The Climate Casino | Reflections & Notes

William Nordhaus. The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. Yale University Press, 2013. (377 pages)


REFLECTIONS


One of the most respected American economists, with one of the most excellent reputations, produces one of the most clearly articulated explanations for addressing–economically–the most critical issue of our day. What’s incredible is the scope that Nordhaus puts in one volume, from the science to the skepticism, from the economic models to the political theories; it’s all in here. Should there be any questions, doubt, or criticism regarding climate change, and specifically the economics of climate change, Nordhaus covers them all.

While this book is complete with plenty of numbers, charts, and research papers to back up his conclusions, you don’t need an economics degree to understand his conclusion, summarized in the last paragraph:

Humans are putting the planet in peril. But humans can undo what they are doing. Moreover, this can be achieved at relatively low cost if people accept the realistic threat of global warming, put in place an economic mechanism that penalizes carbon emissions, and take vigorous efforts to develop low-carbon technologies. By taking these steps, we can protect and preserve our precious planet. (326)

There’s a reason this book won the Nobel Prize in Economics in 2015. There’s even more reason to read it, and heed its directives. He’s right.


NOTES


NOTE TO READERS

There are two electronic editions of this book: cf. Inkling.com. More details on the DICE model used in this book are available at dicemodel.net [no longer up].

PART I THE GENESIS OF CLIMATE CHANGE

Risk varies inversely with knowledge. – Irving Fisher

1 First Encounters in the Climate Casino

By [Climate Casino], I mean that economic growth is producing unintended but perilous changes in the climate and earth systems. These changes will lead to unforeseeable and probably dangerous consequences. We are rolling the climate dice, the outcome will produce surprises, (3) and some of them are likely to be perilous. But we have just entered the Climate Casino, and there is time to turn around and walk back out. This book describes the science, economics, and politics involved–and the steps necessary to undo what we are doing. (4)

…”externality,” which occurs because those who produce the emissions do not pay for that privilege, and those who are harmed are not compensated. One major lesson from economics is that unregulated markets cannot efficiently deal with harmful externalities. Here, unregulated markets will produce too much CO2 because there is a zero price on the external damages of CO2 emissions. (6)

The need to introduce effective policies has been particularly difficult in the United States, where ideological opposition has hardened eve as the scientific concerns have become increasingly grave. (9)

Figure 1. The circular flow of global warming science, impacts, and policy.

2 A Tale of Two Lakes

…life on earth is in fact a fragile system. (12)

Moreover, designing effective measures to slow or prevent climate change requires understanding not only the physical laws that carbon dioxide obeys, but also the more fluid laws of economics and politics–those that involve human behavior. … So getting the science right is the first step in mapping the way humans are changing our future climate, but understanding the economic and political dimensions is essential for designing ways to fix the problem. (15)

3 The Economic Origins of Climate Change

An externality is a by-product of economic activity that causes damages to innocent bystanders. (18)

…global warming is the Goliath of all externalities. (18)

So global warming is a special problem for two central reasons: It is a global eternality caused by people around the world in their everyday activities of using fossil fuels and other climate-affecting measures; and it casts a long shadow into the future, affecting the globe and its people and natural systems for decades and even centuries into the future. (18)

Economists talk about an “invisible hand” of markets that set prices to balance costs and desires. However, the unregulated invisible hand sets the prices incorrectly when there are important externalities. (18)

Figure 2. Global CO2 emissions 1900-2010.

The efficiency of energy use has improved over time, but the rate of improvement is insufficient to bend down the emissions curve. Hence, total CO2 emissions continue to rise. (23)

The first step,…is to estimate the future emissions of CO2 and other important GHGs. The second step is to put those emissions estimates into climate and other geophysical models to project future change in CO2 concentrations, temperature, and other important variables. (24)

The basic idea is that a model is a simplified picture of a more complex reality. Economists represent the complex set of relationships that govern output, inflation, and financial markets using “macroeconomic models.” (24)

You might wonder whether climate models are simplified. That is actually their purpose–to simplify, but not to oversimplify. (25)

Simplicity is the highest form of sophisitcation. – Leonardo da Vinci

These models represent the best efforts of economic and energy experts today, and they indicate that the CO2 problem is not going to disappear or be magically solved by unrestrained market forces. (33)

…the biggest unknown arises from uncertainty about future growth of the world economy: Will the world enjoy robust economic growth like that from 1950 to 2005? Or will it stagnate, with slow technological change, recurrent financial crises and depressions, spreading pandemics, and occasional widespread war? These are the most important questions behind the divergent estimates of CO2 emissions. (34)

Waiting for many years to act is costly because of the delayed responsiveness of the economy and the climate system to our actions. It is less costly to spread our investments over time than to cram them all into a short time when the fog lifts and we see disaster right in our path. (34)

| Economic research on dealing with uncertainties leads to the following conclusion: Start with a best-guess scenario for output, population, emissions, and climate change. Take policies that will best deal (34) with the costs and impacts in this best-guess case. Then consider the potential for low-probability but high-consequence outcomes in the Climate Casino. (35)

