Krugman Models the Economics of Climate Change

Ezra Klein pointed me to this note by Paul Krugman on the economics of climate change. Economics students will recognize the methods. The non-geeks among my readers will find it rather heavy going. Krugman uses a simplified "toy model" to illustrate some of the economics of climate change and atmospheric carbon. According to his model, the longer it takes the carbon price to rise, the longer it takes for action to make economic sense:

Nordhaus and other modelers, making their best possible estimates, come to the conclusion that while emissions must eventually be brought way down and carbon concentration stabilized, it’s not worth doing this until K has risen a long way above current levels. So it’s a mega-St. Augustine: O Lord, make us carbon-neutral, but not yet.

One of Krugman's equation depends on "the sensitivity of temperatures to carbon concentration, and the sensitivity of welfare to temperature." This is where concerns over accelerating change come into play:

Lately, climate models have begun suggesting a lot more sensitivity to concentration, with a number of groups doubling their predicted temperature rise. As for the welfare sensitivity: Marty Weitzman has managed to scare me, by pointing out that there’s a pretty plausible case that a rise of 5 degrees C – which is no longer an outlandish prediction – would be utterly catastrophic. You don’t have to be sure about this; just a significant probability is enough.

In economics, a significant probability of a catastrophic event creates a cost, even if the catastrophe doesn't occur. One either has to set aside reserves or buy some kind of insurance to protect against the potential damage or face catastrophic losses.