor has strong incentives to send out this news.  Ip, implicitly has a model of PT Barnum's "suckers" in mind. In this age of Twitter and the Internet, I reject this logic. We know that we don't know what risks climate change poses to coastal areas and we will build in more resilience and flexibility (i.e options) so that we don't suffer as much from the next Hurricane Sandy.

The future mayors of NYC have a strong incentive to invest in the city's resilience. There will be a brain drain if NYC does suffer significantly from sea level rise. The only ugly scenario that I foresee would occur if there is a large gap between perception and reality of risk. Suppose that future Don Trumps convince the naive public that Southern Manhattan is safe when in reality it isn't. In this case, people will move to the area and "let their guard down" and not be ready when disaster strikes.

There are two pathways to optimism here;

1. rational expectations --- that perceptions of risk are strongly correlated with actual risk

2. Robust decision rules and risk aversion --- people don't like risk and know that they don't know the emerging risks and thus build in options to protect themselves.

Does IP reject #1 and #2 for what % of the population?

I was born in Chicago. I met my wife in Chicago and I learned some economics there.  It is always a thrill to return.  The University of Chicago's Economics Community has turned over almost completely since I started there in 1988.  The faculty who I interacted with back then who are still active faculty include; Hansen, Heckman, Murphy, Topel, and Davis. That's a high quality but small set!  I will be back in town to participate in this media conference.  

The NY Times Room for Debate section has an excellent, calm (and sane) discussion of the small ball actions households, firms and local governments are taking that together will help NYC to adapt so that the "next Sandy" causes much less damage to the area.   I see a group of self interested spatially tied actors not being naive and "crossing their fingers" and hoping that another Sandy doesn't occur. Instead, they are investing under uncertainty and a silver lining of Sandy is that they have learned some hard lessons. To quote The Who "We won't be fooled again." This has been my "Climatopolis" logic for the last five years.  I'm happy to see that the "real world" is catching up to my core logic.  Behavioral economists are going to lose this fight!

Rational expectations is alive and well but in a world of ambiguous risk, the key point here is that we are risk averse and we now know that we don't know what climate change holds in our future. This creates strong incentives to invest in resiliency and to have option values (i.e to be able to identify and move to higher ground).

Two key issues arise in thinking about urban adaptation to climate change. In a world where people differ with respect to how they update their beliefs about future risks, are people converging in their beliefs about risks?  The climate scientists and the New York Times are working hard to scare the hell out of people concerning the risks that climate change will pose.  This helps us to adapt because no West Side intellectuals in NYC can say that they weren't warned. The other key issue here is place based politicians' incentives. Do they have an incentive to play down the risk or to invest funds to fight the risk and thus to reduce it?  One of my key points is that coastal areas should defend themselves with their own $.  Spatial moral hazard emerges when taxes paid by people who live on "higher ground" is used to subsidize cities in flood zones. This must cease.

For those interested in applied microeconomics of climate change adaptation, read this piece.  

Here is the abstract from my paper;

In an urbanizing world economy featuring thousands of cities, households and firms have strong incentives to make locational investments and self protection choices to reduce their exposure to new climate change induced risks. This pursuit of self interest reduces the costs imposed by climate change. This paper develops a dynamic compensating differentials model to explore how the “menu” offered by a system of cities insures us against emerging risks. Insights from urban economics offer a series of testable hypotheses concerning the economic incidence of spatially tied climate change risk.

Crowding out is a powerful idea that always has the same core theme.   One change to an economy has unintended ripple effects.  Social Security crowds out private savings.   FEMA investment in coastal protection crowds out private self-protection of moving to higher ground.  Child proof caps on medicines lulls parents into thinking their kids can't open the bottles (see Viscusi's study).  

Today, the WSJ reports a new Tesla case of the lulling hypothesis.  The lulling hypothesis states that people "lower their guard" when they feel safe and they thus end up less safe than if they had remained vigilante.

A Direct Quote:

"Massachusetts Institute of Technology robotics expert John Leonard said Tesla’s Autopilot system is risky because people are treating it as more capable than intended, and even its name gives the impression that it can operate a car autonomously.  “Tesla owners need to stop operating their autopilot systems in conditions that it was not designed for; it’s not a toy,” he said. “Failure to use good judgment and common sense jeopardizes not only their own lives but the lives of others. Filming themselves while operating the Autopilot is extremely reckless.”

Moral Hazard lurks everywhere.   When risk taking is subsidized, people will take risks!

