-------- Original Message --------
(There are two good sections in this otherwise tedious,
celebratory reflection on the mindset of a usually slovenly Yale
economist, William Nordhaus, by the committed Keynesian Paul
Krugman, who was a Nordhaus assistant 40 years ago. Both tend to
approach mega-crises like climate with the ingrained
self-confident dogma of economists, namely, that market solutions
can be found to market problems. Oops, that's actually an
impossible proposition to sustain, especially thanks to the
[unmentioned] market-failure amplification by carbon financiers
we've seen in the emissions-trading scam. So first, read a
refreshing confession by Nordaus. And second, since markets can't
solve climate crisis, we need regulation: specifically in the US,
the Environmental Protection Agency should nail shut the
coal-fired generators already. And they can. It strikes me that
this is an overdue but nevertheless helpful shift from the
Establishment, and may justify renewed activism to get
environmental regulators
everywhere to start capping,
full-stop, not cap-and-trading.)
“Markets alone will not solve this problem,” declares
Nordhaus. “There is no genuine ‘free-market solution’ to global
warming.” This isn’t a radical statement, it’s just Econ 101.
Nonetheless, it’s anathema to free-market enthusiasts... as
Nordhaus himself points out, studies attempting to analyze how
we might most efficiently reduce carbon emissions strongly
suggest that just one of these margins should account for the
bulk of any improvement—namely, we have to sharply reduce
emissions from coal-fired electricity generation. Certainly it
would be good to operate on other margins, especially because
these studies might be wrong—maybe, for example, it would be
easier than we think for consumers to shift to a radically
lower-energy lifestyle, or there might be radical new ideas for
scrubbing carbon from the atmosphere. Nonetheless, the message I
took from this book was that direct action to regulate emissions
from electricity generation would be a surprisingly good
substitute for carbon pricing—not as good, but not bad. And this
conclusion becomes especially interesting given the current
legal and political situation in the United States, where
nothing like a carbon-pricing scheme has a chance of getting
through Congress at least until or unless Democrats regain
control of both houses, whereas the Environmental
Protection Agency has asserted its right and duty to regulate
power plant emissions, and has already introduced rules that
will probably prevent the construction of any new coal-fired
plants. Taking on the existing plants is going to
be much tougher and more controversial, but looks for the moment
like a more feasible path than carbon pricing.)
http://www.nybooks.com/articles/archives/2013/nov/07/climate-change-gambling-civilization/
Gambling with Civilization
by William D. Nordhaus
Yale University Press, 378 pp., $30.00
1.
Forty years ago a brilliant young Yale economist named William
Nordhaus published a landmark paper, “The Allocation of Energy
Resources,” that opened new frontiers in economic analysis.1
Nordhaus argued that to think clearly about the economics of
exhaustible resources like oil and coal, it was necessary to
look far into the future, to assess their value as they become
more scarce—and that this look into the future necessarily
involved considering not just available resources and expected
future economic growth, but likely future technologies as well.
Moreover, he developed a method for incorporating all of this
information—resource estimates, long-run economic forecasts, and
engineers’ best guesses about the costs of future
technologies—into a quantitative model of energy prices over the
long term.
The resource and engineering data for Nordhaus’s paper were for
the most part compiled by his research assistant, a
twenty-year-old undergraduate, who spent long hours immured in
Yale’s Geology Library, poring over Bureau of Mines circulars
and the like. It was an invaluable apprenticeship. My reasons
for bringing up this bit of intellectual history, however, go
beyond personal disclosure—although readers of this review
should know that Bill Nordhaus was my first professional mentor.
For if one looks back at “The Allocation of Energy Resources,”
one learns two crucial lessons. First, predictions are hard,
especially about the distant future. Second, sometimes such
predictions must be made nonetheless.
Looking back at “Allocation” after four decades, what’s
striking is how wrong the technical experts were about future
technologies. For many years all their errors seemed to have
been on the side of overoptimism, especially on oil production
and nuclear power. More recently, the surprises have come on the
other side, with fracking having the biggest immediate impact on
markets, but with the growing competitiveness of wind and solar
power—neither of which figured in “Allocation” at all—perhaps
the more fundamental news. For what it’s worth, current oil
prices, adjusted for overall inflation, are about twice
Nordhaus’s prediction, while coal and especially natural gas
prices are well below his baseline.
