Friday, May 11, 2012

More on Nordhaus and Global Warming

In a blog post a while back, I pointed out that William Nordhaus's work on the economics of global warming demonstrated a serious problem with policy arguments based on externalities—the risk, in dealing with something as uncertain as costs and benefits over the next century, that the calculation of externalities will be biased in the direction that produces the result the person doing the calculation wants. Nordhaus included, as an essential part of his argument, an estimate of the expected cost from low probability/high cost outcomes of permitting global warming but made no attempt to include the cost of equivalent outcomes from preventing it—although there is no strong reason to assume that the current global climate is optimal, and so that any change will produce costs but not benefits.

Robert Murphy has webbed a detailed response to a recent Op-Ed by  Nordhaus on global warming, dealing with a variety of other issues. Among his points:

1. Climate models have, on average, overpredicted warming, suggesting that a better estimate would be about 2/3 the current predictions of such models.

2. The paper which Nordhaus cites as supporting the claim that CO2 is a pollutant actually provides evidence that net externalities are positive over a temperature range representing about the next fifty or sixty years of predicted rise, and go negative only after that.

3. Nordhaus's own work finds that the optimal policy to reduce global warming, coordinated among all nations of the world, produces net benefits, but that some proposed policies, including one proposed by Gore, produce much larger net costs. 

One point Murphy did not make but that is worth noting is that the benefits of climate control, on Nordhaus's own figures, are not very large. The optimal policy—for obvious reasons not likely to occur—is calculated to produce a net benefit of about three trillion dollars. That sounds like a lot of money—until one recognizes that it is spread over the entire world and about ninety years. That makes the annual benefit of the ideal policy about 33 billion dollar a year—roughly one percent of the current U.S. federal budget or one tenth of a percent of current world income. 

Which suggests that, with a less ideal and more realistic policy, net costs are likely to be larger than net benefits.


At 6:47 PM, May 11, 2012, Blogger Bob Murphy said...

Thanks for the discussion. One thing to be careful about though: Nordhaus' calculation of net benefits of $3 trillion (for the optimal carbon tax) was a PDV of all future costs and benefits. So I don't think it's right to just divide that number by 90 and call it "benefits per year" the way I think you are doing in your post.

I guess to do a benefits/year you'd want to take the $3 trillion figure and ask yourself how much could you consume per year, with a given interest rate, so that the $3 trillion is just depleted after the 90th year.

(What is going on in Nordhaus' model, is that there are enormous net benefits in later years--relative to the no-tax baseline--but of course they get heavily discounted in bringing them forward to today's reckoning.)

At 7:58 AM, May 12, 2012, Blogger jimbino said...

Why should any rational non-breeder care what the hell happens after he's dead, or, for that matter, any breeder after his kids are dead?

Because the Bible says so?

A sensible policy would be to do nothing and just put potential breeders on notice that the world might be a hotter place for their descendants.

At 9:50 AM, May 12, 2012, Blogger SheetWise said...

"Nordhaus' calculation of net benefits of $3 trillion (for the optimal carbon tax) was a PDV of all future costs and benefits."

The belief that 90 years of cost/benefit can be reduced to PDV is just silly.

At 11:44 AM, May 12, 2012, Anonymous Anonymous said...


You seem to make the assumption that being rational requires one to be selfish.

Rationality means choosing the most effective way to reach your goals. For various reasons, many people want this world to be a happy place for future generations, and fight for this result with both rational and, unfortunately, irrational strategies.

At 11:20 PM, May 12, 2012, Blogger Kelsey said...

"Why should any rational non-breeder care what the hell happens after he's dead, or, for that matter, any breeder after his kids are dead?"

I find your emphasis on "rational non-breeder" interesting. What do irrational non-breeders think? Might they be the ones who, regardless of their choices regarding their families, care what happens to their race and their planet? Concern for our fellow man--and, following on that, a general morality--does not need to be rooted in religion. I agree that the most sensible policy is to do nothing, but not for the cavalier and careless reasons you imply.

At 1:32 AM, May 14, 2012, Blogger Jonathan said...

Interesting argument here. Kelsey, I wonder on what basis you think it rational to care what happens to your race and your planet after you're dead?

It is quite common for people to care, but surely on the basis of sentiment rather than reason. I'd like to think of the human race continuing and thriving long after I'm dead, but I can think of no good reason why I should feel that way. It's just an irrational, subjective preference.

As for the planet, if humanity dies out, I imagine it will gradually repair itself and reach some new equilibrium. Perhaps, in time, a new intelligent species will arise. But I can't bring myself to care very much about what happens in that scenario.

