The Cost of Cooling the Climate

A non-alarmist guide for policymakers

Ronald Bailey | August 14, 2007

United Nations General Secretary Ban Ki Moon is convening a high level meeting on global warming at the U.N. headquarters on September 24. The idea is to jump-start the climate change negotiations for the 13^th Conference of the Parties (COP-13) of the United Nations Framework Convention on Climate Change (UNFCCC). COP-13 is scheduled for December 3-14 in Bali, Indonesia.

President George W. Bush is also inviting representatives from the major industrial countries and large developing countries to come to Washington, DC to discuss climate change on September 27-28. The goal of both meetings is figure out what to do about reducing the emissions of greenhouse gases, especially carbon dioxide, after 2012 when the Kyoto Protocol expires. Under the Kyoto Protocol most industrialized nations—with exception of the United States and Australia—have agreed to cut their greenhouse gas emissions by 5 percent below what their 1990 levels.

What is the optimal climate change policy—the one that sets future emissions reductions to maximize the economic welfare of humans? Yale University economist William Nordhaus,perhaps the world's leading expert on the economics of climate change, has just released a new study, The Challenge of Global Warming: Economic Models and Environmental Policy,which estimates the costs of various proposed trajectories for limiting carbon dioxide over the next couple of centuries.

Nordhaus and his colleagues have developed a small but comprehensive model that combines interactions between the economy and climate called DICE-2007, short for Dynamic Integrated model of Climate and the Economy. Nordhaus first computes a baseline that assumes that humanity does essentially nothing to limit its output of carbon dioxide. By 2100 CO₂ atmospheric concentrations would rise from the pre-industrial level 280 parts per million (ppm), to 380 ppm today, to 685 ppm in 2100. Global average temperature would rise by 2.4 degrees Celsius by 2100. In this baseline scenario, the DICE-2007 model estimates that the present value of climatic damages is $22.6 trillion. DICE-2007 includes damage to major sectors such as agriculture, sea-level rise, health, and non-market damages.

Nordhaus then uses his model to assess the ambitious CO₂ reduction proposals made by British economist Nicholas Stern and former Vice President Al Gore. Nordhaus calculates that the Stern and Gore proposals for steep immediate emissions reductions produce very similar cost/benefit results. Nordhaus also evaluates explicit temperature and concentration goals, e.g., limiting average temperatures to 1.5 degrees Celsius above current levels or greenhouse gas concentrations to no more than 1.5-times pre-industrial CO₂ atmospheric concentrations.

So what did Nordhaus find? First, the Stern proposal for rapid deep cuts in greenhouse gas emissions would reduce the future damage from global warming by $13 trillion, but at a cost of $27 trillion dollars. That's not a good deal. For an even worse deal, the DICE-2007 model estimates that the Gore proposal would reduce climate change damages by $12 trillion, but at a cost of nearly $34 trillion. As Nordhaus notes, both proposals imply carbon taxes rising to around $300 per ton carbon in the next two decades, and to the $600-$800 per ton range by 2050. A $700 carbon tax would increase the price of coal-fired electricity in the U.S. by about 150 percent, and would impose a tax bill of $1.2 trillion on the U.S. economy.

In addition, scenarios which attempt to keep the future average temperature increase below 1.5 degrees Celsius and concentrations below 1.5-times pre-industrial atmospheric concentrations are also not cost-effective. The DICE-2007 model calculates that both would cost more than $27 trillion in abatement costs and provide only about $13 trillion in reduced damages.

The optimal policy? Nordhaus reckons that the optimal policy would impose a carbon tax of $34 per metric ton carbon in 2010, with the tax increases gradually reaching $42 per ton in 2015, $90 per ton in 2050, and $207 per ton of carbon in 2100. A $20 per metric ton carbon tax will raise coal prices by $10 per ton, which is about a 40 percent increase over the current price of $25 per ton. A $10 per ton carbon tax translates into a 4 cent per gallon increase in gasoline. A $300 per ton carbon tax would raise gasoline prices by $1.20 per gallon.

Following this optimal trajectory would cost $2.2 trillion and reduce climate change damage by $5.2 trillion over the next century. "The net present-value global benefit of the optimal policy is $3.4 trillion relative to no controls," writes Nordhaus. "While this is a large number absolutely, it is a small fraction, about 0.17 percent, of the discounted value of total future income." Keep in mind that in this optimal scenario climate change damages would still accumulate to $17 trillion (lower than $22.6 trillion in the baseline case), but they are not abated because to do so would cost more than the benefits obtained.

A more optimistic scenario envisions the invention of a low cost zero-carbon technology. Such a technology would have a net value of around $17 trillion in present value. As Nordhaus notes, "The net benefits of zero-carbon substitutes are so high as to warrant very intensive research." Setting a price on carbon through a rising tax will encourage the development of such technologies. Another good way to hurry the process along would be to offer a substantial prize to the inventor of a cheap low carbon energy technology, e.g., perhaps a better battery, or paint-on solar cells.

