I Bought Richard Tol’s ‘Climate Economics’ So You Don’t Have To – It’s Dull and Dangerous

The Sussex University economist has aligned himself with climate denial and his tweets are highly entertaining – shame this book is so damn conventional.

Professor Richard Tol has authored a ruthlessly conventional £57 textbook on the economics of climate change. I took the hit and skimmed the book so you don't have to. 

Climate Economics presents a concise yet comprehensive treatment of neoclassical environmental economics with reference to the problem of climate change and climate change mitigation.

‘Neoclassical’ economics is the school of economic thought that now almost entirely dominates the field.

This school is taught in almost all UK universities, receives the bulk of funding – at least in the Anglophone world – and structures how most professional economists and commentators on the economy think about the world.

Neoclassical economics emerged in the ‘marginalist revolution’ of the 1870s, purporting to show that any economy can be analysed not by reference to how it produces or consumes, but with reference to how individuals freely choose to maximise their utility.

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Rational Individuals

It is fundamentally based on the method of marginal analysis. This means that it looks, in particular, at how a system behaves when changes made to it are very, very small – marginal.

@DeSmogUK it's a fair reflection of your state of mind

— Richard Tol (@RichardTol) September 11, 2014

The justification for this approach is that it is based on the principle of optimisation. If rational individuals seek to maximise their utility, given their resources are not unlimited, they will aim to ensure they get the most value possible from each £1 they have.

This means the marginal £1 is of particular concern for them. Similarly, if firms are profit-maximising, they will be concerned with the marginal revenue they can get from selling one extra unit of their output.

All of this makes for quite neat mathematical solutions, and provides some apparently robust answers to big questions: can a capitalist economy ever be stable? How much should firms produce? What is the optimal amount of pollution?

Flawed Approach

A neoclassical theory of growth has been developed which shows that a capitalist economy can produce stable economic growth over very long periods of time, based on the idea of individual optimisation by consumers and firms.

Tol’s growth model, as presented in the book, is a derivative of these general neoclassical models.

When dealing with climate change, however, this is a deeply flawed approach. First, it depends on being able to say what the marginal effect is, and on the assumption that the impact of this marginal effect will be limited.

This is unlikely to apply to the climate: because the system is so complex, the impacts of even small additions to (for example) the total volume of greenhouse gases (GHGs) emitted may themselves not be small. In mathematical terms, the system is strongly non-linear.

Tipping Points

There may be “tipping points”, like the melting of permafrost, that cannot be accounted for in a marginal analysis.

Instead of a nice, smooth set of “choices” and clear outcomes about how much GHG society should emit, we might well have very “lumpy” outcomes, with sudden, dramatic changes to the climate occurring from relatively small further increases in GHGs.

Second, the analysis also assumes that decisions are in some sense reversible. In other words, the consequences of any decision taken now can be entirely or at least substantially reversed.

There are no truly permanent consequences to decisions. This underlying belief follows from the assumption of optimising behaviour by rational individuals: for individuals to be able to choose rationally when there is uncertainty about the future, they have to be able to consider different possible courses of action to make the comparison.

Threatened with Extinction

But if some course of action are irreversible, this comparison doesn’t make much sense. In particular, there is no convincing way to assign a monetary value to different outcomes – how do we assign a value to a species threatened with extinction? What is the point of comparison here?

These general issues feed into the book’s approach, which is wholly uncritical of its own assumptions. For instance, Tol talks about the “marginal impact” of CO2 emissions.

Yet, if these CO2 emissions set off a “tipping point” a marginal analysis is useless: there is no margin, just an enormous loss from the release of methane trapped in permafrost and other feedbacks.

Tol advocates trading of pollution permits as a “solution” to climate change, the idea being to find the “optimal” level of GHGs, given the presumed costs that they impose.

This belief in trading is fundamentally flawed and derived from a result known, after its proposer, as the Coase Theorem.

But Coase’s Theorem, which purports to show that allowing people to trade licences to pollute will reach an 'efficient' solution only applies when there are no “income effects”.  

Put simply, it only works when different people and institutions trading are indifferent to how much money they actually have – clearly not the case.

Blasé Assumptions

The book uses the EU trading scheme as an example, but notes only “teething problems” rather than suggesting any more fundamental issues at stake.

There is a rather blasé set of assumptions scattered throughout the book, in keeping with its neoclassical bias.

Often this leads it into making unexamined neoliberal claims about the world.

For instance, it says only “non-economists” would be in favour of substituting more expensive domestic energy for cheaper imports of energy. But this ignores work on dynamic trade theory by people like the Cambridge economist Ha Joon Chang.

And elsewhere, Tol claims governments are bad at “picking winners” – that they are not as good at free markets at allocating research funding and supporting new industries.

This ignores the work of Marianna Mazzucato on the critical role governments have always played in supporting new industries.

Tol is equally blasé about the prospects for technological progress. On the basis of the Kaya equation – that total emissions is equal to income per person, times population, times emissions intensity – the book suggests that technological change alone will be sufficient to meet climate change goals.

Social Justice

This flies in the face of work by Peter Jackson who shows that the scale of emissions reduction per £1 produced, with continued economic growth, is completely implausible given current or any plausible future technology.

There is also little or nothing in this book about equity and justice beyond the usual concerns of neoclassical economics for “Pareto efficiency” and the First Welfare Theorem.

And yet the effects of climate change will be uneven globally – and contributions to its cause are also uneven.

There is, in practice, an almost-total mismatch between the likely victims of climate change, and those most responsible for causing global warming.

Tol ends up presenting a pleasantly optimistic view of the future in which the “marginal” costs of climate change can be met with a somewhat increased rate of investment in technology, and some minimal government intervention to correct “externalities”.

These conclusions follow pretty directly from the book's unexamined neoclassical worldview. They are not necessarily correct.