Dreams of Earth and Sky (12 page)

If this chapter were widely read, the public understanding of global warming and possible responses to it would be greatly improved.

Nordhaus examines five kinds of global-warming policy, with many runs of DICE for each kind. The first kind is “business as usual,” with no restriction of carbon dioxide emissions—in which case, he estimates damages to the environment amounting to some $23 trillion in current dollars by the year 2100. The second kind is the “optimal policy,” judged by Nordhaus to be the most cost-effective, with a worldwide tax on carbon emissions adjusted each year to give the maximum aggregate economic gain as calculated by DICE. The third kind is the Kyoto Protocol, in operation since 2005 with 175 participating countries, imposing fixed limits to the emissions of economically developed countries only. Nordhaus tests various versions of the Kyoto Protocol, with or without the participation of the United States.

The fourth kind of policy is labeled “ambitious” proposals, with two versions that Nordhaus calls “Stern” and “Gore.” “Stern” is the policy advocated by Sir Nicholas Stern in the
Stern Review
, an economic analysis of global-warming policy sponsored by the British
government.
†
“Stern” imposes draconian limits on emissions, similar to the Kyoto limits but much stronger. “Gore” is a policy advocated by Al Gore, with emissions reduced drastically but gradually, the reductions reaching 90 percent of current levels before the year 2050. The fifth and last kind is called “low-cost backstop,” a policy based on a hypothetical low-cost technology for removing carbon dioxide from the atmosphere, or for producing energy without carbon dioxide emission, assuming that such a technology will become available at some specified future date. According to Nordhaus, this technology might include “low-cost solar power, geothermal energy, some nonintrusive climatic engineering, or genetically engineered carbon-eating trees.”

Since each policy put through DICE is allowed to run for one or two hundred years, its economic effectiveness must be measured by an aggregated sum of gains and losses over the whole duration of the run. The most crucial question facing the policymaker is then how to compare present-day gains and losses with gains and losses a hundred years in the future. That is why Nordhaus chose
A Question of Balance
for his title. If we can save M dollars of damage caused by climate change in the year 2110 by spending one dollar on reducing emissions in the year 2010, how large must M be to make the spending worthwhile? Or, as economists might put it, how much can future losses from climate change be diminished or “discounted” by money invested in reducing emissions now?

The conventional answer given by economists to this question is to say that M must be larger than the expected return in 2110 if the 2010 dollar were invested in the world economy for a hundred years at an average rate of compound interest. For example, 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; this would be the future value of one dollar in one hundred years’ time. 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. If a strategy of a tax on carbon emissions results in a return of only forty-four dollars per dollar invested, the benefits of adopting the strategy will be outweighed by the costs of paying for it. But if the strategy produces a return of sixty-four dollars per dollar invested, the advantages are clear. The question then is how well different strategies of dealing with global warming succeed in producing long-term benefits that outweigh their present costs. The aggregation of gains and losses over time should be calculated with the remote future heavily discounted.

The choice of discount rate for the future is the most important decision for anyone making long-range plans. The discount rate is the assumed annual percentage loss in present value of a future dollar as it moves further into the future. The DICE program allows the discount rate to be chosen arbitrarily, but Nordhaus displays the results only for a discount rate of 4 percent. Here he is following the conventional wisdom of economists. Four percent is a conservative number, based on an average of past experience in good and bad times. Nordhaus is basing his judgment on the assumption that the next hundred years will bring to the world economy a mixture of stagnation and prosperity, with overall average growth continuing at the same rate that we have experienced during the twentieth century. Future costs are discounted because the future world will be richer and better able to afford them. Future benefits are discounted because they will be a diminishing fraction of future wealth.

When the future costs and benefits are discounted at a rate of 4
percent per year, the aggregated costs and benefits of a climate policy over the entire future are finite. The costs and benefits beyond a hundred years make little difference to the calculated aggregate. Nordhaus therefore takes the aggregate benefit-minus-cost over the entire future as a measure of the net value of the policy. He uses this single number, calculated with the DICE model of the world economy, as a figure of merit to compare one policy with another. To represent the value of a policy by a single number is a gross oversimplification of the real world, but it helps to concentrate our attention on the most important differences between policies.

Here are the net values of the various policies as calculated by the DICE model. The values are calculated as differences from the “business as usual” model, without any emission controls. A plus value means that the policy is better than “business as usual,” with the reduction of damage due to climate change exceeding the cost of controls. A minus value means that the policy is worse than “business as usual,” with costs exceeding the reduction of damage. The unit of value is $1 trillion, and the values are specified to the nearest trillion. The net value of the optimal program, a global carbon tax increasing gradually with time, is plus three—that is, a benefit of some $3 trillion. The Kyoto Protocol has a value of plus one with US participation, zero without US participation. The “Stern” policy has a value of minus fifteen, the “Gore” policy minus twenty-one, and “low-cost backstop” plus seventeen.

What do these numbers mean? One trillion dollars is a difficult unit to visualize. It is easier to think of it as $3,000 for every man, woman, and child in the US population. It is comparable to the annual gross domestic product of India or Brazil. A gain or loss of $1 trillion would be a noticeable but not overwhelming perturbation of the world economy. A gain or loss of $10 trillion would be a major perturbation with unpredictable consequences.