Nordhaus cogently argues that neither doing nothing nor trying to halt global warming immediately are sensible policy targets. Nordhaus's study is certainly not the final word on climate change policy, but it would be a excellent starting point for climate change negotiators when they gather in New York, Washington and Bali this fall.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Comments

|8.14.07 @ 12:46PM|#

I can't speak to his numbers one way or the other, but I like the approach. At least people are thinking in the right terms.

My chief concern with the green movement on this issue is that nobody will tell me how much I'm paying or how much temperature reduction I'm getting for my investment.

|8.14.07 @ 1:26PM|#

(A amount of carbon -> B warming) is a tough enough nut to crack.

A carbon -> B warming -> C environmental damage -> D economic harm seems even tougher to pin down.

What we do know is that the economic costs of environmental regulation are almost always greately overestimated, from the banning of leaded gasoline eliminating the American automobile industry by 1975, to the scrubbing of NOx and SO2 being so expensive that a profitable market in emissions credits was going to spring up in the wake of the 1990 Clean Air Amendments.

|8.14.07 @ 1:33PM|#

These studies are worthless because they rely on assumptions that are basically worthless. Global warming theory is worthless for the same reason. There are a lot of people claiming that they can predict and plan for the future. So far nobody has demonstrated any ability to do this even over a 10 year timespan. Its amazing to me that people believe that global warming will be able to predict the future 100 years in advance. Only one theory has ever been able to do this and that is Newton's theory dealing with Haley's comet. But that was a very very simple system.

|8.14.07 @ 1:35PM|#

"What we do know is that the economic costs of environmental regulation are almost always greately overestimated"

Eh, I don't think we can do anything but take these on a case by case basis. It doesn't seem legitimate to me to just take past estimates and adjust down the costs of any arbitrary regulatory scheme such that they are all worth engaging in.

"Stop all carbon emmissions tomorrow" is a policy, and there is no conceivable way it would be worth persuing. So, we are left trying to figure out the middle ground, and we have to have some sense of costs and benefits to make that decision.

I agree that if we could elimiate carbon for cheap to nothing, I wouldn't be more than slightly annoyed that a regulation got us there. I'm not sure that is where we are, though.

|8.14.07 @ 1:38PM|#

...impose a tax bill of $1.2 trillion on the U.S. economy.

In the latest installment of why libertarians should favor a carbon tax as the least-of-all-evils, we run across the typical dilemma: "Yeah, but why are we generating more revenue for an already engorged Capitol Hill?" (think the exploding man in Monty Python's The Meaning of Life)

I've suggested the possibility of a revenue-neutral tax before, but it's met with the same distrust: "I don't trust those greedy bums!" Which is why the policy is more appropriate on a state/local level. Once the carbon tax mechanism is in place, state legislatures' only responsibilities are to set the target reductions (via $/ton C) and choose which unpopular revenue stream to offset with carbon revenue. Sales tax is often suggested as one tax that has an even effect across the income gradient. Income tax is another common candidate.

This way, things are accountable. The consumers know they're getting back what they paid in (on average), and the government is buoyed by the same revenue stream.

|8.14.07 @ 1:44PM|#

What we do know is that the economic costs of environmental regulation are almost always greately overestimated

But we also know that the economic benefits of not harming the rate of growth of GDP are almost always greatly ignored.

The reason that combined environmental-economic models find light regulation to be better than heavy regulation is that the exponential growth of wealth is such a dominant force in the combined model.

Even the IPCC SRES expresses the tension between the two. The high growth scenario A1 predicts a per capita yearly GDP in 2100 of $80,000. The more environmentally conscious scenario B1 predicts that number to be $50,000. The expected warming for the latter is 1.8°C while for the former it is 2.8°C to 4.0°C depending on whether a low-carbon energy source is found to be as cheap as present-day high-carbon sources.

So we have to ask our descendants a century hence: Would you spend one third of your wealth per person per year to have a world that had experienced one third less warming?

It is hard to imagine their saying "Yes" without really really understanding the costs of that extra third of warming.

|8.14.07 @ 1:53PM|#

That's the problem I have with this issue.It's ,it could raise this much or could cost this much, while saying peolpe like Al Gore know what's best for us.I see flaws and holes in the statments on both sides.Which leads me to think we really don't understand the 4 billion year old climate enough to make bold and difinitive statements.Never mind the fact that the U.S.,being a small portion of the globe,can fix this problem by restricting it's people while most countries look after their own well being first.

|8.14.07 @ 2:13PM|#

I like what MikeP is saying about our descendants and whether they are willing to trade economic growth for warming and the potential economic damgage that it might cause.

