By James K. Boyce & Tyler Hansen

On October 8, 2018, the Royal Swedish Academy of Sciences awarded Yale economist William Nordhaus the 2018 Nobel Prize in economics “for integrating climate change into long-run macroeconomic analysis.” On the same day, the Intergovernmental Panel on Climate Change (IPCC) released a sobering report on what a 1.5 ^oC warmer world will mean. At first blush the two events may seem complementary, but if we look more closely they reveal a profound disconnect between mainstream economics and climate science.

The consensus among climate scientists is that we must limit warming to at most 2^oC, with many arguing for 1.5^oC or less. The 2015 Paris Agreement made the 1.5-2 ^oC target official—governments committed to aim for 1.5^oC, while absolutely staying under 2 ^oC.  This was a statement of good intentions, but the agreement lacks an enforcement mechanism. The IPCC was then invited to submit its special report released in October on global warming of 1.5 ^oC. Among its conclusions:

1. Two degrees Celsius warming would result in significantly greater damages than 1.5^oC, making the 1.5^oC target well worth fighting for.
2. In order to limit warming to 1.5 ^oC, the world must reduce CO₂ emissions about 45% below 2010 levels by 2030 and reach net zero emissions around 2050 (2 ^oC requires a 20% reduction by 2030, and net zero around 2075).
3. Reaching the 1.5 ^oC target is possible: the required speed of change has precedents in other sectors, and the required technologies are proven though not yet on the required scale.

Nordhaus has disagreed with these conclusions. Not only is limiting warming to 1.5-2 ^oC infeasible, he stated (without evidence) in a 2017 article in the Proceedings of the National Academy of Sciences, but also it’s the wrong target. Instead, cranking the numbers through a cost-benefit analysis, Nordhaus concluded that an optimal scenario would allow the Earth to warm 3.5^oC by 2100, with further warming to follow.

Nordhaus’s analysis was based on the neoclassical litmus test of “efficiency,” where the targeted rate of warming is chosen to maximize net present value (i.e., total benefits of limiting emissions, present and future, minus total costs).

Stated right in the user’s manual for his assessment model, however, is the fact that available monetary estimates of the damages that will result from climate change omit “several important factors (the economic value of the losses from biodiversity, ocean acidification, and political reactions), extreme events (sea-level rise, changes in ocean circulation, and accelerated climate change), impacts that are inherently difficult to model (catastrophic events and very long-term warming), and uncertainty.” To reflect these non-monetized effects, Nordhaus simply tacked on an arbitrary 25% to the other damages he could measure. Given the importance of these omitted impacts, the adequacy of this adjustment is debatable to say the least.

Nordhaus conceded as much in 2018 after winning the Nobel. “If we start moving very swiftly in the next 20 years, we might be able to avoid 2 degrees,” he told the New York Times, “but if we don’t do that, we’re in for changes in the Earth’s climate system that we can’t begin to understand in depth.”

Compounding his model’s downplaying of climate damages, Nordhaus applied a high discount rate of 4.3% to future costs and benefits, a procedure that makes long-term impacts melt away.  Discounting makes sense in some contexts, like private investment decisions. But applying this discount rate to the well-being of future generations is a very different matter. One million dollars in climate damages 100 years from now is valued at $15,000 today, so spending more than this amount to keep from imposing that cost on future generations would be “inefficient.” Similarly, one million lives lost 100 years from now is treated as equivalent to 15,000 lives lost today. The ethical foundations of this formula are dubious to say the least.

Nordhaus observed that if he had used instead the 1.4% discount rate adopted by the Stern Review, a 2007 report on climate change written for the British government, the optimal warming target would have been lowered to 2.2 ^oC by 2100.  A lower discount rate would slash this target even further.

If Nordhaus had accounted more adequately for the omitted damages, and had he discounted the well-being of future generations less steeply, then his warming target could have been more in line with the recommendation of climate scientists. Even then, however, the efficiency criterion is a poor basis for choosing the target for limiting warming, among other reasons because it ignores questions of distribution—who gets what.  Climate damages disproportionately impact poor and marginalized communities, a point emphasized by the IPCC.

There are good reasons to base decisions on warming targets on what scientists consider to be safe, rather than what economists consider to be “efficient.” Economists have an important role to play in understanding how best to pursue goals such as decarbonizing the economy, but this is very different from conferring upon them the power to decide what the goals should be. In climate policy it’s time to scrap the so-called efficiency criterion of mainstream economics in favor of the criteria of safety, justice and sustainability.

References:

• The Nobel Prize (10/8/2018): Press release: The Prize in Economic Sciences 2018. Available online at https://www.nobelprize.org/prizes/economic-sciences/2018/press-release/.
• IPCC (2018): Global Warming of 1.5°C. Summary for Policymakers. Available online at https://www.ipcc.ch/site/assets/uploads/sites/2/2018/07/SR15_SPM_High_Res.pdf.
• Nordhaus, William D. (2017): Revisiting the social cost of carbon. In Proceedings of the National Academy of Sciences of the United States of America 114 (7), pp. 1518–1523. Available online at https://www.pnas.org/content/114/7/1518.
• Nordhaus, William; Sztorc, Paul (2013): DICE 2013R: Introduction and User’s Manual. Available online at http://www.econ.yale.edu/~nordhaus/homepage/homepage/documents/DICE_Manual_100413r1.pdf.
• Davenport, Coral (2018): After Nobel in Economics, William Nordhaus Talks About Who’s Getting His Pollution-Tax Ideas Right. In The New York Times, 10/13/2018. Available online at https://www.nytimes.com/2018/10/13/climate/nordhaus-carbon-tax-interview.html.
• Boyce, James K.; Bradley, Raymond S. (2018): 3.5 °C in 2100? Political Economy Research Institute. Available online at https://www.peri.umass.edu/publication/item/1102-3-5-in-2100.

originally posted here