The Challenge of Global Warming: Economic Models and Environmental Policy William Nordhaus (Yale) April 2007 William Nordhaus (Yale) () Global Warming April 2007 1 / 8
Overview Outlines latest version of the Dynamic Integrated model of Climate and the Economy (DICE-2007) Incorporates greenhouse gas emission, climate change and damages into an aggregated Ramsey-style model Compares implications of alternative policy proposals to doing nothing and the "optimum" William Nordhaus (Yale) () Global Warming April 2007 2 / 8
DICE 2007 Objective function: � � t � c 1 � α � T max 1 t ∑ W = L t 1 + ρ 1 � α t = 0 where L t follows a "logistic" function converging to 8.4 billion, c t = C t / L t and Tmax = 600 years (BGP) Production Function: Q t = Ω t Λ t A t K γ t L 1 � γ t where C t + I t = Q t and K t = I t + ( 1 � δ K ) K t � 1 William Nordhaus (Yale) () Global Warming April 2007 3 / 8
Geophysical Sectors Climate damage: 1 Ω t = 1 + ψ 1 T At + ψ 2 T 2 At where global mean surface temperature, T AT evolves according to T At = T At � 1 + ξ 1 f F t � ξ 2 T At � 1 � ξ 3 [ T At � 1 � T Lt � 1 ] g T Lt = T Lt � 1 + ξ 4 [ T At � 1 � T Lt � 1 ] � � �� M At = + F Xt F t η ln M A , 1750 and the carbon cycle is represented by M At = π E t + φ 11 M At � 1 + φ M Ut � 1 = ( 1 � π ) E t + φ 22 M Ut � 1 + φ 32 M Lt � 1 + φ 12 M At � 1 M Ut M Lt = φ 33 M Lt � 1 + φ 23 M Ut � 1 William Nordhaus (Yale) () Global Warming April 2007 4 / 8
Abatement Costs: Λ t = 1 � θ 1 t µ θ 2 t where µ t = emission control rate (control variable) Total carbon emissions E t = E It + E Lt where emissions from industry are given by E It = σ t ( 1 � µ t ) Q t , ! implicit price of CO 2 : 1 P t = σ t ( 1 � µ t ) William Nordhaus (Yale) () Global Warming April 2007 5 / 8
Major Contentious Issues The subjective discount rate, 1 / ( 1 + ρ ) and α r , ! calibrated to long run growth of 1.4% and a real interest rate of 4.3%: ln c t + 1 ' r � ρ = 0 . 043 � 0 . 015 = 0 . 014 c t α 2 , ! could have chosen ρ = 0 . 001 and α = 3 : ln c t + 1 ' 0 . 043 � 0 . 001 = 0 . 014 c t 3 , ! makes a big di¤erence to optimal policy and welfare implication Uncertainty Regional disaggregation , ! RICE–2008 William Nordhaus (Yale) () Global Warming April 2007 6 / 8
Alternative Policies Evaluated No controls (baseline) Optimal policy: µ t set to maximize welfare objective CO 2 concentration constraints: upper limit on CO 2 ppm from 1900 Temperature change constraints: upper limit on rise in o C from 1900 Kyoto protocol (various versions): one o¤ reduction to 5% below 1990 emissions by 2012 Stern proposal: choose optimal µ t under low discount rate, but evaluated under "observed" rate Gore proposal: rapid rise in µ t from 15% to 90% by 2050 Geoengineering? William Nordhaus (Yale) () Global Warming April 2007 7 / 8
250 200 Carbon price (2005 US$ per ton C) 150 100 50 0 2005 2015 2025 2035 2045 2055 2065 2075 2085 2095 2105 Optimal Baseline < 2 degrees C < 2x CO2 Stern Gore Kyoto w US Figure V-4. Carbon prices for different strategies This figure shows the globally averaged carbon price of CO 2 under different strategies for the next century. Note the upward tilt of the strategies. Note these are per ton carbon; for prices per ton of CO 2 , divide by 3.67. Prices are for 2008 for the first period. - 54 -
