William Nordhaus

The Nobel economist Nobel 2018 advocates letting the climate go. Are we walking on our heads?

Start
Two important events have taken place recently. The report of the Giec sponsored by the United Nations that was published on October 8. At the same time, the Nobel Prize in Economics was awarded to William Nordhaus, a pioneer in integrating climate change into economic models. While IPCC scientists warn of the disastrous consequences of a global warming of more than 1.5°C compared to the pre-industrial era (dating from 1850), the economist Nordhaus recommends letting the Earth warm up by +3.5°C by 2100. Are we walking on our heads?
 
Ne have now reached a warming of +0.9°C. The IPCC report (summary here in English) points to the very serious consequences of a global warming of +1.5°C. Without doing anything, we would reach +5.5°C in 2100. Limiting global warming to 1.5°C will only be possible at the price of enormous efforts, of a real economic, social and industrial revolution. The IPCC report describes the necessary changes: they are ambitious. Global carbon neutrality should be achieved by 2050, i.e. zero net CO2 emissions on a global scale. To reinforce the dramatic aspect of this, the IPCC report sets out the long and terrifying list of the disorders caused on Earth by warming above +1.5°C.
Economist Nordhaus has a different approach. While the IPCC assumes that global warming must be limited as much as possible, Nordhaus focuses on the costs and tobenefits financiers in the fight against global warming. It's about finding how much money to invest, and when...in this struggle.
 
This is the business model. To simplify, let's imagine there are only two generations: Wethe present generation, and Themthe next generation. Our activities (industry, transport, agriculture...) enrich us but emit CO2. More We produce, plus We we enrich and more We let's send CO2 into the atmosphere. This CO2 accumulates and heats the planet: it is thegreenhouse gas effect. This warming is causing economic losses for Them (collapse of ecosystems and agriculture, floods...).
NB: in all graphs in this article, the levels above the black arrow are "positive": financial gains. The levels below the arrow are "negative": financial losses.
 
We can invest money today to reduce our CO2 emissions: by extracting less fossil fuel, producing less, investing in cleaner technologies. This investment will benefit Them ...they will live on a cooler planet. Future generations will also be able to invest in the fight against climate change: it will not be about preventionbecause it'll be too late. We're talking about mitigation for example, the construction of dikes or walls to protect against rising water levels.
 
 
The investment made by We (the blue arrow) lowers our GDP. It generates a profit for Them (the red arrow) in the form of reduced losses due to climate change.
To determine the optimal amount to be invested today, Nordhaus uses a very classical model: adding up the "well-being" of We and that ofThem It is the total well-being of humanity present and future. This "well-being", or "happiness", is measured by a function u which links the wealth of a given generation to the "well-being" or "happiness" that this wealth provides.
 
In this formula, the well-being of Themthe future generation, and our well-being at WeThe present generation, the present generation, do not carry the same weight. The weight of the present generation is 1. The weight of the future generation is 1/1+r. We call r the "social discount rate". This rate is used to determine the importance of the well-being of the future generation relative to that of the present generation. If r > 0, the well-being of the future generation matters less than that of the present generation.
 
 
This is not without consequences. If the well-being ofThem counts less than Wethe benefit thatThem will derive from our investment is less valuable to us than what it costs us! The graph below illustrates this mechanism. If r is great, the profit made by Themthe future generation, appears to be very low compared to the cost that We have to pay. It does not justify investing today in reducing CO2 emissions. If r is small enough, on the other hand, the benefit of a reduction in CO2 emissions justifies its cost.
 
 
rThe social discount rate, the social discount rate, is a crucial parameter in economic models involving several generations. It's intuitive: if you don't care about your children's future, you're not going to save for an inheritance but rather spend everything you have during your lifetime.
In the Nordhaus models, there are obviously more than two generations. There's us, and then there are our children, grandchildren, great-grandchildren, and their children, grandchildren, etc. So the question is no longer simply "what's the point? How much invest for future generations? "but" How much and when invest for future generations?"
Plus the social discount rate r is high, the less the initial generations invest in protecting their descendants from the consequences of climate change. In addition, the higher the social discount rate r is high, the longer the fight against climate change is postponed.
Nordhaus chooses a very high discount rate:r=3%. It may not seem like much, but let's take a closer look. The well-being of humans living on Earth in 50 years time weighs only about
 