I feel that there might be another angle to consider more than just economic expenditure to control warming and the economic cost of warming. And that factor is how much do we and how much will our descendants care about living in a warmer world? What if I, or future others say that a reduction in my buying power is worth summers that are not as sweltering? Or if I feel some sort of ethical/religious/spiritual connection to the world and believe that this connection requires me/society to have a less "negative" impact on the planet. (NOTE: I put negative in quotation marks for a reason. Who is to say what is good and bad for the environment with out defining all those terms much more percisely).

I'm not saying that I feel this way, just that there are probably many people who value a reduction in carbon emissions to such an extent that they will choose a plan like Gore's even if it is not economically expediant.

|8.14.07 @ 2:38PM|#

MikeP-I'm sympathetic to your view. I want Americans (and I mean U.S.) to do the best it can relative to other nations (that is what I think it means to be a patriot).
However, I buy what most scientists are saying about GW: it's partly man made, and it can be a real disaster for us.
So what do we do? We should of course try to do what we can as a nation to avert the disaster, but perhaps we should also felx a bit and force other nations to do the same. Of course, in flexing we will trade some goodies that would have directly benefited us.
We can'tbe the world's savior, and in imo that is MikeP
s insight.

What can we do?

|8.14.07 @ 2:50PM|#

Interestingly, I am less concerned with the US being strapped with lowering CO2 while the rest of the world worries about its own well being than I am with the present day world powers' restricting the developing world's opportunities for growth in the name of global warming.

The US is on a 3-4% GDP growth curve. China and India are on a 8-10% GDP growth curve. It is very easy to imagine the quenching of that growth both through intentional strategic decision and through collateral rent seeking in the developed world.

For example, every time someone utters the words, "Green technology will be good for jobs/business/technology in the US/UK/EU," they are really talking about a wealth transfer directly from the lower technology world to the higher technology world. If you must be forced to pay for new green technologies -- via carbon tax or other incentives or mandates -- they are at best a wash for your own economy. If you are forced to pay for new green technologies and the only supply is outside your economy, it is a loss for your own economy.

|8.14.07 @ 2:58PM|#

Jason L,

It doesn't seem legitimate to me to just take past estimates and adjust down the costs of any arbitrary regulatory scheme such that they are all worth engaging in.

I agree. I just threw that out there as one reason to take such predictions with a grain of salt.

Mike P,

But we also know that the economic benefits of not harming the rate of growth of GDP are almost always greatly ignored. Actually, we don't know this. For one thing, the degree of this "extra" growth is likely to be overstated, for the reason I described above - the costs imposed by the regulations tend to be overstated.

As for developing nations, let's not forget that the costs of environmental damage have always and will always fall hardest on those with the least resources.

|8.14.07 @ 3:10PM|#

Actually, we don't know this.

joe, ask anyone walking out of a showing of An Inconvenient Truth what the per capita world GDP is today and what it is predicted to be in 2100 under the IPCC's highest growth scenario. I expect they will underestimate they 11-fold increase by at least a factor of 3.

I think there is no popular understanding of just what 100 years of economic growth will do for humanity's wealth.

As for developing nations, let's not forget that the costs of environmental damage have always and will always fall hardest on those with the least resources.

That is true, joe. I do realize that, when I talk of the greater future wealth available under higher growth scenarios being used to mitigate the greater warming, I am implicitly suggesting some possibly massive redistribution of wealth to those parts of the world suffering the greatest damage.

On the other hand, perhaps if freedom is the rule, markets will be adopted worldwide and the developing world will catch up. Certainly another twenty or thirty years of the present growth of China and India will put them in a fine position to mitigate their own damage due to global warming.

Besides, the developing world also has the most to lose in any plan that limits development intentionally or unintentionally.

DannyK|8.14.07 @ 3:32PM|#

Ron, does this report give any idea of how CO2 emissions will fare under this carbon tax regime, or how much warming we're looking at here?

The big concern for climatologists is that we keep warming low enough to avoid "Dangerous Anthropogenic Interference" -- tipping points, like the melting of the ice cap or massive releases of sequestered methane from undersea reserves and from the tundra -- that will send the climate rocketing off to inhospitalble extremes.

I like the emphasis on carbon taxes, though.

Mike Laursen|8.14.07 @ 3:45PM|#

It's nice to see some actual numbers in the carbon tax debate. I have these horrible visions, though, of what will happen to Nordhau's careful calculations when the Ted Stevens of this world take those numbers into their committee rooms. Trying not to be cynical...

|8.14.07 @ 3:54PM|#

does this report give any idea of how CO2 emissions will fare under this carbon tax regime, or how much warming we're looking at here?

That info is in Figures V-7 and V-8 of Nordhaus's study.

Nordhaus's optimal tax offers the second warmest scheme simulated, second only to doing nothing (and Kyoto, which is effectively doing nothing). The predicted warming through 2100 is 2.5°C over the 1900 average, compared to 2.9°C for doing nothing.

