In my
previous IER post, I pointed out the huge contradiction in the major
media treatment of climate change policy. The same day William Nordhaus
shared the Nobel Prize in economics, the United Nations’s Intergovernmental
Panel on Climate Change (IPCC) released its latest report. The media lauded
Nordhaus and his support of a carbon tax, while it credulously repeated the
IPCC calls to quickly phase out fossil fuels in order to limit warming to
1.5°C. Yet Nordhaus’ own work shows that such a policy goal is absolutely
ludicrous, and in fact would make humanity much worse off than doing
nothing at all about slowing climate change.
In the present article I will provide more details of just how Orwellian
it is, that some pundits and reporters are linking Nordhaus with the IPCC’s
latest announcement. More generally, this whole episode underscores the farce
of the “social cost of carbon” (SCC) concept. The Obama Administration and
academics like Nordhaus go through all of this work to generate estimates of
the quantitative damage caused by carbon dioxide emissions, and then the
United Nations goes ahead and recommends policies that aren’t even in the
same ZIP code as what those “scientific” estimates entail. If anybody in this
debate is a “denier,” it is the people claiming the IPCC’s latest
pronouncements have anything to do with the peer-reviewed economics
literature.
The IPCC Calls for 1.5°C
To refresh the reader’s memory, here is how The Guardian reported
on the IPCC’s recent press release:
Other newspapers, blogs, and Twitter accounts used the IPCC’s announcement
to tell the world what “the top scientists” were all claiming—apparently in
unison. In this climate (no pun intended), the average member of the public
would understandably conclude that the peer-reviewed literature weighed the
pros and cons of various policies and decided that limiting global warming to
1.5°C was clearly a good thing to do. Surely the various
estimates of the impact of climate change would agree that the costs of
pursuing such a policy were vastly outweighed by the benefits.
I will now spend the rest of this post quoting from the most recent
version of William Nordhaus’ climate modeling to show that the above claims
are demonstrably false. Even though I have my differences with Nordhaus’
approach, it is surely significant that the guy who just won the Nobel Prize for
his work on climate change has developed a model that shows the U.N.’s latest
target is impossible and would be a cure far worse than the disease.
Nordhaus’ “Optimal” Warming
Remember that in addition to the U.N.’s recent call to limit warming to
1.5°C, there is also the Paris climate agreement, in which just about all the
governments of the world—except the United States, thanks to President
Trump—have agreed to limit warming to at most 2.0°C, and
with the hope of keeping the ceiling lower than that.
Now in one of my
most popular IER posts, I used the last IPCC documents
(i.e., from the AR5) to demonstrate that this more modest ceiling of 2.0°C
would likely cause more economic harm than it would spare in climate change
damages.
Here I’ll do something similar. Let’s look at what Nordhaus’ most recent
calibration of his DICE model said would be the “optimal” amount of warming,
if all of the governments of the world implemented his preferred carbon tax
at the appropriate level. The following chart comes from an NBER paper that
Nordhaus updated in September 2017:
In the above figure, note that the baseline warming hits about 4.1°C by
the year 2100. The “optimal” trajectory, meaning the one that would unfold
with standard parameter choices if the governments of the world implemented a
carbon tax exactly of the magnitude (over time) that Nordhaus recommended,
would still allow for 3.5°C of warming by 2100.
Further notice in the note under the figure that in Nordhaus’ framework,
the most he would even model is a 2.5°C constraint; anything less than that
was so far removed the realm of possibility that it wasn’t even considered.
Estimates of the “Social Cost of Carbon”: Nordhaus vs. the U.N.
Now experts in the climate change policy debate can recognize the enormous
chasm between the amount of warming that Nordhaus recommends, versus the
latest target championed by the U.N. However, the lay reader might not grasp
just how huge the discrepancy is.
So let’s try a different approach. In this
2017 Nordhaus paper in the Proceedings of the National Academy of
Sciences (PNAS), Nordhaus again uses his most recent (2016) calibration of
his DICE model to provide estimates of the “social cost of carbon” (SCC).
This concept is the present value of the future net damages accruing to
humanity from the emission of an extra unit (such as a metric ton) of carbon
dioxide, in a particular year. It is the starting point for calibrating a tax
on carbon, if the ostensible purpose is to correct the “market failure”
stemming from businesses and individuals neglecting their impact on climate change.
The table below comes from Nordhaus’ PNAS paper, and it sheds light on
just how outrageous the latest U.N. call really is:
In the table above, the “baseline” scenario shows what happens under
business-as-usual. For example, in the year 2030, if the governments of the
world haven’t taken any further action to reduce emissions and if there is no
expectation that they will do so later on, then the DICE model estimates the
social cost of carbon (SCC) at $51.60 per ton of carbon dioxide.
In contrast, what if governments enacted policies that would put a cap on
warming at 2.5°C, so that the world couldn’t surpass that amount of warming
even for a single year? (That’s the “maximum” scenario.) In order to make
that a sensible outcome using a carbon tax, Nordhaus’ model says that the
implied social cost of carbon in the year 2030 would be a whopping $351 per
ton—roughly seven times the amount Nordhaus estimates. For
those keeping score at home, a $351/ton carbon tax works
out to a gasoline tax of more than $3 per gallon.
Now let’s deal with some complications: One of the reasons Nordhaus
derives lower estimates for the SCC than do some other analysts, is that he
uses a higher discount rate than they do, since he believes the market rate
of return on capital is a more appropriate measure of the opportunity cost
involved, as opposed to the analyst’s philosophical views about future
generations. (I agree with Nordhaus on this point, and in any event he’s the
guy who just won the Nobel for inventing the economics of climate change—so take
it up with him, if you disagree.)
Having said that, even if we use the 3% discount rate that is popular in
the climate change policy debate, then we still don’t get
anything close to the U.N. outcome: As the table above shows, the implied SCC
at a 3% discount rate in the year 2030 is “only” $104.90 per ton. Yet to
remind the reader, in order to limit warming to 2.5°C, in 2030 we’d need a
carbon tax of $351 per ton.
And let me emphasize: I am vastly understating the enormous disparities
between Nordhaus’ estimates of the social cost of carbon—and the implied size
of the “optimal” carbon tax—and what the U.N.’s latest pronouncements
suggest. This is because Nordhaus only provides results for scenarios with a
ceiling of 2.5°C, thinking this is the most aggressive target that is in the
realm of feasibility. If instead we used the DICE model to estimate how high
a carbon tax would have to be, in order to achieve the U.N.’s actual call
for a ceiling of 1.5°C of warming, then of course the number would be far,
far higher.
As a reminder from my previous post, when Nordhaus published the results
of his 2007 analysis, at that time the 1.5°C ceiling would
have made humanity $14 trillion poorer than doing nothing at all about
climate change. (See Table 4 of my 2009
article on Nordhaus.)
Conclusion
Those of us who are skeptical
of the case for a carbon tax have been accused of all sorts of
skullduggery, including “science denial.” Yet as the recent media handling of
William Nordhaus’ Nobel award and the U.N.’s latest IPCC report reveal, it is
the boosters of aggressive government action who ignore the peer-reviewed
research. Both the Obama Administration Working Group and the
latest calibration of Nobel laureate Nordhaus’ model estimate that the
“social cost of carbon” is nowhere near the level it would need to be, to
justify the U.N.’s call to limit warming to 1.5°C.
The whole episode shows the farce
of this alleged scientific and empirical process. After going through the
trouble of estimating the SCC, the interventionist camp then proceeds to
trumpet policy goals that utterly ignore their own results.
Originally published at the
Institute for Energy Research
