February 11, 2014
Economist Says Best Climate Fix A Tough Sell, But Worth It
We often talk about climate change as a matter of science. But the biggest questions are really about money. How much would it cost to fix the problem — and what price will we pay if we don't?
The man who invented the field of climate economics 40 years ago says there's actually a straightforward way to solve the problem. William Nordhaus has written a book that lays it out in simple terms.
Nordhaus has been at Yale University since 1967. Now 72 years old, he has silver hair and a warm demeanor. His ideas about climate change, he says, date to 1974, when he was a research scholar in Austria doing energy research and happened to share an office with a climatologist, who told him, " 'This is where energy research is going to be going,' " Nordhaus remembers. "I said, 'Well, OK, tell me about it.' And that's how it started."
Despite some scientific interest in climate change at the time, the topic "was zero on the intellectual Kelvin scale in economics," Nordhaus says. "There was nothing at that point."
He started to grapple with the basic problem: Climate change was looming because people were burning cheap fossil fuels.
Carbon dioxide is now building up in the atmosphere faster than ever, and each extra ton increases the risk of sea level rise, shifting climate and other changes that are likely to cost a huge amount of money to address in the future.
Right now, nobody pays for that, and it wasn't even clear what the price should be until Nordhaus started running the numbers.
"When we did our first calculations, they actually spun out these 'shadow prices,' " he says. "And I remember looking at them and trying to think ... what in the world does that mean?"
The shadow prices, he realized, actually represented the cost of putting carbon dioxide into the atmosphere. And with that, climate change suddenly became a problem that could be attacked with the tools of economics.
"Actually from an economic point of view, it's a pretty simple problem," he says.
If people would simply pay the cost of using the atmosphere as a dump for carbon dioxide, that would create a powerful incentive to dump less and invest in cleaner ways to generate energy. But how do you do that?
"We need to put a price on carbon, so that when anyone, anywhere, anytime does something that puts carbon dioxide in the atmosphere, there's a price tag on that," he says.
His colleagues say that inspiration — now taken for granted — makes Nordhaus a prime candidate for a Nobel Prize. A lot of his work has been figuring out how big a price we should pay, and what form it should take.
It could be a carbon tax — preferably in place of other taxes. Or it could be a cap-and-trade system, where polluters buy and trade the rights to put carbon in the air. California and Europe are putting policies like this in place.
"The real point of the pricing is not to gouge people, not to extract resources from people. It's to tilt the playing field in such a way that people, firms, government — everybody moves toward carbon-free or low-carbon activities," he says.
Nordhaus has laid out how to do this in his book, Climate Casino. The not-so-subtle point of the title is that we're gambling with our future if we don't do anything about climate change.
And Nordhaus knows that the challenge isn't the economics — it's human behavior.
His studies show that it makes economic sense to start paying the price now, even though the benefits would be decades away.
"That's a pretty tough one," he admits. "We have to be grown-ups, I think. There are lots of things we do where the investments come way, way in the future. Educating 4-year-olds ... that's an investment that goes way into the future as well."
But for such a plan to affect climate, at least half the planet needs to cooperate, he says, or it will be all pain and no gain.
Nordhaus is hardly a saber rattler on this subject. Though he sees the potential for very serious problems down the road, he still says that some climate change can actually be good for agriculture — at least up to a point. And he says we shouldn't do any more to address climate change than makes economic sense, even if that means letting the planet warm more than the international target of 2 degrees Celsius.
His calm approach has at times infuriated environmental activists, who are dismayed at the pace of global action.
"What can I say about calm?" he replies when asked about that. "I like to think of the economics as a cool head in the service of a warm heart, and that's my approach to this."
People who have been dubious about climate change have, over the years, quoted Nordhaus' work to argue that it doesn't require urgent action. But lately, urgency has been creeping into Nordhaus' voice.
"At some point you move from 'calm' to 'concerned,' " he says. "I'm not at 'panic,' but there are some pretty deep concerns about what's going on — particularly at the slow pace of the steps that countries are taking to deal with climate change."
The numbers he details in his book argue that the world can actually afford to take the steps we need to rein in climate change — provided that we make smart choices about how to do it.