I looked at these numbers from Nordhaus's 2000 book and from his shredding of the Stern Review and noted that the meager benefit of the optimal tax is not worth handing every government -- from overly indulgent welfare state to the worst kleptocracy -- the power to tax carbon.

But after seeing the global warming proselytizers gaining traction over the past couple years, I am almost ready to sign on with Nordhaus just to mollify the "do something" crowd. I still want to wait to see whether the US voter will go for the high cost schemes being foisted in legislatures today as the only course of action. I doubt he will once he recognizes the price.

|8.14.07 @ 4:26PM|#

the per capita world GDP is today and what it is predicted to be in 2100 under the IPCC's highest growth scenario. I expect they will underestimate they 11-fold increase by at least a factor of 3.

By the way, I consider the IPCC SRES growth predictions to be extremely pessimistic. If I recall correctly, they derived their growth rate from the long term growth rate between 1850 and 1950 -- a period that includes two wealth destroying World Wars and one wealth destroying Great Depression, with little of the subsequent recovery.

At 3% growth, GDP increases 20-fold in a century. At 4% growth, it increases 50-fold. The amount of wealth that will be available to our descendants is truly mind-boggling. We would be phenomenally poor stewards of our progeny's future to diminish that wealth with significant costs to our GDP growth today unless the costs of not doing so are stunning.

DannyK|8.14.07 @ 5:29PM|#

Thanks for the tip, MikeP.

I think I found the skeleton in Nordhaus' closet on page 113, though:


"Those states where the global temperature increase is particularly high are also ones in which we are on average richer in the future. This leads to the paradoxical result that there is actually a negative risk premium on high climate-change outcomes."
--Nordhaus, p. 113, emphasis in the original


This assumption reeks of snake oil. Do we know enough about the risks of high climate change to say that they'll be offset by a given level of prosperity? I don't think we do. "Negative risk premium" is the kind of thing that hedge fund traders say, just before they stop answering your phone calls. I don't mind private citizens making that experiment with their own money, but I object to betting the planet.

|8.14.07 @ 6:08PM|#

DannyK,

That is not an assumption. It is a result.

As Nordhaus notes at the end of that section...

the underlying analytical point is important. If damages predominantly arise because of rapid economic growth, then we might well have a negative risk premium on high-damage states.

Do we know enough about the risks of high climate change to say that they'll be offset by a given level of prosperity? I don't think we do.

Do we know enough about the risks of extensive measures to curb global warming to say that they'll be offset by a given reduction of actual warming? I don't think we do.

I don't mind private citizens making that experiment with their own money, but I object to betting the planet.

I don't mind private citizens making that experiment with their own money, but I object to betting humanity's wealth.

That I could so trivially turn your sentences into the exact opposites is a pretty telling indictment on how little we know about what Doing Something about global warming might do to our progeny.

|8.14.07 @ 7:10PM|#

A more optimistic scenario envisions the invention of a low cost zero-carbon technology. Such a technology would have a net value of around $17 trillion in present value. As Nordhaus notes, "The net benefits of zero-carbon substitutes are so high as to warrant very intensive research." Setting a price on carbon through a rising tax will encourage the development of such technologies. Another good way to hurry the process along would be to offer a substantial prize to the inventor of a cheap low carbon energy technology, e.g., perhaps a better battery, or paint-on solar cells.

At 3$ a gallon isn't there already a strong incentive for innovation in energy efficiently?

And does any of these scenarios take into effect improvements over time in efficiency...or do they assume a f-150 will still get the same gas mileage in 2050 as it does now?

DannyK|8.14.07 @ 7:27PM|#

Huh? Anybody who speaks English can turn my sentences into their exact opposite. I could probably write a program to do that.

Anyway, to reiterate, the fact that he doesn't think that risk premiums are needed makes me very dubious about his analysis. Even if the economy grows amazingly (which is likely but not guaranteed), the world is going to have trouble dealing with a 5 or 6 degree temperature rise. I don't think that's a problem we can grow our way out of in a reasonable time frame. Two examples based on real climate science: the Southwest US is predicted to go into a "megadrought", given continued global warming. If Greenland melts, the sea level rise will inundate Southern Florida. It's theoretically possible to build a wall around half of Florida and pipe in enough water to keep Phoenix, Albequerque and LA alive. But that's not a likely or pleasant prospect.

Finally, if the warming isn't so bad and growth is really severely impacted, we can always decrease carbon restrictions and party on -- if Nordhaus' scenario of high wealth and high temperature turns out worse than he expects, humanity will be stuck. It's an inherently risky strategy.

|8.14.07 @ 8:06PM|#

DannyK,

Albuquerque... but good try.

Not an economist, so I'll stick to broad general impressions here... feel free to correct me.

It is likely that the economic impacts that result from developing technologies to deal with climate change will be a boon rather than a drag on the economy (see the work of Amory Lovin on this). This seems true even if they are motivated by a tax which is a drag on the economy.

