On October 8, two news stories competed for headlines. Both were about global warming, or, more correctly, climate change. One was cause for despair and the other for cheer. The more ominous one was a report by the Intergovernmental Panel on Climate Change (IPCC) on the disastrous consequences of not limiting global warming to 1.5º C compared to the preindustrial era. The good news was the award of half of the Nobel Prize for Economics to William Nordhaus for his pioneering research on economic policies to address climate change.
Three things are notable about the IPCC report and the commentary surrounding it. First, the 1.5º C goal tightens the already stringent 2º C target set at the Paris Agreement in 2015. Secondly, measures suggested to achieve this strikingly ambitious goal are in the realm of science fiction. Third, and most interestingly, some commentators have argued limiting global warming to even 1.5º C is not enough and that we must do more.
On the first point, recall the Paris goal required reducing greenhouse gas (GHG) emissions by 50% from 1990 levels by the year 2050 and eventually to zero net-emissions by the year 2075. The so-called ‘50-by-50’ goal was dead on arrival since voluntary commitments by countries at Paris would not have been enough to meet it.
Also read: Temperatures to Increase by 1.5 Degrees Celsius by 2030: UN Report
On top of that, the decision by the US last year to pull out of the agreement was the last nail in the coffin. The new 1.5º C target requires reducing GHG emissions by 50% by 2030 compared to 2010 levels and to zero net-emissions by 2050. As a reality check, at present GHG emissions are increasing not decreasing and we are only 12 years from 2030. The fudge used in the IPCC report is to allow “overshooting” the 1.5º C before returning to that level.
A key measure proposed to achieve this impossible target is sucking massive amounts of carbon dioxide out of the atmosphere, as much as a billion tonnes depending on the extent of overshooting. But in the words of the report, “carbon dioxide removal deployed at [such a] scale is unproven and reliance on such technology is a major risk in the ability to limit warming to 1.5°C.”
Finally, it is unclear how low the target can go since a warming of 1º C has already happened. If that amount of warming will lead to runaway climate change, then the game is over anyway. The problem with reports such as this and with commentaries on them is that they paint a gloom-and-doom picture while the solutions they propose are either platitudes, such as “alter lifestyles”, “change value systems”, “reconnect humanity with nature”, or are impractical.
In this context, the decision of the Nobel Prize committee to recognise Nordhaus is welcome since it is focuses attention on practical solutions to global warming. Odd as it may sound, action on climate change is an exercise in cost-benefit analyses, where the costs of reducing GHGs are in the now but the benefits of doing so are in the future, even if the not-so-distant future. Put differently, the pleasure from unchecked emissions of GHGs is in the present whereas the pain will be in the future. If there were no such tradeoffs, the problem would have been solved long ago. The question is how much action we should take and the timing.
Over the last 40 years, Nordhaus has developed and refined a tool for cost-benefit analysis of climate policies, starting with his pioneering paper published in 1976, ‘Economic Growth and Climate: The Carbon Dioxide Problem’. Despite its elaborate title, the Dynamic Integrated Climate Economy (DICE) model is a simple, elegant device that integrates climate change with the economy, one that can even be run on a spreadsheet.
Among other things, it can answer the crucial question of how GHG emissions should be priced. While economists agree that pricing GHG emissions – which are currently free – is the only way forward and that this can happen either through carbon taxes or through markets for carbon trading, opinions differ on how rapidly prices should increase and to what extent. With DICE, depending on how you roll it, it can generate results that support big-bang economists who want steep and high prices versus gradualists who want to start with low prices and ramp them up later.
Also read: There’s No Time for Gradualism
Unlike the popular misconception, this has little to do with the discount rate one uses to value future benefits vis-à-vis costs that must be incurred now. In fact, in using DICE, there is growing consensus among economists that fairly high prices for carbon are called for – at least $25 per tonne to begin with and increasing thereafter.
Starting with DICE, other so-called Integrated Assessment models have been developed. Some of these are very large and elaborate. But DICE and its refinements – fetchingly named RICE, ENTICE, etc. – continue to provide insights into policies to address climate change and the tradeoffs they entail.
Unlike Nobel laureates recognised for work done decades or years ago, Nordhaus, who is now 77 years old, continues to develop and use his tool. He recently wrote a popular and eminently readable book summarising his work, aptly titled Climate Casino. For his fundamental and ongoing contributions to developing a framework for sober and rational climate policies sans hype and hyperbole, half a Nobel Prize is better than none.
Shreekant Gupta is professor at the Delhi School of Economics, University of Delhi.