The economics of climate change

Nordhaus has written two excellent books “A Question of Balance” and “Climate Casino: Risk, Uncertainty and Economics for a Warming World”. One of the great things about his books is that they attract vitriolic Amazon reviews from both the left and the right.

To briefly summarise his approach:

  1. Accept climate science as summarised by the IPCC
  2. Perform cost-benefit analysis
  3. Derive policy ideas which include –
  • A mix of prevention and adaption
  • Introduction of a carbon tax now which rises over time

The abuse from the right I find predictable. He accepts climate change science and advocates government intervention and the raising of taxes.

The hatred from the left was far more shocking to me. He has been described as a “sceptic”, which is very surprising since I found him one of the most persuasive writers on why we should accept the science. (http://www.nybooks.com/articles/2012/03/22/why-global-warming-skeptics-are-wrong/.) There are many parts which he explained extremely well, for instance the difference between the impact on managed systems such as agriculture and unmanaged systems such as the oceans. It is the unmanaged systems where we are likely to face the largest problems.

So why is he not popular with the environmental groups?
Why is he treated by some as an enemy rather than an ally?

I would like to understand better but here are some ideas

  • He uses a higher discount rate than that used in the Stern Report.
    This means that he is saying that ‘future people’ are not equally valued to ‘current people’. The discount rate he uses is still far lower than anything we observe from people’s choices. If we had low discount rates, we would save more for our pension, eat less and exercise more. This is a strength of his work. I found the Stern report very disappointing as using such a low discount rate obviously leads to the recommendation of radical policy action. What I had not understood until reading Nordhaus, is that far more reasonable discount factors also lead directly to policy action, a lot more than we are currently doing.
  • He does not put forward an extreme view just to grab headlines
    If you think the way to get things to change is to find the most extreme version of your view you can support, and to use it as your starting point then someone like Nordhaus is irritating. His analysis does not support extreme action now. I do have sympathy with that approach when you want to get something onto the agenda, UKIP showed that it can be effective.
  • He proposes a tax.
    Many environmentalists do not like the morality of this and prefer quotas or talking in terms of limits on the acceptable rise in temperature. For an economist, tradeable quotas are identical to taxes, just harder to implement. But for some people putting a price on carbon makes it morally acceptable.
  • He does not support extreme action immediately.
    Again, I see this as a strength as it means there is a coherent set of policies that could conceivably be adopted. The extreme ideas I think drive the opponents further away again.

Summary

The best model for how to think about climate change policy is welfare economics. The science is easily good enough to be used and debates about its validity should not be central. The economic ideas are simple, but the ethical questions we need to resolve and the political obstacles to implementation should be the focus of the debate.

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