John Cochrane has posted an important blog post about adapting to climate change. His piece mainly focuses on macroeconomic issues. For decades, John was colleagues with Bob Lucas and those familiar with Robert Lucas's optimistic work on economic growth will see a correlation. While John makes many points, his main point is; "if a world's economy grows by 3% per year out to the year 2100 --- it will be rich enough to handle any of Mother Nature's shocks at that point or along the way". He points to the growth of China's economy as an example. John is optimistic about our future;
"The share of the world population in extreme poverty is plummeting. No plausible estimate of climate damage comes close to this kind of change. And this change comes in part from increasing diffusion of fossil fuels. People who used to hoe by hand now use tractors."
John's piece really focuses on misallocation. He wants nations to remove misallocation road blocks such as land use restrictions to unleash economic growth so that more nations and their citizens have the income to take the steps they deem necessary to handle the harder punches thrown by Mother Nature.
As a macroeconomist, John views decarbonization as one strategy that raises our real income in the year 2100 and he wants this strategy to be compared to other pro-growth strategies. Another quote from JC;
"But reducing carbon is thus, logically, just one item on the list of answers to "What can we do to raise GDP in 2100?," and especially "What can we do to raise GDP in currently-poor countries by 2100?" Asked that way, you can see that "lower carbon emissions" is about #100 on the list, even admitting the 5-10% of GDP thumb-on-the-scale estimates. It's like asking whether removing that "Go Bears" flag from your radio antenna will improve your gas mileage and lower your overall expenses. Well, yes, maybe, but it's hardly first on the list."
My Thoughts;
1. Take a look at David Sattherthwaite's 2010 tough review of my 2010 Climatopolis book. You will see that John and I share many thoughts in common on this topic. I have working on the costs of climate change for 15 years now going back to my 2005 Death Toll paper. Once I estimated that richer nations suffer fewer deaths per-capita in natural disasters , I immediately saw the implications for climate change adaptation. Robert Lucas hadn't connected his economic growth work to a nation's non-market quality of life. He was implicitly assuming that there are complete markets and was not incorporating ideas from his buddy Sherwin Rosen on non-market quality of life.
2. John does not discuss rare disasters at fat tail risk. Martin Weitzman's key research was really about macro-economics. Marty argued that rising global GHG emissions pose new ambiguous risks for economy. Such fat tails could be quite disruptive if there are supply chain networks to the economy (intuitively think of a domino chain). While I greatly respect Marty's work, here is my response. Marty was my friend and we would debate. I am a microeconomist and I said to Marty; "Many of us know that we do not know what risks climate change will pose. Those of us who are risk averse will seek out implicit insurance schemes and those that feature option value so that we can move ourselves and our capital to "higher ground" (i.e safer places) if climate change turns out to be as bad as you claim. Firms can build in redundancies in supply chains and use hedging markets to reduce their risk exposure. "
Weitzman's great work didn't engage with Townsend's work on risk sharing and Ehrlich and Becker's work on self protection. Climate change represents a set of spatial shocks and we can always re-optimize as we learn. This is a key theme of my Climatopolis book and my 2021 Yale University Press book Adapting to Climate Change.
3. John sets society's goal as maximizing per-capita income in the year 2100. Would Greta agree with him? The answer hinges on whether there are complete markets. If there are complete markets then the separation theorems hold. With complete markets, the loss we suffer in terms of lost natural capital would be subtracted from GNP to calculate per-capita income net of depreciation to natural capital. If there are incomplete markets, then one must be more explicit about whether the loss of natural capital imposes losses on us that $ can't offset. An example. The recent heat wave may have killed a billion creatures. Is this loss of natural capital reflected in market prices? Yes, if these are market commodities.
4. John's blog post doesn't sketch out any Gary Becker household production functions, what does extra $ in 2100 buy us in terms of safety, comfort or health or protection of our children? This is a key theme of my 2021 book. John's optimism (that I share) hinges on knowing that money will buy inputs that can offset Mother Nature's stronger punches caused by climate change. The Beatles sang that "money can't buy me love". IO economists continue to try to estimate structural production functions of making goods. What do we know about structural production functions of producing health and safety? How do these production functions of Beckerian goods change over time due to new information and new goods? At a conference in 2019 that honored Frank Wolak, I presented these slides to make these points clear.
5. John does not discuss the feedback loop. If economic growth accelerates, then GHG emissions will accelerate (given current technologies). See the paper by Davis and Gertler in PNAS 2015 for an example. John would counter that per-capita income growth will accelerate decarbonization as the Paul Romer green innovation effect will kick in so that Universities such as Uchicago and Stanford do more basic research and this leads more Elon Musks in the future to launch more green firms selling great green products that richer people voluntarily buy. Such innovation means that the Lucas Critique is key here. One will over-estimate future damage caused by climate change using recent estimates of the "climate damage function". The Autstrian critique of empirical economics is correct in this case.
My Bottom Line
For 15 years, I have argued that capitalism caused climate change (the GHG Engel Curve associated with fossil fuel consumption) and capitalism will solve the climate change challenge through fueling innovation and accelerating our adaptation capacity. The old generation of Uchicago economists think alike. Here is 2012 video where I elaborate.
My 2009 piece; "Urban Growth and Climate Change" fleshes this out.
I reject the view that climate shocks are global macro shocks. They are spatial shocks (such as the Texas Freeze in February 2021). Such place based shocks impose costs and trigger cross-elasticities (flows of capital and labor to other places). Spatial prices adjust and a new dynamic compensating differentials equilibrium is achieved. The set of strategies that people have to adapt at any point in time pins down these price adjustments but the strategy set is always growing. See my 2014 lecture.
Abstract
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.
UPDATE
One interpretation of John's blog post is that climate change mitigation should not be the world's top priority right now and instead we should focus on policies that maximize economic growth. I think that many people who are worried about climate change would claim that we can achieve both goals through embracing the "green economy". This claim merits more research.
In my own microeconomic research on the climate change challenge, I have not emphasized policy priorities today because I believe that the political economy is such that global greenhouse gas emissions will continue to rise. This is why I started to work on the adaptation issue. I discuss this point at length in chapter 1 of my 2021 Yale Press book and in the 2009 piece "Urban Growth and Climate Change" linked to above. To repeat this point, I approach the climate change issue from a Nash Equilibrium perspective; given that emissions are rising and that the free-rider problem at the global level is only going to get worse, how do individuals and firms adapt?
