Anniversary Article
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Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus' Framework Supports Deep Cuts in Carbon Emissions
Article first published online: 29 MAR 2015
DOI: 10.1111/ecoj.12188
© 2015 The Authors. The Economic Journal published by John Wiley & Sons Ltd on behalf of Royal Economic Society.
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Issue
The Economic Journal
Special Issue: 125TH ANNIVERSARY ISSUE
Additional Information(Show All)
- We thank Emanuele Campiglio, Antoine Dechezleprêtre, Baran Doda, David Greenaway, Tom McDermott, Elisabeth Moyer, Antony Millner, Bill Nordhaus and Bob Pindyck for helpful comments and discussions, and the editor, Rachel Griffiths. We also acknowledge the financial support of the Grantham Foundation for the Protection of the Environment and the Economic and Social Research Council. We alone are responsible for the content.
Abstract
‘To
slow or not to slow’ (Nordhaus, 1991) was the first economic appraisal
of greenhouse gas emissions abatement and founded a large literature on a
topic of worldwide importance. We offer our assessment of the original
article and trace its legacy, in particular Nordhaus's later series of
‘DICE’ models. From this work, many have drawn the conclusion that an
efficient global emissions abatement policy comprises modest and
modestly increasing controls. We use DICE itself to provide an initial
illustration that, if the analysis is extended to take more strongly
into account three essential elements of the climate problem – the
endogeneity of growth, the convexity of damage and climate risk –
optimal policy comprises strong controls.
1 To Slow or Not to Slow
‘To slow or not to slow’ by Bill Nordhaus (1991)
is a landmark in economic research. As the first analysis of the costs
and benefits of policies to abate greenhouse gas emissions,1
it opened the profession to a new field of application – climate
change. Its importance is partly illustrated by the number of times that
it has been cited – on 1,150 occasions according to Google Scholar; 398
times according to the narrower, journals-only measure in ISI Web of
Knowledge.2
The
context within which Nordhaus's paper was written helps us understand
its contribution. While the basic science of the greenhouse effect was
set out in the nineteenth century by Fourier, Tyndall and Arrhenius,
discussions surrounding the possible role of humans in enhancing it –
and therefore causing global warming and climate change – began in
earnest in the 1970s. For at least a decade, climate change remained
largely a scientific/environmentalist's issue, debated in specialist
conferences and networks (Agrawala, 1998).
Indeed, it is important to stress that the science of climate change
was running years ahead of the economics (something that arguably
remains the case today in understanding the impacts of climate change;
Stern, 2013).
By
the late 1980s, however, climate change was becoming both a policy
issue and increasingly political. In 1988, the Intergovernmental Panel
on Climate Change (IPCC) was established and in 1990 it published the
first of its regular and influential Assessment Reports to member
governments. In 1989, the first meeting of (22) Heads of State to
discuss climate change was held in the Netherlands and various other
major international summits that year also put it on the agenda. Most
OECD countries already had their first climate-change targets by 1990
(Gupta, 2010),
for instance the European Community, as it was then, had pledged to
stabilise its carbon dioxide emissions at 1990 levels by 2000. In 1992,
virtually all countries signed up to the United Nations Framework
Convention on Climate Change (UNFCCC) at a major summit on the
environment and development in Rio de Janeiro, with its objective to
achieve ‘stabilization of greenhouse gas concentrations in the
atmosphere at a level that would prevent dangerous anthropogenic
interference with the climate system’ (Article 2).
Yet
despite the obvious ecological risks of unmitigated climate change, the
question remained whether the benefits of avoiding these risks would
outweigh the perhaps substantial cost of cutting emissions.3
This is the central question that ‘To slow or not to slow’ sought to
tackle, by combining a simple model of social welfare and production
with an externality from greenhouse gas emissions, in general
equilibrium. This model took ‘existing models and simplified them into a
few equations that are easily understood and manipulated’ (p. 920),
something that has become a hallmark of Nordhaus's work in the area. In
summary, the main components of the model are:
- a single equation of motion for the global mean temperature, which rises in response to the difference between the temperature that would be obtained in long-run equilibrium, given the current atmospheric stock of greenhouse gases, and the current temperature;
- an equation of motion for the atmospheric stock of greenhouse gases, in which some fraction of current emissions adds to the stock, at the same time as some fraction of the current stock ‘decays’ by diffusing into the deep ocean;4
- a social welfare function that is the discounted sum over time of utility per capita;5
- utility takes the form of the logarithm of consumption per capita of a single, aggregate good;
- consumption per capita is given by (exogenous) output, less the total cost of abating emissions, and the total cost of climate change;
- a reduced-form abatement cost function, in which the total cost of abatement depends on global aggregate emissions and emissions abatement; and
- reduced-form damage, in which the total cost of climate change depends on global mean temperature but where global mean temperature is an index of a wider set of climatic changes including changes in precipitation and sea level.
This
modelling framework has had a lasting influence on the field and indeed
several elements of it still constitute the ‘industry standard’ today.
The most notable example of this is perhaps the idea of reduced-form
damage.
According to the model, Nordhaus
found that an optimal cut in the current flow of global emissions of 11%
relative to the base level should be made in a medium scenario (given a
rate of pure-time preference of 1% per annum and ‘medium’ damage). In a
‘high’ scenario, with no pure-time discounting and ‘high’ damage, a cut
of global emissions of around one third would be optimal. The
concluding Section of this article lays out these results, without
commenting on the plausibility of the various scenarios. Nonetheless,
that the optimal emissions cuts were not more than one third implied
that only modest targets could be supported by economic analysis of this
kind, in comparison with some targets being discussed in the political
arena. As the editor of the issue in which the paper appeared wrote, it
is ‘certainly a sobering antidote to some of the more extravagant claims
for the effects of global warming’ (Greenaway, 1991, p. 903).