This is a guest essay from Jon A. Anda, President of the Environmental Markets Network, an organization within Environmental Defense focused on legislation to create an efficient carbon market. He was previously a Vice Chairman of Morgan Stanley.

Bjorn Lomborg’s forthcoming book says to Cool It about global warming. I am anxious to read the detailed rationale when the book is released in September. Based on his interviews about the book, as well as insights from bloggers who have read it, some preliminary commentary is worthwhile.

Pecking order has long been Lomborg’s weakness. Business provides a good analogy. If a company has two projects with good risk-adjusted returns, and selects only the one with the highest return, they fall victim to the flawed thesis of “pecking order investment.” The company would have been better off selecting both projects. Similarly, if AIDS and global warming both have a risk-adjusted net benefit, then society is better off addressing both. Some might argue that we can’t afford both projects. That thesis, though, doesn’t hold if markets are efficient and society is rational. Why preclude a project that makes us better off?

Lomborg advocates spending 0.05% of GDP on low-carbon R&D. That’s about $7 billion a year for the U.S. He also advocates a maximum $2.00 per ton carbon tax. That values U.S. CO2 emissions at about $13 billion a year. To put those numbers in perspective, just consider a single statistic: Exxon alone is worth half a trillion dollars. Lomborg doesn’t want Exxon’s cash flow redirected by climate policy because he believes society will overspend. Instead he prefers government-backed R&D to pick the technology winners of the future.

I would ask him to ponder how it came to pass that he can find this blog by searching on an inexpensive internet-ready global PDA. Military-industrial complex fanatics aside, most recognize it’s not a product of government-funded R&D. Our grandchildren might need a similar breakthrough technology in energy … one we can provide if we open the floodgates to private low-carbon capital.

Innovation requires linking capital to ideas; without carbon limits that process is blocked. Reducing carbon emissions by up to 2% per year from current levels, over a 40 year period, will deliver more technology and potentially at less cost than his proposal. But what if Lomborg is right and limiting CO2 now is more expensive than waiting? Well … the choice of policy depends on the nature of the risk. Science points to climate outcomes that are statistically skewed towards worst-case, and irreversible, outcomes. (Specifically, the distributions of both the sensitivity of climate to greenhouse gas concentrations and the damage function are both lognormal.) That argues for stringency now and leniency later. If ex-post, capping emissions now turned out to be more expensive, we still made the right choice given the nature of the risk we faced.

Let’s take a simple example. Lomborg’s preference is to leave future generations more cash and less technology. Our grandchildren can easily go back to burning coal if climate turns out to be manageable. But how easily can they spend the extra cash if the Greenland ice sheet is irreversibly melting? Lomborg assumes they will spend it scaling up government-led innovations. That is an unnecessarily risky bet given the skewed distribution of climate risks alongside the powerful potential of privately funded innovation.

Capping (and trading) CO2 emissions creates an option to hedge climate risk. The cost of the option is the incentive provided for new technologies. And when we consider the resource constrained, and resource concentrated, world in which we live … that looks like a pretty valuable option.