4 Future Climate Change

Climate is usually defined as the statistical average and variability of temperature, wind, humidity, cloudiness, precipitation, and other quantities over a period of time ranging from months to thousands of years. Climate change is a change in these statistical properties when considered over long periods of time. Climate is distinguished from weather, which is the realization of the climatic process for a short period of time. The distinction between weather and climate can be seen because the climate is what you expect (such as cold winters) and weather is what you get (as in an occasional blizzard). (37)

…CO2 released into the atmosphere stays there for a long time. … The long residence time means that the effects of today’s actions cast a long shadow into the future. (39)

…if there were no GHGs, the earth’s surface temperature would be -19˚C, whereas the actual average temperature on earth is 14˚C. (40)

As more and more gases are added, an increasing fraction of the outgoing long-wave radiation is absorbed by the atmosphere, and this in turn pushes the planetary temperature equilibrium higher. … Increasing the atmospheric concentration of CO2 by what seems a tiny fraction (from about 280 to 560 ppm) is projected to increase average surface temperature of the planet by around 3˚C (5 1/2˚F). (41)

…all modeling groups project large climatic changes over the twenty-first century. These findings are at the cutting edge of modern climate science, and the basic message should not get lost in the differences. (48)

The bottom line ist hat if no policies are made to slow global warming, the central estimate is that the average global temperature by 2100 will be about 3 1/2ˆC above the 1900 level. There is considerable uncertainty about this projection. But unless all the economic models and all the climate models are dead wrong, the pace of global warming will quicken over the decades to come and climate conditions will quickly pass beyond the range of recent historical experience. (49)

5 Tipping Points in the Climate Casino

The problem is not a simple rise in average temperature but rather the accompanying physical, biological, and economic impacts of such a change–in particular, the thresholds and nonlinear responses that may be encountered. A rise in our body temperature from 98˚F to 104 or 105ˆF does not sound like a large change, but it may signal a deadly infection. (50)

Was climate stability a prerequisite for the emergence of farming and cities? Would the Sumerians have developed the first written language if they had been confronted with an unstable climate system? How would philosophy and literature have developed in Greece if the city-states were suddenly plunged into an ice age? We do not know, but many anthropologists believe that the stability of climates over the last seven millennia was an important contributor to the evolution of human societies as we know them today. (52)

A tipping point comes when a system experiences a sharp discontinuity in its behavior. (53)

…four global-scale tipping elements are of particular concern:

  • The collapse of large ice sheets
  • Large-scale changes in ocean circulation
  • Feedback processes by which warming triggers more warming
  • Enhanced warming over the long run (56)

…”fast feedback processes”–those involving the direct effects of increasing concentrations of GHGs and the associated rapid feedback, such as changes in water vapor, clouds, and sea ice. (59)

…there are also likely to be “slow feedback processes” that would amplify the effects of global warming. The slow processes involve ice sheet disintegration, the migration of vegetation, and accelerated releases of GHGs (such as the frozen methane just discussed) from soils, tundra, and ocean sediments, as well as decomposing vegetation. (59)

Scientists can estimate the scope and timing of melting of Arctic sea ice in the summer. But the impact of this melting on commerce, wildlife, and ecosystems is very difficult to measure. What will it mean for Russia or Canada if their northern ports are open to shipping six months of the year? Equally perplexing issues involve the impacts of large-scale changes in the Amazon rain forest or the Sahara region. We might suppose that any change is unwelcome because people have adapted to the world as it is today. But that does not help us understand how serious it would be if the Sahara turned green or if the Amazon rain forest were transformed into savannah. (64)

Climate change is no longer just geophysics and ecology; it has become economics and politics. (66)

PART II IMPACTS OF CLIMATE CHANGE ON HUMAN AND OTHER LIVING SYSTEMS

All the evidence shows that God was actually quite a gambler, and the universe is a great casino, where dice are thrown, and roulette wheels spin on every occasion. – Stephen Hawking

6 From Climate Change to Impacts

How does climate change affect the economy and habitability of different regions? Will food become more expensive? And what are the consequences for the natural world? Will ecosystems be disrupted by the changing climate patterns? Will some species become extinct? What will happen to marine life as the oceans become more acidic? (69)

managed system is one in which societies take steps to ensure the efficient and sustainable use of a resource. (71)

By contrast, in our context an unmanaged system is one that operates largely without human intervention. (71)

From an economic point of view, decline and collapse came from narrowly based economic structures, heavily dependent on unmanaged or mismanaged systems, with few trade linkages to enable provisioning from other regions. When most economic activity is based on local hunting and gathering of food, and the food supply dries up because of the interaction of climate and human activities, there is little resilience in the system, and the population must migrate, decline, or perish. (72)

The most consequential example of managing human affairs is the rise of modern medicine. (73)

Why is the distinction between managed and unmanaged systems so important for our topic? This distinction helps us identify those areas where climate change is of greatest concern by contrast with those areas where humans may be able to adapt to climate change. (74)

Most of the economy falls into the extensively managed area and is likely to experience relatively little direct impact from climate change. At the other end of the spectrum are natural systems that are unmanaged or unmanageable with current technologies. One theme of this book is that major concerns stem from unmanaged sectors, while the managed sectors pose limited risks as long as societies use sensible adaptation strategies. (74)