At 2:43 AM, May 14, 2012, Blogger Grant McDermott said...

David, I have a fairly detailed response to Bob here that you might be interested in. (Quasi summary here.) Please take special note of the quote by Richard Tol at the bottom.

At 5:23 AM, May 14, 2012, Anonymous martin said...


I wonder on what basis you think it rational to care what happens to your race and your planet after you're dead

On what basis would it be rational to care about anything?

At 6:25 AM, May 14, 2012, Blogger Jonathan said...

This comment has been removed by the author.

At 6:31 AM, May 14, 2012, Blogger Jonathan said...

Martin, I think your question is as unanswerable as mine. Caring about anything is a matter of subjective preference.

Some people care deeply about the future of humanity, many care about it moderately (but not enough to do much about it), and I suppose some care next to nothing about it.

Probably people would care more about the future of humanity if they had eternal youth and could expect to see more of it.

At 7:30 AM, May 14, 2012, Blogger jimbino said...

I believe it is rational for a person to seek pleasure and avoid pain. For that reason, it is irrational to sacrifice current pleasure that depends on 100W light bulbs for indeterminate pleasure of faceless future generations.

I do feel that extermination of the human race would make the rest of the planet rejoice.

Anyway, folks who feel otherwise have no rightful claim to my earnings or wealth to secure their idea of a proper planet well after we are gone. Let the breeders pay for the distant future.

At 8:01 AM, May 14, 2012, Blogger Jonathan said...

Jimbino, if it's rational to seek pleasure and avoid pain, then it's rational for people to seek to protect the future of humanity if the idea of its extinction gives them pain and the idea of its thriving gives them pleasure.

On the other hand, if people don't care about the future of humanity then it's equally rational for them to do nothing about it.

I agree with you that people should use their own resources to pursue their own objectives.

At 9:41 AM, May 14, 2012, Blogger jimbino said...

Yes, Jonathan, I quite agree.

I don't mind that Roman Catholics enjoy suffering in the present in order to secure eternal bliss.

It's just that I'd declare war on them if they forced me to join in their superstition.

At 10:24 PM, May 14, 2012, Blogger David Friedman said...


Thanks for the link; I find your defense of Nordhaus less persuasive than you do, but that would be a long argument.

One point of interest to me ... . You appear to take it for granted that net externalities are negative, at least past two degrees or so. Have you posted anywhere a rebuttal to the argument I have made here? In particular, how do you deal with my point that Nordhaus demonstrates the problem with the "add up the externalities" methodology when he includes, as an important part of his (webbed) paper, an estimate of high cost/low probability negative externalities, but ignores the positive equivalent--although there is little a priori reason to assume the former more likely tha the latter? More generally, can you offer any reason to expect that net externalities from (slow) climate change will be large and negative?

At 5:37 AM, May 17, 2012, Blogger Fearsome Pirate said...

It's not rational to think higher CO2 levels will lead to the extinction of humanity. The amount of warming necessary to cause mass extinction is far beyond a few degrees centigrade and probably can't be induced by CO2 alone.

At 10:24 PM, June 26, 2012, Anonymous Anonymous said...

Several career changes ago, I was a spectroscopist with an interest in CO2. With an eye to potential funding, I sat in on the climate seminars. I concluded that the correlation between atmospheric CO2 and warmer temperatures was real (and this has improved since then). I also concluded that we had little concept of the nature of the Earth's carbon balance. However, my interest in funding was frustrated by the climate modelers because they did not want to improve the experimental parameters they used: their computer simulations were such that changing numbers in one area destabilized the models. (This was long ago and I expect the climate models are much better now.)

The real problem is not the if there is a correlation between atmospheric CO2 levels and the Earth's temperature: it is what to do about it. How can we say what the remediation will require or the costs and benefits if we have little knowledge about the Earth's carbon balance? Three trillion over 90 years to do what in terms of the equilibrium between various forms of carbon?

At 5:57 PM, October 19, 2013, Anonymous baju bola said...

For various reasons, many people want this world to be a happy place for future generations, and fight for this result with both rational and, unfortunately, irrational strategies.

At 10:06 PM, June 04, 2014, Anonymous cara mengecilkan paha said...

Hello David, I really like this article. Incidentally, I live in Indonesia so hot that if during the day. This may result from global warming .. Every day I am uncomfortable working because the rooms were hot and no air vents.

If left alone can be dangerous to my country some years to come.


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