Policy ramp versus big bang:optimal global mitigation policy

In 2006 the UK released an “Economics of Climate Change” report by Nicholas Stern that sparked debate by calling for much more aggressive action than others

• AKA: the Stern Review (SR)

• Sir Nicholas Stern (Nobel Laureate)

• Adviser to the UK government on the

Economics of Climate Change and

Development 2005-2007

• Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE) since 2008

The SR arrived at estimates of damage from climate change that were much larger than previous studies

Tol and Yohe (2006)

The SR used a much lower discount rate than other mainstream economists.

0 20 40 60 80 100 120 140 160 180 2000

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Stern, r = 1.4%

Nordhaus, r=4.5%

The level at any given time t represents the weight given to consumption arriving at year t.

Discount weight under various assumptions

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eigh

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William Nordhaus is a distinguished economist with significant leadership experience in academia and public policy

Faculty member of Yale University since 1967

Nordhaus, W. (2007).  “Critical assumptions in the Stern Review on climate change.”  Science 317, 201–202.

Nordhaus, W. (2010). Economic aspects of global warming in a post-Copenhagen environment. Proceedings of the National Academy of Sciences 107(26), 11721-11726.

Nordhaus expresses the stringency of his policy ramp vs. the big bang by estimating the carbon tax needed to get the targeted mitigation.

Nordhaus (2007)

Nordhaus policy ramp/DICE baseline

“big bang”/Stern assumptions

Nordhaus (2008, p. 174): To set the discount rate

Stern was prescriptive (normative),

Nordhaus was descriptive (positive).

To set the discount rate Stern was prescriptive, Nordhaus descriptive• SR approach—prescriptive/normative

– r = ρ + ƞg = 0.1% + 1*1.3% = 1.4%.• ρ: favors a “low” social rate of time preference = 0.1%

– Argument: the only ethical reason to discount future generations is that they might not be there at all (e.g. cataclysmic comet) [consistent with Frank Ramsey]

– Prob. of extinction: 0.1%/year • g: growth rate of consumption ~ 1.3%; • ƞ: elasticity of marginal utility of consumption = 1

– (intergenerational) inequality aversion: lower

• Nordhaus approach--descriptive/positive• ρ = 1.5% (assumed, Nordhaus 2008, p. 51)• ƞ = 2 (calibrated, given r, ρ and g)

– (intergenerational) inequality aversion: higher• r = 6.5% in 2015, falls over time to 4.5% in 2095 as g falls (in DICE 2007, Arrow et al. 2012)

The big bang approach is >10 times as stringent as Nordhaus’ policy ramp in the short term.

Nordhaus (2007)

Nordhaus policy ramp/DICE baseline

“big bang”/Stern assumptions

(1-D(At))*F(Kt): Production

Kt: technologicalcapital stock

Consumption: Ct

U(Ct): utility

R(At): natural GHG cycling

Kt+1 = Kt + kt

At+1 = At + a(Mt)Ft - R(At)

+R(At)

GHG

emissions

kt: Investment

t: timeAt: GHG stock

Mt+1 = Mt + mt mitigation capital

mt: invest in mitig. cap.

The economic logic of the policy ramp is that investment in mitigation capital is ideal but only up to a point forgoing investment in technological (and other kinds of) capital is costly

Since “capital is productive and damages are far in the future … the highest-return investments today are primarily in tangible, technological, and human capital.” (Nordhaus, 2007)

While CO2 intensity (tons/$GDP) has fallen, growth in population & GDP have led to rising emissions.

(Nordhaus, 2012)

Nordhaus, W. (2010). Economic aspects of global warming in a post-Copenhagen environment. Proceedings of the National Academy of Sciences 107(26), 11721-11726.

The Copenhagen accord adopts a target of limiting the increase in global mean temperature, “recognizing the scientific view that the increase…should be below 2 degrees Celsius.”

The reality behind the accord is not consistent with achieving this goal.

The RICE model is a regionally disaggregated version of the DICE integrated assessment model.

Regional

Integrated model of

Climate and

Economy

Nordhaus analyzes 5 scenarios to compare stated objectives (Limit 2C), to possible international commitments (Cop. all/rich), to welfare maximizing policy (Econ. opt.)

The global net costs of the C.A. to 2055 would be $1.65T, with regions bearing unequal burdens.

Much more drastic emissions cuts from BAU than discussed in the C.A. are needed to achieve a 2 degrees Celsius goal.

Nordhaus’ optimal policy would allow for a 3 degrees Celsius increase in global mean temperature.

Reaching the 2 degrees Celsius goal would require a path twice as stringent as Nordhaus’ policy ramp (in $/ton terms).

References

Nordhaus, W. (2007).  “Critical assumptions in the Stern Review on climate change.”  Science 317, 201–202.

Nordhaus, W. (2008). A Question of Balance: Economic Modeling of Global Warming, Yale Press.

Nordhaus, W. (2010). Economic aspects of global warming in a post-Copenhagen environment. Proceedings of the National Academy of Sciences 107(26), 11721-11726.

Nordhaus, W. (2012). "Integrated Economic and Climate Modeling," Slides for Keynote Address, 19th Annual Conference of EAERE, Prague, June 2012.