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Business Management Book Store > Business Management books beginning with Q
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A Question of Balance: Weighing the Options on Global Warming Policies |
Author: William D. Nordhaus
Published: 2008-06-24 |
List price: $28.00
Our price: $22.40
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As of: November 21st, 2008 03:25:38 PM
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Customer comments on this selection.
 Misguided plea for another tax on energy
William Nordhaus, Sterling Professor of Economics at Yale University, urges a global carbon tax to cut carbon emissions.
He admits, "on the side of climate damages, our knowledge is very meagre." Yet he then writes that his `best guess' is that climate damage will cost 2.5% of world output per year by 2100, if emissions are not cut. But the Intergovernmental Panel on Climate Change says that with the forecast 3oC increase, "Globally, the potential for food production is projected to increase." What could be more important than increasing food production?
Nordhaus rightly attacks three recent proposals: the Stern Review's proposal, backed by the Brown government, of an 85% global cut in emissions by 2050, Al Gore's proposed 90% cut in US emissions by 2050, and the German government's proposal to cut global emissions to 50% of 1990's levels by 2050. Nordhaus points out that all three proposals would cause great damage, because they would all cost huge amounts in the short term, about $17-22 trillion each.
Nordhaus also attacks the Kyoto Protocol as too dear. Its adherents hurt themselves by adding to their production costs. He admits that a stronger Kyoto "would involve strenuous efforts virtually without precedent among international agreements."
But so would the global carbon tax that he proposes. If every nation imposed the tax, it would cost $2 trillion. He says that this tax should be $27 per ton of carbon at first. In the USA, this would add 9 cents to the price of a gallon of petrol and 10% to the price of coal-generated electricity. The total US tax take would be $50 billion a year. He wants the tax to rise to $90 per ton by 2050 and to $200 by 2100.
But any country fool enough to impose this tax would force its energy-using industries abroad to some country that didn't impose the tax. So the tax wouldn't cut global emissions, but it would cut living standards in countries that imposed it.
 Essential evaluation of the economics of ameliorating global warming
The author accepts global warming as a given and a very serious problem. He considers what we can do about it at what cost. His approach is to create a computer model in which he hopes to capture the salient economic, energy and climate factors while being simple enough that it can be understood and run repeatedly with different scenarios. I am not an economist and and the equations and their import were often beyond my understanding. I relied on Professor Nordehaus's academic standing (Stirling Professor of Economics at Yale and coauthor of a standard economics text with Paul Samuelson) and took him to be fair in his assessments. I thought he was thorough is his descriptions of the limitations of this approach and his model which I would describe as an economic and cost benefit analysis over time of various strategies for ameliorating global warming.
To understand his model you must understand how future losses from climate change are "discounted" by economists. Freeman Dyson explains this as follows "the value of one dollar invested at an average interest rate of 4 percent for a period of one hundred years would be fifty-four dollars ... therefore, for every dollar spent now on a particular strategy to fight global warming, the investment must reduce the damage caused by warming by an amount that exceeds fifty-four dollars in one hundred years' time to accrue a positive economic benefit to society."
Nordhaus runs his model under eight varying assumptions and or goals so that they can be compared 100 and 200 years out.
1) captures the cost of doing nothing to which the others can be compared.
2) is an optimal policy economically without constraints of eventual temperature or CO2 increase. It only spends on abatement when in costs less than doing nothing.
3) constrains allowable CO2 to 1.5, 2.0 and 2.5 times the pre-industrial level in separate runs.
4) constrains the eventual temperature increase to 1.5, 2.0, 2.5 and 3.0 degrees C. in separate runs.
5) runs several variants of the Kyoto agreement, with and without the US and with an improved treaty.
6) evaluates the Stern review proposal (early major carbon reduction).
7) evaluates the Gore proposal (early stringent carbon reduction).
8) evaluates the result of finding a cheap non-carbon energy source for all energy needs.
For the results let me quote Nordhaus: "The net present-value global benefit of the optimal policy is $3 trillion relative to no controls. This total involves $2 trillion of abatement costs and $5 trillion of reduction climate damages. Note that even after the optimal policy has been taken, there will still be substantial residual damages from climate change, which we estimate to be $17 trillion More of the climate damages are not eliminated because the additional abatement would cost more than the additional reduction in damages."
Note that less than 25% of the economic damage is prevented because it is not cost effective in the "optimal" policy to prevent the rest and thus global temperature increases 2.7 C. (about 5 F.) by 2100. There is also large scale damage for which a dollar amount cannot be assigned and is thus omitted from the model. This includes loss of species, discomfort of higher temperatures, displacement of human, animal and plant populations, shifting weather patterns etc.
Limiting atmospheric CO2 to two times pre-industrial levels or limiting the temperature increase to 2.5 C. produce very similar results to the "optimal" policy. Limiting CO2 to 1.5 times pre-industrial or temperature to 1.5 C. has a net loss of $14 trillion (damages plus abatement costs) over doing nothing. The Gore proposal produces similar results but costs $21 trillion. The Kyoto proposal results where almost identical to doing nothing!
The model also computes an optimal carbon tax for each strategy which because of the discounting needs to increase gradually over time. For the "optimal" strategy the carbon tax would be $27 per ton initially, $90 per ton in 2050 and $200 per ton in 2100. Note that because CO2 is 3.2 times as heavy as carbon if you tax CO2 the rate would be 3.2 times lower or just over $8 initially. Nordhaus also discusses the advantages of a carbon tax over a cap and trade approach.
These results surprised me. I had assumed that the Kyoto Agreement approach, although flawed, could be good if modified and joined by the US and that the Gore approach would be even better. I was annoyed by those who proposed putting the major carbon restrictions off to the future which seemed to push the problem onto our children. I though a cap and trade approach would be superior to a carbon tax since if guaranteed specific reductions. What makes this such an important book from my point of view is that I found myself to be so frequently wrong. The approaches I had favored turned out to be either relatively ineffective, much more expensive or both. This is not a book for those who do not want their current conceptions challenged.
Findings I found important include: 1) A moderate carbon tax with gradual increase is much more cost effective in achieving the SAME GOAL as a stiff initial tax. This was by far the most surprising to me. 2) total participation is much much more efficient that partial whether it is nations or industries. 3) A carbon tax has several important advantages over a cap and trade system. 4) The cost of the various approaches varies dramatically in ways I would not have predicted. 5) There is a huge gain in finding alternative energy sources early in the game making research a top priority deserving large public investment.
This is a book about economic tradeoffs - a question of balance. The author is clear that these models do not capture esthetic, moral, species extinction, stewardship and other concerns which policy makers must address. For instance, the "optimal" economic approach leaves our great grandchildren in a world 5 degrees warmer, with many fewer species, and major environmental shifts. I myself would probably opt for a less economically "optimal" approach that preserved more of the world as I know it and takes fewer risks about possible positive feedback loops leading to an escalating and uncontrollable heat gain. We can make these political decisions more rationally when we can estimate the costs of alternatives. Other things being equal, we would like to arrive at a chosen result at the least cost. I believe that professor Nordhaus's continuing work is a major advance toward helping us achieve that goal.
It is important to remember that this is a simplified model for which the inputs are often best guesses and that some crucial unknown features may turn out to have been omitted. I expect the model will improve over time as more data is accumulated.
If you do not wish to buy the book I think most of the material can be found and the author's website (Google: William Nordhaus). Again I think this is a very important book and I consider it a must for those setting global warming amelioration policy.
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