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WES 2022: Lars Peter Hansen on modelling climate change uncertainty

As part of the 21st annual Warwick Economics Summit, Lars Peter Hansen delivered a riveting keynote address to our virtual audience on 5th February, 2022.


Below, you will find our official Summit Press Release for the event, which summarises the speech's highlights, and is accompanied by a collection of the very best quotes from Lars Peter Hansen at WES 2022.


 

PRESS RELEASE:


Winner of the Nobel Memorial Prize in Economic Sciences, Lars Peter Hansen spoke to the student-run Warwick Economics Summit on 5th February about the all-important notion of uncertainty. When considered as separate from the notion of risk, uncertainty has for too long been left out of long-term economic planning, with Hansen urging: "it's a first order consideration, not a second-order consideration, and we shouldn't be shying away from it."


In his speech, "The Macroeconomic Consequences of Uncertain Climate Change," Hansen demonstrated that the insufficient treatment of uncertainty has been particularly detrimental to economic planning surrounding the green transition. Answering the crucial question, "do we act now, or do we wait until we learn more?" Hansen emphasised the importance of taking immediate policy action to mitigate the worst impacts of climate change. While economic models are, by nature, simplifications - and while companies may be motivated "to exploit [their] carbon-dependent assets now," in anticipation of even harsher future policies - the need to regulate carbon emissions ultimately renders statistics and economics our best combative tools.


More importantly, these economic models must look for innovative ways to incorporate uncertainty into their forecasts. Hansen advocated the use of temperature response thresholds, and the representation of the social cost of carbon as an asset price - where marginal damages to the environment can be thought of as cash flows in current future time periods. As a result, when talking about climate change legislation, and "about pushing the world economies into places it hasn't seen yet, we can't look at historic evidence."


Along with a far more robust treatment of uncertainty, Hansen emphasised the need for cooperation between the public and private sectors, designating a crucial role for governments in the process of decarbonisation. For instance, the subsidisation of new technologies, implementation of a carbon tax, or even reinvestment in nuclear energy, could all be critical next steps. Only through this two-pronged cooperation between state and industry, argued Hansen, will we "entertain global policy changes, [as opposed to] just local ones".


 

KEY QUOTES:


  • "Do you want to exploit your carbon-dependent assets now, because there’ll be policies down the road that will make them very, very costly? That can affect your economic behaviour currently."


  • "We’re talking about pushing the world economies into places it hasn’t seen yet [through climate change modelling]. (...) We can’t then look at historic evidence and expect this stuff to be magically revealed to us; there’s real uncertainty in these damages as well.”


  • "The type of discount you want to do in uncertain environments is stochastic discounting. (...) There’s not one discount rate that applies to all possible realisations in the future. Discounting ought to be viewed in a very stochastic fashion, and not in this simple-minded deterministic fashion.”


  • "Do I know the exact, right, best policy right now, engaging climate change? No. Would I typically rather be proactive right now, during the climate change? In my own view, absolutely, yes.”


  • "For governments and societies, they have to be thinking more in terms of: should we be subsidising more new technologies, and if so, which ones? (...) Should we be doing a cap on trade; should we be doing carbon taxes? If we taxed carbon, exactly what should we do with the proceeds in order to make it politically viable? I think those are the more important questions”


  • "Uncertainty is important; it’s a first-order consideration, not a second-order consideration, and we shouldn’t be shying away from it. We ought to instead put it up front and out there, inclusive of tipping points.”


  • "Governments don’t have a great track record as being venture capitalists. They often get their choices of prudent societal investments polluted by political considerations, and misallocated. So we have to figure out smart ways to put the money out there, but allocate it intelligently, and not in the political arena”


 

Press release written by Ingrid Bahnemann


VIDEO RECORDING OF THE TALK:


You will find the video recording of Lars Peter Hansen's full talk, delivered at WES 2022, here: https://www.dropbox.com/sh/onpn6vmjv9dknaj/AAA7TvalX1wmjFDjtgO_F9Nfa/Day%202?dl=0&preview=LarsPeter_Hansen_Day2.mp4&subfolder_nav_tracking=1

 

A NOTE ON PRESS RELEASE REDISTRIBUTION:


If you, or any organisation which you represent (media, educational, or otherwise) would like a bespoke press release regarding Lars Peter Hansen's WES 2022 talk - or any of our other 2022 talks - please get in touch with our Press and Communications team at presscoordinator@warwickeconomicssummit.com

We are also able to provide full event transcripts, or bespoke collections of quotes from Lars Peter Hansen's (or any other WES 2022) talk upon request.


Any press release or promotional material issued relating to Lars Peter Hansen's talk at WES 2022 must explicitly mention Warwick Economics Summit by name. Where this requirement has been upheld, third parties are free to produce and distribute their own press releases at will.

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