Imagine 50 terms in this multiplication: it is equal to 23% of our current well-being! As for individuals living in 2100, their weight is worth less than 9% of ours. In other words, future generations do not weigh much in the balance!
Thus, Nordhaus advocates very gradual investments to reduce CO2 emissions. In short, the ideal is to do nothing until the middle of the 21st century, and then slowly start to reduce our CO2 emissions a little. This way, we spend relatively little money, and we arrive at an "optimal" global warming of +3.5°C, a level more recently revised to +3.1°C after new calculations... Of course, warming would not stop in 2100 and would continue throughout the 22nd century.
 

Economists put forward several justifications for the choice of a high social discount rate. The main reason is related to what you hear about every day on the radio: "growth". In his economic models, Nordhaus predicts that global growth will continue - despite global warming. In other words, GDP, as a measure of wealth creation, will continue to grow. Future generations will then be a lot, a lot richer than us! Why should we invest in them? The social discount rate r therefore serves to restore equity between generations.
 
 
In other words, even if global warming results in losses for future generations, they will be so rich that they will be able to easily absorb these losses. The economic losses associated with climate change will not prevent GDP from growing inexorably. Since future generations are richer than we are, let's worry about us first (let's consume, burn oil and raze the forests).
 
 
There are other arguments for a high social discount rate. For example, the technical progress (a favourite subject of Paul Romer, co-prize winner of this year's Nobel Prize in economics) and theinformation.
In the first case, we must imagine that in the more or less distant future, humanity will find effective technological solutions against global warming. Why invest today in costly and painful solutions, such as reducing our consumption of meat, switching to renewable energies, or flying less? Maybe in 20 years' time, some genius will invent a giant vacuum cleaner that will pump our greenhouse gases into the intergalactic vacuum!
 
Note: these life-saving technological advances are unlikely to happen unless developed countries invest more in research. France invests just over 2% of its GDP, which is very little and below the European Union's objectives. For comparison, Germany, Austria, Switzerland and the USA invest around 3%, Japan 3.6%, Israel 4.1% and South Korea 4.3%.
 
Another justification is the lack of knowledge about the mechanisms of climate change. Some climate sceptics will say that we are not really sure that climate change is a reality. Or, like the President of the United States, some people think that global warming is a Chinese invention designed to torpedo the U.S. economy (FYI, the Chinese denied it). Why invest money to fight against something that we only half understand and that perhaps doesn't exist any more than the giants of Don Quixote?
 
As you can see, I personally don't agree with Nordhaus. I see no ethical reason to give less weight to future generations. It is all the more unethical since the vast majority of humanity that will suffer from global warming has not yet been born: how can we arrogate to ourselves the right to decide for them?
 
Other economists have used a much lower social discount rate: for example, Nicholas Stern uses r=0.1% and William Cline chooses r=0%. This last choice simply means that all generations, including those who will live in 2200, weigh just as much as each other. Both Stern and Cline come to very different conclusions from Nordhaus: we must start to reduce CO2 emissions very quickly and dramatically. These conclusions are much more in line with the IPCC report.
And I strongly challenge the notion that "growth", that magic wand, will make our great-great-grandchildren so rich that they will not care to live on a planet devastated by climate change. Growth" is a flawed indicator that only describes the creation of wealth that can be measured in terms of money. If you buy a kilo of beef fed on Brazilian soybeans, you increase GDP: that's growth. If you fly to the Coconut Festival in Papeete, you generate growth. Nowhere does it show the cost of the methane gas your beef burps (farts, actually, are less serious) or the cost of the 15,000 litres of water that this kilo of meat required. Nowhere does it show the cost of the CO2 sent into the atmosphere by your Easy Jet.
 
