Assessing Energy Futures 1

What Can Economic Models Contribute to Climate Policy? Stephen J. DeCanio Professor of Economics, University of California, Santa Barbara Director, UCSB Washington Program 1608 Rhode Island Avenue, NW [email protected] Presentation for 6th National Conference on Science, Policy, and the Environment January 26-27, 2006 Washington DC

The Economy: A Complex Territory

Conventional View of General Equilibrium Economic Modeling

Economy

Model

• Model is “descriptive” and approximates reality • Adding detail and complexity can fill out the model and improve the approximation • Dynamic behavior of the model corresponds to evolution of the economy

But What if the Model and the Economy Have Very Little Overlap?

Model

Economy

• Model assumptions about firms and individuals largely unrealistic • What’s left out as important or more important than what is included • “Equilibrium” underdetermined and dynamics unspecified

Can “Normal Science” Improve the Models?

• Assumption of optimization necessary for “economics” - What restrictions other than first-order conditions? - Atomistic utility functions must be given exogenously - Parameterization of technological change • Information requirements for agents’ decision-making - How much foresight? - Complexity and heuristics - Freedom or determinism? • “Present-centric” orientation assumes away the main problems - Focus on markets excludes future people - Discounting vs. future generations

Conceptual Modeling: A Less Ambitious Approach

Economy

Conceptual Model

• Model highlights some key feature or aspect of the economy • Thought experiment, not description • Grounding for policy insight, not calculation of optimal policy

Areas in which conventional energy-economic models do a poor job

• Illuminating the moral foundations of intergenerational interactions - Discounting is a misleading kludge - Utilitarianism is an obstacle to consensus • Long-term predictions of economic variables - Checking predictions against outcomes possible - Both signs and magnitudes of changes uncertain • Incorporating world-changing technological change - How did we imagine the future of computing back in the 1970s? - Do futurists ever get the “look and feel” of the future right? • Incorporating non-economic factors in human and social behavior - Economics is not the universal standard of behavior - Why does it occupy such a prominent place in public discourse?

Areas in which conceptual models can be helpful

• Outlining features of the future we want - Scenario analysis - Economics can help us avoid stupid mistakes • “What if” future generations could transact with us? - Golden Rule models of economic growth - Including future generations in “the market” results in multiple equilibria • Highlighting the limits of knowledge - The unpredictability of the future has consequences for action now - The importance of risk management