So the future is uncertain, a reality acknowledged in the title
of Nordhaus’s new book, The Climate Casino: Risk,
Uncertainty, and Economics for a Warming World. Yet
decisions must be made taking the future—and sometimes the very
long-term future—into account. This is true when it comes to
exhaustible resources, where every barrel of oil we burn today
is a barrel that won’t be available for future generations. It
is all the more true for global warming, where every ton of
carbon dioxide we emit today will remain in the atmosphere,
changing the world’s climate, for generations to come. And as
Nordhaus emphasizes, although perhaps not as strongly as some
would like, when it comes to climate change uncertainty
strengthens, not weakens, the case for action now.
Yet while uncertainty cannot be banished from the issue of
global warming, one can and should make the best predictions
possible. Following his work on energy futures, Nordhaus became
a pioneer in the development of “integrated assessment models” (IAMs),
which try to pull together what we know about two systems—the
economy and the climate—map out their interactions, and let us
do cost-benefit analysis of alternative policies.2
At one level The Climate Casino is an effort to
popularize the results of IAMs and their
implications. But it is also, of course, a call for action. I’ll
ask later in this review whether that call has much chance of
succeeding.
2.
Stylistically, The Climate Casino reads like a primer
rather than a manifesto—something that will no doubt frustrate
many climate activists. This is, one has to say, something of a
characteristic position for Nordhaus: within the community of
reasonable people who accept the reality of global warming and
the need to do something about it, he has often taken on the
role of debunker, criticizing strong claims that he doesn’t
think are justified by theory or evidence. He has raised hackles
by expressing relative optimism about our ability to adapt to
moderate global warming. He harshly criticized Nicholas Stern’s
widely publicized report on the economics of climate change for
arguing that we should not discount the costs imposed by fossil
fuel consumption on future generations at all compared with cost
imposed on the current generation.3
And he has taken a skeptical line toward the widely circulated
arguments by Harvard’s Martin Weitzman that the risk of
catastrophic climate effects justifies very aggressive and early
action to limit greenhouse gas emissions.4
As I said, Nordhaus’s part in these controversies has
frustrated some climate activists, not least because opponents
of any kind of climate action have seized on some of his work in
support of their position. So it’s important to realize that The
Climate Casino is in no sense the work of someone
skeptical about either the reality of global warming or the need
to act now. He more or less ridicules claims that climate change
isn’t happening or that it isn’t the result of human activity.
And he calls for strong action: his best estimate of what we
should be doing involves placing a substantial immediate tax on
carbon, one that would sharply increase the current price of
coal, and gradually raising that tax, more than doubling it by
2030. Some might consider even this policy inadequate, but it’s
far beyond anything currently on the political agenda, so as a
practical matter Nordhaus and the most hawkish of climate
activists are entirely on the same side.
And one of the nice things that those of us who deeply respect
both Nordhaus and Stern will discover in this book is Nordhaus’s
conclusion (to his own surprise), based on his models, that the
whole issue of how much to discount costs to future generations
is something of a red herring—it turns out that the rate at
which you discount the distant future doesn’t make much
difference to optimal policy, only slightly raising the amount
of global warming that we should, in the end, allow to take
place.
So, what does Nordhaus tell us in this primer?
First, he reviews basic climate science. By burning huge amounts
of fossil fuels, we have greatly increased the concentration of
carbon dioxide in the atmosphere, and will almost surely
increase it much more in the next few decades. The problem is
that CO2 is a greenhouse gas (as are several
other gases also released as a consequence of
industrialization): it traps heat, raising the planet’s
temperature.
How big a rise are we talking about? Nordhaus more or less goes
along with the scientific consensus as expressed in the latest
report of the Intergovernmental Panel on Climate Change, which
puts the likely increase at between 1.8 and 4° Centigrade by
2100, or between 3 and 7.5 degrees Fahrenheit. Nordhaus’s
“baseline run” is actually toward the high end of this range,
and he shows the temperature rise at almost 6° Centigrade—more
than 10° Fahrenheit—by 2200. He also notes the possibility of
nasty surprises, for example if warming leads to the release of
substantial amounts of methane—a powerful greenhouse gas—from
thawing tundra.
Warming, in turn, has a number of consequences going beyond a
simple rise in temperatures. Sea levels will rise, both from the
expansion of the water itself and from melting ice—and here,
too, there is a possibility of nasty surprises if, for example,
the melting of the Greenland ice sheet in turn causes more
melting. Hurricanes will become more intense, because they are
fed by warm water. Local climates may shift drastically, e.g.,
with wet areas becoming even wetter or going dry.
