Any takers for Tony’s bet on climate economic risk?

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Lately I’ve become a little obsessed with the disconnect between economists’ and climate scientists’ views on a 3°C temperature rise.  In short, the latter think it would be apocalyptic while the former are more sanguine, at least when it comes to the developed world.

I align with the economists – probably because I am one.  However, suggesting that the economic effects of a 3°C climate scenario might be modest, economically speaking, for rich countries tends to rub people up the wrong way. You invariably get criticized; sometimes lambasted.

Hopefully we’ll never find out if the harsh criticism is justified.  

If the climate scientists are right, a 3°C scenario will devastate the global economy.  I’ve seen estimates of GDP declines for some regions as high as 80-90%.  Predictions in the range of around 30-40% appear to be the modal view among this group.

In this linked article, Prof Steve Keen – a heterodox economist aligned with the climate scientists – is critical of the model used by more orthodox economists like William Nordhaus to generate their loss predictions, specifically about the way it is structured:

“The typical quadratic [function] that economists use results in about 20 per cent of damages at six degrees of warming. The logistic [function] points to a complete elimination of the economy at six degrees, and the exponential [function] gives a complete elimination at four degrees.”

“So it all comes down to how you extrapolate, and which one makes more sense in the context of tipping points, and then you can rule out the quadratic straightaway.”

To be clear, one of Prof Keen’s preferred model structures (using the exponential function) indicates an extinction level event at 4°C.  That’s what “complete elimination” of the economy implies, after all.  

Really, this is a question of biology.  If humans cannot survive on a planet warmed by 4°C in any location on the face of the earth (or beyond) then, yes, the economy would be eliminated.  However, if a few million people can eke out a living in Siberia, Greenland, Mars, or Antarctica, the economy will not be completely eliminated.  Of course, I doubt the survivors will be all that interested in maintaining the national accounts.

Frankly, I find this discussion a bit specious.  There’s no way to plan or prepare for outcomes like these.  If they occur, none of the existing societal institutions will survive, so there’s no point in conducting climate stress tests to estimate how banks will perform under this scenario.  We would have likely reverted to a world without fractional reserve banking, anyway.  

Now, the economists’ predictions may be overly optimistic (we won’t know until they’re tested) but they are actionable, because they are consistent with the idea of the survival of the species and continuation of existing institutions.

Really the only value the climate scientists’ predictions have is rhetorical.  If the threat of extinction prompts truly concerted action on climate change at all levels of society, then their doomsday prognostications could be extremely worthwhile.  Unfortunately, I suspect that many in society will remain unmoved by such warnings until they personally face climate-related hardships.  Psychologists may be the right experts to tell us whether alarming predictions – be they accurate or not – are effective in driving behavioral change.  

This, to my mind, is a more important question than whether the functional form of Nordhaus’ DICE model should be quadratic or exponential.

Bold predictions

Without getting into the weeds, I think it’s fair to describe climate scientists' predictions as ‘bold’.  If Prof. Keen’s model is capable of accurately describing (mostly) continuous economic growth through to the present day, and economic decay to the point of extinction going forward, it’s a remarkable model, make no bones about it.  The chart below depicts the freight train that Prof. Keen asserts will be completely halted by a 4°C rise in global temperatures:

While I disagree with the climate scientists’ predictions, I do respect their boldness.  A lot of people will knock down those with whom they disagree without nailing their own colors to the mast.  We can have no doubt about Prof Keen’s convictions.  

One of the reasons I keep tabs on the good professor is that our paths intersected, kind of, back in 2013.  The Australian housing market was the cause, but the interaction nonetheless has relevance to the present debate.  I think it’s interesting enough to recount in some detail.

Before he retired – he has since been very active – Keen was an academic at the University of Western Sydney.  Though I was living in the US at the time, I am Australian and have always followed the Oz economy much more closely than the average Yank.  In the streets of Melbourne and Sydney, those who are aware of Prof Keen will know him as an outspoken commentator on the state of the Australian housing market.  His work on climate change would, I suspect, be relatively unknown.

In 2013 the wonderful Daniel Melser and I published a paper on Australian consumer credit, a piece which got a fair bit of airplay.  Our paper was pretty moderate – you can read it and decide for yourself – but we did make a bold, conditional prediction: that Australian banks would face doom if house prices ever fell the way they did in the US in 2008/09.  The antipodean media picked up on the paper and I received a stream of emails accusing us of being doom merchants, sadly out of touch with the Australian economy.

One correspondent even accused me of being a Prof Keen acolyte!  

You see, back in 2008 at the peak of the global financial crisis, Prof Keen was forecasting steep declines in Aussie house prices and had made a bet with Rory Robertson, a well-known local economist from Macquarie Bank, about what was going to transpire.  History shows that Australia avoided a recession and that house prices actually surged.  Robertson won the bet and Keen had to walk from Canberra to Mt Kosciuszko – about 220km, mostly uphill – in order to settle up.

You’ve got to respect the gumption of both Keen and Robertson for putting their shoe leather on the line, and Keen individually for paying up when the bet was ultimately lost.

So when I saw that Prof Keen was now working on climate risk – and making bold predictions – my interest was piqued.  Now, I have made bolder predictions than the one that caused such a ruckus eleven years ago.  Some are a bit embarrassing, and none have ever panned out.  Our forecast of doom for the Aussie banks, though, is still yet to resolve – simply because house prices have never (yet) fallen by the requisite amount.   

That’s the thing about bold predictions.  They don’t work out very often, but you look like a genius when they do.

The bet

With all this in mind, I would like to propose a bet.  If Prof Keen reads this, he is formally challenged, but I’ll take the bet with anyone willing to take the other side.  Unfortunately my knees and hips won’t allow me to walk very far but I am willing to do something embarrassing, pro-climate, and legal for charity.

For this bet, I don’t think it’s viable to wait for 3°C.  We won’t get there for another 30 years or so, even under the discredited RCP 8.5 scenario.  We’re currently at about 1.5°C.  If the dire predictions are right we should soon start seeing measurable GDP declines with each marginal increase in global warming beyond this point.

So here’s the bet.

My challenger will metaphorically “walk” if US GDP is above current levels when the average global surface temperature hits 1.8°C.

I will metaphorically “walk” if US GDP is more than 5% below current levels when we’re at 1.8°C.

We will need to define “GDP” and “global surface temperature” more carefully, but I think these parameters make for an interesting wager.  If anyone would like to propose different parameters, I’m open to changes.

Are there any takers?