The main conclusion of the Nordhaus analysis is that the ambitious proposals, “Stern” and “Gore,” are disastrously expensive; the “low-cost backstop” is enormously advantageous if it can be achieved; and the other policies, including “business as usual” and Kyoto, are only moderately worse than the optimal policy. The practical consequence for global-warming policy is that we should pursue the following objectives in order of priority: (1) Avoid the ambitious proposals. (2) Develop the science and technology for a low-cost backstop. (3) Negotiate an international treaty coming as close as possible to the optimal policy, in case the low-cost backstop fails. (4) Avoid an international treaty making the Kyoto Protocol policy permanent. These objectives are valid for economic reasons, independent of the scientific details of global warming.

There is a fundamental difference of philosophy between Nordhaus and Stern. Chapter 9 of Nordhaus’s book explains the difference, and explains why Stern advocates a policy that Nordhaus considers disastrous. Stern rejects the idea of discounting future costs and benefits when they are compared with present costs and benefits. Nordhaus, following the normal practice of economists and business executives, considers discounting to be necessary for reaching any reasonable balance between present and future. In Stern’s view, discounting is unethical because it discriminates between present and future generations. That is, Stern believes that discounting imposes excessive burdens on future generations. In Nordhaus’s view, discounting is fair because a dollar saved by the present generation becomes fifty-four dollars to be spent by our descendants a hundred years later.

The practical consequence of the Stern policy would be to slow down the economic growth of China now in order to reduce damage from climate change a hundred years later. Several generations of
Chinese citizens would be impoverished to make their descendants only slightly richer. According to Nordhaus, the slowing down of growth would in the end be far more costly to China than the climatic damage. About the much-discussed possibility of catastrophic effects before the end of the century from rising sea levels, he says only that “climate change is unlikely to be catastrophic in the near term, but it has the potential for serious damages in the long run.” The Chinese government firmly rejects the Stern philosophy, while the British government enthusiastically embraces it. The
Stern Review
, according to Nordhaus, “takes the lofty vantage point of the world social planner, perhaps stoking the dying embers of the British Empire.”

The main deficiency of Nordhaus’s book is that he does not discuss the details of the “low-cost backstop” that might provide a climate policy vastly more profitable than his optimum policy. He avoids this subject because he is an economist and not a scientist. He does not wish to question the pronouncements of the Intergovernmental Panel on Climate Change, a group of hundreds of scientists officially appointed by the United Nations to give scientific advice to governments. The IPCC considers the science of climate change to be settled and does not believe in low-cost backstops. Concerning the possible candidates for a low-cost backstop technology he mentions in the sentence I previously quoted—for example, “low-cost solar power”—Nordhaus has little to say. He writes that “no such technology presently exists, and we can only speculate on it.” The “low-cost backstop” policy is displayed in his tables as an abstract possibility without any details. It is nowhere emphasized as a practical solution to the problem of climate change.

At this point I return to the Keeling graph, which demonstrates
the strong coupling between atmosphere and plants. The wiggles in the graph show us that every carbon dioxide molecule in the atmosphere is incorporated in a plant within a time of the order of twelve years. Therefore, if we can control what the plants do with the carbon, the fate of the carbon in the atmosphere is in our hands. That is what Nordhaus meant when he mentioned “genetically engineered carbon-eating trees” as a low-cost backstop to global warming. The science and technology of genetic engineering are not yet ripe for large-scale use. We do not understand the language of the genome well enough to read and write it fluently. But the science is advancing rapidly, and the technology of reading and writing genomes is advancing even more rapidly. I consider it likely that we shall have “genetically engineered carbon-eating trees” within twenty years, and almost certainly within fifty years.

Carbon-eating trees could convert most of the carbon that they absorb from the atmosphere into some chemically stable form and bury it underground. Or they could convert the carbon into liquid fuels and other useful chemicals. Biotechnology is enormously powerful, capable of burying or transforming any molecule of carbon dioxide that comes into its grasp. Keeling’s wiggles prove that a big fraction of the carbon dioxide in the atmosphere comes within the grasp of biotechnology every decade. If one quarter of the world’s forests were replanted with carbon-eating varieties of the same species, the forests would be preserved as ecological resources and as habitats for wildlife, and the carbon dioxide in the atmosphere would be reduced by half in about fifty years.

It is likely that biotechnology will dominate our lives and our economic activities during the second half of the twenty-first century, just as computer technology dominated our lives and our economy during the second half of the twentieth. Biotechnology could be a great equalizer, spreading wealth over the world wherever there is
land and air and water and sunlight. This has nothing to do with the misguided efforts that are now being made to reduce carbon emissions by growing corn and converting it into ethanol fuel. The ethanol program fails to reduce emissions and incidentally hurts poor people all over the world by raising the price of food. After we have mastered biotechnology, the rules of the climate game will be radically changed. In a world economy based on biotechnology, some low-cost and environmentally benign backstop to carbon emissions is likely to become a reality.

Global Warming: Looking Beyond Kyoto
is the record of a conference held at the Yale Center for the Study of Globalization in 2005.
‡
It is edited by Ernesto Zedillo, the head of the Yale Center, who served as the president of Mexico from 1994 to 2000 and was chairman of the conference. The book consists of an introduction by Zedillo and fourteen chapters contributed by speakers at the conference. Among the speakers was Nordhaus, contributing “Economic Analyses of the Kyoto Protocol: Is There Life After Kyoto?,” a sharper criticism of the Kyoto Protocol than we find in his own book.