WILLIAM NORDHAUS AND HIS INTEGRATION CLIMATE-ECONOMY

“Decision making [to fight climate change] requires a robust set of alternative scenarios and sensitivity analyses. But this is the role of committees and panels, not of individual scholars”

-William Nordhaus (A Question of Balance, 2008

“Will sea-level rise this century remain in the expected range of two to seven feet, or could instability in the massive East Antarctic ice sheet add significantly to the surge? And if that happens, which cities can adapt and which will be inundated, and how will such variations affect economic production?” – William Nordhaus’ ideas of environmental economics were documented in the Yale Insights.

The carbon tax came to limelight as the world witnessed two major events concerning climate change in October this year. First, a UN report warning of catastrophic consequences if the world doesn’t cut back the carbon emissions to half in the coming decade and second, that Yale professor William Nordhaus shared the Nobel Prize in Economics for his path breaking work on carbon pricing i.e. integrating climate change into long-run macroeconomic analysis in the language of the Nobel Committee. Nordhaus’ work can be described as one extending beyond the scope of Economic analysis to study the unintended effects that human activities have on long term economic growth and general welfare.

The 2018 Nobel Laureate, William Nordhaus integrated “end-to-end fashion the economics, carbon-cycle, climate science and impacts in a highly aggregated model that allows a weighing of the costs and benefits of taking steps to slow down greenhouse warming.”

Externalities and spill over effects due to the composition of the green house gases

Climatic changes in the recent era is posing serious threats to our nature and ecosystems. We are entering into a ‘climatic casino’ and ‘rolling the global-warming dice’. Bringing together all the important issues of the climate debate, Nordhaus describes the science, economics and politics involved-and the steps necessary to reduce the perils of global warming.

Economics has always dominated other scopes and fields, from psychology to maths and politics. This time, Nordhaus developed two models integrating the three main dominants of analysis- economics, technology and politics. He has calculated the economic costs due to climatic externalities using a computer program and thus integrating them in the policies of the country.

BACKGROUND AND EARLY WORK

The early ‘70s witnessed much concern among the media an academia over the looming resource scarcity. Nordhaus’ works suggest that as resources become scarce, they become more valuable and often lead to discovery of new techniques instrumental in economizing the use of those resources, or alternative resources to substitute the scarce ones. As per those works, Nordhaus saw the human impact on the environment as a bigger threat in comparison to resource scarcity.

“I have performed a rough calculation of the atmospheric concentration of carbon dioxide… Assuming that 10% of the atmospheric carbon dioxide is absorbed annually (G. Skirrow), the concentration would be expected to rise from 340 ppm [parts per million] in 1970 to 487 ppm in 2030 – a 43% increase. Although this is below the fateful doubling of carbon dioxide concentration, it may well be too close for comfort.” - (W. Norhaus, 1974)

As we can see, Nordhaus was pretty accurate in his predictions about the future level of atmospheric carbon concentration and therefore we are right on track to hit the 447ppm mark in 2030. In two of his papers in 1975 and 1977, he laid the foundation of a groundwork which has transformed into a discipline known as the Economics of Climate Change. He began with the Classical Macroeconomic Model of long run Growth which was the first of its kind model to represent CO2 in such a macroeconomic framework and analyse how climate change can be mitigated at the minimum cost possible.

WHAT LESSONS DOES NORDHAUS DRAW FROM HIS MODELS?

Nordhaus has proposed his model as a solution to the Kyoto protocol due to its failures and drawbacks. Kyoto Protocol is the international treaty which extends the 1992 UNFCC( United Nations Framework Convention on Climate Change) that commits states to reduce the greenhouse gas emissions.

The Kyoto Protocol failed due to:-

It only required wealthy nations to cut emissions
None of the limits imposed on participating countries resulted in a reduction of greenhouse gas emissions.

Nordhaus says that price should be imposed on emissions. What that price should be depends on society’s goals , he explained to the Yale insights “if we want to limit the temperature rise to three degrees centigrade over the next x number of decades, what kind of pricing structure on emissions would cap that temperature increase?”

The models can help identify that price, but there must be political will to follow through-another complexity in the climate change equation.

DICE

The Dynamic Integrated Model of Climate and the Economy (DICE) is a model developed by William Nordhaus which provides a framework to understand the nature of climate change and how to address the issues. The model involves bringing physics and chemistry into economic modelling to answer a critical policy question of developing an optimal policy to address climate change.

What makes Nordhaus’ model stand out from all other models is the transparency and simplicity that the model offers. Apart from this, Nordhaus’ model is a very influential one in terms of influencing policy which can hardly be said about any other Nobel Laureates.

The DICE model (Dynamic Integrated Climate Economy) is a simplified analytical and empirical model that represents the economics, policy and scientific aspects of climate change. Along with its more detailed regional version RICE (Regional Integration Climate Economy).

The latest versions of the DICE model are available as a GAMS program. There are Excel versions of the model as well. There are two GAMS versions available of the model 2013R.

· The vanilla version can be run without any subroutines. It contains only the baseline and the optimal scenarios. It produces output which has the major variables of the models.

The other flavour is the RockyRoad version. This has 6 scenarios, which can be run in any combination. The RockyRoad version requires both a Mothership and the Satellites

The models have been upgrading from 1992 to the latest day. Modelling economic consequences of climatic changes is an uncertain work with many exogenous and endogenous factors involving in it. In addition, any these models need a political support for its implementation.

William Nordhaus, The American economist from Yale University has immense contribution on developing environmental economics model that can inform policy decisions.

NORCHAUS’ RECOMMENDATIONS

Nordhaus doesn’t clearly indicate whether a direct carbon tax or any 2 alternative levy such as a cap-and-trade etc. will be more feasible but he is 3 certainly of the view that an increase in the price of fossil fuels will be quite instrumental in driving the demand away from fossil fuels to alternative fuels and will also lead of discovery of alternative cleaner fuels.

Further, he recommends the creation of a Climate Club wherein there will be participating countries agreeing upon a single global carbon pricing system. Those countries refusing membership in such a Club will be charged by the membership by imposing high tariff on imports from these countries. However, this idea is questioned on the basis of its practicality and whether it will be realistic enough. Another thing that we doubt here about such a club is whether such a club will be free from dominance by the First World nations.

IMPLEMENTATION

The US Administration under Barack Obama and the UN Intergovernmental Panel on Climate Change (IPCC), are a few bodies to recognize Nordhaus’ ideas on climate change.

The current administration under Donald Trump and a majority of the Republican representatives in the US Congress have vote against climate tariffs and refused to accept the reality of climate change. Under such a scenario, the chances of Nordhaus’ ideas turning into a reality seem blurred.

Keynes was heavily criticised for his changing views on monetary policy after the great depression. His response to his critics was, “When the facts change, I change my mind. Pray, sir, what do you do?” This is a reminder of the need to the economical and scientific changes required rather than sticking to the single perspective overlook of the situations. ’to err is human, so to be humble is divine’

-says Sir Nordhaus in his conclusion about the models. Hence, we thank Sir Nordhaus for bringing this revolution in the field of economics.