There's no shortage of lessons on what happens when you don't plan for improbable but potentially catastrophic events. Japan's nuclear industry learned the hard way. And the 2008-09 financial crisis hit so hard in part because economic models didn't consider the possibility of house prices dropping nearly everywhere at once. Japan will recover, and the Federal Reserve came to the rescue of the U.S. financial system. But there will be no such rescue if the world's climate meets one of these events.
One of the economic models informing our climate-policy debate is called DICE - the Dynamic Integrated model of Climate and the Economy, created by Yale economist William Nordhaus and endorsed by Bjorn Lomborg, author of Cool It: The Skeptical Environmentalist's Guide to Global Warming, whom I recently debated in Toronto at the annual International District Energy conference.
DICE holds that rapid reductions in carbon emissions are too costly to implement. The model calculates the costs of climate-change policy by summing the net costs of implementing a given policy response and the damage caused by the warming associated with that response. It balances these costs with the economic benefits of avoided environmental damage, and uses a standard discount rate to yield a net present value. Out pops the optimum rate of both investment and warming.
But this model and many of its ilk are fatally flawed. They treat the climate system like a simple oven, with temperature controlled by policy and technology. The net result? Slow and steady is the way to go. The optimum path lets the Earth warm 2.6 degrees Celsius by the end of the century. Start with a bit of money for R&D, but save the heavy lifting until we find the magic bullet that makes fossil fuels obsolete.
The DICE flaw is simple. Reducing the complexity of climate models to a few linear equations excludes most of the climate system's non-linear behaviour. We know, for example, that sudden, catastrophic changes in climate are a real possibility. Such events include the breakdown of ocean circulation patterns and the melting of ice caps. The timing of these "tipping points" and their effects can't be treated with certainty. DICE ignores the possibility of these nasty surprises.
The climate system also has a lot of positive feedback, whereby greenhouse gases cause warming that releases more greenhouse gases, and so on. Warming oceans may start to release the carbon they'd been absorbing. A melting North may belch huge amounts of methane, a potent greenhouse gas. If we reach one of these triggers, we may have to watch helplessly as the climate shifts into a very hostile equilibrium. An aggressive early response is essential if we are to avoid these triggers. The climate is path-dependent; DICE ignores path-dependency.
Ted Nordhaus acknowledges DICE doesn't entertain the possibility of low probability, highly catastrophic events, and admits our knowledge of climate damages is "very meagre." Yet, DICE still informs debate on policy choice.
There is another view. The Stern Review on the Economics of Climate Change, commissioned by the British government and released in 2006, includes the possibility of catastrophic climate change and estimates its damage as a loss to global GDP of as much as 20 per cent a year. Put more plainly, that's a collapse of our industrial economy. The costs of early and aggressive cuts in emissions are treated as a kind of insurance policy against this collapse. Paying something to reduce the risk is common sense.
Tom Rand, senior Cleantech adviser at MaRS Discovery District, is the author of Kick the Fossil Fuel Habit: 10 Clean Technologies to Save Our World .