A growing field of applied economics examines long run correlations and uncovers some startling patterns.   Daron Acemoglu's work on institutions heavily relies on long run persistence.   In recent years, startling new facts have emerged. Areas that were anti-Semitic in the 14th century were more likely to be anti-Semitic in 1920s Germany.   Today, the NY Times reports another persistent fact.   The geographic location of Cross-national Internet cables that lie at the bottom of the ocean can be predicted by 1860s cross-national cable routes.  

"Mr. Sechrist noted that the locations of the cables are hardly secret. “Undersea cables tend to follow the similar path since they were laid in the 1860s,” he said, because the operators of the cables want to put them in familiar environments under longstanding agreements.

The exceptions are special cables, with secret locations, that have been commissioned by the United States for military operations; they do not show up on widely available maps, and it is possible the Russians are hunting for those, officials said."

The front page NY Times article worries that Russia is planning to cut these cables.  For those who argue that globalization is "evil" will they support this Russian potential attempt to send us back to national autarky?

The Economist Magazine recognizes that Singapore is rich and hot (and air conditoned) but rejects this optimistic vision for the world's urban future.  This linked piece reports some "doom and gloom" based on a new important paper by Burke, Hsiang and Miguel.  These three excellent scholars have published this piece in Nature which I plan to take a careful look at.

A quote from the Economist Magazine;

"Countries can try to mitigate the effects of warming, but cooling things down is expensive. In Singapore, air conditioning consumes 40% of the power used in buildings. If nothing is done to stop global warming, the world will see an 83% increase in electricity consumption between 2010 and 2100, due simply to greater use of air conditioning, fans and refrigeration, according to a paper published in the journal PNAS in March by Lucas Davis and Paul Gertler. Richard Tol of the University of Sussex points out that homes and offices in cold countries are built to conserve heat, with large south-facing windows. Refurbishing such buildings could help keep people cool, but at great cost."

Note that the economist magazine reports no estimates of the $ cost of adaptation and cooling. Singapore is doing quite well. Innovation in electricity generating and air cooling clearly has a bright future. Is the Economist Magazine really that pessimistic about induced innovation?

UPDATE: Note the pessimism implicit in this quote above contrast that with this optimistic piece about our increased ability to shield ourselves from the cold at low cost.  Will induced innovation really not come up with great ideas in a world with 7 billion people and venture capitalists seeking to fund "the next Uber"?  If 1 in 1 million people has a good energy efficiency idea then we will have 7,000 good ideas to choose from to provide our future electricity.  The best idea from this set will earn the profits of "Facebook today". Order statistics represents a powerful (and optimistic) concept.

The Economist Magazine is engaging in a pinch of cheer-leading before the December 2015 Paris Climate Treaty meeting.   Here is the conclusion of the piece that reveals this.

Moreover, even if rich countries manage to fend off the worst effects of global warming, they will still feel its repercussions. Trade with more vulnerable places would decline; refugees would proliferate. The Paris climate conference this December is supposed to come up with policies to avoid such outcomes. The new findings on the baleful impacts of high temperatures should give rich countries an extra incentive to compromise.

For an ungated piece stating my vision for our urban future; read this.  

Successful  "low carbon" people in San Francisco such Thomas Steyer face a fundamental challenge.  Much of the U.S relies on fossil fuels to create their jobs, to generate low electricity prices and to allow for cheap transportation services. These individuals are aware of this point and they are voting their pocket book and thus opposing carbon pricing.  The NY Times discusses the fact that 25 states will oppose President Obama's new carbon policies.

Permit me to point you to my low carbon politics research.

1.   My JPAM 2000 paper documents that suburbanites drive more and consume more electricity than urban residents.

2. My 2011 JUE paper documents that center city liberal resident NIMBY zoning regulation has deflected more development to the suburbs where people live a high carbon life (see paper #1 above) and then oppose carbon pricing.

3. My co-authored 2013 JPUBE paper documents that energy intensive manufacturing industries seek out cheap electricity price areas.  Whether U.S carbon pricing and the resulting higher electricity prices would nudge them to move oversees remains an open question.

4.  My co-authored 2012 EER paper documents that more educated people are more likely to have installed solar panels and to go off the grid and thus not pay higher electricity prices.

5. My 2013 EI paper documents that Congress Representatives oppose carbon mitigation regulation when they are conservative, their district is poorer and their district is high carbon.  Nancy Pelosi and Tom Steyer are in liberal, rich, low carbon San Francisco.  There, it is easy to comply with carbon regulation.  They will pay few new costs for such low carbon regulation.

