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Economics. Critical assumptions in the Stern Review on climate change.
| Content Provider | Semantic Scholar |
|---|---|
| Author | Nordhaus, William |
| Copyright Year | 2007 |
| Abstract | I n November 2006, the British government presented a comprehensive study on the economics of climate change (1), the Stern Review. It painted a dark picture for the globe, “[I]f we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP [gross domestic product] each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.” The Stern Review recommended urgent, immediate, and sharp reductions in greenhouse-gas emissions. These findings differ markedly from economic models that calculate least-cost emissions paths to stabilize concentrations or paths that balance the costs and benefits of emissions reductions. Mainstream economic models definitely find it economically beneficial to take steps today to slow warming, but efficient policies generally involve modest rates of emissions reductions in the near term, followed by sharp reductions in the medium and long term (2–5). A standard way of showing the stringency of policies is to calculate the “carbon tax,” or penalty on carbon emissions. A recent study by the author estimates an optimal carbon tax for 2005 of around $30 per ton carbon in today’s prices, rising to $85 by the mid–21st century and further increasing after that (5). A similar carbon price has been found in studies that estimate the least-cost path to stabilize CO 2 concentrations at two times preindustrial levels (2). The sharply rising carbon tax reflects initially low, but rising, emissionsreduction rates. We call this the climate-policy ramp, in which policies to slow global warming increasingly tighten or ramp up over time. A $30 carbon tax may appear to be a modest target, but it is at least 10 times the current globally averaged carbon tax implicit in the Kyoto Protocol (shown as Stern assumptions). What is the logic of the ramp? In a world where capital is productive and damages are far in the future (see chart above), the highestreturn investments today are primarily in tangible, technological, and human capital. In the coming decades, damages are predicted to rise relative to output. As that occurs, it becomes efficient to shift investments toward more intensive emissions reductions and the accompanying higher carbon taxes. The exact timing of emissions reductions depends on details of costs, damages, learning, and the extent to which climate change and damages are nonlinear and irreversible. The Stern Review proposes to move the timetable for emissions reductions sharply forward. It suggests global emissions reductions of between 30 and 70% over the next two decades, objectives consistent with a carbon tax of around $300 per ton today, or about 10 times the level suggested by standard economic models. Given that the Stern Review embraces traditional economic techniques such as those described in (2–5), how does it get such different results and strategies? Having analyzed the Stern Review in (6) (which also contains a list of recent analyses), I find that the difference stems almost entirely from its technique for calculating discount rates and only marginally on new science or economics. The reasoning has questionable foundaDepartment of Economics, Yale University, New Haven, CT 06511–8268, USA. E-mail: william.nordhaus@yale.edu Comparing the optimal carbon tax under alternative discounting assumptions. The Dynamic Integrated model of Climate and the Economy (DICE model) (5) integrates the economic costs and benefits of greenhouse-gas (GHG) reductions with a simple dynamic representation of the scientific and economic links of output, emissions, concentrations, and climate change. The DICE model is designed to choose levels of investment in tangible capital and in GHG reductions that maximize economic welfare. It calculates the optimal carbon tax as the price of carbon emissions that will balance the incremental costs of abating carbon emissions with the incremental benefits of lower future damages from climate change. Using the DICE model to optimize climate policy leads to an optimal carbon tax in 2005 of around $30 per ton carbon (shown here as “DICE baseline”). If we substitute the Stern Review’s assumptions about time discounting and the consumption elasticity into the DICE model, the calculated optimal carbon tax is much higher and rises much more rapidly (shown as "Stern assumptions"). 2015 2025 2035 2045 2055 2065 2075 2085 2095 C a rb o n t a x ($ /t o n C ) |
| Starting Page | 3759 |
| Ending Page | 3759 |
| Page Count | 1 |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://piketty.pse.ens.fr/files/Nordhaus2007.pdf |
| Alternate Webpage(s) | http://www.econ.yale.edu/~nordhaus/homepage/nordhaus_stern_science.pdf |
| Alternate Webpage(s) | http://www.econ.yale.edu/~nordhaus/homepage/documents/Stern_review_Science_2007a.pdf |
| PubMed reference number | 17626869v1 |
| Volume Number | 317 |
| Issue Number | 5835 |
| Journal | Science |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Carbon Dioxide Carbon-Carbon Lyases Emission - Male genitalia finding Estimated Financial cost Flatulence Global Warming Gross Domestic Product Guanosine Diphosphate Increment Investments Policy Taxes Twice (Numerical Qualifier) adenotonsillectomy benefit metric ton |
| Content Type | Text |
| Resource Type | Article |
