Stacking the Deck at the Climate Casino

This year, Prof. William Nordhaus (Yale) published The Climate Casino: Risk, Uncertainty and Economics for a Warming World. The book continues Professor Nordhaus' forty year career investigating the economics of energy resources. The book was also recently reviewed by Paul Krugman (Princeton, here) and is interesting on many levels: the use of sophisticated macroeconomic models, attempts to forecast far out into the future, the use of probability and uncertainty (the models are purely deterministic), Prof. Nordhaus' willingness to make very specific policy recommendations (increase the price of CO2 and increase technological change in the energy sector), and finally his long running argument about the Limits to Growth.

The initial argument about the Limits to Growth grew out of Prof. Nordhaus' work on nonrenewable resources, particularly fossil fuels. The argument is captured in the causal diagram above.  A group of engineers at MIT were arguing that the depletion of nonrenewable resources would lead to economic collapse. Prof. Nordhaus countered that technological change would create substitutes that would prevent any future collapse from happening. Paul Krugman points out that Nordhaus was wrong about the specifics in his long-term forecasts (real oil prices are about twice as high as the models predicted while real coal and natural gas prices are much lower) but was right to have attempted the forecast (presumably, we should be learning from what went wrong).

In any event, the argument about nonrenewable resources has morphed into an argument about the impacts of CO2 emissions on climate change, that is, the impact of extracting fossil fuels and pumping the by-products into the atmosphere.

The new argument is summarized in the causal diagram at the left which in part, is taken from page 10 of the Climate Casino. The resource extraction issue is still lurking in the link between economic growth and CO2 emissions but technological change is now supposed to help us reduce emissions by decreasing the carbon intensity of the economy.

Nordhaus accepts the basic causal link that Economic Growth -> CO2 Emissions -> Climate Change -> Ecological Impacts. He is less certain about what will happen as a result of observable ecological impacts (sea level rise, super typhoons, water scarcity, habitat loss, coastal flooding, ocean acidification, reduction of agricultural yields, and other impacts). His major argument is that policy change is needed, but his concern is also with avoiding negative effects on economic growth. The policy measures he is most focused on are cap-and-trade systems, carbon taxes, and environmental regulation. Nordhaus is looking for a policy that will raise the price of carbon, can be universally applied and will not inhibit economic growth.

One causal link that is not presented in the summary diagram on page 10 of the Climate Casino is the link between Ecological Impacts and Economic Growth. If all the negative ecological impacts listed above actually happen, negative economic impacts (Limits to Growth) would seem to be highly likely. Possibly, this is just a matter of emphasis. Policy change is already happening and Prof. Nordhaus wants to shape the debate (stack the deck?). Aside from the political agenda, there are deeper issues that go back to the reasons Prof. Nordhaus' original long-range forecasts were off the mark.

The Climate Casino uses an embellished version of the same macroeconomic growth model used to make the original predictions (here) about nonrenewable resource allocation. If the initial forecasts were not very accurate, has anything fundamental been changed in the new version to produce better projections? Publication of the Climate Casino gives us the opportunity to look back at Prof. Nordhaus' model and his competitor's models (to include the Limits to Growth models). In future posts, I'll review chapters of the Climate Casino and look more closely at the underlying models and how they were constructed. The "deep dives" into model specifics are not particularly reassuring.