Case study: Global Warming

Part I: What to do about global warming A UN treaty now under discussion looks promising - as long as it remains flexible

How should reasonable people react to the hype and controversy over global warming? Judging by recent headlines, you might think we are already doomed. Newspapers have been quick to link extreme weather events, ranging from floods in Britain and Mozambique to hurricanes in Central America, directly to global warming. Greens say that worse will ensue if governments do not act. Many politicians have duly jumped on the bandwagon, citing recent disasters as a reason for speeding up action on the Kyoto treaty on climate change that commits rich countries to cut emissions of greenhouse gases. This week saw the start of a summit in The Hague to discuss all this. Yet hot-headed attempts to link specific weather disasters to the greenhouse effect are scientific bunk. The correct approach is coolly to assess the science of climate change before taking action. Unfortunately, climate modelling is still in its infancy, and for most of the past decade it has raised as many questions as it has answered. Now, however, the picture is getting clearer. There will never be consensus, but the balance of the evidence suggests that global warming is indeed happening; that much of it has recently been man-made; and that there is a risk of potentially disastrous consequences. Even the normally stolid insurance industry is getting excited. Insurers reckon that weather disasters have cost roughly $400 billion over the past decade and that the damage is likely only to increase. The time has come to accept that global warming is a credible enough threat to require a public-policy response. But what, exactly? At first blush, the Kyoto treaty seems to offer a good way forward. It is a global treaty: it would be foolish to deal with this most global of problems in any other way. It sets a long-term framework that requires frequent updating and revision, rather like the post-war process of trade liberalisation. That is sensible because climate change will be at least a 100-year problem, and so will require a treaty with institutions and mechanisms that endure. The big question over Kyoto remains its cost. How much insurance is worth buying now against an uncertain, but possibly devastating, future threat? And the answer lies in a clear-headed assessment of benefits and costs. The case for doing something has increased during the three years since Kyoto was signed. Yet it also remains true that all answers will be easier if economic growth is meanwhile sustained: stopping the world while the problem is dealt with is not a sensible option, given that resources to deal with it would then become steadily scarcer. That points to two general conclusions about how to implement Kyoto. The simplest is that countries should search out "no regrets" measures that are beneficial in their own right as well as reducing emissions - such as scrapping coal subsidies, liberalizing energy markets and cutting farm support. The second is that implementation should use market-friendly measures that minimize the costs and risks of slowing economic growth.

Part II: Hot potato revisited

A lack-of-progress report on the Intergovernmental Panel on Climate Change You might think that a policy issue which puts at stake hundreds of billions of dollars' worth of global output would arouse at least the casual interest of the world's economics and finance ministries. You would be wrong. Global warming and the actions contemplated to mitigate it could well involve costs of that order. Assessing the possible scale of future greenhouse-gas emissions, and hence of man-made global warming, involves economic forecasts and economic calculations. Those forecasts and calculations will in turn provide the basis for policy on the issue. Yet governments have been content to leave these questions to a body - the Intergovernmental Panel on Climate Change - which appears to lack the necessary expertise. The result is all too likely to be bad policy, at potentially heavy cost to the world economy. In our Economics focus of February 15th this year, we drew attention to (and posted on our website) telling criticisms of the Intergovernmental Panel on Climate Change work made by two independent commentators, Ian Castles, a former head of Australia's Bureau of Statistics, and David Henderson, formerly the chief economist of the Organisation for Economic Co-operation and Development and now visiting professor at Westminster Business School. Their criticisms of the Intergovernmental Panel on Climate Change were wide-ranging, but focused on the panel's forecasts of greenhouse-gas emissions. The method employed, the critics argued, had given an upward bias to the projections. The Intergovernmental Panel on Climate Change procedure relied, first, on measuring gaps between incomes in poor countries and incomes in rich countries, and, second, on supposing that those gaps would be substantially narrowed, or entirely closed, by the end of this century. Contrary to standard practice, the Intergovernmental Panel on Climate Change measured the initial gaps using market-based exchange rates rather than rates adjusted for differences in purchasing power. This error makes the initial income gaps seem far larger than they really are, so the subsequent catching-up is correspondingly faster. The developing-country growth rates yielded by this method are historically implausible, to put it mildly. The emissions forecasts based on those implausibly high growth rates are accordingly unsound. The Castles-Henderson critique was subsequently published in the journal Energy and Environment (volume 14, number 2-3). A response by 15 authors associated with the Intergovernmental Panel on Climate Change purporting to defend the panel's projections was published in the same issue. It accused the two critics of bias, bad faith, peddling "deplorable misinformation" and neglecting what the 15 regard as proper procedure. Alas, it fails to answer the case Mr Castles and Mr Henderson had laid out - namely, that the Intergovernmental Panel on Climate Change low-case scenarios are patently not low-case scenarios, and that the panel has therefore failed to give a true account of the range of possibilities. If anything, as the two critics argue in an article in the subsequent issue of Energy and Environment, the reply of the 15 authors gives new grounds for concern. This week the Intergovernmental Panel on Climate Change is preparing to embark on its next global-warming "assessment review" - and if the tone of its reply to the critics is any guide, it is intent on business as usual. It is true, as the Intergovernmental Panel on Climate Change says in its defense, that the panel presents a range of scenarios. But, as we pointed out before, even the scenarios that give the lowest cumulative emissions assume that incomes in the developing countries will increase at a much faster rate over the course of the century than they have ever done before. Dis aggregated projections published by the Intergovernmental Panel on Climate Change say that - even in the lowest-emission scenarios - growth in poor countries will be so fast that by the end of the century Americans will be poorer on average than South Africans, Algerians, Argentine, Libyans, Turks and North Koreans. Mr Castles and Mr Henderson can hardly be alone in finding that odd.

