Month: October 2018

Congratulations to William Nordhaus for winning a Nobel in Economics for work on climate. However … I find that this award leaves me conflicted. I’m happy to see the field proclaim that it’s optimal to do something about climate change. But if this is the best economics has to offer, it’s also an indication of just how far divorced the field is from reality. (Or perhaps not; not all economists agree that we have reached a Neoclassical nirvana.)

Nordhaus was probably the first big name in economics to tackle the problem, and has continued to refine the work over more than two decades. At the same time, Nordhaus’ work has never recommended more than a modest effort to solve the climate problem. In the original DICE model, the optimal policy reduced emissions about 10%, with a tiny carbon tax of $10-15/tonC – a lot less than a buck a gallon on gasoline, for example. (Contrast this perspective with Stopping Climate Change Is Hopeless. Let’s Do It.)

Nordhaus’ mild prescription for action emerges naturally from the model’s assumptions. Ask yourself if you agree with the following statements:

• Except for climate change, the world is optimal as is.
• People know the future and the outcome of untried contingencies.
• The only positive feedbacks in the world are accumulation of population, capital and technology.
• Technology comes from a cloud, i.e. the rate of technical progress is exogenous and inevitably positive.
• Technical progress (and therefore economic growth and emissions pressure) will slow down of its own accord in this century.
• Increasing returns from learning curves, R&D and network externalities don’t matter. (Maybe the Nobel committee should have checked with Paul Romer on that point!)
• Global sinks can absorb unlimited carbon.
• Economists should reestimate the parameters of climate models using inappropriate statistical methods.
• There are no policy biases or market failures favoring carbon-based fuels.
• Carbon emissions are uncorrelated with any other health or environmental externalities.
• The carbon intensity of existing capital can be changed overnight.
• Market goods can fully substitute for environmental services.
• Resource depletion doesn’t matter.
• The welfare of future generations should be discounted, not for the time value of money, but simply because we today are more important.
• The global poor have less wealth because that’s what they deserve.

If you find yourself agreeing, congratulations – you’d make a successful economist! All of these and more were features of the original DICE and RICE models, and the ones that most influence the low optimal price of carbon survive to this day. That low price waters down real policies, like the US government’s social cost of carbon.

In any case, you’re not off the hook; even with these rosy assumptions Nordhaus finds that we still ought to have a real climate policy. Perhaps that is the greatest irony here – that even the most Neoclassical view of climate that economics has to offer still recommends action. The perspective that climate change doesn’t exist or doesn’t matter requires assumptions even more contorted than those above, in a mythical paradise where fairies and unicorns cavort with the invisible hand.