Hurricane Sandy's Dangerous Tail

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By Evan Soltas

If there can be a silver lining to such a horrible natural disaster as Hurricane Sandy, it's that the devastation has given many Americans a firsthand understanding of the costs of climate change. This is something many voters, long doubtful of and poorly informed on climate issues, could sorely use.

The problem has been that it's easy to tune out warnings of environmental damage and economic losses several decades away. Many Americans surely have. But you can't ignore a forced evacuation when you're the one leaving. You can't ignore the lines for gasoline when you have to wait in them. You can't ignore $50 billion in storm damage when some of that comes from your own home. You can't ignore climate change once it has changed your life in a meaningful way. (I spent the last week in coastal Monmouth County, New Jersey, just north of where Sandy made landfall.)

Sandy illustrates a major reason economists see climate change as dangerous: its "tail risk." Tail risks, or small probabilities of extreme outcomes, have become a major focus of recent research and discussion on the environment.

Sandy was the quintessential "tail event." It caused the first two-day shutdown of the New York Stock Exchange since 1888 because of weather  -- and has left the broader metropolitan area in a state of desperation and disarray for likely weeks to come.

The combination of risk aversion and tail uncertainties strengthen the case for action, as many economists now contend. The more in the dark we are about climate-change tail risk, the more prudent we should be, and the more pre-emptory our policy response should be. Any policy that can reduce the probability or cost of catastrophe is disproportionately valuable because of risk aversion.

Consider the work of Martin L. Weitzman, an economics professor at Harvard and an expert on climate change. "The most striking feature of the economics of climate change is that its extreme downside is non-negligible," he wrote in a paper last year. "Deep structural uncertainty" about our planet's reaction to higher levels of greenhouse gases, he argued, leaves the world exposed to "essentially unlimited downside liability."

William D. Nordhaus of Yale, another authority in the field, has also called for policies to address tail risk, though he is less inclined to Weitzman's lofty estimates of cost. "Policies implemented today serve as a hedge against unsuspected future dangers that suddenly emerge to threaten our economies or environment," Nordhaus wrote in a recent piece in the New York Review of Books. "So, if anything, the uncertainties would point to a more rather than less forceful policy -- and one starting sooner rather than later -- to slow climate change." With highly uncertain estimates of the probability and damage of an extreme scenario, a cost-benefit analysis will favor taking that scenario off the table with a measured policy response.

And economist Richard S.J. Tol, who looked at 211 different estimates of the costs of the anthropogenic carbon pollution causing climate change, found that its high-cost fat tail is so statistically important that it should guide any forecasts and policy conclusions.

The findings of Weitzman, Nordhaus and Tol are consistent with those of the Intergovernmental Panel on Climate Change in its 2007 report in this respect. As global mean temperatures increase, the report found, not only do the environmental and economic costs increase, but so does their rate of increase in terms of temperature anomaly. The costs of climate change, in other words, accelerate: The worst-case scenarios are vastly more expensive economically and environmentally than the central-tendency projections.

These economists are trying to tell U.S. policymakers something: not just that, when it comes to Sandy, "it's global warming, stupid," but also that "it's tail risk, stupid." If Sandy can bring that to light, then it may have saved us all.

(Evan Soltas is a contributor to the Ticker. Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Nov/05/2012 21:28 GMT