When we consider the question of impacts, we are generally not concerned about climate change itself. … Rather, we are concerned about the effects of climate change on physical and biological systems and on human societies. (75)

…after we have balanced costs and benefits in a careful manner, a precise target for policy will emerge. I call this a “focal policy” because it would be an obvious policy that people can agree and focus on. (76)

7 The Fate of Farming

Of all major sectors, farming is the most sensitive to climate and is therefore most likely to feel the impacts of climate change. (78)

One important factor is that agriculture is a heavily managed activity, particularly in technologically advanced information-rich economies. (78)

The extent of climate change, and the size and severity of damanges on sectors like farming, will depend primarily on the pace of economic growth over the next century and beyond. But the flip side of this is that societies are likely to be much wealthier in the future when they confront the dangers of global warming. (79)

The likelihood that people will be richer in the future is no excuse for ignoring climate change today. But it is also a reminder that we will leave our grandchildren a more productive economy alongside a degraded climate. If you compare the projected living standards in 2100 or 2200 in the two economic scenarios in Figure 13, you can see that it would take an enormous amount of climate damage to offset the fruits of future productivity growth on our living standards. (82)

Adverse assessments of the impacts of global warming on farming rely on two major factors. First, climate change is likely to lead to warmer climates with declining soil moisture in many regions of the world where climates are already close to the margin. (84)

A second factor is that climate change may lead to adverse impacts on the “hydrological cycle,” that is, systems that provide water for agriculture. (84)

One review of multiple field studies found that doubling atmospheric concentrations of CO2 would increase yields of rice, wheat, and soybeans 10-15 percent. … There are many questions about how (84) CO2 fertilization will interact with other stresses. However, experts…[conclude] that CO2 fertilization could offset many of the adverse effects of warmer and drier conditions. (85)

Studies that allow for adaptation and international trade generally showed that warming would reduce world food prices relative to a no-warming baseline for increases up to 3˚C. (88)

Increasingly, farming is a market activity, not a subsistence activity. There is a world market for many agricultural products. This means that a shock to yields in one region will be cushioned by the world market. (88)

So while food is clearly critical to our health and well-being, the economy can absorb a large shock to the farm sector without a major loss of welfare. (89)

What is the summary judgment here? The best evidence is that the economic impact of climate change on overall economic welfare through agriculture is likely to be small over the next few decades. The impact will be declining as countries develop and move their labor force out of the farm sector. Over the longer run, the outlook is cloudier, especially if climate change is unchecked. If global temperatures rise sharply, changes in precipitation patterns and abrupt changes are more likely to cause substantial impacts on food production. (90)

8 The Impact on Human Health

Although these are just estimates, they have the advantage of being consistent with the assumptions of the integrated-assessment model used to predict the temperature increases. So the estimates of growing malnutrition and related diseases in the climate-health scenarios are incompatible with the estimates of growing incomes that produce the very emissions that lead to the rapid warming. (98)

Health care is one of the most intensively managed of all human systems. In the case of malaria and other diseases that might be aggravated by climate change, we would expect governments to take steps to reduce vulnerabilities through research, preventative measures, and treatment programs. This analysis is consistent with trends in malaria incidence over the last decade. (99)

In looking forward, we must remember that human societies increasingly devote resources to insulate their lives and property from environmental conditions as their incomes rise. This is true in all areas of human activity–in adaptive housing, storm warning systems, more and better trained doctors and nurses, and improved public health infrastructure. (99)

9 Perils for the Oceans

In the current context, the further we look into the future for economic, social, and political calculations, the more things look fuzzy and uncertain. (101)

In reality, we know virtually nothing about the impact of global warming on future human migrations. (102)

The lesson here is that we are likely to overestimate the economic impacts if we simply impose estimated climate changes on current socities. In considering the impact of climate change in the late twenty-first century, two major trends can be seen–even through the fuzzy telescope. The first is that under the scenarios that produce dangerous climatic change, most countries will be much richer than they are today. Clearly we should not assume that African countries will have (103) incomes comparable to those of North America today and also assume that large numbers will still be nomads herding cattle across teh desert. (104)

| Second, one of the regularities of economic development is that societies increasingly insulate their populations from all kinds of adverse shocks. We see this in the area of public and private health, agricultural shocks, environmental disasters and degradation, and violence. We would expect that adaptation to the dangers of future climate change would be added to this list of tasks of the modern state. (104)

About 4 percent of the world’s population and output are in regions at elevations at or below 10 meters (33 feet). (108)

Let all men know how emtpy and worthless is the power of kings, for there is none worthy of the name but God, whose eternal laws heaven, earth, and sea obey. – King Canute

This will be the cry of future generations if we do not take forceful steps to reverse the rising tide of CO2 and other greenhouse gases. (113)

10 Intensification of Hurricanes

Recent calculations suggest that a warming of 4˚C would increase the average intensity by about one category (say, from a category 2 to a category 3 hurricane, or about 16 miles per hour). (118)

If these relocation costs were one-fifth of the replacement capital costs, securing the nation’s capital from hurricanes would cost about 0.01 percent of GDP annually over the next half century. This is much small than the costs if no such adaptations are made. (121)

| This example illustrates how strategic planning for the impacts of climate chagne can significantly reduce the damages. (121)

