Transcript Slide 1

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.
Discount weight under various assumptions
1
Stern, r = 1.4%
Nordhaus, r=4.5%
0.9
0.8
Discount weight
0.7
0.6
The level at any given time t
represents the weight given to
consumption arriving at year t.
0.5
0.4
0.3
0.2
0.1
0
0
20
40
60
80
100
t
120
140
160
180
200
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 postCopenhagen 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.
“big bang”/Stern assumptions
Nordhaus policy ramp/DICE baseline
Nordhaus (2007)
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.
“big bang”/Stern assumptions
Nordhaus policy ramp/DICE baseline
Nordhaus (2007)
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
t: time
At+1 = At + a(Mt)Ft - R(At)
At: GHG
stock
Mt+1 = Mt + mt
mitigation
capital
Kt+1 =
Kt + kt
Kt: technological
capital stock
mt: invest in
mitig. cap.
+R(At)
R(At): natural
GHG cycling
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)
U(Ct): utility
(1-D(At))*F(Kt):
Production
Consumption: Ct
kt:
Investment
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 postCopenhagen 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 postCopenhagen 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.