Whether this boon is, as MikeP says, a direct wealth transfer from the developing world to the developed economies will depend on how it happens. If the US, the primary carbon polluter historically, and its rich cohorts, used their carbon tax money to create these technologies and gave them directly to the developing world we would have a win-win situation. It is in the rich world's interests to have the developing world avoid the mistakes that were made in the past. This is a cost that can be born primarily by the rich countries... an investment in their own future.

Importantly, it is the poorest countries that will feel the initial brunt of GW, but the rich countries will pick up the bill for climate refugees, etc.... Using our resources to help the developing world develop in sustainable ways will help their economies, help our economies, and help the environment.

Nordhaus, I think, minimizes the impact that GW has on the margins. A few degrees of warming can have serious impacts, but at the margins we get really, really, really bad consequences. The time delay involved in avoiding those bad consequences would make it seem like doing something earlier rather than later is a good idea.

Remember, global warming is likely the primary driver in most of the world's major species extinction events*. When it is, it usually wipes out more than 90% of the species (plants and animals) on the planet in both the oceans and the land. We have about a 200 year window to avoid that scenario based on current rate of C02 increase, but I would think we would want to keep it that far off if at all possible.

(see Impact from the Deep from the 10/2006 SciAmerican, or http://geology.geoscienceworld.org/cgi/content/abstract/33/5/397)

Mark Bahner|8.14.07 @ 10:34PM|#

I think there is no popular understanding of just what 100 years of economic growth will do for humanity's wealth.

I think there's no understanding of just what 100 years of economic growth will do for humanity's wealth, even among Nobel-prize-winning economists. (Even those who won their prize for economic growth theory!)

Robert E. Lucas Jr. underpredicts world per-capita GDP in 2100 by a factor of 100

|8.15.07 @ 1:51AM|#

Huh? Anybody who speaks English can turn my sentences into their exact opposite.

A fair critique. It was simply striking how you place your concern toward risk to the environment while discounting risk to the economy when swapping the two seems more natural to me. But I would hazard a guess that I don't discount the environmental risk as much as you discount the economic.

|8.15.07 @ 12:36PM|#

Mark B.,

Have you submitted any of your economic predictions for peer review yet?

If not, why not?

|8.16.07 @ 12:01AM|#

Bailey and Nordhaus are obviously enemies of Reason, and must be sent to Goreducation camps immediately.

|8.16.07 @ 3:13AM|#

Ron, serious question for you here.

What is the optimal climate change policy-the one that sets future emissions reductions to maximize the economic welfare of humans?

Do you really think that anything approaching a majority of the people pushing to "do something", actually have humanity's best interests at the forefront of their concerns?

I have sincere doubts about that.......

|8.16.07 @ 3:17AM|#

JasonL,

My chief concern with the green movement on this issue is that nobody will tell me how much I'm paying or how much temperature reduction I'm getting for my investment.

You are right to be concerned. About this, and a lot of other things.

As far as I can tell, the biggest concern the Do Something crowd has, is getting some kind of "control" (i.e. tax the bastards!) on the US pronto.

Don't feed me the BS about the US is the biggest polluter. Take a quick glance across the Pacific -- it isn't going to be that way for very long.

Here's a good question for everybody who wants the US to "Do Something". Are you still interested in taxing the US for carbon, even though that act by itself will do little of nothing about emissions in China and India?

You can do the Gore thing and kill the US economy -- if you don't kill China, India, and the rest of the world with us, then by 2100 it won't have changed GW significantly.

|8.16.07 @ 3:25AM|#

assman,

Its amazing to me that people believe that global warming will be able to predict the future 100 years in advance.

You and Michael Pack,

Which leads me to think we really don't understand the 4 billion year old climate enough to make bold and difinitive statements.Never mind the fact that the U.S.,being a small portion of the globe,can fix this problem by restricting it's people while most countries look after their own well being first.

hereby officially split the prize for "Smartest Person on This Post".

Assman, don't you believe in God?!?!

Michael, the mere fact that socialist/communist governments can't predict the economic future well enough to make their economies grow for even five years in a row, is no reason to doubt their ability to predict the interactive trends in weather, technology, and economics over the next 100 years.

I mean, don't you believe in God?!?!

Now, if I could just remember where it was that hand baskets go, I think there was some old saying about that wasn't there?

The majority believes in God, and they are very probably going to vote for a ride in the hand basket.

|8.16.07 @ 3:38AM|#

btw, has it occurred to anyone that Iraq is a flea bite compared to what it's going to cost to "do something" about GW?

But to those who believe, no explanation is necessary.

|8.16.07 @ 3:45AM|#

Neu Mejican,

Have you submitted any of your economic predictions for peer review yet?

If you think this is something that should be submitted to a peer reviewed journal, then you do not understand how the process of publishing a peer reviewed paper actually works.

It takes a little more than that to make a paper, or even a note. If you're trying to discredit Mark B., this is not a particularly good way of going about it.

