dinsdag 30 augustus 2011

Edward Glaeser's "Triumph of the city"

In “Triumph of the city”, Harvard economics professor Edward Glaeser sets out “how our greatest invention makes us richer, smarter, greener, healthier and happier”. Hyperbole aside (are cities really a greater invention than the wheel?), he largely succeeds in this ambition. Moreover, despite the scholarship that shows on every single page of the book, the book is very enjoyable.
Glaeser starts his book with a startling question: why do people choose to live in cities at all, while there is so much free space around (all of humanity could fit in Texas, as he duly reminds us)? The answer, in short, is that, even in the Internet age, the productive advantages conferred by proximity outweigh all disadvantages linked to urban life. Cities are places where entrepreneurial and smart people congregate because they know that that’s where they can meet other entrepreneurial and smart people,  and it is this interaction that leads to the innovative forces that underlie human progress. If, as Matt Ridley has argued in “The rational optimist” (  see my review of Ridley), human progress is due to “idea having sex”, then urban life is indeed one big orgy.
Of course, Glaeser is not blind to the crime, the squalor, the pollution, and the congestion that often blight city life. However, he correctly argues that several myths and misconceptions surround these elements. For instance, the co-existence of extreme wealth and extreme poverty is not a sign of failure, but the natural consequence of a city’s success: poor people move to cities because they are attracted by the opportunities for upward mobility offered by city life.
Of course, one cannot talk about cities without discussing suburbs and urban sprawl. In economists’ jargon, the move to suburban life is a typical example of an externality: people who can afford the commute from suburbs to the city centre, tend indeed to move to the suburbs, because they only consider the benefits to themselves, and not the costs they impose on society (more congestion, higher energy consumption, biodiversity losses etc). Glaeser describes not only how decreases in transportation cost have led to “classical” suburbanization, but he also discusses the recent emergence of exurbs. Paradoxically, while city dwellers may indeed suffer from high concentrations of air pollutants, their environmental impact and their energy consumption are sometimes orders of magnitude smaller than those of people living close to nature. It would be exaggerated to put that only city life can save the planet, but further suburbanization will certainly lead to disproportionate environmental impacts, especially with respect to greenhouse gas emissions (which are much more closely linked to energy consumption than conventional pollutants). One cannot even start thinking about the consequences should China and India follow the path of the Western world in this domain.
It is impossible to do full justice to the breadth and depth of this book in just a few pages. Let me just briefly mention some of the other the other topics covered in the book: Why do some cities remain successful even after the original causes of their success have become irrelevant (New York, say)? Why would it be better for declining cities to just tear down entire building blocks rather than to invest in new infrastructure? Why are urbanites willing to cope with extraordinary high costs of living? How have building regulations resulted in keeping poor people out of the centre of Paris? Why are the slums of Mumbai the result of poor policies? Why are cities essentially marriage markets? To all these questions, Glaeser provides answers, sometimes surprising, sometimes provocative, but always well argued.
Does that mean that the book is without flaws? Let’s just say, that as an economist with a professional interest in topics with a strong urban dimension (such as transport and waste policy), I would have liked a more detailed discussion of how cities have coped with these specific challenges: What were the issues in these fields? How have changes in technologies and in institutions interacted? What are the challenges for the future?
But these are minor issues, and a more technical discussion may put some of the audience of this book off.
“Triumph of the city” is popularized social science at its best, and is highly recommended to anyone with an interest in urban life – as more than half of the people on this planet currently live in cities, that should be nearly everyone. 

zondag 13 maart 2011

Review of “Sustainable Energy – without the hot air”

