1 William D. Nordhaus Yale University Public Lecture Becker-Friedman Institute April 2014 Economic Perspectives on Climate Change

The challenge of climate change A new and controversial area: global, costly, large impacts Affects virtually every area of society and the economy I will emphasize an economic innovation: using the market mechanism to achieve environmental goals and particularly the role of carbon prices. 2

Emissions and climate science 3

4 Global CO 2 emissions since 1900

5 Trend in CO 2 emissions relative to GDP for US

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CO2 concentrations for last 800,000 years 7 TODAY

8 Temperature record (°C), Sources: [25]

9 Merged temperature record (°C),

The recent temperature record and modeling 10

The Impacts of Climate Change The Copenhagen Accord 2009 recognized “the scientific view that the increase in global temperature should be below 2 degrees Celsius.” This is the most difficult area of climate science. Examples: –Agriculture –Potential species extinctions –“Tipping points” and abrupt climate change 11

12 Studies of impact of climate change: The example of low-latitude rice 12 With adaptation Without adaptation

13 The example of temperate-zone wheat 13 With adaptation Without adaptation

Major impacts: non market (here extinction rates) 14

Issues of Tipping Points and Catastrophic Risks Major areas of concern: –Reversal of North Atlantic deepwater circulation –Impact of melting of Arctic summer icecap –Melting of Greenland and West Antarctic ice sheets –Abrupt climate change –Ocean carbonization 15

Example of Greenland Ice Sheet at 6 °C warming 16 IPCC, Science, AR4, p. 830.

Aggregate damage estimates from different studies 17

Aggregate damage estimates from different studies Source: Nordhaus, IPCC Impacts 2014, Tol

19 The Contribution of Economics: Integrated Assessment Models (IAMs) What are IA models? These are models that include the full range of cause and effect in climate change (“end to end” modeling). Major goals of IA models: Project trends in consistent manner Assess costs and benefits of climate policies Estimate the carbon price and efficient emissions reductions for different goals

20 CO2 emissions Carbon cycle and climate Impacts on humans and natural systems Typical integrated assessment models Policies (limits, taxes, subsidies, …)

An example: the Yale DICE model We can use the models to examine the effects of different policies: 1. No policies 2. “Optimal” policies 3. Limit temperatures to 2 degrees C 21

Emissions under policy and no policy 22

Climate change under different scenarios 23

Carbon prices under policy and no policy 24 Today

Policies to date Began with Framework Convention on Climate Change (1992), a voluntary agreement to “prevent dangerous” climate change. Kyoto Protocol ( ) was conceptually a “cap and trade” approach After expiration of Kyoto Protocol in 2012, no binding international regime in place. 25

26 Kyoto Protocol suffered from extreme attrition …

Economist’s Preferred Approach: Carbon tax Tax goods proportional to their CO 2 content. Tax should be harmonized across all industries and countries. Can reduce other taxes or use revenues for public goods 27

28 Three inconvenient truths 1.An inconvenient scientific truth: Global warming is not a hoax. It will (almost surely) become an increasingly important and obvious feature of earth systems. 2.An inconvenient economic truth: To be efficient, firms and consumers must face a market price of carbon emissions that reflects the social costs. 3.An inconvenient political truth: To be effective, the price must be universal and harmonized in virtually every sector and country.

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