Not every idea belongs in a peer reviewed journal. And btw, peer reviewed journals are as susceptible to bias as the NYT. I've published over 40 papers, so I do know something of what I'm talking about.

|8.16.07 @ 12:13PM|#

Genghis Kahn,

Mark B's claims are that the peer reviewed stuff is wrong, and that he has a better analysis.

He makes claims to have done an analysis of sufficient detail to stand against the claims of the peer reviewed stuff.

Given that, it seems just a formality to write it up and publish it under peer review.

Your list of articles is longer than mine, but not by enough for me feel like I need to be schooled by you regarding the peer review process.

Mark Bahner|8.16.07 @ 12:33PM|#

Mark B.,

Have you submitted any of your economic predictions for peer review yet?

If not, why not?

No, I haven't. The most logical place for submission would be the Journal of Economic Perspectives, effectively as a counter-point to Robert E. Lucas Jr.'s paper in the Winter 2000 issue of that journal. To review:

In that paper, (Nobel laureate) Dr. Lucas predicted that the world per-capita GDP growth rate would fall from approximately 3.1 percent per year at present, to approximately 2.2 percent per year in the year 2100. His reasoning was that world economic growth would slow as poor countries like China and India caught up to rich countries like the U.S. and Western European countries. If his prediction came to pass, world per-capita GDP would grow from approximately $7,000 in the year 2000 to approximately $90,000 in the year 2100 (both values in year 2000 dollars...purchasing power parity).

My counter-argument is that world per-capita GDP growth will INCREASE from the present 3.1 percent per year, to over 4 percent per year by the 2020s, over 6 percent per year by the 2030s, and over 10 percent per year by 2100. This will produce a world per-capita GDP of over $10,000,000 by 2100. This acceleration will be caused primarily because of the development of machine intelligence:

http://markbahner.typepad.com/random_thoughts/2005/11/why_economic_gr.html

The main problem with me submitting a paper to the Journal of Economic Perspectives that argues that Dr. Lucas is (spectacularly) wrong is that he has a frickin' Nobel Prize in Economics (specifically related to economic growth theory), and I have degrees in environmental and mechanical engineering. I took something like four courses in undergraduate economics. I don't even know enough economics to be able to describe (without referring to Wikipedia) what Dr. Lucas' Nobel-winning work involved.

But what I do know that Dr. Lucas apparently does not-or at least did not, in the Winter of 2000-is that computers are going to become spectacularly capable during this century. For example, there is simply no doubt in MY mind that computers will replace human drivers in cars and trucks in the next few decades. This alone will have dramatic effects on the economy. Cars and trucks will be able to drive virtually bumper-to-bumper at 70+ mph without accident, down streets so narrow that the pavement width only exceeds the width of the largest vehicle by inches. Trips to well-lit, air-conditioned grocery stores, with their refrigerated frozen food sections and spacious aisles, will be replaced by online purchases of groceries from a tiny, dark, incredibly cramped warehouses that use robotic product-pickers, and deliver groceries to doorsteps by robotic drivers and deliverers. Trips to malls (if they even exist) and sports stadiums will involve being delivered to the entrance, with the car parking itself and returning later. In other areas: houses and buildings will be constructed chiefly or entirely by robotic laborers. Lawns will be cut by robotic laborers. Fast food will be prepared by robotic laborers.

But I don't have the background in economics to describe mathematically how these various advances should boost the world economy. About the only thing I've ever found is the effects of population IQ on economic growth.


Furthermore (as far as *I* am aware) there is virtually no awareness within the economics profession of the likely dramatic effects of improvements in machine intelligence on economic growth. That's why a Nobel laureate could write a paper in a prestigious journal on 21st century economic growth, and not even mention machine intelligence.

In fact, about the only economist I know of who is firmly in agreement with my thoughts is Arnold Kling:

First thoughts on economic growth in the 21st century

I've emailed him and Robin Hanson:

Accelerating economic growth from machine intelligence

…about doing a paper in J.E.P., but no luck so far. I've got other things to do, anyway.

Mark

|8.16.07 @ 1:02PM|#

Thanks for the elaboration Mark B.

I wasn't, btw, trying to discredit you (despite GK's read on things).

I do wonder, however, why your are so confident in your economic predictions given your admitted lack of expertise.

It is not like you claim..."This smart guy forgot this important factor, which means his prediction is probably overly conservative."

Instead you make a very specific mathematical claim - "by a factor of 100."

|8.16.07 @ 1:03PM|#

I will go out on a limb here (based on my area of expertise), that you are over-estimating the pace at which machine intelligence will develop.

But I am not going to make a specific claim as to the rate of growth or the degree to which you are over-estimating.

Mark Bahner|8.16.07 @ 5:22PM|#

I do wonder, however, why your are so confident in your economic predictions given your admitted lack of expertise.

It is not like you claim..."This smart guy forgot this important factor, which means his prediction is probably overly conservative."

