Saturday, March 15, 2014

Contra Nordhaus

A recent piece by William Nordhaus purports to show why global warming skeptics are wrong. As he notes, one problem with the project is that there are a lot of people skeptical of different parts of the argument for doing something about global warming. He therefor chooses to select a specific set of criticisms, published in the Wall Street Journal. He writes:
The first claim is that the planet is not warming. More precisely, “Perhaps the most inconvenient fact is the lack of global warming for well over 10 years now.”
In response he offers a graph of global temperature and writes: "We do not need any complicated statistical analysis to see that temperatures are rising, and furthermore that they are higher in the last decade than they were in earlier decades"

We do not need any complicated analysis to see that temperatures have risen over the period 1900 to the present—but the piece he is attacking doesn't say they didn't. It says that they have not been rising for more than ten years—which, so far as one can tell from the graph, is true.  He is attacking them for the offense of making a true claim on the grounds that a claim they did not make is false. 

It is no doubt true that, among those critical of AGW, there are at least a few who deny that warming has occurred at all. But Nordhaus has explicitly limited himself to the claims in a particular article, and that is not one of them.

He goes on to criticize the WSJ article's attack on the IPCC models—specifically, its claim that "computer models have greatly exaggerated how much warming additional CO2 can cause." Unfortunately, his rebuttal never responds to that criticism. 

He writes, for all I know correctly, that "the projections of climate models are consistent with recorded temperature trends over recent decades only if human impacts are included." That is a statement about the ability of models to fit past data, not about whether models fitted to past data did or did not successfully predict temperatures thereafter. The distinction between the ability of a theory to fit past data and its ability to predict data not used in building it is something one would expect an economist to be familiar with.

He next responds to the article's attack on the description of CO2 as a pollutant, writing:
In economics, a pollutant is a form of negative externality—that is, a byproduct of economic activity that causes damages to innocent bystanders. The question here is whether emissions of CO2 and other greenhouse gases will cause net damages, now and in the future. This question has been studied extensively. The most recent thorough survey by the leading scholar in this field, Richard Tol, finds a wide range of damages, particularly if warming is greater than 2 degrees Centigrade. Major areas of concern are sea-level rise, more intense hurricanes, losses of species and ecosystems, acidification of the oceans, as well as threats to the natural and cultural heritage of the planet.
The critical point here is the concept of net damages. That CO2 increase causes damages is not sufficient to make it a pollutant in the economic sense, since it also produces benefits. Neither Nordhaus, Tol, nor I  knows what the sign of the sum is, since it depends on unknown future events. As Nordhaus and others have made clear, negative effects become more serious at higher temperatures. The IPCC projections include a range of temperatures, over some of which net effects might well be positive. I have linked in the past to a piece by Chris Landsea suggesting that a very small increase in force of hurricanes will be combined with a somewhat larger decrease in frequency, in which case that effect also might be positive. I have discussed in past posts here other positive effects and my reasons for thinking that they might well outweigh the negative at levels of temperature increase suggested by the IPCC models.

Nordhaus goes on to make some arguments about the controversy itself—that it is not biased in various ways against skeptics—that I find neither convincing nor terribly interesting. 

His final, and possibly most important point, is based on his own research, which he complains that the WSJ article is misrepresenting. He starts with a correct point—that it is the difference between benefit and cost, not the ratio, that matters. He goes on to summarize his conclusion:
My research shows that there are indeed substantial net benefits from acting now rather than waiting fifty years. A look at Table 5-1 in my study A Question of Balance (2008) shows that the cost of waiting fifty years to begin reducing CO2 emissions is $2.3 trillion in 2005 prices. If we bring that number to today’s economy and prices, the loss from waiting is $4.1 trillion. Wars have been started over smaller sums.
 What he does not mention is that his $4.1 trillion is a cost summed over the entire globe and the rest of the century. Put in annual terms, that comes to about $48 billion a year, a  less impressive number. Current world GNP is about $85 trillion/year. So the annual net cost of waiting, on Nordhaus's own numbers, is about one twentieth of one percent of world GNP. Not precisely a catastrophe. 

I suggest a simple experiment. Let Nordhaus write a piece explicitly arguing that the net cost of waiting is about .06% of world GNP and see whether it is more popular with the supporters or the critics of his position. I predict that at least one supporter will accuse him of having sold out to big oil.

That aside, is his conclusion that we ought to have a carbon tax correct? In a world of certainty run by benevolent philosopher kings, the fact that a policy has even a relatively modest benefit is a good argument for it, but we do not live in such a world. In practice, policies aimed at reducing warming will be designed not by William Nordhaus but by political actors subject to political incentives. For a sample of what that is likely to produce, I suggest looking at the cap and trade bill that passed the House a few years ago but did not make it through the Senate. The farther the policies are from optimal, the higher the costs and the lower the net benefits.

Even aside from that very serious problem, we do not live in a world of certainty. Fifty years from now it may turn out that warming has been much less than the IPCC projected due to technological changes that lower the cost of solar or nuclear power below that of power from fossil fuels, sharply reducing CO2 output. It may turn out that warming has followed the projected path, but costs have not—that the increased droughts, hurricanes, etc. have not appeared. It may turn out that benefits from longer growing seasons, milder winters, CO2 fertilization of agriculture, expansion northward of habitable land area, turn out to be larger than in Nordhaus's calculations. It may turn out that progress in other technologies has provided us with easy and inexpensive ways of modifying either the CO2 content of the atmosphere or global temperature. 

The future is very much too uncertain to have confidence in estimates of what will be happening fifty years from now—for an extended demonstration, see my Future Imperfect. If we follow Nordhaus's current advice and tax carbon now in order to slow warming, it may turn out that the costs were unnecessary or even counterproductive. We may be spending money in order to make ourselves poorer, not richer.