There is also one important consequence of rising CO2
levels that isn’t tied directly to warming: the oceans become
more acidic, with adverse effects on sea life. Devastating
effects on coral reefs are probably already inevitable.
How much harm will this do? Nordhaus draws a contrast between
what he calls “managed systems”—things like agriculture and
public health, which are basically human activities affected by
climate—and “unmanageable systems,” like sea level, ocean
acidification, and species loss. Compared with some climate
writers, Nordhaus is relatively sanguine about the impact of
rising temperatures on the managed systems. In fact, he
summarizes studies suggesting that agricultural yields will
probably rise a bit thanks to one or two degrees of warming, and
declares, “It is striking how this summary of the scientific
evidence contrasts with the popular rhetoric.” (You see what I
mean about his role as debunker—although he concedes that the
costs become serious once temperatures reach levels that on
current trends they are likely to hit late this century, and
much more so at temperatures likely next century.) Health
impacts, too, he views as modest, at least for the warming
likely this century, declaring his overall assessment “similar
to that for agriculture.”
The bigger costs, Nordhaus argues, come from the unmanageable
systems: rising seas, more powerful hurricanes, loss of species
diversity, increasingly acidic oceans. The trouble is how to put
a number on these costs—something he needs to do because, as I
already suggested, his goal is to do cost-benefit analysis.
In the end, and despite the debunkery, Nordhaus concludes that
there will be mounting costs as the temperature rise goes beyond
2°C—and a rise of at least that much seems, at this point,
almost impossible to avoid. When one takes into account the risk
of surprising rises in temperature, there is an overwhelming
case for action to limit the temperature rise. The questions
then become how much action, and what form it should take.
3.
There’s a faction in the climate debate that acknowledges the
reality of global warming and its costs, but rejects the notion
of trying to limit greenhouse gas emissions—either because it
views such limits as too costly, or (one suspects) because
limiting human impacts on the environment strikes some people as
a wimpy, hippie-type thing to do. Instead, this faction calls
for geoengineering: rather than limiting human impacts, we
should offset them with deliberate impacts in the opposite
direction.
Many environmentalists reject geoengineering out of hand.
Nordhaus doesn’t; he suggests that schemes like pumping
reflective aerosols into the upper atmosphere could offset
global warming from greenhouse gases relatively cheaply. Yet as
he points out, geoengineering wouldn’t actually reverse the
effects of greenhouse gases, just offset one of their effects,
and even that only at a global level. Ocean acidification, for
example, would continue; and even if the average global
temperature could be stabilized, there might be major
disruptions from changes in local temperatures and climates.
In the end, Nordhaus makes a pretty good case that
geoengineering should be studied, and in effect held in reserve,
the same way that doctors study and bear in mind dangerous but
potentially life-saving treatments to be risked if, but only if,
all else has failed. The first line of defense should be an
effort to limit global warming by limiting emissions. How should
this be done?
Every introductory textbook in economics covers the concept of
“negative externalities”—costs that people impose on others
through actions, yet have no individual incentive to take
account of in their own decisions. Pollution and traffic
congestion are the classic examples, and emissions of greenhouse
gases are, at a conceptual level, just a kind of pollution.
True, there are some unusual aspects to greenhouse gases: the
harm they do is global, not local, the costs extend very far
into the future rather than occurring contemporaneously with the
emissions, and there is at least some risk that emissions will
lead not just to costs but to civilizational catastrophe.
Despite these unusual aspects, however, much of the standard
textbook analysis ought to apply. And what this textbook
analysis says is that the best way to control pollution is to
put a price on emissions, so that individuals and firms have a
financial incentive to cut back.
How do you put a price on emissions? The most obvious way is
via an emissions tax—a Pigouvian tax, in the economics jargon.
An alternative, however, is to issue a limited number of
licenses to pollute, and let people buy and sell those pollution
permits—a so-called cap-and-trade system. The United States has
limited acid rain with a highly successful cap-and-trade program
on sulfur dioxide since 1995; the Waxman-Markey climate change
bill, which passed the House in 2009 but died in the Senate,
would have established a broadly similar system for carbon
dioxide. Not surprisingly, then, Nordhaus advocates a carbon tax
and/or cap-and-trade for greenhouse gases. (As he explains, it’s
possible to construct hybrid systems.)
