Suppose...that we are uncertain about which environment we are in but the uncertainty will resolve over time. In this case, there is a strong argument for delay. The argument comes from option pricing theory applied to real options. A potential decision is like an option, making the decision is like exercising the option. Uncertainty raises the value of any option which means that the more uncertainty the more we should hold on to the option, i.e. not exercise or delay our decision.I agree wholeheartedly, except to stress that the typical problem is not the binary problem of full delay vs. immediate full action, but one of how much and what sorts of things to do in this decade versus future decades. In that sense, for global warming it seems to me none too early to set up political agreements and markets we will need to incentivize greenhouse gas reductions. Not to immediately and radically cut down emissions of greenhouse gases -- far from it -- but to learn about, experiment with, and debug the institutions we will need to reduce greenhouse emissions without creating even greater political and economic threats. Once these are debugged, but not until then, cutting greenhouse emissions will have a far lower cost than if we panic and soon start naively building large international bureaucracies.
We already know how to use markets to reduce pollution with minimal cost to industry (and minimal economic impact generally). We now need to learn how to apply these lessons on and international level while avoiding the very real threat of the corruption and catastrophic decay of essential industries that comes from establishing new governmental institutions to radically alter their behavior.
There are tons of theories about politics and economics, practically all of them highly oversimplified nonsense. No single person knows more than a miniscule fraction of the knowledge needed to solve global warming. Political debate over technological solutions will get us nowhere. We won't learn much more about creating incentives to reduce greenhouse gases except by creating them and seeing how they work. As with any social experiment, we should start small and with what we already know works well in analogous contexts -- i.e. what we already know about getting the biggest pollution reductions at the smallest costs.
The costs of the markets -- especially the target auction (and expected exchange) prices of carbon dioxide pollution units -- should thus start out small. In that sense, the European approach under the Kyoto Protocol (the European Union Emission Trading Scheme ) provides a good model even though it has been criticized for costing industry almost nothing so far, and correspondingly producing little carbon dioxide reduction so far. So what? We have to learn to crawl before we can learn to walk. The goal, certain fanatic "greens" notwithstanding, is to figure out how to reduce carbon dioxide emissions, not to punish industry or return to pre-industrial economies. Once people and organizations get used to a simple set of incentives, they can be tightened in the future in response to the actual course of global warming, in response to what we learn about global warming, and above all in what we learn from our responses to global warming.
We already know markets -- and perhaps also carefully designed carbon taxes, but as opposed to micro-regulation and getting the law involved in choosing particular technological solutions -- markets can radically reduce specific pollutants if they specific mitigation decisions are left to market participants rather than dictated by government. And we might learn certain mitigation strategies (perhaps this one, for example) that turn out to be superior to radical carbon dioxide reductions.
Let's set up and debug the basics now -- and nothing is more basic to this problem than international forums, agreements, and exchange(s) that include all countries that will be major sources of greenhouse gases over the next century. These institutions must be designed (and this won't be easy!) for minimal transaction costs -- in particular for minimal rent-seeking and minimal corruption. Until we've set up and debugged such a system, it could be far more catastrophic than the projected changes in the weather to impose large costs and create large bureacracies funded by premature "solutions" to the global warming problem.
As the accompanying illustrations show, a domestic United States programming that left all decisions beyond the most basic and general of market rules to the market participants -- and thus left the specific decisions to those with the most knowledge, here the electric utility companies, and minimized the threat of the rise of a corrupt bureaucracy -- was able to radically reduce sulfur dioxide and nitrous oxides (acid rain causing) pollution. So much so that few remember that acid rain in the 1970s and 80s was a scare almost as big global warming is today. Scientists plausibly argued that our forests were in imminent danger of demise. By experimenting with, learning about, and then exploiting the right institutions, that major pollution threat was, after methodically working through the initial learning curve, rapidly mitigated.
Global warming is an even bigger challenge than acid rain -- especially its international nature which demands the participation of all major countries -- but we now have the acid rain experience and others to learn from. We don't have to start from scratch and we don't need to implement a crash program. We can start with what worked quite well in the similar case of acid rain and experiment until we have figured out in reality -- not merely in shallow political rhetoric -- what will work well for the mitigation of global warming.
Furthermore, it probably will pay to not impose the big costs until we've learned far more about the scientific nature of the problems (note the plural) and benefits (yes, there are also benefits, and also plural) of the major greenhouse gases, and until the various industries have learned how to efficiently address the wide variety and vast number of unique problems for industry that the general task of reducing carbon dioxide output raises. It's important to note, however, that the scientific uncertainty, while still substantial, is nevertheless far smaller than the uncertainties of political and economic institutions and their costs.
To put it succinctly -- we should not impose costs faster than industry can adapt to them, and we should not develop international institutions faster than we can debug them: otherwise the "solutions" could be far worse than the disease.
Another application of Tabarrok's theory: "the" space program. (Just the fact that people use "the" to refer to what are, or at least should be, a wide variety of efforts, as in almost any other general area of human endeavor, should give us the first big hint that something is very wrong with "it"). For global warming we may be letting our fears outstrip reality; in "the" space program we have let our hopes outstrip reality. Much of what NASA has done over its nearly fifty year history, for example, would have been far more effective and self-sustaining if done several decades later, in a very different way, on a smaller scale, on a much lower budget, and for practical reasons, such as commercial or military reasons, rather than as ephemeral political fancies. The best space development strategy is often to just to wait and learn -- wait until we've developed better technology and wait until we've learned more about what's available up there. Our children will be able to do it far more effectively than we. I understand that such waiting is excrutiatingly painful to die-hard space fans like myself, but all the more reason to beware of deluding ourselves into acting too soon.
In both the global warming and space program activist camps you hear a lot of rot about how "all we need" is "the political will." Utter nonsense. Mostly what we need to do is wait and experiment and learn. When the time is ripe the will is straightforward.
A million-yuan giraffe, brought back to China from East Africa by a Zheng He flotilla in 1414 (click to enlarge). Like NASA's billion-dollar moon rocks, these were not the most cost-efficient scientific acquisitions, but the Emperor's ships (and NASA's rockets) were bigger and grander than anybody else's! In the same year as the entry of this giraffe into China, on the other side of the planet, the Portuguese using a far humbler but more practical fleet took the strategic choke-point of Ceuta from the Muslims. Who would you guess conquered the world's sea trade routes soon thereafter -- tiny Portugal with their tiny ships and practical goals, or vast China with their vast ocean liners engaging in endeavours of glory?