Book Review: Climate Shock: The Economic Consequences of a Hotter Planet

Climate Shock: The Economic Consequences of a Hotter Planet by Gernot Wagner and Martin L. Weitzman. Princeton: Princeton University Press, 2015. 264 pp, $27.95 / £19.95 hardcover 9780691159478

In Climate Shock by Gernot Wagner and Martin Weitzman, the authors consider the implications and potential responses to climate change. The rapidly growing and evolving momentum surrounding global climate change negotiations make this book’s subject matter exceptionally timely, as the Paris meetings in December 2015 grow nearer. But the ongoing transformation of these issues at present illustrate the challenges of keeping such a written work and its associated research up to date, despite only being released earlier this year.

The answers to two questions which the authors present to their readers in the opening pages partially illustrate this dramatic evolution: “Do you think climate change is an urgent problem? Do you think getting the world off fossil fuels is difficult?” Although Wagner and Weitzman pose the questions to illustrate the current landscape of popular opinion as well as related obstacles to addressing this global challenge, in each instance the answers given by world leaders and their constituents alike have continued to demonstrate a sea change.

Question One: An Increasing Sense of Urgency

The proactive pledges of world leaders at last month’s United Nations General Assembly in New York surrounding the newly adopted Sustainability Development Goals offered a panoramic view of how extensively the conventional wisdom surrounding the authors’ questions has begun to change. While the core economic, technical and moral conclusions offered in the book bear significant merit, the underlying premise that related policy concerns are not viewed as urgent show signs of quickly becoming obsolete.

Wagner and Weitzman clearly acknowledge the relevant uncertainties at the foundation of their arguments throughout many sections of the book including in Chapter 3, during their discussion of fat tails: "Climate change is beset with deep-seated uncertainties on top of deep-seated uncertainties on top of still more deep-seated uncertainties. And that’s just for going from emissions to concentrations to final temperatures. Further uncertainties prevent us from simply translating temperatures into economic damages, and none of that yet clarifies the uncertainties around the correct discount rates to calculate the optimal carbon price today." (p.75) Historically, these uncertainties have been successfully leveraged by climate change deniers in their efforts to delay definitive action in addressing these challenges.

Given such policy constraints and prior tendencies, few observers would have expected Bank of England Governor Mark Carney to directly allude to such tail risks as he recently did just a few months after this book’s release. Directly addressing these uncertainties, he noted in his September 2015 speech at the insurance market Lloyd's of London: “Your capital requirements are based on evaluating the impact of severe but plausible scenarios. You peer into the future, building your defences against a world where extreme events become the norm. This stress-testing technology is well-suited to analysing tail risks likely to grow fatter with time, casting light on the future implications of environmental exposures embedded in a wide range of firms and investments.”

As the authors continued in their own discussion of tail risk: "In each of these steps, though, one thing is clear: because the extreme downside is so threatening, the burden of proof ought to be on those who argue that fat tails don’t matter, that possible damages are low, and that discount rates ought to be high." While such an acceptance may have previously remained highly unlikely for most economic actors, the possibilities of proactive steps have now demonstrably increased in recent months with the recognition of Carney, Pope Francis and other prominent voices that these issues require more immediate attention. Although some may disregard the June 2015 pledge by G7 leaders to phase out fossil fuel use due to the long-term nature of these objectives and the narrow scope of their potential impact over the near term, many other immediate steps warrant greater attention.

In the lead up to the Paris negotiations in December, 147 countries representing approximately 85% of global greenhouse gases have already presented pledges on what they will do to confront climate change. The authors of this book note that, “Climate change is a problem because too few of us consider it one. And those of us who do consider it a problem, or worse, can do little about it unless we get everyone else to act.” While 85% participation may fall short of everyone acting, the number of states and people who consider climate change a problem is clearly on the rise including in some unexpected places. Previously unimaginable for a magazine from the Middle East, the recently released first issue of EconomicME included a dramatic banner with a similar theme on its cover: “Celebrating the End of Oil”.

Although a slender volume, this extensively researched book includes over fifty pages of notes as well as a bibliography of over thirty pages of sources. On the one hand, many of these resources suffer similar timeliness problems given the rapidly changing nature of these issues. On the other hand, this small database offers a useful compendium of important references.

Aspects of the diverse backgrounds of these two authors may hold future political significance as well. Born in 1942, Weitzman is an older member of the baby boomer generation. He has been a Professor of Economics at Harvard University since 1989. Born in 1980, Wagner is currently the lead senior economist at the Environmental Defense Fund. He is also a member of the millennial generation, amongst which growing evidence has shown that these younger voters are more closely attuned to monitoring and taking action on climate change. Such demographic trends appear destined to further catalyze these shifts in popular opinion towards more proactive action in the future.

What You Can Do: Past, Present and Future

Near the end of the book, Wagner and Weitzman offer the reader suggestions regarding what they can do to address the climate change problem. This ties back closely to the second question which the authors posed at the very beginning in their preface regarding whether getting the world off fossil fuels will be difficult.

Amongst their recommendations, it is worth considering the fossil fuel stock divestment campaign which the authors advocate in this concluding chapter. Last week, ExxonMobil CEO Rex Tillerson gave a keynote speech at a major energy industry conference in London entitled, "Unleashing Innovation to Meet our Energy and Environmental Needs". As the leader of the largest publicly traded energy company in the world by market capitalization, the fact that the focus of his remarks directly acknowledged the current sustainability and climate change agenda in itself represented a step forward.

While the underlying forces that determine share prices may be difficult to bifurcate, the downward trend of commodity markets in general may have stood as the more material drivers in the company’s fate over the past year. But the fact that ExxonMobil’s market capitalization has decreased over $100 billion between the company’s 2014 highs and the week of Tillerson’s speech reflects the relevance of these current pressures. President of Harvard University, Drew Faust, has previously written that, “I do not believe, nor do my colleagues on the Corporation [Committee on Shareholder Responsibility], that university divestment from the fossil fuel industry is warranted or wise.” Beyond other growing pressures, the quantitative realities of low investment returns have more recently provided many investors increased motivation to reconsider such inclinations.

In fairness to the authors, their frustration with society’s rate of change in addressing these issues is not unwarranted and is by no means unique. At the recent 1st Global Conference on Stranded Assets and the Environment at Oxford many of the leading experts in attendance echoed similar pessimism. The consensus of the conference participants could be concisely captured by the words of Wagner and Weitzman: “The gap between our current efforts and what’s needed on climate change is enormous.” (p.88)

In summary, several of the core arguments presented in Climate Shock may in many ways struggle to keep up with the current state of play in climate negotiations despite its release just a few months ago. But the framework for understanding elements of these current macro trends, future possibilities for climate change negotiations and considerations surrounding geoengineering alternatives make the book an important contribution to the literature. With less than fifty days to go until the historic United Nations COP21 Conference, Climate Shock ironically makes for a timely read despite the fundamental impact of these momentous negotiations on many of the book’s underlying arguments.

Carter W. Page is Founder and Managing Partner of Global Energy Capital LLC. He is a Fellow at the Center for National Policy in Washington and a Columnist for Global Policy Journal.