I have a confession to make. “Sustainable Energy – without the hot air” had mostly gathered dust on my bookshelf for almost two years before I finally took the time to finish reading it. So why did I take it up again and finalise it this time (and, more importantly, bother to write this review and try and convince you to read it yourself)?
Well, in the last few months, several reports have been published, outlining how it would be possible to run an economy without fossil fuels in the foreseeable future – I suppose that this sudden outburst is not completely unrelated to the preparation of the European Commission’s roadmap for a low-carbon future.
While the headlines of these reports caught my attention, in most cases, I rather quickly abandoned reading them.  The main motivation for doing so was not that I fundamentally disagreed with the authors’ conclusions, but rather that the published material was not sufficiently concrete to help me make up my mind on the validity of these conclusions. Indeed, any report looking 40 years or more into the future is inevitably speculative. There is nothing wrong with that: taking into account the stock nature of greenhouse gasses, we have no choice but to think about the very-long-term consequences of today’s choices. However, with such a time horizon, it is clear that any conclusion you draw can depend critically on some assumptions that may appear to be minor but that have dramatic cumulative impacts in 40 years from now. Therefore, complete transparency with respect to the assumptions used (and how they translate into conclusions) is essential for any publication on this subject. It was precisely because this transparency was lacking in most publications on the subject that I felt that a further reading would not really enlighten my own thoughts.
It was then that I recalled that complete transparency was the key selling point of “Sustainable Energy” (one should not take “selling” too literally, as the book can be downloaded freely). To his own admission, the main motivation of the book’s author, David MacKay, a professor of Physics in Cambridge, is his concern about cutting the emissions of “twaddle about sustainable energy”. He starts from the observation that many of the things that allegedly make a difference in terms of energy consumption simply do not add up. However, he rightly points out that the debate about sustainable energy is one about numbers, and that in a climate where people don’t understand numbers, anyone can get away with murder (or energy plans that do not add up).
The book is essentially a case study of whether it is possible to draw up an energy plan for a country (in this case, the United Kingdom, but the methodology can be readily applied to any country) that would cover its entire energy needs without the use of fossil fuels.
MacKay proceeds as follows.
In the first half of the book, he compares the country’s energy consumption with “sustainable” energy production. His approach is bottom-up pushed to the extremes. On the consumption side, he takes any possible activity that uses energy (transport, heating and cooling, light, “gadgets”, food, etc) and estimates the corresponding energy use of a “typical” household. On the production side, he considers all possible sources of sustainable energy (on-shore wind, solar, hydropower, offshore wind, wave, tide and geothermal). The only constraint MacKay considers are physical constraints. His main motivation for deliberately ignoring economic or environmental constraints is that doing so helps focusing on the question whether conceivable sustainable energy production would be enough to cover total consumption.
After having verified the results of his bottom-up estimates with actual energy consumption (according to official statistics), Mac Kay goes on to the second half of the book, where he verifies whether an appropriate mix of demand (better transport, more efficient heating etc) and supply (importing renewables from abroad, nuclear, even coal with carbon capture and storage) measures would result in a renewable energy mix that actually adds up. 
In case you cannot wait to read the book, the answer to the feasibility question is: yes, it is physically possible to fulfil a country’s energy needs with renewable energy but (even if one ignores economics) it will be far from obvious and it will require some drastic changes in current consumption and production patterns. Actually, the author even hints that some climate engineering may be needed in case the sums for mitigation do not add up (see my discussion of Superfreakonomics for more on this). Whether you like this conclusion or not, I would strongly recommend to find out the details of the argument for yourself, and to verify whether you can agree with them.
What is really wonderful about this book, is that you can indeed verify every single step in the argumentation. Moreover, you can put all the assumptions in a spreadsheet, and verify how the results changes according to geography (you may well live in a country with a very short shoreline but lots of spare place and sun) or time (some of the technical assumptions may change quickly and unexpectedly when time unfolds – for instance, The Economist of 12 March hints that the potential for increased energy efficiency in aviation is much higher than Mac Kay’s estimates).
To put it simply, this is probably the most transparent book I have ever read, and it sets a very high standard for any future work in this field.
Through its emphasis on verifiable facts and figures, rather than on perceptions, the book is also very good at demystifying a lot of misconceptions (no, you will not save the planet by unplugging your mobile-phone charger when it’s not in use; yes, there are limits to energy efficiency that are not imposed by economics, but simply by the laws of physics etc), which can only lead to a better informed debate (in case, of course, that’s what you’re interested in).
Of course, the level of detail and the emphasis on hard facts may also put a lot of people off (despite the tongue-in-cheek humour, it is hardly compelling bed-time reading, which may explain why it lingered on my own “to read” list for so long).  I suppose that’s the eternal dilemma of books that are meant to be intellectually rigorous but that aim at a general audience at the same time: there’s an unavoidable trade-off between rigour and accessibility. This is typically the kind of book that boffins will enthusiastically recommend as being very “accessible”, just to find out that no one except their own kind shares this enthusiasm.