Tunnel vision

The fact that the Intergovernmental Panel on Climate Change mobilized as many as 15 authors to supply its response is interesting. The panel's watchword is strength in numbers (lacking though it may be in strength at numbers). The exercise criticized by Mr Castles and Mr Henderson involved 53 authors, plus 89 expert reviewers and many others besides. Can so many experts get it wrong? The experts themselves may doubt it, but the answer is yes. The problem is that this horde of authorities is drawn from a narrow professional milieu. Economic and statistical expertise is not among their strengths. Making matters worse, the panel's approach lays great emphasis on peer review of submissions. When the peers in question are drawn from a restricted professional domain - whereas the issues under consideration make demands upon a wide range of professional skills - peer review is not a way to assure the highest standards of work by exposing research to skepticism. It is just the opposite: a kind of intellectual restrictive practice, which allows flawed or downright shoddy work to acquire a standing it does not deserve. Part of the remedy proposed by Mr Castles and Mr Henderson in their new article is to get officials from finance and economics ministries into the long-range emissions-forecasting business. The Australian Treasury is now starting to take an active interest in Intergovernmental Panel on Climate Change-related issues, and a letter to the British Treasury drawing attention to Castles-Henderson (evidently it failed to notice unassisted) has just received a positive, if long delayed, response. More must be done, and soon. Work on a question of this sort would sit well with Mr Henderson's former employer, the O E C D. The organisation's economic policy committee - a panel of top economic officials from national ministries - will next week install Gregory , head of America's Council of Economic Advisers, as its new chairman. If Mr gregory is asking himself what new work that body ought to take on under his leadership, he need look no further than the dangerous economic incompetence of the Intergovernmental Panel on Climate Change. This case study illustrates the variety of issues with which managerial economics is concerned.

The following questions arise:

1.0 Is there a problem to be addressed?

2.0 Is there a solution or solutions to the problem, in terms of strategies or courses of action that can be taken?

3.0 What objective or objectives can be defined for these strategies?

4.0 What constraints exist in terms of operating any strategies?

5.0 How can we identify strategies as solutions to the problem?

6.0 How can we evaluate these strategies in terms of costs and benefits, particularly when these involve life and health?

7.0 What is the best way of measuring the relevant variables?

8.0 What assumptions should be made in our analysis?

9.0 How do we deal with the problem of risk and uncertainty regarding the future and the effects of strategies in the future?

10.0 How can we approach the problems of conflicts of interest between different countries and between different consumers and producers?

11.0 What criteria can we use for selecting strategies from among different possible courses of action?

12.0 How do political biases and agendas affect decision-making processes in practice?