11 Wildlife and Species Loss

Ecosystems have two interesting features. To begin with, they are largely unmanaged or unmanageable systems, and, second, they are economically far removed from the marketplace. (122)

Economists have long recognized that people do not live by bread alone–there is a definite value of nonmarket activity. (125)

Most people agree that we shoudl prevent the loss of species and valuable ecosystems. However, major difficulties arise when we try to measure the value of these systems. (126)

The natural and social sciences have great difficulty in making reliable estimates of the value of preserving ecosystems and species. There are two difficutlies–getting reliable estimates of the losses, and then valuing the losses. (127)

I found it impossible to evaluate the hypothesis that significant medicinal riches will be lost int he disappearing rain forests of the world. … However, we can make one point with confidence: Most of the economic value of threatened species an ecosystems will not be found in the marketplace. Perhaps preserving species is important, but the value of preservation will not be found on the stock market. Ecosystems and species simply do not have much cash-and-carry value in today’s market economies. (129)

…environmental economists have devised methods to simulate missing markets. The most important echnique is known as contingent valuation methodology (CVM), which estiamtest he value of nonmarket activities and resources. (130)

My personal appraisal here is that CVM and similar survey-type techniques are illustrative but too unreliable at present to be used for assessing the costs o ecosystem effects triggered by the rising CO2 concentrations and climate change. (132)

The short summary on the valuation of ipacts on species and ecosystems is that estimateing these impacts is one of the most difficult tasks of all. We ahve insufficient understanding of the risks, and indeed we do not even know how many species exist in the world today. We cannot today value ecosystems in a reliable way, nor can we rank them in terms of their importance. (133)

The assumption that animals are without rights and the illusion that our treatment of them has no moral significance is a positively outrageous example of Western crudity and barbarity. – Arthur Schopenhauer

12 Adding Up the Damages from Climate Change

Five overarching themes emerged from our rview of impacts, and it is worth emphasizing them.

  • We found that climate damages are closely linked to economics. They are unintended by-products or externalities resulting from rapid economic growth. Zero economic growth would greatly reduce the threats from warming.
  • Additionally, we saw the important distinction between managed systems (such as the industrial economy) and unmanageable systems (such as ocean acidification). We emphasized that the major focus of our concerns should be on those impacts that are unmanaged or unmanageable.
  • We have seen that market economies of high-income countries are increasingly insulated from the vicissitudes of climate and other disturbances of nature. This is partly because the nature-based sectors such as agriculture are shrinking relative to services, and (135) partly because nature-based sectors are becoming less dependent on unmitigated natural influences.
  • This point then raises a fourth and deeper issue regarding impacts. If our societies do indeed evolve and grow rapidly over the coming decades, as is projected by all economic and climate models, how we can forecast the impacts on those different structures a century or more from now? Assessment is difficult because technological change is rapid in areas such as agriculture, human health, and migration. Assessing the shape of our economies and making reliable impacts analysis in the distant future is like viewing a landscape through a fuzzy telescope.
  • As a final point, we found that the most troubling impacts are in areas that are far removed from the market and thus from human management. This point applies particularly to areas such as human and natural treasures, ecosystems, ocean acidification, and species. Valuing the impacts in these areas is doubly challenging because of the difficulty of estimating impacts and the lack of reliable techniques for measuring impacts. Economics can contribute least in areas where we need it most. (136)

The largest damage estimate is around 5 percent of output. The most carefully studied scenario shows 2 1/2˚C of warming (which we estimate to occur around 2070). For this warming, the central damage estimate is around 1.5 percent of global output. (139)

To being with, these estimates include only the quantifiable impacts and largely concentrate on market or near-market sectors such as agriculture, real estate, land, forestry, and human health. (143)

They exclude several small negative and positive items: the impact on energy expenditures (less space heating, more space cooling), lower expenditures on winter coats, the costs of cooling plants for electricity generation, increased accessibility of Arctic harbors, greater cost of snowmaking for skiing, decreased amenities from winter recreation and greater amenities from warm-weather recreation, loss of income from fisheries, and so on. It is possible that many small impacts could add up to a large total–in effect, economic death by 1,000 climatic cuts. (143)

A more important reservation concerns impacts that are either too uncertain or too difficult to estimate reliably. (143)

The major qualification centers on the difficulty of assessing the impacts of tipping points–the potentially discontinuous, abrupt, and catastrophic climate changes and consequences. (144)

What should we conclude at the end of this review of the impacts of future climate change? the first point to emphasize is the difficulty of estimating impacts. (144)

The estimates here are that the economic impacts from climate change will be small relative to the likely overall changes in economic activity over the next half (144) century to century. Our estimated impacts are in the range of 1-5 percent of output for a 3˚C warming. (145)

This projection will surprise many people. However, it is based on the finding that managed systems are surprisingly resilient to climate changes if they have the time and resources to adapt. (145)

A third major conclusion is that the most damaging impacts of climate change–in unmanaged and unmanageable human and natural systems–lie well outside the conventional marketplace. (145)

…preserving our environment for the future while economizing on losses in living standards along the way. (146)

