zaterdag 15 januari 2011

Review of Matthew Kahn's "Climatopolis"

Following the events of the last few months, it becomes increasing unlikely that an agreement will be reached to reduce emissions of greenhouse gasses to levels that, according to most scientists, will not lead to significant climate change in the coming decades. If Plan A (“climate change mitigation”) doesn’t work, only ideologues will tell you that you should not start seriously considering a plan B (“climate change adaptation”). With Climatopolis, Matthew E. Kahn has written a very accessible discussion of how cities will cope with plan B (of course, there is still plan C, “climate engineering”, but let us leave that for some future discussion).
Matthew E. Kahn , a professor of economics at the University of California at Los Angeles,  has published extensively and authoritatively  on environmental and urban economics, and this little book builds heavily (but far from exclusively) on his own research.
The theme of Climatapolis can be summarized as follows. Kahn agrees that anthropogenic climate change is real, and that it will have serious consequences (mainly in the form of increased risks of flooding in some places and in increased risks of droughts in other places). Kahn also admits that the burden of climate change will fall disproportionally on developing countries and on the poor in developed countries. However, on balance, Kahn is optimistic about cities’ potential for adaptation.  At the risk of oversimplifying his argument, it boils down to the following. If climate changes gradually, Kahn argues that people will become aware of its consequences, and that this will lead to changes in their behaviour: either their voting behaviour at the ballot box will lead local politicians to undertake adapting measures, or they will “vote with their feet” and move to places where quality of life has remained stable (or has even improved) in a changing climate. As long as people are mobile, and as long as markets are allowed to send the right price signals, Kahn is confident that humanity will continue to thrive in the future.
Any discussion of the merits and flaws of this book should start with an assessment of its target audience. Environmental economists who have worked on the consequences of climate change or on urban economics will find nothing fundamentally new in the book: all the topics covered by the book have been discussed elsewhere (including by Kahn), and with more rigor. However, the book provides a good non-technical introduction to these themes: Kahn has a good command of a very broad range of topics, and he writes well (being an economist myself, I have discovered to my own embarrassment that economists’ sense of humour is somewhat out of line with that of normal human beings  and I am more reluctant to write that Kahn is very witty as well).
With this caveat in mind, I think the book has several important merits. 
Kahn not only explains  why cities are the foundations of modern prosperity. He also shows that cities have shown a remarkable resilience in the past when faced with dramatic events (including being completely annihilated during wars) and confirms with new evidence that the environmental impact of urbanites is much smaller than that of people residing in the green countryside (somewhat ironically, this argument would have more appropriate in a book on climate change mitigation).
One important issue that is often overlooked in policy debates and that Kahn rightly reminds us off, is that climate change will not only cause harm: cold waves currently kill more people than heat waves, in some areas of the world agricultural productivity will improve etc… Some specific locations will thus gain from a warmer climate, and part of the effects of climate change will be a redistribution of welfare from some regions to others.
Kahn also correctly reminds the reader that some of the most important obstacles to efficient adaptation lie in flowed government interventions. For example, lax zoning regulations combined with (implicit) promises to publicly cover any damages from flooding, induce people to live in flood-prone areas (while moving out of this type of area is an efficient way to adapt to climate change). Also, poorly designed prices for water already lead to overconsumption, while forthcoming droughts call for higher prices (which should induce conservation efforts).
At some places in the book, I was offended by what I read, only to find out a few pages later that Kahn had anticipated my objections and had provided a sensible answer. Thus, whether you are a climate sceptic or a tree-hugger, do read on until the end: Kahn really does know your arguments, and he does provide counterarguments.
However, sensible does not always mean convincing.
I will now elaborate here on some of my objections to the analysis.
Kahn firmly places himself in the tradition of Chicago school economics, emphasizing that changing circumstances will translate into changed prices (insurance premiums for living in flood-prone areas will increase, for instance), and that changed prices will provide the right incentives for efficient adaptive behaviour (people will move to areas that are less flood-prone). Kahn explicitly dismisses the “behavioural economics” approach which claims that human behaviour departs in predictable ways from the rationality axioms postulated in neoclassical economics. In the world vision of Kahn, once people start realizing that, due to climate change, the quality of life in their city is deteriorating, they will adapt optimally.
