Climate Change Adaptation Optimism

The old cliche is that economics is the “dismal science” but our new paper offers a counter-example. Our new co-authored paper ; “The Economics of Climate Change Optimism” , pushes back against the conventional wisdom taught to thousands of sustainability students in leading Universities around the world.

I am grateful to Matthew Burgess for leading our team and it has been great to get to know Patrick Brown and Roger Pielke Jr. better.

Back in 2005, I published my Death Toll from Natural Disasters paper and ever since then I have been part of a lonely (and isolated academic coalition) arguing that economic growth and free markets together help us to adapt to what might be a scary future under “business as usual”.

Kahn, Matthew E. "The death toll from natural disasters: the role of income, geography, and institutions." Review of economics and statistics 87, no. 2 (2005): 271-284.

My views have been critiqued severely by students at Policy Schools when I taught at Columbia, Tufts and UCLA. I have taken these punches and gently tried to argue with many people who didn’t want to engage with my responses. I am a pretty good debater but it takes two to tango!

When I was young , I admired Bjorn Lomborg’s Skeptical Environmentalist. I did think that he didn’t do enough research on the microeconomics of environmental progress. He was content to present macro graphs of overall time series patterns showing progress in life expectancy and reductions in poverty. As a microeconomist, I was (and am) focused on what rules of the game unlock human ingenuity and experimentation to allow us the opportunity to discover solutions to the challenges that Mother Nature confronts us with.

There are 8.5 billion people on the planet. If 1/1000 of us are actively seeking to solve a problem related to heat, flooding, farming, drought, etc then there are 8.5 million “searchers”. As Paul Romer has taught us, ideas are public goods. We do not need the average person to figure out how to design a great air conditioner, we need some out there to discover a new way of achieving a goal. Similar to Milton Friedman’s video on how capitalism created the pencil; similar “pencils” emerge from this trial and error Hayek innovation process. Once we have these “blueprints” then these ideas diffuse through market transactions.

For this optimistic dynamic to play out we need;

Rule of law enforcing property rights (so that resilience R&D takes place)

International trade in goods, people and capital

An understanding of “known unknowns” —- we can better adapt to risks we slightly anticipate

Educational institutions and the Internet (to spur the basic skills in math, engineering and thinking so that we have more innovators entering the entrepreneurial arena).

These are the building blocks of my Julian Simon optimism.

The strange irony in politically correct academia is that there is huge demand for carbon mitigation optimism and the claim that the green economy will be cheap to achieve and will cause economic growth while it is highly politically incorrect to make the case that we are making ever faster adaptation progress.

Sustainability scholars want to make the case that this asymmetry exists. I have argued the flip. We are making faster adaptation progress than we are making carbon mitigation progress because there is a huge population out there seeking to become middle class and enjoy their own American Dream in Africa and India and still in China.

Our new paper calmly discusses our collective optimism that the global economy is decarbonizing. We are not even on a RCP 4.5 path for global CO2 concentration. As the growth of CO2 slows, we have “more time” until the Greta Doom and Gloom unfolds.

At the same time, every day we grow better at adapting to the the risks that we have already “baked in”. I have argued that the Social Cost of Carbon is declining! Here is a 2014 blog I wrote discussing this.

How is this possible? Endogenous innovation provides us with higher quality products at a lower price to protect ourselves from emerging threats.

Of course the poor face greater risks at any point in time. How do we help the poor to protect themselves? Through facilitating economic growth. I discuss this at length in this piece about microeconomics.

What Are the Steps Forward Here?

I want to do new research on the barriers to adaptation. I claim that Government policy through subsidies and regulations of entry and price ceilings often cause these barriers. Sustainability scholars often argue that information gaps and cognitive dissonance is the true reason why many people fail to adapt.

Let’s explore this!

Let’s agree on what are objective metrics of adaptation. In our new paper, we present evidence on how economic growth effects swamp any direct effects of climate change on these metrics. All else isn’t equal! When the economy grows, more and more people have the resources to protect themselves from the specific challenges they face in their daily lives. They are free to choose!

Sustainability scholars keep claiming that there are “tipping points” and we won’t know how much we suffer until we hit that point. My counter is that futures markets should reflect these risks if futures markets go out sufficiently far in the future. For example coastal real estate markets should reflect that risk if these areas face a 2% chance of disaster over the next 25 years.

Given that “tipping points” are a known unknown; rational expectations economics predicts that we should invest in more real options such as modular real estate that can be deconstructed and moved into flooding is worse than predicted. I have written and economics of Lego paper with Devin Bunten published in the Journal of Housing Economics.

I have also argued that in a micro economy we are diverse and those who are risk lovers and have an edge in handling such risks will self select to live in those areas. Read my recent X piece on adapting to the Altadena wildfire smoke in homes that didn’t burn down.