PART III SLOWING CLIMATE CHANGE: STRATEGIES AND COSTS

Gambling: The sure way of getting nothing for something. – Wilson Mizner

13 Dealing with Climate Change: Adaptation and Geoengineering

Economic evidence suggests that it would be relatively inexpensive to slow climate change if nations adopted efficient control strategies in a timely and near-universal fashion. The necessary steps–which involve rapidly developing new technologies and raising the price of carbon emissions as an incentive to reduce emissions–rely on economic mechanisms that have worked effectively around the world for many years. But tried and true are not necessarily popular and achievable. (150)

So if one takes unmanaged or unmanageable systems into consideration, adaptation is at best an incomplete solution to the vast changes that are likely to occur in the coming centuries. (151)

| Specialists here make two fundamental points about adaptation. First, adaptation is local while prevention is global. (151)

So adaptation is likely to be a necessary and useful part of the portfolio of actions to reduce the dangers from global warming. It is a complement, not a substitute, for mitigation. (152)

In today’s world, where everyone is guilty of causing global warming, no one can be held responsible. However, if certain countries engage in active climate management, then affected parties can point the finger at them if some undesirable weather pattern emerges. This means that any responsible geoengineering program will need to be negotiated among countries, and it might require some kind of compensation scheme if some regions are damaged. (154)

To me, geoengineering resembles what the doctors call “salvage therapy”–a potentially dangerous treatment to be used when all else fails. …no responsible country should undertake geoengineering as the first line of defense against global warming. (155)

14 Slowing Climate Change by Reducing Emissions: Mitigation

The task of reducing CO2 emissions is simple in principle but difficult in practice. It “simply” requires the world either to use less fossil fuel, or to find a way to remove the CO2 emissions if fossil fuels are burned. (158)

Here are the estimates of the tons of CO2 emissions per $1,000 of expenditures on fuel:

  • Petroleum emits 0.9 tons of CO2 per $1,000 of fuel.
  • Natural gas emits 2 tons of CO2 per $1,000 of fuel.
  • Coal emits 11 tons of CO2 per $1,000 of fuel. (159)

Here are the main approaches:

  • We can slow the overall growth of the economy.
  • We can reduce our energy consumption. (161)
  • Reduce the carbon intensity of production of goods and services.
  • Remove carbon from the atmosphere. (162)

…suppose that countries continue on a path of rapid emissions growth through 2100 and then completely stop all emissions. CO2 concentrations would remain well above preindustrial levels for a millennium, and global temperature would peak at around 4˚C above 1900 levels. This striking result shows the tremendous inertia in the carbon cycle and the climate system. (163)

Economists who have studied this problem are generally in agreement: We can slow global warming through mitigation if the task is taken seriously and managed efficiently. It need not be ruinously expensive, and the use of market-friendly tools will reduce the expense and the intrusiveness of policies on our everyday lives. The impact on living standards over the next half century would be modest if mitigation is efficiently managed. All these are big assumptions, to which I turn in the next few chapters. (168)

15 The Costs of Slowing Climate Change

If half the countries make no efforts to reduce emissions, substantial warming will be inevitable even if the other half of countries make maximum efforts. This calculation also indicates that delayed participation of a substantial part of the world will make it virtually impossible–not just costly–to meet the Copenhagen objective of 2˚C. (179)

In the case of universal participation, about half the models found that it was possible to attain the 2˚C target. For partial participation, twenty of twenty-two model runs found the 2˚C target infeasible. In reality, “infeasible” means that it would require causing a horrible economic depression. (180)

So the bottom line on costs is this. Suppose we live in an ideal world–one where countries worked together cooperatively to introduce emissions reductions, take care to ensure that all countries and sectors participate, and time their actions efficiently. For this world, slowing climate change to meet the Copenhagen objective of a 2˚C limit or something close to it would be a feasible objective. Estimates from economic (180) models suggest that attaining this goal would take between 1 and 2 percent of total world income on an annual basis. (181)

| But we need to be realistic about country behavior and the efficiency of our policies. to the extent that countries do not participate, or that inefficient measures are used, or that the timing of actions is inefficient, then we cannot realistically attain an ambitious temperature target such as that adopted at Copenhagen. Under such circumstances, we might be able to achieve a less ambitious goal, perhaps limiting global warming to an increase of 3˚C. (181)

| So unless virtually all countries participate very soon, and do so in an efficient manner, achieving the Copenhagen target of limiting the increase in global temperature to 2˚C is not possible with current or readily available technologies. This does not mean that we should give up. We need to strive to develop more efficient technologies; we need to design social mechanisms that will encourage economic efficiency and high participation; we should provide help to poor countries that have limited resources; and we will need to recalibrate our objectives toward achievable goals rather than fail in the ambitious but impossible ones. (181)

16 Discounting and the Value of Time

How should we compare present and future costs and benefits? (182)

Here is the issue in a nutshell: When we make investments to reduce emissions, these costs are paid largely in the near term. The benefits in the form of reduced damages from climate change come far in the future. (182)