GDP and its growth rate do not take into account the creation or destruction of "environmental wealth". GDP only looks at things that can be bought and sold. This is completely arbitrary, but it is the way the economy has been operating since the end of the Second World War.
Some economists are proposing to change our benchmark and move to a "...". green GDP « . This GDP would take into account the creation and destruction of monetary wealth, but also the creation or destruction of environmental goods. Thus, polluting activities would no longer increase GDP and generate growth, but rather would create decline, as they would destroy certain environmental goods. It is very complicated, because it implies giving a price (in Euros / Dollars / Yuan...) to the environment, to pollution, to CO2 emissions. Attempts exist: carbon quota markets, or "carbon taxes" on polluting activities, for example.
 
A green GDP would therefore be the sum of the production of "monetary" and "environmental" wealth: for example, the restoration of a degraded ecosystem would increase the GDP. GDP would decrease when the environment is degraded: oil production would increase GDP by creating monetary wealth, but would decrease it at the same time because of the CO2 emissions generated.
 
 
The Stiglitz Commission of 2008, initiated by the French government, has helped to legitimize criticism of the current accounting of the wealth of States. Even the UN has suggested that we should revise the way we account for wealth to include the environment. Of course, this is extremely controversial and no "green accounting" method has yet emerged.
 
There is no doubt that GDP is not a satisfactory indicator of well-being or happiness. The increase in GDP very often implies enormous environmental degradation and consequent damage for certain populations. Think of mining, oil drilling, or the oil shales in Alberta Canada. With a green GDP, the oil sands wouldn't necessarily mean growth, since there would be enormous environmental damage caused by their development.
Let's imagine that Nordhaus uses a "green GDP". In the "optimal" trajectory proposed by Nordhaus, global warming of +3.5°C will result in immeasurable environmental losses for Them (the future generation).
 
 
With a "green GDP", however, Them will not necessarily be "richer" than We. Chances are that future generations will be even poorer than us! It is then no longer really justified to use a social discount rate as high as Nordhaus.
 
 
In conclusion, Nordhaus was undeniably a true pioneer. He was one of the first to integrate CO2 emissions, global warming and the estimation of associated financial losses into economic models. However, Nordhaus is in favour of "weak" measures against global warming. He has regularly minimized the risks involved, for example by strongly criticizing the Meadows report from Club of Rome in 1972 on the dangers posed by growth (depletion of resources, collapse of ecosystems, pollution...).
By being in favour of very limited State intervention in the regulation of CO2 emissions, it remains in the very liberal line that dominates current economic thinking. Although it rewards work on the climate, the 2018 Nobel Prize does not in any way reflect a radical change in economic thinking.
 
This liberal thinking and the cold calculation resulting from a "cost-benefit" analysis lead to conclusions that go totally against scientific recommendations, such as the IPCC report mentioned at the beginning of this article: unbridled global warming. Unfortunately, political decision-makers most often think like economists, except that a politician is interested in even shorter time horizons (the next elections) and doesn't care much about the future of humanity in 2100. It is up to us, citizens, to send a powerful message to the elites who govern us. The future of our children, their children, and their children's children matters to us. Decision-makers must be held accountable for the damage they cause today to the planet of tomorrow's humans.
 
Hélène Schernberg, Agricultural engineer - Doctoral student in economics
 

Why not enjoy unlimited reading of UP'? Subscribe from €1.90 per week.

Header image: William Nordhaus - Photo © Handout/Reuters

Anything to add? Say it as a comment.

0 Comments
Inline Feedbacks
View all comments
durable development
Previous article

Funding for sustainable development in need of ideas?

ICO cryptomoney
Next article

France, a land of welcome for cryptomonnages?

Latest articles from ECONOMY

JOIN

THE CIRCLE OF THOSE WHO WANT TO UNDERSTAND OUR TIME OF TRANSITION, LOOK AT THE WORLD WITH OPEN EYES AND ACT.
logo-UP-menu150

Already registered? I'm connecting

In order to contribute to the information effort on the current coronavirus crisis, UP' proposes to its readers a free entry to the latest published articles related to this theme.

→ Register for free to continue reading.

JOIN

THE CIRCLE OF THOSE WHO WANT TO UNDERSTAND OUR TIME OF TRANSITION, LOOK AT THE WORLD WITH OPEN EYES AND ACT

You have received 3 free articles to discover UP'.

Enjoy unlimited access to our content!

From $1.99 per week only.
14 Shares
Share14
Tweet
Share
WhatsApp
Email
Print