Ryan Avent points to this paper by Robert Stavins on cost-benefit analysis. In particular highlighting this passage:

Although formal benefit-cost analysis should not be viewed as either necessary or sufficient for designing sensible public policy, it can provide an exceptionally useful framework for consistently organizing disparate information, and in this way, it can greatly improve the process and hence the outcome of policy analysis

There is little that I could disagree with in this passage or in Stavin’s full post. Cost-Benefit analysis is useful but it is not everything. I, myself,  tried to illuminate some of the limitations to pure cost-benefit analysis in this paper.

On the other hand, one of the principle advantages of of cost-benefit analysis is that it forces us to be explicit about our assumptions. To build a model we must write down exactly what we are assuming and proceed only from those assumption.

Once, the model is done, we may not be satisfied. We may feel it fails to capture key elements. But, then we must be prepared to state explicitly what key elements are missing and why we think they overwhelm the conclusion of the model.

What I’ve tried to do in the climate change debate is shine a harsh light on the latter stages of this process. Waxman-Markey doesn’t do well under traditional cost-benefit analysis. Supporter, however, argue that this doesn’t matter because of the overwhelming narrative in support of carbon restrictions: Without significant reductions in carbon emissions we will wind up devastating the developing world.

Very well, I’ve argued, but there is a competing narrative in which carbon restrictions themselves harm the developing world. Carbon restrictions potentially reduce growth rates and slow the transition to an industrial economy.

We could exempt the poorest nations from international carbon restrictions, but this has two problems. First, it assumes that business interests in the developed world will go along with this. It assumes that companies will accept a competitive disadvantage and that the public will be insensitive to cries that we are loosing our jobs to counties with lax environmental regulations.

Second, we can’t ignore the emissions from China and India, which together are  home to hundreds of millions of the world’s poor.  Indeed, until recently the China and India were home to the majority of those in poverty. Heavy industry and high carbon emissions are part of the story of how over half of a billion people were lifted out of poverty in the last 25 years.

This doesn’t mean that there is no role for emissions restrictions. This doesn’t mean that we should forget about cap and trade. It does, however, mean that we need a careful and explicit effort to balance competing concerns. 

If we believe that damage from climate change will overwhelm the damage from emissions restrictions then we have to be clear as to why. What scenarios are we envisioning? What assumptions are we making?

Likewise, if we want to close the door on emission restrictions we have to be explicit as to why the benefits from potentially higher growth outweigh the possibility of devastation later.

The fact that both climate change and economic growth are non-linear processes with tipping points and varying dynamic regimes makes this thought exercise excruciatingly hard. It is, however, excruciatingly important.

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