Avoiding catastrophic climate change

How do you put a value on extreme events when doing cost-benefit calculations? Extreme environmental events will become more common if the climate changes radically. They might have a low probability of occurring, but they could be catastrophic. Jim Giles in the New Scientist says that economists have generally ignored extreme events when doing cost-benefit calcuations about climate change: they are so unlikely and lie so far in the future that it is not cost-effective to try to prevent them. "But environmental groups argue that the risk of extreme events justifies large investment now...."

Martin Weitzman of Harvard University has developed the first thorough method for including unlikely but extreme events, such as widespread crop failures, in cost-benefit analyses. When you take into account extreme temperature rises of more than around 6 °C, he says, they dominate all other options and effectively demand that investment aimed at stopping them be made now. "This tells us that we should take the problem much more seriously that normal cost-benefit analyses suggest," says Weitzman.... It "probably means we should spend more money now, but it doesn't tell us how much."

Exactly. The scientific uncertainties are huge and so is the range of plausible expenditures. So too is the urgency of the problem and any policy debate under the current system is quite simply going to take too long. The usual international initiatives demand a degree of scientific and economic certainty that is higher than we are ever likely to achieve until the problem has become too late to do much about. The current system is fundamentally flawed: it insists on too high a degree of proof before action can be taken. It does so because our governments are the ones that bear all the risk of making a wrong decision. Governments have to find the (considerable) resources to spend now on a problem that may or may not materialize years or decades in the future. Naturally they will be reluctant to do so until the evidence becomes impossible to ignore - by which time it will be too late to avert a calamity.

Climate Stability Bonds would solve that problem by transferring the risks of getting it wrong to those willing to bear it - voluntarily and with a continuing incentive to get the cost-benefit calcuations correct. Globally-backed Climate Stability Bonds would contract out the achievement of climate stability to the most efficient operators. If they fail to perform, then it is they who would lose out, not taxpayers the world over. It would be in their interests to do the calculations correctly, and to continuously refine them in line with our rapidly expanding knowledge and technology. They would have incentives to spend resources immediately on the most effective climate-stabilising projects, while bearing all the risk of failure. They certainly wouldn't delay doing anything until catastrophe becomes imminent and obvious to recalcitrant taxpayers...by which time it's also likely to be inevitable.