Why is putting a price on carbon better than direct regulation
of emissions? Every economist knows the arguments: efforts to
reduce emissions can take place along many “margins,” and we
should give people an incentive to exploit all of those margins.
Should consumers try to use less energy themselves? Should they
shift their consumption toward products that use relatively less
energy to produce? Should we try to produce energy from
low-emission sources (e.g., natural gas) or non-emission sources
(e.g., wind)? Should we try to remove CO2
after the carbon is burned, e.g., by capture and sequestration
at power plants? The answer is, all of the above. And putting a
price on carbon does, in fact, give people an incentive to do
all of the above.
By contrast, it would be very hard to set rules to accomplish
all these goals; in fact, even figuring out the comparative
emissions from a simple choice, like whether to drive or fly to
a city a few hundred miles away, is by no means a simple
problem. So carbon pricing, says Nordhaus, is the way to go. And
I, of course, agree—they’d probably revoke my economist card if
I didn’t.
And yet there is a slightly odd dissonance in
this book’s emphasis on carbon pricing. As I’ve just suggested,
the standard economic argument for emissions pricing comes from
the observation that there are many margins on which we should
operate. Yet as Nordhaus himself points out, studies attempting
to analyze how we might most efficiently reduce carbon emissions
strongly suggest that just one of these margins should account
for the bulk of any improvement—namely, we have to sharply
reduce emissions from coal-fired electricity generation.
Certainly it would be good to operate on other margins,
especially because these studies might be wrong—maybe, for
example, it would be easier than we think for consumers to shift
to a radically lower-energy lifestyle, or there might be radical
new ideas for scrubbing carbon from the atmosphere. Nonetheless,
the message I took from this book was that direct action to
regulate emissions from electricity generation would be a
surprisingly good substitute for carbon pricing—not as good, but
not bad.
And this conclusion becomes especially interesting given the
current legal and political situation in the United States,
where nothing like a carbon-pricing scheme has a chance of
getting through Congress at least until or unless Democrats
regain control of both houses, whereas the Environmental
Protection Agency has asserted its right and duty to regulate
power plant emissions, and has already introduced rules that
will probably prevent the construction of any new coal-fired
plants. Taking on the existing plants is going to be much
tougher and more controversial, but looks for the moment like a
more feasible path than carbon pricing.
However it’s done, how ambitious should an emissions reduction
program be? There’s an international consensus that we should
aim to limit the temperature rise to 2°C; sure enough, Nordhaus
goes into full debunking mode here: “The scientific rationale
for the 2°C target is not really very scientific.” Instead, he
argues for cost-benefit analysis—but this leads him to an only
slightly higher target: his best estimate of the optimal climate
policy if done right would limit the temperature rise to
2.3°C.
The qualifier “if done right” is important. Stabilizing
temperature rise in the 2–3 degree range already requires very
large reductions in CO2 emissions, albeit
reductions that Nordhaus (and just about all serious energy
economists) believe can be achieved at only moderate cost, given
sufficient lead time. But what if some major nations refuse to
participate in the effort? What if domestic policy is poorly
designed, so that the costs of emission reductions are higher
than they should be? In such cases, Nordhaus concludes, the
target temperature should be considerably higher, possibly close
to 4°C.
Personally, I think Nordhaus is being too pessimistic here.
Start with the issue of international cooperation. It seems
fairly clear that if the United States were to get serious about
climate policy, Europe and Japan would quickly follow suit, so
that we would have what amounted to a solid bloc of wealthy
nations committed to emissions cuts. The wealthy nations would,
in turn, be able to deploy both sticks and carrots to induce
developing countries, above all China, to join in.
On one side, “carbon tariffs” on imported goods from
nonparticipating countries would provide a powerful inducement
to join in. My reading of international trade law is that such
tariffs would probably be ruled legal by the World Trade
Organization—and if not, so much for the WTO.
Saving the planet trumps free trade. On the other side,
cap-and-trade offers a natural way to compensate countries for
the costs of emissions reduction: simply grant them enough
permits that they can sell some of the permits to the extent
that the countries do, in fact, reduce emissions, and they’ll
have a powerful incentive to make the reductions bigger.
As for the problem of inefficient domestic policies, I come
back to the point that despite the complexity of our economy,
most of the emissions problem seems to be quite simple: stop
burning coal to generate electricity. Given the basic political
will to take on the problem at all, this really shouldn’t be
that hard. The problem, of course, is that such political will
is lacking in the country that must lead on this issue: our own.