6. My co-authored 2015 JAERE paper documents that even in California and within counties that suburbanites vote against low carbon regulation relative to center city residents. Since we control for the fact that liberals live in center cities, this 3rd variable does not explain the urban form/voting correlation.

7.  In my co-authored 2015 JUE paper we document that U.S protectionism through the Buy America Act has hindered the improvement of our bus fleet as a green technology.

8.  My co-authored 2015 EE paper shows that the carbon footprint from transportation is smaller in cities whose "vitality" is centered downtown (versus in the suburbs).  In this sense, local center city quality of life (i.e good restaurants and culture downtown) and being a low carbon metropolitan go hand in hand.

So, I encourage Tom Steyer's people to call me to talk about how to navigate these realities.  I want to see the U.S introduce a carbon tax but we need to be honest about the "playing field" and the adjustment costs for achieving the "green economy".  The losers from this transition are well aware of what they will lose.  How will Mr. Steyer smooth this transition?

Now I do have one optimistic paper on carbon mitigation. In this co-authored 2014 paper,  we argue that improvements in battery technology,  EV quality and solar panels could decarbonize the suburbs and this would affect support for carbon taxation see #6 above.

President Obama has talked several U.S companies into pledging to reduce their respective greenhouse gas emissions.  Why have these companies signed these pledges?

"The companies that have made the pledge include such iconic American brands as Levi Strauss & Company, McDonald’s, I.B.M. and Procter & Gamble."

Permit me to propose some different hypotheses;

1. Talk is cheap and these companies won't follow through with their promises.
2. These companies believe that they have earned "good will" with President Obama that will yield regulatory leniency in the future and thus this pledge will pay for itself.  Tom Lyon and John Maxwell have been the leading scholars discussing this point. Read their paper.
3. There is a principal-agent problem that the CEOs of these firms are buddies of the President and want to feel his warmth but the shareholders of the company will ultimately bear the costs of higher energy prices but since the CEO isn't a major shareholder he/she avoids bearing these costs.
4. These firms already are energy efficient so it is easy for them to sign a pledge that doesn't require any marginal new costly actions.
5.  These firms anticipate that energy prices are rising (perhaps because of future democrats introducing a carbon tax); anticipating higher energy prices they are already investing in energy efficiency (to lower their future energy bills) and thus it is easy for them to announce that they will take the pledge because it doesn't require any actions that they weren't already planning to take.

Note that the list of "iconic" companies listed above are not in energy intensive industries. Their main GHG production occurs from transportation of workers to work and shipping product.  What transportation pledges will these companies make to reduce their GHG emissions?

Permit me to tell a story.  When I joined UCLA back in 2007, I scheduled a meeting with UCLA's Parking people because I had the following idea.  UCLA's parking permit data base allowed the parking office to know what car every employee drives.  UCLA's database indicates where every employee lives.   Given this information, it is easy to calculate the gallons of gasoline every worker at UCLA consumes every day he commutes to UCLA.

For example, a person who lives 10 miles from UCLA and owns a Hummer that achieves 10 MPG would consume 2 gallons of gasoline each day in UCLA commuting roundtrip.  This information could be used to calculate every UCLA commuter's carbon footprint.  UCLA administrative data also includes information on each employee's salary and department.  Using linear regression techniques, I wanted to create an index of which departments on campus have the highest carbon footprint WHILE controlling for a person's income.   Consider the following regression:

Tons of CO2 from commuting per year =  a + b1*Department  + b2*Annual Income + U

This regression would have allowed me to rank departments by estimating "b1" for each department. The transit people threw me out calling me a nut but 9 years later my idea looks quite good.   Big data can be used in constructive ways but UCLA won't give me a chance.  

I am grateful to the UCSB Economics Department for offering me the opportunity to give the 3rd Annual Babcock Lecture. I tried my best to give a serious (but funny) lecture for a general audience of undergraduates, graduates and faculty focused on the microeconomics of climate change adaptation. My lecture video is posted here.   It was a hot day and my talk was in the late afternoon.  For those who prefer that economists be level headed and calm, I apologize.  During my day at UCSB Econ, I was reminded that it is a great department. Unlike at UCLA or USC, environmental economics is one of the core fields.  The place is packed with environmental economists and graduate students who are working on environmental and urban topics. I felt at home by the beach and had a great day there.

Watch Dr. Martin L. Kahn's interview here.  Here is the transcript.    You can contrast his public speaking with my style.