Post on 12-Jan-2016
1
William D. NordhausYale University
Public LectureBecker-Friedman Institute
April 2014
Economic Perspectives on Climate Change
The challenge of climate change
• A new and controversial area: global, costly, large impacts
• Affects virtually every area of society and the economy
• I will emphasize an economic innovation: using the market mechanism to achieve environmental goals and particularly the role of carbon prices.
2
Emissions and climate science
3
4
Global CO2 emissions since 1900
5
Trend in CO2 emissions relative to GDP for US
6
300
320
340
360
380
400
420
1960 1970 1980 1990 2000 2010
CO2: South PoleCO2: Hawaii
CO2 Concentrations (ppm)
CO2 concentrations for last 800,000 years
7
TODAY
8
-.6
-.4
-.2
.0
.2
.4
.6
0700 0900 1100 1300 1500 1700 1900 2100
Mann's proxy (based on tree rings, bore holes, etc.)
Long-term temperature records
Temperature record (°C), 200 - 1980
Sources: [25]
9
-.6
-.4
-.2
.0
.2
.4
.6
0700 0900 1100 1300 1500 1700 1900 2100
Mann's proxy (based on tree rings, bore holes, etc.)Instrumental record (average of 3)
Long-term temperature records
Merged temperature record (°C), 200 - 2012
The recent temperature record and modeling
10
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1900 1925 1950 1975 2000
GISS recordHadley recordNCDC recordModel prediction
Actual and model prediction[degrees C from period average]
The Impacts of Climate Change
The Copenhagen Accord 2009 recognized “the scientific view that the increase in global temperature should be below 2 degrees Celsius.”
This is the most difficult area of climate science. Examples:
– Agriculture– Potential species extinctions– “Tipping points” and abrupt climate change
11
12
Studies of impact of climate change:The example of low-latitude rice
12
With adaptation
Without adaptation
13
The example of temperate-zone wheat
13
With adaptation
Without adaptation
Major impacts: non market (here extinction rates)
14
0
10
20
30
40
50
60Ex
tincti
on (%
per
per
iod)
Historical extinction rate (%/century)
Projected extinction rate (%/century +)
Issues of Tipping Points and Catastrophic Risks
• Major areas of concern:– Reversal of North Atlantic deepwater
circulation– Impact of melting of Arctic summer icecap– Melting of Greenland and West Antarctic ice
sheets– Abrupt climate change– Ocean carbonization
15
Example of Greenland Ice Sheet at 6 °C warming
16
IPCC, Science, AR4, p. 830.
Aggregate damage estimates from different studies
17
Aggregate damage estimates from different studies
Source: Nordhaus, IPCC Impacts 2014, Tol 2011. 18
-3
-2
-1
0
1
2
3
4
5
6
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Dam
ages
as
perc
ent
of o
utpu
t
Global mean temperature increase (°C)
Tol survey
DICE model
IPCC estimate
-3
-2
-1
0
1
2
3
4
5
6
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Dama
ges a
s perc
ent o
f outp
ut
Global mean temperature increase (°C)
Tol survey
DICE model
IPCC estimate
-3
-2
-1
0
1
2
3
4
5
6
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Dama
ges a
s perc
ent o
f outp
ut
Global mean temperature increase (°C)
Tol survey
DICE model
IPCC estimate
-3
-2
-1
0
1
2
3
4
5
6
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Dama
ges a
s perc
ent o
f outp
ut
Global mean temperature increase (°C)
Tol survey
DICE model
IPCC estimate
IPCC 2014Estimate
19
The Contribution of Economics:Integrated Assessment Models
(IAMs)
What are IA models?These are models that include the full range of cause and effect in climate change (“end to end” modeling).
Major goals of IA models:Project trends in consistent manner Assess costs and benefits of climate policies Estimate the carbon price and efficient emissions
reductions for different goals
20
CO2emissions
Carbon cycle and climate
Impacts on humans and natural systems
Typical integrated
assessment models
Policies (limits, taxes,
subsidies, …)
An example: the Yale DICE model
We can use the models to examine the effects of different policies:
1. No policies2. “Optimal” policies3. Limit temperatures to 2 degrees C
21
Emissions under policy and no policy
22
0
20
40
60
80
100
120
2010 2020 2030 2040 2050 2060 2070 2080 2090
CO2
emis
sion
(GtC
O2)
Industrial CO2 Emissions
No controlsOptimalT < 2 degC
Climate change under different scenarios
23
0
1
2
3
4
5
6
7
2010 2035 2060 2085 2110 2135 2160 2185
Glo
bal t
empe
ratu
re (d
egc,
190
0 =
0)
TemperatureBase
Optimal
Lim2t
Carbon prices under policy and no policy
24
0
20
40
60
80
100
120
140
2010 2020 2030 2040 2050 2060 2070 2080 2090
CO2
pric
e (2
005
$ pe
r ton
CO
2)
Carbon Price
No controls
Optimal
Limit < 2 degC
Today
Policies to date
Began with Framework Convention on Climate Change (1992), a voluntary agreement to “prevent dangerous” climate change.
Kyoto Protocol (1997 - 2012) was conceptually a “cap and trade” approach
After expiration of Kyoto Protocol in 2012, no binding international regime in place.
25
26
Kyoto Protocol suffered from extreme attrition …
0
10
20
30
40
50
60
70
1990 1995 2000 2005 2010
Cove
red
emis
sion
s as
% o
f wor
ld
Kyoto participants
European Union
Economist’s Preferred Approach:Carbon tax
• Tax goods proportional to their CO2 content. • Tax should be harmonized across all industries
and countries.• Can reduce other taxes or use revenues for public
goods
27
0
20
40
60
80
100
120
140
2010 2020 2030 2040 2050 2060 2070 2080 2090
CO2
pric
e (2
005
$ pe
r ton
CO
2)
Carbon Price
No controls
Optimal
Limit < 2 degC
28
Three inconvenient truths
1. An inconvenient scientific truth: Global warming is not a hoax. It will (almost surely) become an increasingly important and obvious feature of earth systems.
2. An inconvenient economic truth: To be efficient, firms and consumers must face a market price of carbon emissions that reflects the social costs.
3. An inconvenient political truth: To be effective, the price must be universal and harmonized in virtually every sector and country.
29