While I agree with Kahn that the market can be a really powerful force for the good (and are often better than any other realistic alternative), I also agree with the “behavioural economics” school’s position that markets are most likely to be efficient when people face choices amongst goods they are familiar with. Rapid climate change is not such a good. To paraphrase the late Austin Robinson, what’s the sense of talking about rational expectations with respect to climate change if there’s no way to form such expectations? To his own admission, the scheme described by Kahn can only work if climate change happens gradually and unfolds in largely predictable way. I am not convinced that things will work out that way. Actually, I am a European, and as scientists are still far from having reached a conclusion on whether the Gulf Stream is actually slowing down or not (I’ve discussed this extensively with atmospheric modellers at my home institution’s New Year’s party, and that was before our third glass of wine), I don’t even know whether I should be heading north or south to cope with climate change.  It is also ironic that Kahn discusses Moscow as one of the places that is unlikely to suffer from heat waves – the facts in the weeks after the publication of the book have been rather unkind to this thesis. Of course, this does not imply that Kahn’s assessment of the situation in Moscow is silly: it just shows that his argument rests upon the assumption that the general public is better at forecasting the future than he is (while he is surely more knowledgeable  than the general public, at least as far as these specific issues are concerned).
I think there are enough examples of societies who have reacted too little and too late when faced with impending disaster. Kahn refers to Jared Diamond’s Collapse in his book, and I wonder how well he could fit the Greenland Norse’s behaviour in face of eminent starvation within his paradigm. Well, maybe there was some government failure that Diamond had not identified and that was the real cause of the disaster, but I mainly see myopia, simplistic extrapolation and group conformity, all explanations that behavioural economists are very happy with.  In conclusion, I definitely do think that an analysis of climate change adaptation should try to incorporate some lessons from behavioural economics (I have to disclose a conflict of interest here: this is exactly one of the points I am making in ongoing consultancy work).
I also wonder how Kahn can be so optimistic in his conclusions, while some sections in the book are rather gloomy. Maybe this is just a cultural thing (remember, I am a continental European, and being pessimistic is très chic on this side of the Atlantic). Still, I find the optimism in the conclusions quite inconsistent with the remainder of the analysis, certainly when it comes down to the role played by government action. How can you claim that markets will induce people to undertake the right actions and at the same time provide numerous examples of democratically elected governments screwing up the same markets? In my own country (Belgium), one of the policy conclusions after floods in the 1990s is that too many people lived in areas vulnerable to flooding. We had some new floods recently, and (not surprisingly) building in these areas had increased substantially since the 1990s (in some cases, built up surface had doubled in the two last decades). To the credit of our policy makers, I must add that the insurance that was provided in the past by a national disaster fund has been abolished and has to be provided now by private insurers. This has however not proved enough of an incentive for people to stop building houses close to rivers.
There is however one point where I am probably less sceptical about government action than Kahn is. Kahn argues against what is sometimes dubbed the New Green Deal: the idea that we can spend ourselves out of the recession by directing public money to investment in green technologies. In Kahn’s view, an important chunk of that money will just be wasted, and it is better to have the market direct technological innovation.  Let me explain why I don’t share this view (another conflict of interest must be revealed: my home institution is in this line of business). I agree with Kahn that the first step towards green innovation is to set the prices right and to tax polluting processes and products (this is precisely what I have argued a few years ago in consultancy work on market failures in recycling markets I had undertaken for the European Commission). However, in the real world, government rarely provide these incentives (I don’t understand why Kahn actually thinks that carbon prices in the US will increase in the future – this does not seem in line with recent election results).  Public support for “green innovation” can then be an acceptable second best policy, certainly if private funding for innovation is insufficient (we could now start a separate discussion on why there is a lack of venture capital in Europe but not in the US, but let us try to keep the discussion focused).
Finally, one is sometimes left with the feeling that Kahn sees climate change mitigation mainly as an issue of welfare redistribution from one set of regions to another. This impression is probably not correct, but the book would have gained from an attempt to assess the net costs of climate change. Pointing out that some regions will win does not provided any comfort if the gains to the winners are smaller than the costs for the losers.
Of course, these disagreements with Kahn do not imply that the book is fundamentally flawed: it does raise a lot of important issues, and on most points, I agree with the analysis. I just do not draw the same conclusions. And Kahn should have spend more time discussing approaches to economic thinking that differ from his own – the book would have been more balanced if he had done so.

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