Robert P. Murphy, an economist at Texas Tech, used Mr. Nordhaus’s work to show that setting too high a carbon tax can be worse than setting no carbon tax at all. Using Mr. Nordhaus’s 2009 calibration, Mr. Murphy calculated the present value of damages caused by carbon dioxide and abatement costs at $22.6 trillion. Mr. Nordhaus’s optimal carbon tax would have reduced damages but increased abatement costs, decreasing the impact of emissions to a total of $19.5 trillion—a relatively minor net improvement of just over $3 trillion.
Meanwhile, the Nordhaus model shows that the cost of a policy to limit the temperature increase to only 2.7 degrees Fahrenheit by 2100 would have been $37.03 trillion—$16.4 trillion more than the cost of doing nothing after accounting for the damage done by carbon emissions. Thus, Mr. Nordhaus’s work doesn’t support the recent announcement by the International Panel on Climate Change about the urgent need to limit warming to 2.7 degrees. Indeed, Paul Krugman castigated Mr. Nordhaus in 2013 for his belief that the optimal temperature increase is 4.1 degrees.
These two paragraphs are from my “A Nobel Economics Prize for the Long Run,” Wall Street Journal, October 8 (electronic) and October 9 (print). The article is gated but I’ll be able to post the whole thing in 30 days.
I faced a tight space constraint and so I didn’t have room for this further thought on global warming:
One major variable that affects the estimate of the SCC [Social Cost of Carbon] is the discount rate used to weight the well-being of future generations affected by global warming. The lower the discount rate, the greater the weight on future generations’ well being and, therefore, the higher the optimal tax rate. Interestingly, though, although few of the major participants in the debate point this out, taxing ourselves now to help future generations transfers resources from the relatively poor (us) to the relatively rich (future generations.) Why? Go back to Romer. With positive growth rates, the vast majority of people 50 or more years from now will be substantially better off than the vast majority of people today.
Or this. I could state my version but cue Donald Boudreaux, who said it well:
Yet, undoubtedly because of space constraints, Mr. Henderson did not mention one of Prof. Nordhaus’s most remarkable and important findings, namely, that nearly all – about 98 percent – of the benefits of technological innovation are captured, not by the entrepreneurs and businesses who introduce them, but by the general public. In his 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement,” Prof. Nordhaus wrote that “only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”
Note that I haven’t quoted from the part on Romer, but I’m constrained by my contract with the Journal. For some of the highlights of Romer’s work see my post yesterday.
HT2 Bob Murphy for catching a small numerical error and reminding me of Krugman’s criticism of Nordhaus. Bob gave me a quick comment on a draft when I was under tight time pressure.
READER COMMENTS
MikeP
Oct 10 2018 at 12:28am
Actually, calculations are not required. Those values are found exactly as is in Table 5-1 on pages 82 and 83 of Nordhaus’s 2008 book A Question of Balance.
Net present value of abatement costs plus climate damages in trillions of dollars:
No control 22.59
50-year delay 20.45
Optimal tax 19.52
1.5°C limit 37.03
2.0°C limit 24.39
Stern Review 36.77
Gore proposal 43.96
It is staggering how phenomenally expensive aggressively addressing global warming is. It is also staggering how phenomenally cheap not addressing global warming is in comparison.
But it is not at all surprising that Nordhaus’s Nobel Prize is being used in the media as evidence for the IPCC’s recent claim that 2°C as agreed in Paris is not enough and that 1.5°C must be the new target, rather than a direct contradiction of that policy.
E.g., take Science News, the first thing I found in a search:
Preternaturally incapable of telling the truth? Or intentionally lying? Or supremely ignorant? It is the puzzle of our age.
Dylan
Oct 10 2018 at 12:12pm
I am not well versed in the numbers, but it seems at least plausible that our estimates of both the costs associated with global warming and/or the amount of warming expected based on current trends has gone up in the last decade since the book was published, and that the cost of abatement has decreased more than expected meaning that you would get different estimates even running the same model today? My understanding is that the cost of solar and energy storage have both decreased far quicker than previously forecast for example.
btw, I think those NPV should have negative numbers in front of them, unless the takeaway is supposed to be that Gore’s proposal is the best value.
David Henderson
Oct 10 2018 at 12:50pm
Yes, Dylan, that is plausible; what I don’t know is if it’s true.
No. He got the sign right. He just mislabeled it. It’s not NPV. It’s just PV.
MikeP
Oct 10 2018 at 1:44am
It looks like Bjorn Lomborg makes the same point as I do in tomorrow’s Wall Street Journal.
Cody Custis
Oct 11 2018 at 11:06am
Nuclear power (massive initial cost, minimal marginal cost, low emission) is held back not by technological challenges but by issues with rates of return. Environmentalists who argue for a low discount rate for the well-being of future generations should, logically, argue for a low discount rate for the production of their energy.
Bill
Oct 12 2018 at 5:27pm
On the discount rate, William Baumol wrote, “a redistribution to provide more for the future may be described as a Robin Hood activity stood on his head—it takes from the poor to give to the rich. Average real per capita income a century hence is likely to be a sizeable multiple of its present value. Why should I give up part of my income to help support someone else with an income several times my own?”
Baumol, W.J. On the social rate of discount. Am. Econ. Rev. 1968, 58, 788–802
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