The End of Doom and Cost-Benefit Methodology

From Bryan Caplan of EconLog.

"Like all useful tools, cost-benefit analysis is flawed.  After surveying cost-benefit analyses of global warming and warming abatement, Ron Bailey's The End of Doom turns to methodological objections.  From his section on "How Much to Insure Against Low Probability Catastrophic Warming?":

How much should we pay to prevent the tiny probability of human civilization collapsing?  That is the question at the center of an esoteric debate over the application of cost-benefit analysis to man-mind climate change.  Harvard University economist Martin Weitzman raised the issue by putting forth a Dismal Theorem arguing that some consequences, however unlikely, would be so disastrous that cost-benefit analysis should not apply.

Weitzman contends that the uncertainties surrounding future man-made climate change are so great that there is some nonzero probability that total catastrophe will strike.  Weitzman focuses on equilibrium climate sensitivity... As has been discussed, the IPCC Physical Science report finds that climate sensitivity is likely to be in the range of 1.5° to 4.5° C and very unlikely to be greater than 6°C.  But very unlikely is not impossible.

Weitzman spins out scenarios in which there could be a 5 percent chance that global average temperature rises by 10°C (17° F) by 2200 and a 1 percent chance that it rises by 20°C (34°F)... Surely people should just throw out cost-benefit analysis and pay the necessary trillions to avert this dire possibility, right?

Then again, perhaps Weitzman is premature in declaring the death of cost-benefit analysis.  William Nordhaus certainly thinks so, and he has written a persuasive critique of Weitzman's dismal conclusions...  Weitzman's Dismal Theorem implies that the world would be willing to spend $10 trillion to prevent a one-in-100-billion chance of being hit by an asteroid...

Nordhaus also notes that catastrophic climate change is not the only thing we might worry about.  Other low-probability civilization-destroying risks include "biotechnology, strangelets, runaway computer systems, nuclear proliferation, rogue weeds and bugs, nanotechnology, emerging tropical diseases, alien invaders, asteroids, enslavement by advanced robots, and so on." 

Deja vu.  Bailey's Nordhaus digest continues:

Weitzman's analysis also assumes that humanity will not have the time to learn about any impending catastrophic impacts from global warming.  But midcourse corrections are possible with climate change...

At the end of his critique of Weitzman's Dismal Theorem, Nordhaus investigates what combination of factors would actually produce a real climate catastrophe.  He defines a catastrophic outcome as one in which world per capita consumption declines by at least 50 percent below current levels...

Nordhaus ran a number of scenarios through the Dynamic Integrated Climate-Economy (DICE) model... DICE would produce a catastrophic result only if temperature sensitivity was at 10° C, economic damage occurred rapidly at a tipping point of 3°C, and nobody took any action to prevent the catastrophic chain of events.  Interestingly, even when setting all of the physical and damage parameters to extreme values, humanity still had eighty years to cut emissions by 100 percent in order to avoid disaster.

Bailey closes with a spot-on challenge:

Why has no one ever applied a Dismal Theorem analysis to evaluate the nonzero probability that bad government policy will cause a civilization-wrecking catastrophe?

I fear climate activists will dismiss Bailey's challenge as a debating trick.  But I see no way around it."