Instead you make a very specific mathematical claim - "by a factor of 100."

My lack of expertise is in knowledge of 20th century models of economic growth. But it seems clear that 20th century models of economic growth don't include machine intelligence...otherwise Dr. Lucas would have included such considerations in his prediction. If 20th century models of economic growth don't include the effects of machine intelligence, I think they'll be rendered obsolete within the next 50 years.

Further, the "factor of 100" is completely arbitrary. When per-capita GDP gets sufficiently large, money will probably no longer even be relevant. And that point is likely to occur before per-capita GDP reaches $10,000,000. So I could have just as easily said that Dr. Lucas will be infinitely far off.

I will go out on a limb here (based on my area of expertise), that you are over-estimating the pace at which machine intelligence will develop.

But I am not going to make a specific claim as to the rate of growth or the degree to which you are over-estimating.

Well then, you aren't really making a falsifiable prediction. But I'll go ahead and make a falsifiable prediction, to which you can either agree or disagree:

By the year 2035, every single new car for sale in the U.S. will have the option of "fully automatic" computer driving. That is, every new car for sale in the U.S. in 2035 will allow completely "hands free" driving, with acceleration, steering, and brakes all controlled entirely by computers.

|8.17.07 @ 5:38AM|#

Ron, it's good to see you pushing action now in the form suggested by Nordhaus, but you fail to note both (1) the good arguments that Nordhaus underestimates the costs of climate change damage and the benefits of quicker action and (2) the very real possiblity, largely for reasons argued by Harvard prof. Martin Weitzman (whom you've quoted before) - http://www.economics.harvard.edu/faculty/Weitzman/papers/JELSternReport.pdf - that Gore and Stern may be right, given the desirablity of insurance against the risks that James Hansen is now proclaiming that we may soon find ourselves on essentially "a different planet" and that an ice sheet disintegration is a distinct possibility (and now apparently in evidence in Greenland and West Antarctica) unless we act now. http://environment.newscientist.com/channel/earth/mg19526141.600-huge-sea-level-rises-are-coming--unless-we-act-now.html
Weitzman argues that Stern may be right, although for the wrong reasons.
1. First, Weitzman showed in his seminal paper "Gamma Discounting" (AEI 2001) that the socially efficient discount rate declines over time at a hyperbolic rate, and more sharply given uncertainty about its appropriate future level. Weitzman argues that " a fair recognition of the truth that we are genuinely uncertain about what interest rate should be used to discount costs and benefits of climate changes a century from now brings discounting rates down from conventional values r _ 6-7% to much lower values of perhaps r _ 2-4%, which would create a more intermediate sense of urgency somewhere between what the Stern Review is advocating and the more modest measures to slow global warming advocated by many of its critics." My understanding is that the discount function in Nordhaus' DICE is higher than what Weitzman suggests.
Stern and others have of course defended his much lower discount rate, which would increase the present value of costs to be avoided by mitigation policies:
http://hm-treasury.gov.uk/media/0/B/paper_a.pdf
http://johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf
2. Weitzman then states that "The important remaining caveat is that such an intermediate position is still grounded in a conventional consumption-smoothing approach to the economic analysis of climate change that avoids formally confronting the issue of what to do about catastrophe insurance against the possibility of thick-tailed rare disasters, which from first principles of economic-statistical reasoning presumptively drive expected-discounted-utility outcomes." Weitzman concludes that Stern apparently addressed this problem indirectly by lowering the discount rate even further - while Nordhaus' analysis is a conventional consumption-smoothing approach to climate change that avoids this issue.
What does he mean by this? Here's his fuller description:

In my opinion, public policy on greenhouse warming needs desperately to steer a middle course, which is not yet there, for dealing with possible climate-change disasters. This middle course combines the gradualist climate-policy ramp of ever-tighter GHG reductions that comes from mainstream mid-probability-distribution analysis (under reasonable parameter values) with the option value of waiting for better information about the thick-tailed disasters. It takes seriously whether or not possibilities exist for finding out beforehand that we are on a runaway-climate trajectory and - without leaving it all up to geoengineering - confronts honestly the possible options of undertaking currently-politically-incorrect emergency measures if a worst-case nightmare trajectory happens to materialize. The overarching concern of such a middle course is to be constructive by having some semblance of a game plan for dealing realistically with what might conceivably be coming down the road. The point is to supplement mainstream economic analysis of climate change (and mainstream ramped-up mitigation policies for dealing with it) by putting serious research dollars into early detection of rare disasters and by beginning a major public dialogue about contingency planning for worst-case scenarios perhaps akin to the way Americans (at their best) might debate the pros and cons of an anti-ICBM early warning system. It may well turn out that the option value of waiting for better information about catastrophic tail events is negligible because early detection is impossible, or it is too expensive, or it comes too late (this is Stern's line, and it might, or might not, happen to be true), or because nothing practical can be done about reversing greenhouse warming anyway - so we should stop stalling and start making serious down payments on catastrophe insurance by cutting CO2 emissions drastically. But … [i]nstead of declaring immediate all-out war on greenhouse-gas emissions as advocated by Stern, maybe we would do better by steadily but surely ramping up GHG cuts over the next decade or two while simultaneously investigating seriously the nature of the runaway-climate disasters in the thick tails and what might be done realistically about them should they start to materialize. We can always come back in ten or twenty years time and declare all-out war on global-warming emissions then - if we then think it is the best option among a better-studied reasonably-considered portfolio of possible options.

