William Nordhaus versus the United Nations on Climate Change Economics

By Robert P. Murphy – Re-Blogged From WUWT

William Nordhaus was a co-recipient of the 2018 Nobel Prize in economics for his pioneering work on the economics of climate change. On the day of the Nobel announcement, the United Nations’ Intergovernmental Panel on Climate Change (UN IPCC) released a special report advising the governments of the world on various steps necessary to limit cumulative global warming to 1.5 degrees Celsius. The major media coverage treated the two events as complementary. In fact, they are incompatible. Although Nordhaus favors a carbon tax to slow climate change, his own model shows that the UN’s target would make humanity poorer than doing nothing at all about climate change.

Indeed, we can use Nordhaus’s and other standard models to show that the now-championed 1.5°C target is ludicrously expensive, far more costly than the public has been led to believe. This is presumably why the new IPCC special report does not even attempt to justify its policy goals in a cost/benefit framework. Rather, it takes the 1.5°C target as a politically “given” constraint and then discusses the pros and cons of various mechanisms to achieve it.

It is ironic that in the context of accusations that opponents of government intervention are “science deniers,” the latest UN report largely ignores the peer-reviewed publications in climate-change economics, including those of the man who just won the Nobel Prize in the field.3

Nordhaus’s “DICE” Model

Nordhaus is arguably the inventor of the modern economics of climate change, with contributions going back at least to his 1979 book.4 Then, in the 1990s, he, along with others, developed the Dynamic Integrated Model of Climate and the Economy (DICE). Nordhaus and co-author Joseph Boyer, in a 2000 book, outlined the DICE model as well as a regional version called RICE and in 2008, Nordhaus published a book summarizing the model as of 2007. He updated his model in 2016 and published technical papers in 2017 based on its latest findings.

Nordhaus subscribes to the standard view that greenhouse gas emissions from human activities constitute a negative externality and, therefore, recommends that the governments of the world implement a carbon tax. One of his major purposes in developing and refining his DICE model is to estimate the “social cost of carbon.” The social cost of carbon is the present value of the net future harms from an additional ton of emissions in a particular year. A related purpose of Nordhaus’s DICE model is to estimate the trajectory of the optimal carbon tax over time. (Note that the “social cost of carbon” trajectory depends on government policy. In the presence of an optimal carbon tax, the volume of future emissions will be lower than otherwise. Thus, on the margin, an additional ton of carbon dioxide emitted in, say, 2050 will be less damaging than it would have been in the laissez-faire baseline.)

I endorse neither Nordhaus’s diagnosis of “market failure” nor his prescription for a carbon tax. Indeed, I have critiqued Nordhaus’s model elsewhere,5 and I have co-authored a study with climate scientists in which we make the case against a generic U.S. carbon tax.6

For the purposes of the present article, however, I stipulate Nordhaus’s work as representative of the state of the art when it comes to the mainstream economics of climate change. That is all we need to show that the UN’s special report on climate change is utterly at odds with the literature.

Nordhaus’s 2007 Results Showed Current UN Target Much Worse Than “Doing Nothing”

As I explain in greater detail in my 2009 journal article, the exposition Nordhaus gave for his 2007 model runs was useful in showing the consequences of various climate policy goals. Below, I reproduce a table from my article, which I adapted from a table in Nordhaus’s 2008 book.

Table 1. Relative Benefits and Costs of Various Climate Policies According to DICE-2007 (Trillions of 2005 US$)

Source: Table 4 from Murphy (2009), p. 211.

The first row of the table shows what the DICE model—as of its 2007 calibration—estimated would happen if the governments of the world took no major action to arrest greenhouse gas emissions. There would be significant future environmental damages, which would have a present-discounted value of $22.55 trillion.

In contrast, the second row shows what would happen if the governments implemented an optimal carbon tax. Because emissions would drop, future environmental damages would fall as well; that’s why the PDV of such damage would be only $17.31 trillion. However, even though the gross benefits of the optimal carbon tax would be some $5 trillion as a result (because of the reduction in environmental harms), these gross benefits would have to be offset by the drag on conventional economic growth, or what is called “abatement costs.” Those come in at a hefty $2.20 trillion (in PDV terms), so that the net benefits of even the optimal carbon tax would be “only” $3.07 trillion.

Consider, now, the scenario “Limit temp. to 1.5°C.” Recall that this is the IPCC’s current policy goal and that various environmental analysts and pundits also embrace it. Because Nordhaus just won the Nobel Prize for his work on climate change, one might suppose that his model would provide support for the UN’s goal. It doesn’t.

As Table 1 indicates, Nordhaus’s model—at least as of its 2007 calibration—estimated that such a policy goal would make humanity $14 trillion poorer compared to doing nothing at all about climate change. Moreover, the $14 trillion magnitude of the net damages from the wrong policy—including what is now the UN’s goal—dwarfs the $3.07 trillion size of the net benefits from even the best theoretically possible policy.

Notice, also, that two of the other impoverishing policies considered by Nordhaus were not the product of his fanciful imagination but, instead, were proposals that either other economists (Nicholas Stern) or famous political figures (Al Gore) offered. The difference in the two Kyoto scenarios also showcases the sensitivity of the calculations to the participation of the world’s major emitters; the $3.07 trillion net benefits from a carbon tax accrue only if all of the governments enact the textbook carbon tax profile for more than a century.

In light of Nordhaus’s calculations shown above, the apparently urgent need for “climate action” is not so urgent. It now looks more analogous to economists discovering the theoretical possibility of an “optimal tariff” but still understanding that free trade is the safest rule of thumb.

Full essay here


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