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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.

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Emissions and climate science

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4

Global CO2 emissions since 1900

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Trend in CO2 emissions relative to GDP for US

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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

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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]

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-.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

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-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

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12

Studies of impact of climate change:The example of low-latitude rice

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With adaptation

Without adaptation

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The example of temperate-zone wheat

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With adaptation

Without adaptation

Major impacts: non market (here extinction rates)

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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

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Example of Greenland Ice Sheet at 6 °C warming

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IPCC, Science, AR4, p. 830.

Aggregate damage estimates from different studies

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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

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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

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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

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Emissions under policy and no policy

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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

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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

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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.

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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

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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

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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.

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