This being said, are there any other issues with the book?
Actually, it covers so much ground, that I do not feel qualified to comment on most of the details (when I wrote that you can verify every detail in the book, what I really meant is that it is possible to set up a team of experts to verify everything ).
Let me therefore limit my discussion to the few subjects where I think I know a thing or two more than Professor MacKay.
First, transport. MacKay makes a compelling case for the (physical) limits to energy efficiency in private transport. However, I am afraid he is way too optimistic concerning the potential of public transport. I do not dispute that public transport is, on average, much more energy efficient than private transport. However, current averages are a very poor predictors of actual energy efficiency if a massive shift from private to public transport were to take place. Indeed, public transport can only be more energy efficient than private transport if it used to move huge (more or less predictable) quantities of people from one (predictable) origin to a (predictable) destination. In other words: it is mainly efficient in peak time in urban areas. The problem is that a significant amount of people who are currently using their car for moving around do not fall into this category (they live spread around in large suburban areas, their work places are dispersed in other large suburban areas, etc). If these people would switch to public transport, energy efficiency of public transport is likely to decrease, not increase. Of course, my reasoning depends also on specific assumptions with respect to spatial structure: one may retort that the promotion of public transport should go hand in hand with measures against urban sprawl. Now, that’s a point I fully agree with, but the reality is that spatial structure is like housing: poor choices that were made in the past are likely to stay with us for a very, very long time. So, to summarize, in some countries where public transport has been underfunded or poorly organised, there is probably some potential to improve the energy efficiency of the transport system by promoting a modal shift. Also, this may be an interesting policy option for the hundreds of cities that will be built in India and China in the decades to come, and where spatial structure remains to be defined. But do not think you can stretch the potential of public transport much further in many European urban areas.
Second, economics. Of course, as an economist, I would have liked to see a more thorough discussion of the economics of sustainable energy (the solutions with the highest technical potential are not necessarily the ones with the highest cost-effectiveness). However, I understand Mackay’s point that you should evaluate the physical feasibility of an economy entirely based on renewable before  you even consider economics. Actually, I would have preferred if MacKay would have stuck to this approach throughout the book, because most of what he has to say on economics does not come close to the analysis of other issues. For instance, MacKay finds it odd that people have faith in market, “given how regularly markets give us things like booms and busts, credit crunches, and collapses of banks”. Very well. Using a similar line of argument, I find it odd that people have faith in governments, given that that they gave us things like decades of economic stagnation and mass famine (Soviet Union and China under Mao), and mass massacres (Birkenau, the Gulag and the Cambodian killing fields were organised by government bureaucracies, were they not?). If you think this argument is a caricature, I agree – it is. But not much more than the diatribe against markets that you can find in Chapter 29 of the book.
My point here is: finding out what is technically achievable is an essential first step in a move to an economy that is based upon renewable energy. However, it is only a first step. Once you go further than that, you have to define priorities  and you must design institutions that will induce the desired changes  in a cost-effective manner. While the design of these institutions should indeed involve legislation, regulation and taxes (as argued by MacKay), there is nothing dogmatic about affirming that you also need to harness the power of market forces to induce these most cost-effective reductions.
By the way, I also have a substantial comment or two to make on the economics. Electrical vehicles may have a lot of technical potential, but, for the foreseeable future, most economists reckon that their cost per tonne of CO2 saved is up to an order of magnitude larger than the cost per tonne of CO2 saved in other sectors of the economy (such as housing). I also doubt that the costs of all sources of renewable energy can be expected to drop in the future: whilst technological progress may induce lower prices, higher demand will also put upward pressure on prices. I do not think we can predict which effect will dominate. However, discussing these issues in depth should be the subject of a separate post on this site.
Third, MacKay barely touches upon the energy and non-energy resource cost of creating the infrastructure  that will provide all this renewable energy. This is not a trivial matter. Actually, some have argued recently that the main constraint on moving to a low carbon economy is that it will not be possible within the coming decades to mine all the minerals that are needed in the creation of this infrastructure. This is maybe an issue that should be considered in a new edition of the book. 
Of course, within the larger picture, these are minor comments. On the whole, this book is an impressive intellectual achievement. As it is freely available on-line, you do not have the excuse of the cost for not downloading it right away and making up your mind yourself (and, more importantly, for not forwarding it to all policy makers you know).
And, oh please, don’t forget to repeat its core one-liner to everyone you know: if everyone does a little, we’ll achieve only a little. 