4.
I enjoyed The Climate Casino, and felt that I learned a
lot from it. Yet as I read it, I couldn’t help wondering whom,
exactly, the book was written for. It is, after all, a calm,
reasoned tract, marshaling the best available scientific and
economic evidence on behalf of a pragmatic policy approach. And
here’s the thing: just about everyone responsive to that kind of
argument already favors strong climate action. It’s the other
guys who constitute the problem.
Nordhaus is, of course, aware of this, but I think downplays
just how bad things are. He notes that the book The Greatest
Hoax: How the Global Warming Conspiracy Threatens Your Future
was written by “a US senator”; he doesn’t point out that the
senator in question, James Inhofe, was the chairman of the
Senate Committee on Environment and Public Works from 2003 to
2007, and that someone with similar views will probably take
that position if Republicans regain the Senate next year. He
tells us that a manifesto titled “Cap and Trade—Taxing Our Way
to Bankruptcy” came from “an advocacy group,” but doesn’t point
out that this advocacy group, the Heartland Foundation, is a
lavishly financed enterprise largely devoted to promoting
climate science denial; it’s secretive about its funding, but
appears to be backed both by major corporations and by wealthy
individuals.
The point is that there’s real power behind the opposition to
any kind of climate action—power that warps the debate both by
denying climate science and by exaggerating the costs of
pollution abatement. And this isn’t the kind of power that can
be moved by calm, rational argument.
Why are some powerful individuals and organizations so opposed
to action on such a clear and present danger? Part of the answer
is naked self-interest. Facing up to global warming would
involve virtually eliminating our use of coal except to the
extent that CO2 can be recaptured after
consumption; it would involve somewhat reducing our use of other
fossil fuels; and it would involve substantially higher
electricity prices. That would mean billions of dollars in
losses for some businesses, and for the owners of these
businesses subsidizing climate denial has so far been a highly
profitable investment.
Beyond that lies ideology. “Markets alone will not solve this
problem,” declares Nordhaus. “There is no genuine ‘free-market
solution’ to global warming.” This isn’t a radical statement,
it’s just Econ 101. Nonetheless, it’s anathema to free-market
enthusiasts. If you like to imagine yourself as a character in
an Ayn Rand novel, and someone tells you that the world isn’t
like that, that it requires government intervention—no matter
how market-friendly—your response may well be to reject the news
and cling to your fantasies. And sad to say, a fair number of
influential figures in American public life do believe they’re
acting out Atlas Shrugged.
Finally, there’s a strong streak in modern American
conservatism that rejects not just climate science, but the
scientific method in general. Polling suggests, for example,
that a large majority of Republicans reject the theory of
evolution. For people with this mind-set, laying out the extent
of scientific consensus on an issue isn’t persuasive—if
anything, it just gets their backs up, and feeds fantasies about
vast egghead conspiracies.
Hence my worries about the usefulness of books like The
Climate Casino. Given the current state of American
politics, the combination of self-interest, ideology, and
hostility to science constitutes a huge roadblock to action, and
rational argumentation isn’t likely to help. Meanwhile, time is
running out, as carbon concentrations keep rising.
Throughout this book, Nordhaus’s tone is slightly cynical but
basically calm and optimistic: this is ultimately a problem we
should be able to solve. I only wish I could share his apparent
conviction that this upbeat possibility will translate into
reality. Instead, I keep being haunted by a figure he presents
early in the book, showing that we have been living in an age of
unusual climate stability—that “the last 7,000 years have been
the most stable climatic period in more than 100,000 years.” As
Nordhaus notes, this era of stability coincides pretty much
exactly with the rise of civilization, and that probably isn’t
an accident.
Now that period of stability is ending—and civilization did it,
via the Industrial Revolution and the attendant mass burning of
coal and other fossil fuels. Industrialization has, of course,
made us immensely more powerful, and more flexible too, more
able to adapt to changing circumstances. The Scientific
Revolution that accompanied the revolution in industry has also
given us far more knowledge about the world, including an
understanding of what we ourselves are doing to the environment.
But it seems that we have, without knowing it, made an
immensely dangerous bet: namely, that we’ll be able to use the
power and knowledge we’ve gained in the past couple of centuries
to cope with the climate risks we’ve unleashed over the same
period. Will we win that bet? Time will tell. Unfortunately, if
the bet goes bad, we won’t get another chance to play.
