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Warming and a limited future? No!

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Pavel Golovkin/AP

(Read caption) American tourists wear surgical masks during a visit to Red Square last week as smog from wildfires covers Moscow. St. Basil's cathedral is seen in the background. The World Meteorological Organization (WMO) says the weather-related cataclysms of July and August fit patterns predicted by climate scientists, although those scientists always shy from tying individual disasters directly to global warming.

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Who am I? Where am I? I can answer the 2nd question. I'm at the UC Energy Institute . A great set of energy economists are sitting around here and it is my job to lower the average. While Berkeley is not a glamorous town, it is a mildly productive place. I apologize for not blogging for a week but I don't get paid much for this activity.

I would like to talk about a thoughtful review of Climatopolis that is posted here . Unlike the Publishers Weekly review, here a reasonable intelligent person sat down and with an open mind read my book.

The reviewer liked the book but has two concerns:

"But Kahn’s analysis gives short shrift to two aspects of climate change that make it especially daunting. First, waiting for markets to feel the effects of global warming before getting serious about limiting greenhouse gas emissions will guarantee that the disruption is extreme and long-lasting. Second, the world is finite. It may be true that wealthy nations can easily import food if agricultural patterns change, but only up to a point. As the recent global economic recession illustrates, when a crisis is bad enough, it hurts pretty much everywhere."


This first point is wrong. Insurance markets have every incentive to be forward looking. If premiums are priced wrong in the face of changing risk probabilities, then these firms will go bankrupt. Farmers have access to futures markets to hedge risk and to see what is the best guess of future scarcity of various commodities such as oranges. Home owners own the rental stream of their home into the infinite future. They have every incentive to investigate whether the future holds an ugly fate for their specific community. In fire zones where such fires become more likely due to climate change, homes will sell for a lower price today (to reflect this anticipated future risk) and the home seller will have an incentive to invest in fire proof materials to lower this risk. This is adaptation baby! Free market adaptation and this is at the heart of Climatopolis.

As climate science improves, these forecasts will give us predictions about the time persistence of likely continued heat waves and droughts --- this information will help us to make "better" decisions today in terms of holding inventories and engaging in self insurance (i.e buying dried fruit) to protect us against the anticipated hotter trend.

I hope that my book reinvigorates the 1970s debate on Rational Expectations versus Myopic Expectations. This is an important debate. I agree that we have a better chance to more easily adapt if we have "rational expectations" and we learn over time. My point is that market forces encourage such learning and the anticipation of future scarcity creates opportunities today that actually help us to adapt (i.e product innovation that economizes on increasingly scarce commodities).

His second point is the "finiteness" of the globe. Economists don't believe this. The mind is our limiting factor. Human capital and new ideas can augment our finite natural capital stock in ways that will continue to amaze you. Star Trek now!

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