zondag 20 februari 2011

Superfreakonomics and climate engineering

With Freakonomics, Steven Levitt and Stephen Dubner had written a very enjoyable overview of how the standard techniques of economic analysis can be applied to a wide variety of less standard issues (how to detect cheating teachers and sumo wrestlers, how liberalizing abortion laws eventually translates in lower crime rates , why most drug dealers live with their mothers, etc ).
With Superfreakonomics, they do it again. The range of topics is just as wide as in their first book: why walking drunk is more dangerous than driving drunk, why wages of prostitutes have gone down over the last century, why your month of birth is a good predictor of future professional achievement, how to detect from someone’s bank account whether he is likely to be a suicide terrorist, why children (at least in the US) are more likely to visit their parents in retirement homes if they have siblings, etc.
These two unconventional books are the result of a just as unconventional team. Stephen Dubner, who writes for The New York Times and the New Yorker, had joined efforts with Steven Levitt,  a professor of economics at the University of Chicago. In case the subjects listed above would make you doubt, Steven Levitt is no crank: for his original research, he has won the John Bates Clark medal, which is arguably harder to get than a Nobel Prize.
As the authors explain, both books have one grand unifying theme: (a) people respond to incentives (b) they do not necessarily do this in ways that are predictable or manifest. In the first book, the emphasis was on professor Levitt’s own research in this field, while Superfreakonomics  covers more work undertaken by other researchers.
The general appreciation of the book can be relatively short:  just as its predecessor, it is very well written and chockfull of facts and insights that are both amusing and revealing. If you have any interest in human behavior, you should read it.
However, in this review, I would like to elaborate more on one specific chapter that is specifically relevant for the subject of this blog: the discussion on climate engineering.
The chapter can be summarized as follows. The authors do accept the hypothesis that climate is changing, and that these changes are anthropogenic (even though they rightly point out that a lot of processes are still very poorly understood). However, they doubt very much that a binding international agreement to reduce the emissions of greenhouse gasses (GHG) will ever be signed. Moreover, they argue that, even if such an agreement would be reached today, it would probably be too late to prevent significant climate change.  Finally, scenarios that assume that significant climate change mitigation still falls within the realm of the possible, tend to overestimate the potential of technological solutions (for instance, because they do not take into account the GHG emissions during the production of “clean” technologies such as photovoltaic cells).
In a previous post of this blog, I had already discussed one possible approach to plan B – climate change adaptation.  Levitt and Dubner discuss plan C: climate change engineering.
The idea is really quite simple: just as the presence of greenhouse gasses in the atmosphere tends to increase average temperatures,  the presence of sulfur dioxides tends to decrease average temperatures. This phenomenon is well documented and quite well understood. For instance, important volcano eruptions can lead to a marked decrease in average temperatures for several months or even years.
Does this mean that simply putting huge quantities of sulfur dioxides  will be enough to stop climate change?
Actually, it’s not that simple. In case you’ve forgotten, or are simply too young, we have already been through this: before we started imposing environmental regulations in the 1970s, we had already been emitting huge quantities of sulfur dioxides (the big worry about climate change in the beginning of the 1970s was global cooling, not warming). The ensuing decrease in the emissions of sulfur dioxides is actually one of the really big success stories of  environmental policy, leading to significant health benefits.
Again, one may be tempted to jump to conclusions and think that the choice is now between facing intolerable temperature increases or inhaling particles that directly affect our health and life expectancy.
However, this reasoning overlooks one potential way out that Levitt and Dubner discuss: instead of pouring the sulfur dioxides in the atmosphere at ground levels, we could develop tools to release them directly in the stratosphere instead. In their book, Levitt and Dubner report interviews with several scientists who argue that this should be technically possible at an economic cost that would be a fraction of the cost of climate change mitigation.
 Would this work?
I am not a physicist nor an engineer, so I do not feel qualified to comment on this specific point.  However, if it would work, and if its cost would really be so low (that’s admittedly two big ifs) than moving the focus from climate change mitigation to climate engineering looks like a no-brainer.
Maybe surprisingly, this approach faces some stark opposition, and it is important to understand why.
One counter-argument is that climate engineering comes down to tinkering with the climate. I agree completely with Levitt and Dubner that this argument makes no sense: everything we do involves tinkering. There’s just tinkering that involves doing something and tinkering that involves not doing anything. Some moral philosophers may think there is a deep difference between the two, but from a policy point of view, this seems irrelevant to me.
One argument that merits some discussion is that the possibility of climate engineering would just be an excuse for a continuation of “business-as-usual”.  Of course, unless one thinks that emitting green house gasses is a sin in itself, this argument is in the same category as the previous one: symbolism and not substance.  Thus, the relevant question is: is it a sin to emit greenhouse gases if there an antidote to the global warming effect?
The answer is: in some cases, yes. Well, not in the case of CO2, but there are a lot of less widely known gasses that do not only trap heat in the atmosphere but also hurt the environment in other ways. It has been known for some time that several ozone depleting substances are also very potent greenhouse gasses.
A forthcoming report by the United Nations Environmental Programme now confirms that there are other villains out there: methane and black carbon. The negative environmental effects of black carbon (or soot)  , which is emitted massively by primitive stoves and  old diesel engines, are already well known. However, recent research suggests that black carbon is also a potent greenhouse gas. Moreover, it has a relatively short atmospheric life time, implying that  reducing the emissions of black carbon would not only improve air quality (notably in developing countries), it could lead to significant climate benefits in the short term.  The emissions of methane, in turn, lead to increased formation of tropospheric  ozone, which has also well-documented adverse health effects (contrary to stratospheric ozone which blocks ultraviolet rays).
Even though the science of black carbon is far from settled, this insight somehow turns the problem raised by climate engineering on its head. Because black carbon and tropospheric ozone are local pollutants, individual countries have a strong incentive to reduce emissions of soot and methane (well, at least if governments can be held accountable by their people), and this can lead to climate benefits even if we cannot agree on reducing CO2 emissions. I also think no one would dispute that the Conventions on Long Range Transboundary Air Pollution have been far more successful than the Framework Convention on Climate Change: this suggest that it is far easier to sign successful environmental treaties when the benefits occur in the short run and when there is a little scientific uncertainty surrounding these benefits.
So, if you ask me, I think the first priority is now to work on greenhouse gasses that bring strong co-benefits in terms of local air quality. And, in the meanwhile, we should work further on our understanding of climate engineering, as a possibly quick fix in case we run out of other options.
And more people should read what Levitt and Dubner write on the subject.

