Here’s an article I wrote in October 2018 exploring Robert P. Murphy’s article, Rolling the DICE: William Nordhaus’s Dubious Case for a Carbon Tax. It unpacks the estimated costs and benefits of prominent climate change mitigation proposals.
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Just a few weeks ago, William Nordhaus won the Nobel Memorial Prize in Economics for his work on the economics of climate change [1]. At the same time, the United Nations Intergovernmental Panel on Climate Change (IPCC) also issued a report calling for governments to take urgent action to limit global warming to 1.5°C to avoid dire consequences [2].
Interestingly, Nordhaus does not concur with the IPCC’s recommendation. Nordhaus uses his Dynamic Integrated model of Climate and the Economy (DICE) Model to arrive at his recommendation of using a carbon tax to allow for a global temperature increase between 2.3°C and 4.0°C. His model shows that the comparatively aggressive IPCC goals “would likely cause far more damage to economic growth than they would alleviate in terms of climate change.” [3]
Competing Policy Recommendations
In the scenario where there are no climate controls on carbon, Nordhaus’s 2007 DICE model calculates the present discounted value of damages from climate change to be $22.55 trillion (2005 US dollars). Any policy proposals to mitigate climate change must beat this number, otherwise the policy is counter productive.
- Nordhaus’s optimal carbon tax policy proposal reduces damage to $17.31 trillion and costs $2.20 trillion, resulting in “damages + costs” of $19.52 trillion.
- This is $3 trillion less costly than the scenario where there are no controls on carbon.
- IPCC’s plan to limit temperature rise to 1.5°C reduces damage to $9.95 trillion and costs $27.08 trillion to implement, totaling a staggering $37.03 trillion!
- This is $14 trillion more costly than the scenario where there are no controls on carbon.
- Al Gore’s plan to cut 90% emissions results in $10.05 trillion in damage and costs $33.90 trillion to implement, for a total of $43.96 trillion.
- This is $21 trillion more costly than the scenario where there are no controls on carbon. [4]
According to William Nordhaus, the world’s foremost authority on the economics of climate change, the IPCC’s policy proposal will cost $14 trillion dollars more than if governments took no action to restrict the market’s emissions of greenhouse gases!
“The dangers of an overly ambitious or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted one,” notes Institute for Energy Research Chief Economist, Robert Murphy [4].
Uncertain Assumptions
Compared to the baseline of taking no action, “Nordhaus’s optimal plan yields net benefits of approximately $3 trillion, consisting of $5 trillion in reduced climatic damages and $2 trillion of abatement costs” [5]. There are arguably unrealistic assumptions in calculating these benefits, not least of which includes that the policy will be universally enforced across the globe for several decades. To this point, Nordhaus notes that “This is not presented in the belief that an environmental czar will suddenly appear to provide infallible canons of policy that will be religiously followed by all. Rather, the optimal policy is provided as a benchmark to determine how efficient or inefficient alternative approaches may be. This is the best possible policy path for emissions reductions given the economic, technological, and geophysical constraints that we have estimated.”
Further, Nordhaus considers the implications of a scenario with only partial compliance, noting “there are substantial excess costs if the preponderance of sectors and countries are not fully included. We preliminarily estimate that a participation rate of 50 percent, as compared to 100 percent, will impose an abatement-cost penalty of 250 percent.” [6]
Before leaving this topic, we should highlight some of the uncertainty in the assumptions used to calculate the $22.55 trillion in damages in the “do nothing” scenario and the possibility for revising this number significantly downward.
- Concentrations in greenhouse gases may be overstated given uncertainty in the ocean’s capacity to absorb carbon dioxide. Nordhaus’s model assumes that, after reaching the point of ocean saturation, emissions have a greater effect on atmospheric CO2 concentrations. However, the particular projections used in the model are not based in empirical trends and are tenuous.
- Temperature increases from feedback effects may be overstated. There is consensus on the direct temperature increase from a higher CO2 concentration. For example, doubling the pre-industrial concentration from the year 1750 would result in a 1.2°C rise in temperature. However, the IPCC estimates that, because rising temperatures cause further warming from feedback effects, such a concentration would ultimately result in a 2.0°C to 4.5°C rise in temperature.
An example of a feedback effect is that, because of higher temperatures, more water vapor will exist in the atmosphere, which may enhance the greenhouse effect. However the IPCC, in its Fourth Assessment Report, notes the “amplitude and even the sign of cloud feedbacks… as highly uncertain… It is somewhat unsettling that the results of a complex climate model can be so drastically altered by substituting one reasonable cloud parameterization for another.” - Economic damages from temperature increase may be overstated, given uncorrected biases used in studies. Nordhaus estimates the damage caused by climate change by selecting a value within the range of values presented in other studies. “Extreme and catastrophic events” presents the greatest amount of damage (in terms of cost) at an indefinitely long loss of 25 percent of global GDP. Unlike the specific and carefully studied impacts of a warmer climate (such as the benefit to agriculture or the loss in human settlements), the cost estimation of extreme and catastrophic events “was not derived in a rigorous way and may vastly overestimate the damages from present carbon emissions.” [7]
The uncertainties in the DICE model “drastically affect the magnitude of the economically efficient Pigovian tax on carbon” presented in Nordhaus’s policy recommendation. Further, “Nordhaus relies on speculative estimates that depart from historical trends in a direction that yields higher carbon taxes” [4].
Choosing Economic Growth
Concluding, I concur with Robert Murphy’s preference of reliance on economic growth as a robust means of dealing with climate change. “Government programs to avert global warming will undeniably stifle economic growth, thereby ironically limiting people’s ability to adapt… By bequeathing to [future] generations a freer economy and more material wealth, we give them flexibility to deal with environmental challenges as they occur.”
“Many economists favor some form of government penalty on CO2 emissions because of the threat of climate change. However, the steps in the argument—going from computer simulations to a specific, numerical tax on economic activity today—are riddled with uncertainties. Besides the theoretical difficulties, we cannot dismiss the likelihood that politicians will rely on politics—rather than pure science—to implement the recommended programs. Rather than depending on conjectural models and the good faith of politicians, economists should instead consider the ability of markets to generate wealth to ease the adaptation process. Given the large uncertainties at each major step of the case for reliance on a carbon tax, economists should reconsider their current support for such a policy” [8]
[1] https://www.nytimes.com/2018/10/08/business/economic-science-nobel-prize.html
[2] http://www.ipcc.ch/report/sr15/
[4] http://www.independent.org/pdf/tir/tir_14_02_03_murphy.pdf at pp. 209-210.
[5] https://www.instituteforenergyresearch.org/uncategorized/what-nordhaus-gets-wrong/
[6] http://www.independent.org/pdf/tir/tir_14_02_03_murphy.pdf at pp. 213-214.
[7] Ibid at 200-209.
[8] Ibid at 214-215.