Carbon models and economic models

Don’t count on the economists to have a good “Computable General Equilibrium” model to yield valid estimates of how each nation’s economy will evolve in the presence of a carbon tax. If we introduced uncertainty into our models the confidence intervals would be huge. But today a group of economists are getting rich peddling their “scientific” models as truth in predicting very difficult policy counter-factuals.

The modern economics profession has made great progress estimating partial equilibrium relationships. See almost any NBER applied micro paper to get a taste of this. We have made much less progress on multi-sector dynamic general equilibrium models with endogenous innovation, irreversibilities, learning and uncertainty. Introduce all of these bells and whistles and you have the issue of climate change. Now economists like to be quoted and we are self confident but if we currently do not have good answers to policy questions should we follow the Nobel Laureate Robert Lucas and modestly say; “I don’t know”? If we follow this path, we are well aware that some bozo out there will fill our place offering the politicians an even sillier answer. So, we must pick our poison.

via Environmental and Urban Economics: Copenhagen and International Carbon Politics.

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