Nordhaus acknowledges the short-comings pointed out by Weitzman and by Richard Tol (http://www.fnu.zmaw.de/fileadmin/fnu-files/models-data/fund/ccuncertain.pdf) with respect to Nordhaus' cost-benefit analysis and essentially kicks the can down the road: "fears about low-probability outcomes in the distant future - which are unlikely to be verified or refuted in the near future - should not impede our taking constructive steps to deal with the high-probability dangers that are upon us today. We should start with the clear-and-present dangers, after which we can turn to the unclear-and-distant threats."
3. Beyond Weitzman there are also good grounds to argue that Nordhaus has underestimated the costs of climate change damage, especially to the ecosystems upon which we rely.
http://johnquiggin.com/index.php/archives/2006/11/17/stern-on-the-costs-of-climate-change-part-1/
4. Further, the Nordhaus DICE model does not take into account, as Thomas Sterner and U. Martin Persson of the University of Sweden have pointed out, "the important fact that relative price change is an inherent aspect of economic growth. As the rate of growth is uneven across the sectors of the economy - the composition of economic output will inevitably change over time. Output of mobile telephones may grow fast while glaciers and coral reefs decline and therefore relative prices will change. … [T]his has important implications for the efficient level of climate change mitigation …." http://www.hgu.gu.se/files/nationalekonomi/personal/thomas%20sterner/b88.pdf
Sterner and Persson have rerun DICE to illustrate the impact that changes in relative prices can have on calculations of future climate-change damages. They conclude that greenhouse gas stabilization scenarios that are even more stringent than those discussed or suggested in the Stern Review are be justified: "Society in the future will not only be a lot richer but very different in other aspects. An integral part of increasing income must be that growth is uneven and that some of the sectors that decline or do not grow will see a strong tendency to rising prices. Climate change is likely to damage some of these non-market sectors and taking these changes in relative price into account raises the future cost estimates of climate damage and acts as a motivation for stronger abatement now."
5. To be fair to Stern and Gore, their proposals are targeted at complying with objective of the UNFCCC, to which the US signed on, of "avoiding dangerous interference" with the climate. Nordhaus does not attempt to satisfy that goal: he notes that

The baseline temperature increase relative to 1900 is 0.73 °C in 2005 (relative to the 1890-1910 average). The projected increase for the baseline is 3.06°C in 2100 and 5.30 °C by 2200. Clearly, major warming is in store according to the DICE model projections because of past emissions and climatic inertia. By comparison, the economic optimal has a projected increase of 2.61 °C in 2100 and 3.45 °C by 2200.

Those who want to use Nordhaus strictly as a stick against against Gore and as a reason for doing nothing should pay close attention. Under Nordhaus' proposal, we are looking at AVERAGE global temperature increases of 4 °F in the next 90 years, with even higher temps being experienced in the temperate regions and closer to the poles (as with warming to date).
6. Another point worth mentioning that Nordhaus omits has been made by Ross McKittrik. He points out that "Under a carbon tax, the government collects revenue which it can use to offset the negative impacts of the policy by reducing other taxes and lessening the deadweight losses associated with them. This so-called "revenue recycling" made possible by carbon taxes can substantially reduce the costs of carbon abatement policies."
www.uoguelph.ca/~rmckitri/research/co2briefing.pdf
7. Of course, it's interesting to note how Nordhaus' estimates of the optimal carbon tax continue to rise.
He first proposed a $5/ton carbon tax in 1994; in 1999 he posed a carbon tax of $10 per ton rising to about $30 in 2050 and $70 in 2100; when reviewing Stern, and now his proposal is for a global carbon tax of$ $27.28 now, $34 per metric ton carbon in 2010, reaching $42 per ton in 2015, $90 per ton in 2050, and $207 per ton of carbon in 2100. I can hardly wait for his next proposal! Shall we continue to sit around on our thumbs?
8. Finally, while Nordhaus recognizes that to be effective any mitigation scheme must be implemented globally, he fails to discuss the need, unstated by many who loudly trumpet a preference for adaptation over mitigation, for a coordinated approach to aiding the countries that are most vulnerable to climate change but which lack the physical and social infrastructure (rule of law and risk-sharing mechanisms) to deal with the problems they are expected to face. Here's hoping you will address adaptation difficulties in addition to mitigation.

Regards,

TT