zondag 13 februari 2011

Is mankind really unique in its propensity to exchange?

One of the central propositions in "The rational optimist" (see my review of December 2010) is that human progress results from our propensity to exchange, which, according to Matt Ridley, is unique to mankind.

Apparently, it is time to reconsider this assumption.

Recent laboratory work by Keith Chen has shown that capucin monkeys do not only understand monetary exchange, but they also understand the basic laws of demand and supply. Moreover, they also appear to act irrationally in exactly the same settings as humans do (to be  more precise, they are risk-averse: they attach more value to losses than to gains of the same amounts). Finally, when they were allowed to barter not just with the experimenters, but also amongst themselves, the first profession that was created was..... indeed, prostitution!

An accessible discussion of these experiments is provided in Levitt's and Dubner's Freakonomics, which I intend to review more at length in the coming days. Who ever said that economics wasn't fun?

maandag 7 februari 2011

Climatopolis and the European Commission's climate change adaptation strategy

I have just taken a look at the European Commission's white paper on climate change adaptation.  Comparing this document with Matthew Kahn's Climatopolis (see one of my previous blogs for a detailed discussion of this book) reveals some interesting points.

First of all, cities are central in Kahn's book, and their resilience is an important source of optimism. In the Commission's view, cities are part of the areas that are especially vulnerable - the impact assessment points specifically to the "urban heat island" effect that will exacerbate the effects of heat waves in urban areas, and to the need for building infrastructure (such as green roofs) that can mitigate this effect.

Second, in Kahn's book, migration is, alongside technological innovation, the main instrument for adaptation. In the Commission's assessment, when migration is mentioned, it is alongside issues such as state failure, social cohesion and security.

Third, Kahn puts a lot of faith in society's spontaneous capacity for adaptation. The Commission does not assume that solutions will emerge and proposes an integrated strategy for adaptation.

These three observations have a clear pattern: where Kahn sees solutions, the Commission sees problems that need to be addressed. Some people may prefer the almost boyish enthusiasm that can be found in Climatopolis. However, the Commission's white paper is not just doom and gloom: it analyses the problem, and then proposes an action plan.

Of course, some will argue that climate change adaptation is just a new excuse for interventionist policies that will affect individual freedoms at high costs and with no clear environmental benefit. As I cannot venture into discussions of individual policies without incurring the risk of future conflicts of interest, I will just point out that one of the recommended actions is further trade liberalization - hardly a communist agenda point!