We need to use a discount rate that reflects the actual market opportunities that societies face, not an abstract definition of equity taken out of the context of market realities. The logic of market discounting is not just a selfish view that the future should take care of itself. It does not hold that we should consume all our income and make no investments to protect our world or future generations. Nor does it hold that we should ignore impacts a few decades in the future. Rather, it reflects the fact that there are many high-yield investments that would improve the quality of life for future generations. (193)

Investments to slow global warming should compete with other investments, and the discount rate is the measuring rod for comparing competing investments. (194)

First, economic and engineering analyses indicate that it is feasible to keep climate change within safe limits. (194)

Second, this optimistic outlook must be qualified by the strong warning that it requires cooperative and efficient measures. (194)

Third, efficiency requires not only near-universal participation but cost effectiveness. (194)

PART IV POLICIES AND INSTITUTIONS FOR SLOWING CLIMATE CHANGE

The best throw of the dice is to throw them away. – English proverb

17 Historical Perspectives on Climate Policy

There is no bright line for targets at 1 1/2˚C or 2˚C or 3˚C or any specific temperature increase. The best target will depend upon the costs of achieving it. We should aim for a lower temperature target if it is inexpensive, but we might have to live with a higher target if costs are high or policies are ineffective. (198)

…the scientific rationale for the 2˚C target is not really very scientific. (200)

…we find three justifications for the temperature target. The first ist hat the maximum experienced global temperature for the last half-million years is about 2˚C more than today, and to exceed that would be potentially dangerous. A second rationale is that ecological adjustments may be difficult beyond this temperature increase. A final reason is that many dangerous thresholds will be crossed once the temperature surpasses 2˚C. (200)

…we cannot realistically set climate-change targets without considering both the costs of slowing climate change and benefits of avoiding the damages. (204)

18 Climate Policy by Balancing Costs and Benefits

The basic idea is quite intuitive. In a world of limited resources, we should make investments that produce the greatest net social benefits–that is, ones that have the greatest margin of social benefits over social costs. (205)

The general point here is that if the damages are uncertain, highly nonlinear, and clifflike in the Climate Casino, then our cost-benefit analysis will generally lower the optimal target to provide insurance against the worst-case outcomes. (217)

…while simple temperature targets make an attractive approach, they are insufficient in a world of competing goals. People want to be assured that these targets are not simply the result of overly concerned environmentalists who are intent on saving their ecosystems at the expense of humans. Nations will want to make sure that they are not subsidizing undeserving countries or feeding corrupt dictators whose green policies are really an excuse for skimming greenbacks. (219)

19 The Central Role of Carbon Prices

The history of economic interventions in the energy sector and elsewhere shows that the best approach is to use market mechanisms. And the single most important market mechanism that is missing today is a high price on CO2 emissions, or what is called “Carbon prices.” (221)

Governments must ensure that people do pay the full costs of their emissions. Everyone, everywhere, and for the indefinite future must face prices that reflect the social costs of their activities. (222)

| Putting this differently, putting a price on carbon represents a societal decision about the priority of reducing CO2 emissions. (222)

There are two ways to raise the price on carbon.

  • The easiest way is simply to tax CO2 emissions: a “carbon tax.”
  • A second and more indirect method requires firms to have permits to emit CO2, and to allow them to be bought and sold. This is called “cap and trade” because the quantity of emissions is capped, but the rights to emit can be traded for a price among firms. (223)

SETTING THE RIGHT CARBON PRICE

The first is to estimate the damages from climate change with a concept called the “social cost of carbon.” The second is to estimate the required price of carbon that would attain different environmental objectives using integrated assessment models. (227)

Table 8. Impact of a $25 per ton carbon tax on wholesale energy prices. This table shows the impact on the wholesale prices of major energy products. The effect on coal will be substantial because it is so carbon intensive. Petroleum has the smallest increase because it has high value per unit of CO2 emissions.

Item Unit Without carbon price With carbon price Change (%)
Prices (2005 $):
Petroleum $ per million btu 17.2 19.1 11
Coal $ per million btu 1.8 4.1 134
Natural gas $ per million btu 4.5 5.8 30
Electricity (industrial Cents per kWh 6.9 9/0 31

Table 9. Impacts of a $25 per ton CO2 price.

Example Tons of CO2 Increase in spending due to $25 CO2 price Increase in spending (%)
Year’s electricity use 9.34 $233.40 19.45
Year’s driving 4.68 $116.90 7.79
Economy class transcontinental flight 0.67 $16.80 5.61
One year’s household communication services 0.01 $0.36 0.04
One year’s household financial services 0.02 $0.41 0.04
On year’s household consumption 29.48 $737.00 0.92

Table 10. Economic impacts of proposed carbon tax, United States, 2010-2030.

