Archives for September 30, 2008

 

The risk of a climate crisis, like the risks associated with sub-prime mortgage securitisation, are calculated using complex computer models and both are too complex for the average punter to understand.  

 

As Graham Young wrote last week in a blog post entitled ‘Sub-prime and climate change’, these models were created by clever people with PhDs in maths and physics, but they are only as good as the information feed into them.  GIGO (garbage in, garbage out) is how he described both the climate models and the models that helped created the current credit crisis.   

 

 

According to Richard Mackey, a sceptic from Canberra, also writing on the issues of climate change and financial systems, a key limitation with both financial and climate models is the underlying false assumption that economic and climate systems are ergodic systems – that is they normalise to an equilibrium state. 

 

Richard Mackey wrote:

“One of the lethal critiques of the United Nation’s Intergovernmental Panel on Climate Change (IPCC) models is that the climate system can never be at anything like an equilibrium state. 

 All the models assume that the climate system normalises to an equilibrium state, the state modelled.  As the natural processes of the climate system are non-linear and non-ergodic, small variations may result in large changes. There are negative and positive feedback loops.  There is randomness in the system. As a result, the simple deterministic computer simulations on which all climate change projections are based will have little to do with the real world.

 

The econometric models of the Treasury are also equilibrium models.

 

They too assume that the economic system normalises to an equilibrium state, the state modelled by those models.

 

As Nobel Laureate, Douglass North, has demonstrated, the real world is vastly more complex that the simulated world of the models and is never in an equilibrium state, more precisely, never anywhere near such a state.

 

He argued that we live in a non-ergodic world and explained that an ergodic phenomenon has an underlying structure so stable theory that can be applied time after time, consistently, can be developed. 

 

In contrast, the world with which we are concerned is continually changing: it is continually novel. Inconsistency over time is a feature of a non-ergodic world.  The dynamics of change of the processes important to us are non-ergodic.  The processes do not repeat themselves precisely.  Douglass North argued that although there may be some aspects of the world that may be ergodic, most of the significant phenomena are non-ergodic.

 

Douglass North stressed that our capacity to deal with uncertainty effectively is essential to our succeeding in a non-ergodic world.  It is crucial, therefore, that the methodologies we use to understand the exceedingly complex phenomena measured in our time series, correctly inform us of the future uncertainty of the likely pattern of development indicated by the time series.” [end of quote]

 

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Additional Reading

 

 

 

In 1993 Douglass North, along with fellow economic historian, Robert W. Fogel, received the Noble Prize for Economics for pioneering work which resulted in the establishment of Institutional Economics, now a central school of modern economics.  There is a substantial economic literature that identifies the fatal flaws in the neoclassical deterministic equilibrium models that the Commonwealth Treasury uses and that Ross Garnaut will rely on to tell the Australian Government of the (almost certain) economic consequences of the (almost certain) predictions of the equilibrium climate models. 

 

North, D. C., 1999. Dealing with a Non Ergodic World: Institutional Economics, Property Rights, and the Global Environment. Duke Environmental Law and Policy Forum Vol 10 No. 1 pps 1 to 12.

 

Professor North’s opening address at the Fourth Annual Cummings Colloquium on Environmental Law, at Duke University, April 30, 1999, is available on line here: Global Markets for Global Commons: Will Property Rights Protect the Planet?   

 

Classical time series analysis that features in the reports of the IPCC necessarily underestimates future uncertainty. Of great relevance here is that two scientists at the Department of Civil and Environmental Engineering University of Melbourne, Dr Murray Peel and Professor Tom McMahon, have recently shown that randomness in the climate system has been on the rise since the 1950s.  The authors used the time series analysis technique, Empirical Mode Decomposition (EMD), to quantify the proportion of variation in the annual temperature and rainfall time series that resulted from fluctuations at different time scales.  They applied EMD to annual data for 1,524 temperature and 2,814 rainfall stations from the Global Historical Climatology Network.

 

Peel, M and McMahon, T. A., 2006. Recent frequency component changes in interannual climate variability, Geophysical Research Letters, Vol.33, L16810, doi:10.1029/2006GL025670

 

Richard Mackey’s submission to the Garnaut Climate Change Review is entitled ‘Much more to the Earth’s climate dynamics than human activity’ and can be read here.