300 250 Carbon emissions (tons C per decade) 200 150 100 50 0 2005 2015 2025 2035 2045 2055 2065 2075 2085 2095 2105 Optimal Baseline < 2 deg C < 2x CO2 Stern Kyoto w US Gore Figure V-6. Global emissions of industrial CO 2 per decade by policy - 56 -
1100 1000 900 Carbon concentrations (ppm) 800 700 600 500 400 300 5 5 5 5 5 5 5 5 5 5 5 0 2 4 6 8 0 2 4 6 8 0 0 0 0 0 0 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 Optimal Baseline < 2 deg C < 2x CO2 Stern Kyoto w US Gore Figure V-7. Atmospheric CO 2 concentrations by policies - 57 -
5.0 4.5 4.0 3.5 Temperature change (C) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 5 5 5 5 5 5 5 5 5 5 5 0 2 4 6 8 0 2 4 6 8 0 0 0 0 0 0 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 Optimal Baseline < 2 deg C < 2x CO2 Stern Kyoto w US Gore Geoeng Figure V-8. Projected global mean temperature change by scenario Note that increases are relative to 1900 average. - 58 -
30 Per capita consumption (2005 US $) 25 20 15 10 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 Baseline Optimal Stern < 2x CO2 Figure V-9. Per capita consumption, major runs - 59 -
20 15 10 Present value of policy (trillions 2005 US$) 5 0 O L L L L L L L S G G t i i i i i i i p m m m e o e m m m m r o t r i i i i n e i i i i e m t t t t t t t n p t t t R t t t t a g o o o o o o o -5 r e l o i 2 1 2 v n 1 2 2 3 p . X . . . i e 5 5 5 d 5 d e o e X X w C d e d e s r g g a i O e e C C n d l r r g g e e g O 2 O i r r s e e e e c 2 2 e e C C o -10 C C u n t i n g -15 -20 ObjFun PV (Dam + Abate) -25 Figure V-1. Present value of alternative policies The figure shows the difference in present value of a policy under two measures. The first bar is the objective function, and the second is the present value of the sum of abatement and damages. The policies are shown in Table IV-1. Note that the baseline is omitted as it has zero present value. - 51 -
3.5 ObjFun PV (Dam + Abate) 3.0 2.5 Present value of policy (trillions 2005 US$) 2.0 1.5 1.0 0.5 0.0 < 2 degree C < 3 degree C Optimal < 2X CO2 < 2.5X CO2 < 2.5 degree C Kyoto with US Kyoto w/o US Strong Kyoto -0.5 Figure V-2. Present value of alternative policies The figure shows the same values as in Figure V-1 with the larger values omitted for clarity. - 52 -
2.0% 1.8% Benefits/income Costs, benefits are % of income Costs/income 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% < 1.5X CO2 < 2 degree C Stern Optimal < 2X CO2 < 1.5 degree C < 2.5 degree C Kyoto with US Strong Kyoto Gore Geoengineering Figure V-3. Costs and benefits as percent of income The figure separates costs and benefits for major policies and shows them as a percent of total income (all figures are discounted at the consumption discount rate). Figures are shown relative to the baseline of no controls. - 53 -
Main Results Theoretical optimum implies gradually rising emissions, leveling out by 2100 and rapidly rising implicit carbon price ! reduces rise in gobal temperature to 1.7 o C over next century , , ! optimal price per ton of carbon is $23.4 in 2007 Alternative versions of Kyoto have almost no impact (both in terms of costs and bene…ts) More ambitious proposals (Stern and Gore): big reduction in emissions, but economically very costly due to initial rate of reduction Nordhaus: "Slow, steady, universal, predictable and boring — those are probably the secrets to success for policies to combat global warming." William Nordhaus (Yale) () Global Warming April 2007 8 / 8
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