Koomey: Moving beyond benefit-cost analysis of climate change

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Jonathan Koomey’s method of ‘working forward toward a goal’, based on analyzing the cost-effectiveness of achieving a normatively defined warming target, is an insightful alternative approach to thinking about the climate change problem that avoids serious limitations of conventional benefit-cost analysis. This approach shows that delaying action is costly, required emissions reductions are rapid, and most proved reserves of fossil fuels will need to stay in the ground if we’re to stabilize the climate.

The following is re-posted from Koomey’s blog with permission.

Moving beyond benefit-cost analysis of climate change

My invited perspective article, “Moving beyond benefit-cost analysis of climate change”, was just posted by the open access on-line journal Environmental Research Letters.  Here’s the abstract and the introduction.

Abstract

The conventional benefit–cost approach to understanding the climate problem has serious limitations. Fortunately, an alternative way of thinking about the problem has arisen in recent decades, based on analyzing the cost effectiveness of achieving a normatively defined warming target. This approach yields important insights, showing that delaying action is costly, required emissions reductions are rapid, and most proved reserves of fossil fuels will need to stay in the ground if we’re to stabilize the climate. I call this method ‘working forward toward a goal’, and it is one that will see wide application in the years ahead.

Introduction

The recent article in ERL by Luderer et al [1] is exemplary in the clarity of its approach and the cogency of its recommendations, demonstrating that further dithering on the climate issue increases the costs of mitigation and makes it more difficult to achieve climate stabilization. Its findings are compelling in large part because it uses an approach to assessing the climate problem that diverges from the usual benefit–cost framing (which purports to characterize marginal costs and benefits of climate action far into the future, as, for example, in Nordhaus [2]). That divergence is all to the good, because the benefit–cost approach, while it has been useful in many contexts, has serious limitations that call into question its utility for analyzing climate change [38].1

This new way of thinking, which I call ‘working forward toward a goal’, involves assessing the cost effectiveness of different paths for meeting a normatively determined target. It has its origins in the realization that stabilizing the climate at a certain temperature (e.g., a warming limit of 2  Celsius degrees above pre-industrial times) implies a particular emissions budget, which represents the total cumulative greenhouse gas emissions compatible with that temperature goal. This approach had its first fully developed incarnation in 1989 in Krause et al [9] (which was subsequently republished in 1992 [10]). It was developed further in Caldeiraet al [11] and Meinshausen et al [12], and has recently served as the basis for the International Energy Agency’s analysis of climate options for several years running [1315].

Such an approach has many advantages. It encapsulates our knowledge from the latest climate models on how cumulative emissions affect global temperatures, placing the focus squarely on how to stabilize those temperatures. It puts the most important value judgment up-front, embodied in the normatively determined warming limit, instead of burying key value judgments in economic model parameters or in ostensibly scientifically chosen concepts such as the discount rate. It gives clear guidance for the rate of emissions reductions required to meet the chosen warming limit, thus allowing us to determine if we’re ‘on track’ for meeting the ultimate goal, and allowing us to adjust course if we’re not hitting those near-term targets. It also allows us to estimate the costs of delaying action or excluding certain mitigation options, and provides an analytical basis for discussions about equitably allocating the emissions budget. Finally, instead of pretending that we can calculate an ‘optimal’ technology path based on guesses at mitigation and damage cost curves decades hence, it relegates economic analysis to the important but less grandiose role of comparing the cost effectiveness of currently available options for meeting near-term emissions goals.

‘Working forward toward a goal’ is a more business-oriented framing of the climate problem [4]. It mirrors the way companies face big strategic challenges, because they know that accurately forecasting the future of economic and social systems is impossible [1617], so they set a goal and figure out what they’d have to do to meet it, then adjust course as developments dictate. To do so, they implement many different options, evaluate continuously, and do more of what works and less of what doesn’t. Such an approach, which the National Research Council [18] dubs ‘iterative risk management’, recognizes the limitations of economic models and frees us from the mostly self-imposed conceptual constraints that make it hard to envision a future much different from the world as it exists today [4].

Read more…

The full reference is:

Koomey, Jonathan. 2013. “Moving Beyond Benefit-Cost Analysis of Climate Change.” Environmental Research Letters.  vol. 8, no. 041005. December 2. [http://iopscience.iop.org/1748-9326/8/4/041005/]

For more on this basic line of argument, see my most recent book, Cold Cash, Cool Climate:  Science-based Advice for Ecological Entrepreneurs.

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Earlier CSW posts:

Koomey,  Clean energy: Learning by doing only happens if we DO! (July 9, 2013)

Book review: Cold Cash, Cool Climate (May 21, 2012)

Jon Koomey on climate change mitigation, corporate power, social responsibility, and the role of the market (July 21, 2012)

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