Year Tax rate (2005 $/ton CO2) Emissions (billion tons CO2) Revenues (2005 billion $) Revenues (% of GDP)
2010 0 6.3 0 0.00
2015 25 5.9 147 0.96
2020 30 5.5 168 0.97
2025 42 5.4 225 1.14
2030 53 5.2 277 1.25

Implementing a carbon tax can be a compromise for fiscal conservatives and environmental activists as a way to reduce growing fiscal deficits, slow global warming, and do both of these in a market-friendly manner. (232)

20 Climate-Change Policies at the National Level

How od the two regimes–cap and trade and carbon taxation–compare? Most people will be surprised to learn that they are fundamentally the same. That is, in an idealized situation, they have the same effects on emissions reductions, on carbon prices, on consumers, and on economic efficiency. (237)

Carbon taxes have two major disadvantages relative to cap-and-trade systems. The first is that the quantity of emissions is uncertain under a carbon tax. (240)

A further point…is that cap-and-trade systems have greater political appeal and greater durability. One reason is that political opposition from industry groups who would be disadvantaged by tighter regulation are bought off by allocation of free allowances. (240)

A final political argument is that taxes are hard to introduce but easy to cut. (240)

The history of regulation suggests that environmental rules tend to have greater durability and have generally been irreversible. … For this reason, many analysts believe that the regulatory route of a cap-and-trade policy would be more durable and have a larger chance of being a credible long-term policy. (241)

| How do I come out after weighing the arguments. My first choice is…either one! The most important goal is to raise the price of CO2 and other GHG emissions. (241)

21 From National to Harmonized International Policies

What are the proposals and the actual institutions for dealing with the global externality of climate change? Here are the four main approaches.

  1. Inaction, in which no measures are taken to override market supply and demand, and the climate-change externality is not corrected. (245)
  2. Unilateral actions, in which countries set their own objectives and policies but do not coordinate them with other countries.
  3. Regional approaches, an important example of which is the EU’s Emissions Trading Scheme. It sets limits for all members of the EU, covering approximately half of EU CO2 emissions.
  4. Binding international agreements among most nations to limit GHG emissions using a combination of regulatory and tax measures. (246)

An efficient policy to slow global warming requires that national policies be harmonized among countries. (249)

The easiest way to achieve harmonization of marginal costs is by ensuring that the prices of CO2 emissions are equalized in every country. (249)

The basic idea is that countries would agree on a carbon price rather than an emissions limitation. (250)

Table 11. Distribution of emissions by country income level.

Country group Lower limit of per capita income (2005 U.S. $) Cumulative share of global CO2 emissions (%) Number of countries
High income 20,000 46.3 35
Middle income 10,000 60.8 30
Low-middle income 5,000 89.9 30
Low income 2,000 99.1 35
Lowest income 280 100.0 37

How might international climate-change treaties introduce enforcement mechanisms? (255)

This discussion suggests that the major motivation for countries to join the carbon treaty would come from the stigma and messiness of being outside the carbon-compliant region. But would it work? (257)

Establishing effective policies to slow global warming will require four important steps. First, it will require focusing on raising the price of CO2 and other GHG emissions in the marketplace. Second, because free markets will not do the job, it will require nations to use either a cap-and-trade or carbon tax system to raise CO2 prices. Third, it will require most nations to agree to the first two steps and to coordinate their policies at a global level. And finally, an international climate-change agreement must contain an effective mechanism to combat free riding. (257)

22 Second Best and Beyond

The deadweight loss is the net loss to society in terms of foregone goods and services. (261)

So in the end, it is much more effective to penalize carbon emissions than to subsidize everything else. (266)

Three tentative points emerge from the analysis of alternatives to carbon pricing. First, alternatives such as regulation are generally more expensive per unit of emissions reduction than a price-based policy. (266) … Second, even a robust set of regulations is unlikely to achieve ambitious targets such as those set at the Copenhagen climate convention. … Third, the selection of the portfolio of regulations is a difficult problem because some options are extremely expensive or even counterproductive, such as the use of corn-based ethanol. (267)

This analysis indicates that the best approach to preventing “dangerous interferences” with the climate is actually straightforward from an economic perspective. The countries of the world need to move quickly to a high and rising price on CO2 emissions and other greenhouse gases, and these prices should be harmonized so that they are roughly equivalent in all countries. … This is one of those rare cases where the right solution is a simple solution. (267)

On top of these, one of the most important and puzzling phenomena is “energy-cost myopia.” This refers to the syndrome in which people invest too little in energy efficiency because they underweigh (or over-discount) future fuel savings. If we could resolve this puzzle, the role of regulation would be much clearer. (268)

…the shortcomings of relying primarily on regulations are severe. One problem is that undertaking most of the emissions reductions by regulation would involve literally thousands of technologies and millions of decisions. (272)

This leads to the second point: Regulatory policies alone cannot come close to solving the global warming problem by themselves. (272)

Third, regulations can be very costly or even counterproductive if they are not carefully designed. (272)

23 New Technologies for a Low-Carbon Economy

How big a challenge is it to “decarbonize” our economy? (274)

What will replace these workhorses [oil and coal] of the modern economy? (274)

How will we get firms to invent and produce, and consumers to buy and use, these new technologies? (274)

Table 14. Estimates of the cost of near-term electricity generation. This table shows estimates by the U.S. Energy Information Administration of the costs of different kinds of power generation. Note that the renewable sources or low-carbon-emissions CCS are much more costly.