I intend to come back to the issues of migration (both of humans and of other species) in future posts.

dinsdag 1 februari 2011

Review of Sam Savage's "The flaw of averages"

If you ever thought that probability calculus and statistics are boring, incomprehensible or just irrelevant for real life, then The Flaw of Averages might make you think again.
The book’s author, Sam Savage,  a Consulting Professor at Stanford University, and a Fellow of the Judge Business School at the University of Cambridge, has set himself as task to explain in plain English how people make avoidable mistakes in assessing risk in the face of uncertainty – and, with respect to this specific point, the book is an unmistakable success. (By the way, Savage also happens to be the son of one of the great statisticians of the last century, which is probably why the name is not completely unfamiliar to you if you have taken a course on the subject).
The book is organized in three main sections.
In the first section, Savage lays the foundations of the book.  Savage points out that, when people plan for the future, they often replace uncertain outcomes with single numbers, the averages. He uses several real life examples (some of them hilarious) to illustrate why this approach is, more often than not, wrong, and leads, on average, to negative outcomes.
Savage then goes on to explain that uncertain outcomes are not just described by their averages, but by their whole distribution. He then quickly moves on to discuss the behavior of combinations of uncertain numbers, and the importance of understanding interrelated uncertainties. Subsequently, he discusses decision trees and the value of information (guess what: you should not be willing to pay any price to make better informed decisions!).
In case (a) you have taken a university level course in statistics (b) actually understood the practical implications of what you have been thought (c) remembered how to apply the tools you have learned, then you will probably already have guessed that this section in the book will teach you nothing substantially new – basically, what Savage tells you is that the expected value of a function of several variables is not always the value of the same function applied to the expected value of these variables. However, this is no reason to think you will learn nothing from the book.
Indeed, the originality of this section is different.
First, even if you think you master the principles of probability calculus, the examples provided by Savage will show you that you often fail to apply these principles when confronted with real life applications . To be honest, I made several hugely embarrassing mistakes myself – the price for revealing one (to you in person, not on this site) is a Westmalle Trippel http://en.wikipedia.org/wiki/Westmalle_Brewery .
Second, Savage is a master teacher and storyteller. He really does succeed in explaining all the essential elements of probability theory (including far-from-obvious topics such as Jensen’s inequality) in a very accessible and humorous style. Every teacher of probability and statistics should read this book to understand how his subject can be brought to life – as a result, his student might even become actively interested in the subject.
 In the second section, Savage provides several applications of the theory: financial portfolio theory, the capital asset pricing model, derivative pricing, corporate investment theory, supply chain management, the war against terrorism, health care, gender issues, World War II and climate change. Again, Savage illustrates brilliantly that problems of staggering complexity can be brought to life, and, more importantly, can be explained in such a way that the student actually ends up understanding what the subject is about (want to understand how the boffins at Long Term Capital Management almost blew up the world economy in 1998? –read the book).
Finally, in the third section, Savage presents his own solution to the problem: Probability Management. This review is not the right place to discuss this approach in detail. Essentially, Savage argues that, when faced with uncertainty, decision makers should be running thousands of simulations, showing how random events affect all relevant variables simultaneously, and illustrating the interactions between these variables. The book contains links to websites that offer commercial software that can be used to run simulations on standard spreadsheet packages (the website also contains demo versions).
This part is the weak link of the book. While the two first sections are light-hearted but very informative, this section mostly reads as a big advertisement for the services Savage has on offer. Instead of providing detailed and informative examples on how Probability Management could improve decision making, Savages mostly discusses personal anecdotes on its intellectual conception. It’s still a lot of fun, no doubt about that, but it’s rather disappointing after the brilliant start of the book. But, then, I suppose that the objective is really to make us download the demo versions and find out their usefulness for ourselves.
Let me summarize. There’s an old joke stating that a statistician is someone who drowns in a river that has an average depth of 30 cm. This joke show a complete lack of understanding of what statistics is about: Savage shows that people who drown in these circumstances are precisely people who fail to understand that one should look at the complete distribution of an uncertain variable, and this is precisely what statisticians do. To quote from the book: the best models are the models you no longer need because they have changed the way you think. If this book can change the way a few hundreds of thousands people worldwide think, it will certainly contribute to make the world a better place.

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.