Away from the headlines, there’s a really important discussion going on about how to think about the economics of climate change. The key player is Marty Weitzman, who has made a simple point (albeit using very, very difficult math) that’s nicely summarized at Env-Econ:

Climate change is fundamentally a problem about uncertainty. We are conducting an experiment with our planet by doubling CO2 levels in the atmosphere from pre-industrial levels. Concentrations have not been this high in hundreds of thousands of years. By and large, we don’t know much about the implications. Tackling this uncertainty is crucial. Extreme outcomes — fat tails — matter and should be at the heart of much of research.

You can see how important this point is by looking at the latest from Bjorn Lomborg,

who says that climate change will reduce world GDP by less than 0.5%, so it’s not worth spending a lot on mitigation.

Weitzman’s point is, first, that we don’t actually know that: a small loss may be the most likely outcome given what we know now, but there’s some chance that things will be much worse. (Marty surveys the existing climate models, and suggests that they give about a 1% probability to truly catastrophic change, say a 20-degree centigrade rise in average temperature.)

And here’s the thing: on any sort of expected-welfare calculation, the small probability of catastrophe dominates the expected loss. Suppose that there’s a 99% chance that Lomborg is right, but a 1% chance that catastrophic climate change will reduce world GDP by 90%. You might be tempted to disregard that small chance — but if you’re even moderately risk averse (say, relative risk aversion of 2 — econowonks know what I mean), you quickly find that the expected loss of welfare isn’t 0.5% of GDP, it’s 10% or more of GDP.

The question is, can we mobilize people to make modest sacrifices to protect against low-probability catastrophes in the distant future?