Interview: LML Fellow Emilie Soysal

Emilie Rosenlund Soysal joined LML as a research fellow in January 2024. Her current research focuses on the economic modelling of climate change and disaster risk, tipping points and extinction. She is particularly interested in optimal policies under the presence of absorbing states, the role of discounting, and the adverse consequences of relying on expected utility as the determinant of strategy in dynamic economic systems.

Prior to joining LML, Emilie worked as a doctoral researcher in the group for Public Economics and Climate Finance at the Potsdam Institute for Climate Impact Research (Germany) while pursuing a doctorate degree in economics at the TU Berlin. Her dissertation revolved around the topic of financial market failures and their impact on investments in the green transition.

Via Zoom, Mark Buchanan recently conducted a short interview with Emilie to find out more about her interests and motivation.

Mark Buchanan: Please tell me about your scientific history, if you will.

Emilie Soysal: I graduated from industrial engineering and management, where for my master’s, I specialized in financial engineering. After graduation, I worked for a while in the finance sector as a consultant on responsible investment issues, but my job mostly involved soft skills. I didn’t really need any engineering or math to do that job, and I started missing working with numbers. At that time, I also got really interested in the energy system and on the side, I took some additional courses in renewable energy technology, and energy systems engineering.

Then I got a job at the Technical University of Denmark as research assistant in the group focusing on energy economics and regulation. I was working on the economic integration of renewable electricity into the energy system, and covered topics such as regulation of district heating and electricity market design. Eventually, I was offered a PhD position at the Potsdam Institute for Climate Impact Research on financial barriers to the green transition.

Mark Buchanan: Your work here involved traditional economics, rather than finance. Can you tell me about that?

Emilie Soysal: Until my PhD studies, my research had been focusing mainly on business or managerial economics, but for my PhD I had to read up on macroeconomic theory. In this field, there is much more focus on the concept of efficiency than I was used to. At the Technical University of Denmark, we approached the problem of the green transition by asking: how do we make it work? And now the focus shofted to: how do we make it efficient? This was a little bit of a culture shock.

Mark Buchanan: You refer to efficiency – as in finding an optimal solution or policy?

Emilie Soysal: Yes. Climate economics, which is traditionally a branch of resource economics, is centred on the idea that we need to decarbonize at the lowest cost to the society. The policy that limits damages from climate change at the least cost is the efficient or optimal solution. This view is also endorsed by the so-called integrated assessment models of Nordhaus and others.

Mark Buchanan: To clarify, these are the cost-benefit models that economists use to evaluate different possible climate policies. If I recall, they require a lot of heroic assumptions on the likely consequences of different actions and try to optimize one very abstract quantity – the sum of the utility of all future human consumption, suitably discounted through time.

Emilie Soysal: Yes, this is right. I personally found the standard approach of integrated assessment models very strange because it relies on maximizing the discounted utility, and the utility function and discount rate are always more or less arbitrary. Another thing I found strange, coming from a background in finance where everything is uncertain, is that in most of these models there is no uncertainty. The analysis aims to choose the optimal path through a deterministic future. To me, climate change is all about uncertainty. While we may have some idea what will happen to the climate under intensified global warming, we have no idea about what it will mean for the economic system. We have no clue.

Mark Buchanan: Is it this appreciation for the importance of uncertainty in climate that led to your interest in ergodicity economics – and, in your recent work, thinking about the role of absorbing states?

Emilie Soysal: Yes, this was actually how I got in touch with Ole Peters and the London Mathematical Laboratory. After coming across some of Ole’s early papers, I started thinking a lot about ergodicity and the role of time in decision-making under uncertainty. These thoughts ultimately let me to develop an alternative way of analysing the intertemporal trade-off related to climate change. Instead of using discounted utility, I framed the issue as a ruin problem.

The core idea is that just like gamblers who want to avoid ruin, humans seek to avoid ending life as we know it. There are two things that affects the probability of ruin, and that’s the current wealth, and the possible risky paths forward in time. Climate change makes the future more risky and therefore increases the risk of ruin, but avoiding climate change requires spending from current wealth. The optimal mitigation strategy can be found by minimising the risk of ruin in the sense of balancing how much wealth to spend on mitigation against the riskiness of the future paths. For example, if we spend a lot on renewable energy now, then we will be poorer in the short term, but maybe we are choosing a better path through time.

I presented this toy-model at the Ergodicity Economics conference last year. For me, the main question is how to integrate time and risk into the climate modelling framework in a reasonable way.  I think discounted expected utility as used in mainstream economics is not the right approach.

Mark Buchanan: One final question: going into the future, are there other things you have thought you’d love to work on, but have never actually gotten around to working? Things you’d like to move toward or little toy problems you’d like to work on that you’ve never worked on before?

Emilie Soysal: Yes, I have a whole list of things! For example, one idea is to integrate the concept of consumption with ergodicity economics. Normally in macroeconomics models and sometimes in financial economics models, utility is derived from consumption, but in the Ergodicity Economics framework, we always focus on the dynamics of wealth. If accumulated wealth is all humans care about why ever consume? I think consumption could be motivated by survival – you have to consume in order to survive, after all.

I think the decision to consume is a really interesting aspect of economic behaviour, and this is something I would like to work on.

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