This story originally appeared in The Straits Times on August 29, 2019.
Climate change: Scientists need the wisdom of economists
Scientists say the world is running out of oil. Economists say oil will be around forever; it is just a function of its price. In climate change discussions, economic thinking helps clarify priorities and trade-offs
The Straits Times, 29 Aug 2019
Mark Castelino firstname.lastname@example.org . Mark Castelino is a professor in the International Executive MBA programme in Singapore offered by the Rutgers Business School, from Rutgers, The State University of New Jersey.
Scientists and economists live in two different worlds, the former in the world of solutions and the latter in the world of trade-offs. Being both a scientist and an economist, I have a foot in both worlds and have long contemplated why this dichotomy in thought exists. The answer may be found in the discussion around global warming or alternatively, climate change.
How often have we heard the cliche that “97 per cent of scientists” believe in global warming? That is true but only in a trivial sense. As a matter of fact, the number should actually be 100 per cent because every scientist knows that carbon dioxide is a greenhouse gas that is increasing, and greenhouse gases cause warming.
The economist will not disagree with that conclusion but goes one step further by asking two critical questions – “how much?” and “does it really matter?”
Herein lies considerable dispute, which will not be settled only in the science but also in the politics, economics, morality and ethics of the issue. This is why the climate change problem is so intractable.
The scientists and their supporters claim that global warming is an existential threat – implying that it must be tackled right now, otherwise we will reach the point of no return and the planet and its inhabitants are doomed. In support of this position they point to scorching temperatures, devastating droughts, intensity of storms and rising sea levels all due to the sharply increased levels of carbon dioxide.
The economist counters by saying all of the aforementioned events have occurred in the past and despite them the world has gotten richer, its population has gotten larger, its people are living longer and poverty is sharply lower. So where is the problem and why should we consider it existential?
Moreover, the economist further counters the existential arguments by providing a long list of scientists and politicians, the most prominent of which is the late Senator Daniel Patrick Moynihan of New York, who predicted that New York City would be several inches to several feet under water by 2005. Obviously no such thing happened. Not only that, but an entire city (Battery Park) was built on reclaimed land in Lower Manhattan whose property values have sharply escalated since.
Hence, from an economist’s point of view, any claim about rising sea levels in 20-30 years literally doesn’t hold water, no pun intended.
The trade-off versus solutions argument is further highlighted by the morality of the issue as well as by the science and economics of fossil fuels. Consider the moral issue first.
Today, billions of people, 300 million in India alone, are living in poverty without electricity. What they need urgently now, and not in the future, is energy which can realistically be provided only by fossil fuels, mainly coal. Asking them to delay development by not consuming such energy because of the future climate in First World countries appears morally indefensible.
Yet the scientist argues that if we do not do something now to prevent inevitable warming caused by the burning of fossil fuels, the future generations are doomed.
The economist retorts: “Which future generations?” Are they future generations from the present affluent countries or the poorer ones proliferating in Asia, Africa or South America? The future generations in those poorer countries may not even exist because their potential forebears died off before producing them, thanks to the lack of energy which sharply shortened their lives. Hence, there is clearly a brutal trade-off here in lives.
Another example that highlights the difference in thinking between the economist and the scientist is that bogeyman that is central to the entire climate change debate: fossil fuels.
Consider the following question: “How much oil is there in the ground and how long will it last?” The answer to that question illustrates the difference between the linear thinking of the scientist versus the non-linear thinking of the economist.
Here is how the scientist, typically the geologist, will approach the problem. They will first estimate the known reserves in the ground. Next they will make an allowance for new discoveries. This will be followed by a forecast of how much is used annually, followed by the number of years before the world runs out of oil. This is essentially the “peak-oil theory”.
They go one step further, in saying that work must begin now on finding a replacement for oil. This inevitably introduces politics into the process with the government picking winners and losers.
The economist will state upfront that he has no idea how much oil there is in the ground nor does it matter. He only knows how much is available at current prices. And, moreover, if the market is allowed to work, oil will always be available at a price. In other words, “forever”.
It is easy to show how the history of the supply, demand and prices of oil confirms the economist’s intuition.
In 1973, Saudi Arabia quadrupled oil prices in retaliation for the perceived support of Israel by the United States at the outbreak of the Yom Kippur War between Israel and Egypt.
Demand was immediately affected. People used far less energy than before. They purchased smaller cars with improved fuel mileage, participated in car-pooling, used public transportation, built smaller homes while better insulating the current ones, lowering the thermostats in winter and increasing them in summer, wearing sweaters – the list goes on and on. All this reduced consumption, none of which figured in the scientist’s calculations.
Next, equally if not more important, was the effect on supply. The quest to find new supplies was triggered. And find oil they did.
Quite literally all over the world, from the North Sea to Australia, Brazil, Indonesia and even Mumbai. All of this resulted in oil reserves doubling 10 years later, completely upsetting the “peak-oil” theory of how long it would take before oil reserves would start declining.
Since 1973, we have had several more shocks such as the 1991 Gulf War, the collapse of the Soviet Union, the Iraq war of 2002 to the run-up in prices from 2005 to 2008 culminating in the financial crisis.
With all of these devastating economic events occurring together with vastly more consumption, the price of oil today is lower than it was in 1973 in inflation-adjusted terms. Even more importantly, the known reserves of oil are several times larger than estimated in 1973. Nobody talks any more of “peak supply”, now it is “peak demand”. One breakthrough that changed the equation was “fracking” – pumping water and chemicals into rocks at high pressure to extract shale gas – which made producing oil and gas much cheaper.
The scientists may have invented the process of fracking but it was the economics of pricing and the wisdom of markets that made it possible.
There is no question that innovation comes from the scientist but the motivation for it comes from the economist. The scientist or engineer clearly knows how to build a bridge. What he doesn’t know is where to build it or whether it should be built at all.
In other words, he knows how to use resources. The economist, on the other hand,is trained in how to make the best use of those resources.
The scientist knows how to solve problems but it is the economist, trained in trade-offs, who knows which problem to solve first.
So any solution on climate change needs not just scientific thought, but also an economist’s mind to weigh trade-offs and priorities.