Plant type Capital and other fixed Variable Total Date of availability Status of technology Emissions rate (tCO2/MWH)
Conventional combined-cycle natural gas 2.05 4.56 6.61 Today Mature 0.60
Conventional coal 7.05 2.43 9.48 Today Mature 1.06
Wind 9.70 0.00 9.70 Today Mature 0.00
Geothermal 9.22 0.95 10.17 Today Developing 0.00
Advanced coal 8.41 2.57 10.98 2020 Developing 0.76
Biomass 7.02 4.23 11.25 2020 Developing 0.00
Solar photovoltaic 21.07 0.00 21.07 Today Developing 0.00
Solar thermal 31.18 0.00 31.18 Today Developing 0.00
Advanced natural gas with CCS 3.97 4.96 8.93 2030 Early-stage 0.06
Advanced nuclear 10.22 1.17 11.39 2025 Early-stage 0.00
Advanced coal with CCS 10.31 3.31 13.62 2030 Early-stage 0.11

This chapter leads to three major conclusions. First, it is essential that governments continue to support basic science and technology in energy and related fields. (289)

Second, we must recognize the importance of the private sector in developing new technologies–both not-for-profit researchers and for-profit entrepreneurs. (289)

Finally, I again emphasize the central role that rapid technological change must play in the transition to a low-carbon economy. (289)

PART V CLIMATE POLITICS

There is no gambling like politics. – Benjamin Disraeli

24 Climate Science and Its Critics

A scientific consensus is the collective judgment of the community of informed and knowledgeable scientists in a particular field at a given time. (294)

Some transactions affect third parties who were not involved in the decision…Such social costs are called externalities because they affect parties external to the economic transactions that cause them. Externalities escape the control of the market mechanism because no financial incentive motivates polluters to minimize the damage they do. – William Baumol and Alan Blinder

In writing reports, the National Academies insist on several ingredients: independence from external pressure, expertise, reliance on evindence, objectivity, approval by the Academies’ leadership, and disclosure of conflicts of interest. (295)

cf. Strengthening Forensic Science in the United States: A Path Forward

Greenhouse gases are accumulating in Earth’s atmosphere as a result of human activities, causing surface air temperatures and subsurface ocean temperatures to rise. – Ralph Cicerone, “Climate Change Science: An Analysis of Some Key Questions”

Consensus does not imply unanimity. (297)

In economics, a pollutant is a form of negative externality–that is, a by-product of economic activity that causes damages to innocent bystanders. (299)

The advice of climate science contrarians is to ignore the dangers in the Climate Casino. To heed that advice is a perilous gamble. (301)

But a good scientist is never 100 percent sure of any empirical phenomenon. (301)

So the correct response to critics is to look carefully at their arguments and determine whether they do indeed undermine standard theories. Scientists and economists need to confront contrary arguments with the same vigor with which they argue for the validity of their own approaches. (302)

…it is better to say, “Given the fundamental science, the many climate models from around the world, the fiercely competitive scientific enterprise that tests assumptions and reasoning, and the accumulation of corroborating evidence, it is very likely that the theories are correct. Perhaps we are only 95 percent certain. But we cannot wait to be 100 percent certain because absolute certainty can never be achieved in an empirical science. And if we wait until we are completely certain, it will be too late to stop it.” (302)

25 Public Opinion on Climate Change

In a democracy, effective and durable policies to slow global warming must ultimately rest on public support. (303)

NASclimatechange

How can it be that highly educated Americans appear less informed about the science than those who never went to college? What accounts for the dramatic drop in public acceptance of mainstream climate science? (307)

cf. The Nature and Origins of Mass Opinion

I believe that the partisan divide can be bridged if we consider the high stakes and potential solutions. (312)

If we’ve learned any lessons during the past few decades, perhaps the most important is that preservation of our environment is not a partisan challenge; it’s common sense. Our physical health, our social happiness, and our economic well-being will be sustained only by all of us workign in partnership as thoughtful, effective stewards of our natural resources. – Ronald Reagan, Remarks on signing annual report of Council on Environmental Quality, July 11, 1984

I conclude that carbon taxes are an ideal policy for true conservatives who care about preserving our beautiful planet but want to do so with well-turned economic incentives and with minimal government intrusion into people’s lives and business decisions. It can be imposed without burdensome regulations or restrictions. Without betting on the technological winners among future energy technologies and without putting regulations in every corner of our society, we can effectively show global warming in a conservative’s way. (315)

26 Obstacles to Climate-Change Policies

cf. Global Warming Gridlock

The first set of obstacles is the result of economic nationalism. (317)

This is the celebrated “prisoner’s dilemma,” which in this context can be better called the “nationalist dilemma.” If each country seeks a strategy that maximizes its national welfare, taking other countries’ policies as given, then the resulting abatement will be much smaller than if each country took global benefits into account. (317)

The lesson for scientists is clear. There is no substitute for clear and persistent explanations of the science along with refutations of contrarian attacks. The evidence will become increasingly clear each year, as it did with smoking. Obstructionists will find themselves as if on a melting ice floe. The political winds will eventually shift. (325)

Humans are putting the planet in peril. But humans can undo what they are doing. Moreover, this can be achieved at relatively low cost if people accept the realistic threat of global warming, put in place an economic mechanism that penalizes carbon emissions, and take vigorous efforts to develop low-carbon technologies. By taking these steps, we can protect and preserve our precious planet. (326)

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