The climate policy debate has been dominated by economic estimates of the costs of policies to reduce greenhouse gas emissions. Yet the models used to derive those estimates are based on assumptions that have largely gone untested. The conventional approach embodies structural features that rule out alternative market outcomes. In addition, the distribution of 'climate rights' is crucial to determining the economic affects of various policies. Bringing these considerations to the forefront shows how domestic and international policy solutions might be found.
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I assigned this book for my class on forecasting at Stanford University, and have been pleased with the results. It is a wonderful exploration of the limitations of all economic forecasting models, not just those assessing the economics of reducing greenhouse gas emissions. It analyzes how these models treat consumers, producers, and intergenerational equity in a way that lays bare the myriad assumptions (most of which are not tested empirically) that determine the results. The book brings to bear the latest developments in information economics, transaction costs economics, increasing returns to scale, and the theory of the firm, and is enormously helpful for determining when economic results are credible. DeCanio makes it clear that "current [modeling] practice only hides the essential questions behind a technical facade," an observation that is in accord with my own experience as leader of Lawrence Berkeley National Laboratory's Forecasting group for more than a decade. DeCanio also analyzes the accuracy of energy-economic models in predicting prices and quantities, and finds their accuracy to be dismal, a result that will not be surprising to anyone familiar with this field. Finally, DeCanio's conclusions about the biases inherent in current climate modelling are important to note: all current modeling frameworks are biased towards overestimating costs for ameliorating climate change, and DeCanio concludes that economic theory is not now able to predict with confidence the economic impacts of reducing greenhouse gas emissions. If you are involved in debates about climate change economics at any level, get this book. Even if you are not an economist, reading the non-technical sections will teach you a lot, and will allow you to ask questions of those who confidently make assertions based on these flawed and limited modeling frameworks.
Reviewed in the United States on September 29, 2004
Did you know that according to economists, it would not be worth 6 cents per person to save the earth's economy from destruction 300 hundred years from now ?
Did you know that the models used by neo-classical economists to consider climate change have so many solutions to their equations that they cannot produce information useful to policymakers without being rigged to do so ?
Did you know that the assumptions then used to run the models either have been shown to be completely wrong or have never been validated scientifically?
Did you know that the energy models being used to project the economics of climate issues decades into the future have been wildly inaccurate in making much shorter term predictions ?
If not, you need to read DeCanio's book.
DeCanio rips away the fig leaf of objectivity from economists claiming to produce valid information for the climate change debate. Deconstructing their models through all their theoretical twists and turns, DeCanio reveals how their biases shape assumptions that in turn predetermine the outcomes of their analyses, a heads I win, tails you lose approach. DeCanio shows how these models, posing as application of the scientific method, with hundreds of equations that seem objective, actually are a classic example of `garbage in, garbage out'.
There is no court of malpractice to charge the neo-classical economists for their recklessness. But DeCanio's book serves as a warning: the results of the neo classical economic models of climate change put the earth's health at risk.