My Recent Economics Discussion with Steven Durlauf on the Climate Change Challenge
Steven Durlauf is a brilliant University of Chicago economist. Whenever we meet, we have wide ranging discussions about many topics. In June 2023, we recorded a Stone Center podcast.
You can listen to our podcast discussion here.
In this brief column, I want to sketch out my worldview on the topic of the economics of climate change.
I believe that global GHG emissions will continue to rise for decades. The developing world needs to consume a lot more energy and fossil fuels will be part of the mix. The emerging middle class in all nations will not support carbon taxes. Read our 2022 paper.
I do not take integrated assessment models of the impact of climate change seriously. Robert Pindyck’s 2013 paper is 100% correct. Economists should not be predicting the world in the year 2070. The IAM models violate the Lucas Critique as they assume stationary production functions. Our Zoom experience in 2020 highlights how our “Hayek” economy can quickly pivot.
Starting with my 2008 paper, Urban Growth and Climate Change, I have explored the role that urbanization plays in producing greenhouse gas emissions and in helping us to adapt to climate change.
I expand on my thoughts about the beneficial effects of urbanization and the competition between cities to attract and retain people and jobs in my 2010 Climatopolis book.
In every nation, urbanization increases one’s income as one acquires more skill to succeed in the urban market. Private income growth fuels adaptation as people have more resources to protect themselves from the serious threats we now face. In a series of empirical papers, I have documented that richer people and richer places suffer a lower death rate from disasters and recover faster.
Due to market innovation, I believe that the Social Cost of carbon will actually decline over time. Every day we grow better at absorbing Mother Nature’s harder punches. There is no “climate crisis”. Instead, there are headwinds to economic growth and prosperity. Globalization, markets and market price signals help us to cope with these threats. I explore this theme in my 2021 Adapting to Climate Change book.
The proper role of government here merits much more research. When do government efforts protect the poor versus when do government investments and rules create moral hazard and “Peltzman” effects such that we take on more risks such as moving to a risky area that the government has invested in sea walls to protect?
I am a fan and a producer of reduced form climate correlations . For example, over the last 4 decades how much lower has the growth rate of a nation’s per-capita income been during years when it very hot? These correlations are interesting. They play a “Paul Revere” role teaching us what future costs we could bear if we fail to adapt. But , that’s my point! Our adaptation menu is always growing. When faced with wildfire induced PM2.5 spikes, we in 2023 have a much larger menu of Amazon PM2.5 indoor air filters and purifiers than we had to buy in 2005. Our menu grows because of capitalism! We are not passive victims. The reduced form researchers who extrapolate about future costs implicitly assume that we are “passive victims” and this violates the Lucas Critique. If economists are economists, then we must incorporate Nobel Laureate work into our work.