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I recently posted on an article authored by Paul Krugman, a highly regarded economist, on his analysis of how to address climate change. I was a bit critical of his choice to spend a considerable amount of time discussing science rather than economics, but I have a much more fundamental problem with the piece: He gave up on economics.

In the last 2500 words of his article, Mr. Krugman decides he needs to make the case for immediate action on climate change so he sets up the classic straw man of “what if we don’t act?” He declares that disaster is certain but that the magnitude of the disaster is uncertain. Based on this uncertainty, Mr. Krugman says:

You might think that this uncertainty weakens the case of action, but it actually strengthens it. As Harvard’s Martin Weitzman has argued in several influential papers, if there is a significant chance of utter catastrophe, that chance -- rather than what is most likely to happen -- should dominate cost-benefit calculations. And utter catastrophe does look like a realistic possibility, even if it is not the most likely outcome policy.

Weitzman argues -- and I agree -- that this risk of catastrophe, rather than the details of cost-benefit calculations, makes the most powerful case for strong climate change.

Spoken like a true politician. That pesky, economics-based cost-benefit analysis needs to go.

Where have you heard this type of argument before?  This is the same argument made by Dick Cheney to justify pursuing Al Qaeda. It is known as the precautionary principle, or the one-percent doctrine based on Mr. Cheney’s statement:

If there’s a 1% chance that Pakistan’s scientists are helping Al Qaeda build or develop a nuclear weapon, we have to treat it as a certainty in terms of our response . . . .

In other words, if there’s a small likelihood, even a one percent chance, of a catastrophic event (such as global warming), then doing a cost-benefit analysis that might result in no immediate response would apparently be . . . well . . . “criminally irresponsible” according to Mr. Krugman.

There are any number of possible responses to that statement, but being a family-friendly blog I will simply say: You have got to be kidding me. We’re going to quit looking at other options based on the 1% possibility of catastrophe? We’re going to ignore the opportunity costs of that decision? We’re going to overlook the downside risk  inherent in such a strategy? And we’re going to do this as a matter of policy for the entire world?  Really?

Allow me to give a few reasons for why such a strategy might not be insanity, but is a very close relative.

First, the precautionary principle is the ideal argument for people who have run out of arguments.  It says: "Ok, ok you’re right almost all of the time, but I might be right a small percentage of the time, so we’re going with my idea."  While I admit that there will be a certain number of politicians that will like this argument (which group will, of course, change depending on who controls Congress), it isn’t a sound basis upon which to promulgate national policy.

Second, where do you draw the line?  What is sacrosanct about a 1 in 100 chance? What about 1 in 1,000,000 or 1 in 10? There has to be a line somewhere. Should we spend years arguing about where it is, or will it be determined, once again, by who has the biggest stick?

Finally, as every trial attorney can tell you, there is an expert for everything. In other words, there will always be someone who can dream up some example of a small chance of a catastrophe. It really isn’t hard to do. (There’s a great Dan Akroyd SNL skit where he justifies selling a “Bag-O-Glass” to children because they might have a small chance of getting hurt by choking on their toy bear anyway, so it’s OK for him to sell glass shards. Well, maybe this would actually be the non-precautionary principle.  The precautionary principle would be to prohibit the selling of the bear).

Using the precautionary principle for environmental policy (as EPA seems to be proposing), or war policy or any other public policy, is wrong. It circumvents honest debate and ignores costs. Mr. Krugman, as brilliant an economist as you are, stick to your area of expertise. Don’t throw out cost-benefit analysis just because it doesn’t fit your political beliefs at the moment (though it, too, has problems). You can still get where you want to go (to encourage immediate action on climate change), but do it using the tools of the discipline you know. Keep economics above the fray, don’t drag it down to the political level.

RELATED POST:  Paul Krugman and the Non-Economics of Climate Change
 

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Three months ago I said that cost-benefit analysis was at the heart of the environmental debate between Republicans and Democrats. Two months ago I said that the United States Supreme Court granting unfettered discretion to EPA to define the applicability and scope of cost-benefit analysis was an extraordinary gift to our new EPA administrator. Three days ago I said that we could expect this administration to make wholesale revisions to the administrative rules and guidelines governing regulation of the environment.

So what happens?  EPA begins to modify the guidelines it uses to undertake cost-benefit analysis when analyzing environmental regulations. The best description I’ve seen is by Michael Livermore. He writes:

The Guidelines [for Preparing Economic Analysis] is little known outside of EPA, but used regularly by the agency to design every major environmental regulation. Before any rule is adopted, it must go through an economic analysis according to the Guidelines . . . .

The draft changes to the Guidelines are under discussion now and will hopefully be adopted this fall. These revisions would create a major shift in the status quo at EPA.

I have to agree with Michael when he says it will create a major shift in the status quo. He argues that that shift will be a good thing for environmental regulation. While I don’t agree with this conclusion, I do think it is very interesting, and telling, that this EPA is acting so quickly to change even the most fundamental rules governing environmental regulation.

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I mentioned earlier that an important finding in Entergy v. Riverkeeper  was that EPA can now decide when it will use cost-benefit analysis in environmental regulation (unless "categorically prohibited"), the standard to be applied to that analysis (strict or loose) and that it may change that standard without notice.  I thought that the ruling was significant in that it put the power to use (and to quickly change the standard for) cost-benefit analysis firmly in the hands of the EPA Administrator, with all the political nuances therein.  Fearing that mine might be a somewhat cynical take on the decision, I thought it might be a good idea to seek a second opinion -- what did the losers think of the ruling?

The New York Times reported that Alex Matthiessen, the president of Riverkeeper, said:

We are disappointed, of course, that the court did not affirm the lower court's judgment in it its entirety, but nonetheless pleased that the court agreed that EPA is not required to use cost-benefit analysis and left it up to EPA on remand to decide to what extent, if any, cost-benefit analysis should be used in regulating cooling water intake structures.  We are looking forward to working with EPA's new administrator, whom we are confident will agree that the Bush EPA regulations failed to satisfy the Clean Water Act's mandate that the adverse environmental impacts of cooling water intake structures be minimized.

Since EPA has not commented on the ruling, one might wonder why Mr. Matthiessen is so "confident."  It is likely that it has something to do with the fact that Lisa Jackson has a new job.  Ms. Jackson, formerly head of the New Jersey's Department of Environmental Protection, is now the Administrator of EPA.  New Jersey was one of six states that joined in the Entergy case -- in support of Riverkeeper.

Ms. Jackson has excellent credentials and I have no doubt that she will be a great administrator of an Agency that is going to be very busy for four or more years.  It must be helpful for her to know that on something as fundamental as the use of cost-benefit analysis, it's pretty much up to her as to when, and to what degree, it will be applied.                               

Sometimes it's funny how things work out.                            

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