Optimal Global Warming Policy
Over at Reason Online Ronald Bailey has an interesting article on global warming policy. He looks at the research of William Nordhaus that looks at economics of global climate change.
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.
So much for both the Stern and Gore policies for dealing with global climate change with Gore’s being by far the worst of the two. In fact, under both Gore’s plan as well as Stern’s we’d be better off doing nothing. So what is the optimal policy?
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.
So, the policies people like Gore are suggesting are actually worse than the problem and are far worse than the optimal policy. If I had to guess which policy will be followed it will be Gore’s. That seems to be the pattern when it comes to government intervention, go for the worst policy.