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On climate change, time to buy an insurance policy

Don’t waste time trying to predict the cost, professor says. Better to prepare for catastrophe.

August 25, 2015

Robert Pndyck

MIT Sloan professor Robert Pindyck says there is no accurate climate change cost model

We know nothing of how much climate change will cost.

While scientific consensus on humankind’s role in climate change is nearly unanimous, there’s little agreement on the toll it will take, ecologically or economically.

MIT Sloan Professor Robert Pindyck doesn’t bother trying to parse the estimates. To him, they’re all bogus.

“They create a perception of scientific knowledge and precision, but they are illusory and misleading,” Pindyck said Aug. 19 at The Future of Energy: Latin America’s Path to Sustainability, a two-day conference in Santiago, Chile hosted by the MIT Sloan Latin America Office and the United Nations Economic Commission for Latin America and the Caribbean.

Pindyck dismissed the so-called “social cost of carbon” estimates used to guide policies like carbon taxes and cap-and-trade. The estimates vary wildly, from $12 per ton to $200 per ton. And the concept underlying all of them, climate sensitivity, or the projection of global temperature increase, is “inherently, probably unknowable,” Pindyck said.

Instead of obsessing on detailed, shaky predictions, Pindyck said, society should treat climate change mitigation as an insurance policy. He argued for focusing on the likelihood of catastrophe, which he said could cause a 20 to 40 percent drop in gross domestic product. He defined GDP broadly to include non-monetary valuables, like the existence of different species. He suggested developing a survey of potential catastrophic outcomes, followed by a cost-benefit analysis of averting those outcomes.

Adaptation

In 2010, the world’s governments acknowledged a 2 degree Celsius threshold for global temperature increase. It now seems impossible to reach that goal, said Emilio Lébre La Rovere, a professor at the Federal University of Rio de Janeiro. La Rovere, who has long contributed to reports for the Intergovernmental Panel on Climate Change, was wistful about the work.

Emilio Lebre La RovereFederal University of Rio de Janeiro Professor Emilio Lébre La Rovere

“In the future generations, we will look back to this period, we will blame the IPCC much more … the red alerts [should have] been more eloquent … to help to foster political action on the problem,” he said.

“We are now getting to the situation where more and more the solutions need to be discussed at the national level,” he said. “Of course, we’ll need a global framework and that’s especially true for developing countries.”

La Rovere defined three broad costs of climate change: damage, adaptation, and mitigation. While damage is now unavoidable, he said, mitigation efforts could reduce the cost of adaptation. Preventing further rising sea levels, for example, would mean fewer people relocated from shrinking coasts.

In countries with a low living standard, La Rovere argued there is a moral obligation to focus on development before climate change mitigation. But he suggested that new ideas about solving climate change might emerge as a “co-benefit” of development in those places.

La Rovere also called for “stable, long-term signs to markets about the value of carbon impact reduction."

Markets

Business leaders called for stability and predictability throughout the conference, especially in regulations and level of subsidies. Tom Georgis, senior vice president at solar company SolarReserve, said renewable energies are nearly ready to go to market without government subsidies.

“It’s becoming more and more challenging to try to finance and deploy capital for fossil fuel generation,” Georgis said, pointing to a series of lawsuits against new coal facilities in Chile and a favorable investment atmosphere for renewable energy projects in South Africa.

In Latin America, especially, Georgis said, renewable energy sources are ready to compete. Though he believes markets should factor in the cost of carbon, “we can’t count on that as an industry” and the risk-reward of renewable energy “really becomes market by market.”