Economic Models of Climate Change : A Critique

Rating:
Summary: A superb look at the limitations of all economic models
Review: I assigned this book for my class on forecasting at Stanford University, and have been pleased with the results. It is a wonderful exploration of the limitations of all economic forecasting models, not just those assessing the economics of reducing greenhouse gas emissions. It analyzes how these models treat consumers, producers, and intergenerational equity in a way that lays bare the myriad assumptions (most of which are not tested empirically) that determine the results. The book brings to bear the latest developments in information economics, transaction costs economics, increasing returns to scale, and the theory of the firm, and is enormously helpful for determining when economic results are credible. DeCanio makes it clear that "current [modeling] practice only hides the essential questions behind a technical facade," an observation that is in accord with my own experience as leader of Lawrence Berkeley National Laboratory's Forecasting group for more than a decade. DeCanio also analyzes the accuracy of energy-economic models in predicting prices and quantities, and finds their accuracy to be dismal, a result that will not be surprising to anyone familiar with this field. Finally, DeCanio's conclusions about the biases inherent in current climate modelling are important to note: all current modeling frameworks are biased towards overestimating costs for ameliorating climate change, and DeCanio concludes that economic theory is not now able to predict with confidence the economic impacts of reducing greenhouse gas emissions. If you are involved in debates about climate change economics at any level, get this book. Even if you are not an economist, reading the non-technical sections will teach you a lot, and will allow you to ask questions of those who confidently make assertions based on these flawed and limited modeling frameworks.