Public economics as if time matters: Climate change and the dynamics of policy
Tony Atkinson played a crucial role in shaping modern public economics, but throughout his life challenged whether we were making the right assumptions and were building models which captured the essence of the issues under examination. This paper examines questions discussed with Tony concerning public policy to foster change where the pace and nature of change are critical to any serious policy assessment. The primary example is climate change.
The paper argues that subjects such as the dynamics of innovation, of potentially immense and destabilising risks, and of political economy, together with technicalities around non-linearities and dynamic increasing returns, all of which are at the heart of the challenge of climate change, will require a series of focused models for their investigation. Attempts to build integrated assessment models (IAMs) for the analysis of climate change have been largely misplaced and omit key effects and questions of the above kind. Intertemporal issues and values are at the core of policy towards climate change and the paper shows that much of the intertemporal economic analysis of the issues around climate change has been misguided and has ridden roughshod over the analytical underpinnings and the underlying ethics of discounting. Where major decline is possible, discounting is fiercely endogenous; and where capital markets are imperfect and risk intense, discount rates cannot be read off from markets.
Notwithstanding the modelling difficulties and the challenging research agenda, the paper argues that the urgency of the problem (for example, world infrastructure will double in the next 15–20 years and there are major dangers of lock-in of dirty and damaging capital) require strong action and we know enough about policy to begin travelling down the path of an attractive low-carbon transition.