I conclude, on the basis of Nordhaus's own figures and without taking account of my past criticism of his calculations, that he has his conclusion backwards. The sensible strategy is to take no actions whose justification depends on the belief that increased CO2 produces large net costs until we have considerably  better reason than we now do to believe it.

P.S. Bob Murphy raised the question of why I assumed that Nordhaus was giving the cost summed over the rest of the century rather than some other period. After looking through Nordhaus' webbed manuscript and a spreadsheet of his model that he sent me in response to a query by email, I think Bob is correct and I was mistaken. As best I can tell, Nordhaus is running his calculations out to 2305.

If so, that has two implications. 

First, I was too generous in my calculation of annual cost—I should have divided by 291 instead of by 86, reducing the annual cost, in 2012 present value, to about .02% of current world GNP.

Second, Nordhaus writes in his manuscript: "At the same time, we must emphasize that, based on our formal analysis of uncertainty, we have relatively little confidence in our projections beyond 2050." So it looks as though the great majority of the cost he reports is from a period for which he has little confidence in his calculations. Something he did not mention in the NY Review of Books piece I have been commenting on.


10 Comments:

At 1:54 PM, March 15, 2014, Blogger David R. Henderson said...

David, Bob Murphy made this point 2 years ago and I posted about his work here:
http://econlog.econlib.org/archives/2012/05/bob_murphys_cri.html
Also, you actually linked to his piece back then.

 
At 2:15 PM, March 15, 2014, Anonymous MikeP said...

I've been making this point at least since 2006:

Since you bring up Nordhaus, let's look at numbers from his 2000 book, in particular Table 7-3 "Abatement Costs and Environmental Benefits of Different Policies"...

Looking at this table, Nordhaus's optimal strategy may be the best strategy, but the second best strategy is to do absolutely nothing at all. Furthermore, considering how very close the optimal strategy is in its effects to doing nothing at all, any strategy that is much more aggressive is sure to have negative economic impact. Finally, given the improbability that governments can be moved to implement something close to the optimal policy without incurring vast deadweight costs to the economy, doing absolutely nothing about global warming looks like the best deal possible.

 
At 3:04 PM, March 15, 2014, Blogger jimbino said...

Both Friedman and Nordhaus are far too glib in speaking of "net benefits." The reality is that climate doomsayers want to impose costs on living people in order to benefit the yet unborn.

Dumb. We could solve the problem by, inter alia, keeping the unborn unborn. Or does the Constitution or Bible give more votes to parents and prospective parents to account for their parochial interest in continuing to breed and pollute the planet, killing off numerous species of plants and animals?

As I've said before, I've voted against AGW and other future ills with my pecker, which has not been used to help breed us into oblivion, and I don't expect to be taxed to support the breeding of others, like Friedman, who alone need to pay to secure the future of their brood.

It's fun to debate the cost/benefit and other economic concepts, but economics cannot be used to promote breeding over annihilation of the A doing whatever GW.

 
At 6:18 PM, March 15, 2014, Anonymous MikeP said...

I conclude, on the basis of Nordhaus's own figures and without taking account of my past criticism of his calculations, that he has his conclusion backwards.

By the way, it is truly stunning that Nordhaus doesn't come to this conclusion himself and continues to think there's a case for government action on global warming.

The numbers he comes up with are clear: The optimum strategy of taxing the social cost of carbon is simply fine tuning the strategy of doing nothing. And how could it be otherwise? Growth of wealth is exponential. CO2 grows linearly with wealth. And temperature grows sublinearly with CO2. Unless there are striking nonlinearities, the exponential dominates, and the best you can do is tweak it modestly.

But not only does political economic theory tell us that government is incapable of making its entire AGW policy the optimal carbon tax: the empirical evidence that government action will cost far more than it benefits is inescapable. Every single bill, law, and treaty on global warming comes out worse in Nordhaus's model than doing nothing at all. The conclusion should not be to ask governments to execute the optimum policy. The conclusion should be not to ask governments to execute anything at all.

 
At 8:33 PM, March 18, 2014, Anonymous alan moran said...

Interesting comment from Richard Tol on the Nordhous paper that 1.2 degrees would be optimal but that we cannot stop at that level.

Lindzen estimates the doubling of carbon dioxide concentrations would bring an increase of 1.2 degrees (most of which has already happened) and further increases would bring a negligible temperature effect. Lewis and Croc suggest 2 degrees as a best estimate

 
At 8:06 AM, March 19, 2014, Anonymous Martin-2 said...

"It says that [temperatures] have not been rising for more than ten years—which, so far as one can tell from the graph, is true"

Doesn't look that way to me. Doesn't "Changes in Global Mean Temperature" mean this is a graph of a derivative?

 
At 9:15 AM, March 19, 2014, Blogger David Friedman said...

"Doesn't "Changes in Global Mean Temperature" mean this is a graph of a derivative?"

No. If it were the derivative, the units on the vertical axis would be degrees per year.

It's showing the change relative to some baseline, possibly (looking at the graph) the 1890-1910 average.

If in doubt, you can easily enough google for other graphs of global temperature and see the same pattern.

 
At 12:22 PM, March 21, 2014, Anonymous Jack Q said...

Has anyone mentioned that it is really just the period 1980-2000 that shows a clear upward trend? Before 1980 you have ups and downs but the overall increase is tiny and I would guess not statistically significant.

Since recent years have not seen an increase, it means we are really just debating a 20 year period. I am not rejecting that overall the trend is positive, just that it is clearly positive only for a short period (20 years).

 
At 9:27 PM, March 22, 2014, Blogger David Friedman said...

Looking at graphs, 1910 to 1940 is also a pretty striking increase.

 
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