How a Very Influential Economist Got So Much Wrong About Climate Change
“A fool is someone who knows the price of everything and the value of nothing.” Oscar Wilde
In an introductory economics class, my professor observed that economics was the only field in which someone could win a Nobel Prize without ever having been right. I was reminded of this assessment while reviewing the evolution of complex models to balance costs and benefits of climate change. A leading creator of such models, Yale professor William Nordhaus, was awarded the Nobel Prize in 2018. Nordhaus and his followers did their best to develop increasingly sophisticated models to address a key question for policymakers: what amount of warming is acceptable relative to the cost of emission reductions? Nordhaus’s answer, it turns out, was way off the mark, although unfortunately very influential. The Nobel Prize, as The Intercept blog argues, “made him one of the world’s most consequential thinkers” with an influence on climate policy that “literally could affect the lives of billions of people.”
A major reason for the appeal of the Nordhaus model was no doubt its complexity, which gave the appearance of accuracy. His model was comprised of three modules, one to characterize greenhouse gas emissions, a second relating emissions to global temperature increases; and a third with estimates of both the costs of climate policies (e.g., carbon taxes) and the damages from climate change over time. His initial conclusion from this work was that 1oC of warming would reduce GDP by only 1–2% and an economically optimum level of warming would be 3.5oC warming. Based on these estimates, the value of reducing a ton of carbon could be calculated — as of 2016, $31 a ton of CO2. The most recent estimate by EPA is $190 per ton.
Nordhaus built his model based on the most widely accepted climate science at the time. The problem was not poor research but poor reasoning — not allowing for the limitations of available knowledge and the possibility that damages would prove to be much greater. By promoting the idea that climate impacts will not be unduly expensive and can be readily offset by investments in adaptation, economic arguments have helped support claims by climate skeptics that reducing fossil fuel use is not worth the cost.
Balancing the costs and benefits of climate policies, in contrast with many more traditional environmental problems, presents numerous challenges. The first and most fundamental is to identify climate impacts with sufficient precision to quantify the costs. As a recent analysis points out, “this approach is not suitable for cases with unknown damages and/or probability distributions.” A closely related issue is to predict when the impacts will occur — the farther out in time, the less their current value. (This concept, discounting, is one everyone learns in econ 101 — a dollar ten years in the future is worth considerably less than one today.) Authors of science fiction have characterized the risks much better (my favorite is Ministry for the Future by Kim Stanley Robinson).
Numerous distinguished economists including the Nobel Laureate Joseph Stiglitz and the former World Bank chief economist Nicolas Stern have severely criticized Nordhaus’s methodology and conclusions. They point out that the results are extremely sensitive to assumptions, which “make the results of very limited usefulness.” They and others have concluded that there is no single alternative, but rather the need to adopt “a diversity of approaches” consistent with the complex reality of climate change. They refer favorably to a “guardrail approach,” beginning by asking what needs to be done to avoid the most extreme damages, then exploring the feasibility and costs of the measures required.
In his Nobel Prize acceptance speech, Nordhaus recognized that “many impacts are ones that may be difficult to measure, or ones that we may be reluctant to monetize.” An understatement, to say the least. Noting how only a small rise in sea level is causing widespread overflow of septic tanks in the southeastern U.S., Paul Krugman, also a Nobel Laureate (and coincidentally a former student of Nordhaus) recently noted, “I’ve long been worried that these models understate the economic costs of climate change, because so many things you weren’t thinking of can go wrong.” No kidding! To note a few other costly impacts only recently becoming apparent:
· Heat “domes” creating longer and more intense localized areas of extreme heat
· Multiple direct and indirect impacts on human health, including heat strokes, pest-related diseases, and increased likelihood of preterm birth,
· Wildfires due to the combination of high temperatures and drought. The frequency and intensity of wildfires has doubled in the past 21 years.
· Intense, persistent rainfall events creating unprecedented floods
· Hurricanes that intensify rapidly and allow little time for effective evacuations
· Mass hunger in parts of Africa due to drought and dust storms
Additional impacts in the difficult to monetize category: millions of climate migrants, the bleaching of coral reefs and mangroves, acidification, warming, and deoxygenation of the oceans, a decline in biodiversity, blooms of toxic algae in freshwaters — even interference with elections. Worse, as many climate scientists acknowledge, there are “unknown unknowns” — surprises still to come. This growing and seemingly endless list of consequences for humanity and the planet is why climate change is increasingly being termed an “existential” threat.
Nordhaus acknowledged many of the challenges in both identifying and monetizing all the damages. (Environmental economists Robert Repetto and Robert Easton explained this problem in some detail in their 2009 paper.) Yet he defended the value of the effort with a quotation usually credited — erroneously — to have come from the distinguished economist John Maynard Keynes: “better to be vaguely right than precisely wrong.” Still, Nordhaus has proven to be precisely wrong while helping frame arguments used by climate skeptics and deniers, who to this day argue the costs of reducing fossil fuels are too great. As The Intercept blog aptly described it, a kind of “sociopathy as policy prescription.”
There are many constructive and appropriate roles for economic thinking in the formulation of climate policies. Taxing carbon and other greenhouse gas emissions or creating tradeable credits for emissions reductions, policies based on market principles and advocated by many economists, are arguably effective means to achieve climate policies for the lowest cost. Economic analysis was also the basis for defining the incentives for climate related investments in the Inflation Reduction Act.
If we compare the approach taken to protecting the ozone layer, the Montreal Protocol, a critical difference was an emphasis on the “precautionary principle,” the concept that acting to protect the public is justified when, despite uncertainties, there is plausible scientific evidence of an environmental risk. Once the risk is identified, initial cost estimates are invariably too high until incentives for action have been clearly established — a reality proven by the ozone experience but also the recent dramatic cost reductions for renewable energy. The alternative very unscientific process of weighing costs and benefits has not served us nearly as well.
Addendum: An excellent critique of cost-benefit analysis for climate change by Lexi Smith was published by Yale Climate Connections in 2021. Another example of unanticipated climate impacts is a contribution to inflation thanks to the cascading impacts of heat extremes on food prices, as much as 1.2 percentage points by 2035 according to a recent analysis. Yet additional recent impacts of climate change outside economic models include a rising incident of dengue fever due to the spread of mosquitos, the collapse of dams due to intense rainfall, and the inability of emergency helicopters to fly due to extreme heat.
