Thursday, October 11, 2018

In Defense of Optimism

Interestingly, the IPCC dropped its latest global warming analysis around the same time as this year's Nobel prizes in economics were awarded. One of the Nobel honorees was Paul Romer, who strikes a note of optimism about our ability to combat global warming. The IPCC report, of course, sounded a warning of fairly serious consequences if we fail to keep global warming to 1.5 degrees (previous analyses have focused on a 2 degree target).
It's not really a surprise that a 2 degree rise would have more serious consequences than a 1.5 degree rise. And if you were already pessimistic that we could hit the 2 degree target, presumably focusing on a 1.5 degree target just makes you more pessimistic. Paul Romer is not so sure this is a useful approach.
In a very interesting post on his blog, Romer, who is famous for his theory of endogenous technological progress (look it up!), has this to say:
"[T]here are two very different types of optimism. Complacent optimism is the feeling of a child waiting for presents. Conditional optimism is the feeling of a child who is thinking about building a treehouse. “If I get some wood and nails and persuade some other kids to help do the work, we can end up with something really cool.”
What the theory of endogenous technological progress supports is conditional optimism, not complacent optimism. Instead of suggesting that we can relax because policy choices don’t matter, it suggests to the contrary that policy choices are even more important than traditional theory suggests....
By emitting carbon dioxide when we burn carbon-based fuel (and by emitting other greenhouse gases too), humans are changing our natural environment in ways that could be very harmful. Faced with such risks, I also agree that complacency is dangerous. But there is no logical connection between optimism and complacency.
The conclusion from endogenous growth theory is that progress is not free. We make progress because of things that people do. This is what it means for technological progress to be endogenous. The models and evidence suggest that the benefits we get when people do the things that produce progress are so large, and the resources that it takes to produce the progress we’ve enjoyed are so small, that the progress seems to be free. This means that we should encourage people to do a lot more of whatever it is that they are doing to generate progress. Instead of encouraging us to be complacent, the theory encourages us to be even more active....
The textbook analysis of externalities and pollution suggests that the solution is to get a once-and-done increase in the price of fossil fuel by imposing a steep tax. [But] the main reason to put a tax on greenhouse gases is not the one from the textbook. This is a tax that we want to people to avoid. We want innovators to discover all kinds of clever new ways to let people have the things that they want without paying this tax.
This changes how we think about the timing of the tax. We want innovators to know that the tax is coming and to take steps now to make sure that when it bites, it will be little more than a nuisance. Eventually, we want the tax to be so high that no one ever pays it, yet no one cares because it is irrelevant.
One way to achieve this would be to start with a very low tax on greenhouse gases right away and commit that the tax (in dollars per unit of greenhouse gas emitted) will increase gradually but inexorably. Innovators will start investing now in ways to for people to get what they want without paying the tax. They will stop investing in ways to extract more fossil fuels that will be subject to the tax.
After all the fear and hand-wringing, once we commit to this kind of tax, progress will continue but in a slightly different and much better direction. It will still seem to be free.
Our intuition tells us that solving this problem cannot be so easy. But intuition has also been telling us for two centuries that the price of natural resources has to climb as the rate of resource extraction increases. So what are you going to believe? Your intuition or the logic and the evidence?...
The lesson from resource prices (and from almost every other domain where we’ve looked carefully) is that small incentives can generate lots of innovation. This means that small changes in incentives will encourage more discoveries that are truly beneficial, such as ones that give people what they want without emitting greenhouse gases. These small changes will also discourage the socially harmful discoveries that keep the price of fossil fuels too low. So, there is no basis for complacent optimism and tolerance of bad status quo policies and lots of logical and empirical justification for conditional optimism."
Romer concludes by discussing environmental advocates' historic tendency to embrace:
" implicit model of political action in which optimism encourages complacency and pessimism spurs action. There is a grain of truth to this model; optimistic complacency can take root all too easily. But if we had emphasized the conditional optimism that is consistent with the scientific results....we would probably have found that it is a better way to encourage...policy action.
Pessimism is more likely to foster denial, procrastination, apathy, anger, and recrimination. It is conditional optimism that brings out the best in us."
This was a big point I was trying to get over in my book, The Optimistic Leftist. Unfortunately, all many people heard was what Romer refers to as "complacent optimism". But. with Romer, what I always believed--and still believe--is that conditional optimism is what we need.
Conditional Optimism about Progress and Climate Last Friday at the NBER Summer Institute, Martin Stuermer presented a thought provoking paper (written jointly with Gregor Schwerhoff.) It takes an important and puzzling fact seriously, then uses some credible theory to work out the implications of th...

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