The Climate Casino: Risk, Uncertainty, and Economics for a Warming World

the_climate_casino

“Risk varies inversely with knowledge.”
— Irving Fisher

Charles C. Mann calls economist William Nordhaus’ book, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, “[a]mong the most lucid, calm analyses of climate change I’ve come across.” That was enough for me to give it a look.

In the book, Nordhaus sets out to “put global warming in perspective so that concerned citizens can understand and come to an informed judgment about it.”

I will use the metaphor that we are entering the Climate Casino. By this, I mean that economic growth is producing unintended but perilous changes in the climate and earth systems. These changes will lead to unforeseeable and probably dangerous consequences. We are rolling the climatic dice, the outcome will produce surprises, and some of them are likely to be perilous. But we have just entered the Climate Casino, and there is time to turn around and walk back out.

Life on earth is fragile.

Although our world is huge and seems impervious to human insults, life on earth is in fact a fragile system. It is full of organisms, linked together in a complex web of relationships, all of which are made possible by the warmth of the sun and the protection of the atmosphere.

Global warming is one of the most defining issues of our time. “It ranks along with violent conflicts and economic depressions as a force that will shape the human and natural landscapes for the indefinite future,” Nordaus writes. It’s also an incredibly complex subject involving multiple disciplines: climate science, ecology, engineering, economics, politics, and international relations to name but a few.

The book is organized into five parts. In the first part, Nordhaus surveys the science of global warming. Concluding:

Current climate change is increasingly caused by human activities. The major driver of global warming is the emissions of CO2 from the burning of fossil fuels. CO2 concentrations in the atmosphere were 280 parts per million (ppm) in 1750 and have reached 390 ppm today. Models project that, unless forceful steps are taken to reduce fossil fuel use, they will reach 700– 900 ppm by 2100. According to climate models, this will lead to a warming averaged over the globe in the range of 3– 5 ° C by 2100, with significant further warming after that. So unless there is either a major slowdown in economic growth or strong steps to curb CO2 emissions sharply, we can expect continued accumulations of CO2 emissions in the atmosphere—and the resulting global warming with all its consequences.

Part two lays out the impacts of climate change. Nordhaus argues that the major concern is not temperature per se, but rather the effects on human and natural systems.

Scientists are particularly concerned about “tipping points” in the earth’s systems. These involve processes in which sudden or irreversible changes occur as systems cross thresholds. Many of them operate at such a large scale that they are effectively unmanageable by humans with existing technologies. Four important global tipping points are the rapid melting of large ice sheets (such as Greenland), large-scale changes in ocean circulation such as the Gulf Stream, feedback processes where warming produces more warming, and enhanced warming over the long run. These tipping points are particularly dangerous because they are not easily reversed once they are triggered.

The third part discusses “the economic aspects of strategies to slow climate change.”

Economics points to one inconvenient truth about climate-change policy: For any policy to be effective, it must raise the market price of CO2 and other GHG emissions. Putting a price on emissions corrects for the underpricing of the externality in the marketplace. Prices can be raised by putting a regulatory tradable limit on amount of allowable emissions (“ cap and trade”) or by levying a tax on carbon emissions (a “carbon tax”). A central lesson of economic history is the power of incentives. To slow climate change, the incentive must be for everyone—millions of firms and billions of people spending trillions of dollars—to increasingly replace their current fossil-fuel-driven consumption with low-carbon activities. The most effective incentive is a high price for carbon.

Raising the price on carbon will achieve four goals. First, it will provide signals to consumers about which goods and services are carbon intensive and should therefore be used more sparingly. Second, it will provide signals to producers about which inputs are carbon intensive (such as coal and oil) and which use less or no carbon (such as natural gas or wind power), thereby inducing firms to move to low-carbon technologies. Third, it will give market incentives for inventors, innovators, and investment bankers to invent, fund, develop, and introduce new low-carbon products and processes. Finally, a carbon price will economize on the information that is required to undertake all these tasks.

Part four examines the central questions of climate change policy.

While all approaches agree on the three central principles— universal participation, equalizing marginal costs in all uses in a given year, and increasing stringency over time— there are big differences among analysts on the stringency of policies. Our analysis suggests that policy should aim for limiting temperature to a range between 2 ° C and 3 ° C above preindustrial levels (here taken to be the 1900 temperature) depending upon costs, participation rates, and discounting. The lower target is appropriate if costs are low, participation rates are high, and the discount rate on future economic impacts is low. A higher target would apply for high costs, low participation rates, and high discounting.

An effective policy must necessarily be global in scope. Earlier treaties (such as the Kyoto Protocol) were ineffective because they provided no incentives to encourage participation. Countries have strong incentives to free ride on the efforts of others because emissions reductions are local and costly while the benefits are diffuse and distant over space and time. An effective global arrangement will need an effective mechanism to encourage participation and discourage free riding. The most promising approach is to impose import tariffs on the products and services of nonparticipants. This will be sufficiently burdensome that it will encourage most countries to participate in an international climate regime.

Finally, in the last part, Nordhaus tackles some reality. Tragedy of the commons anyone?

One major reason for the slow progress is the nationalist dilemma, which leads to free riding. Countries that do not participate in a global agreement to reduce emissions get a free ride on the costly abatement undertaken by other countries. This incentive leads to a noncooperative free-riding equilibrium in which few countries undertake strong climate-change policies— a situation that closely resembles the current international policy environment. They speak loudly but carry no stick at all. A link whereby nonparticipants are penalized through international trade tariffs would help alleviate the free-riding syndrome.

It’s also easy to push the costs onto future generations.

Nordhaus argues there are three things we can do today to slow the trajectory of global warming.

circular flow

First, people around the world need to understand and accept the gravity of the impacts of global warming on the human and natural world. Scientists must continue intensive research on every aspect from science to ecology to economics to international relations. People should be alert to the trumped-up claims of contrarians who find a thousand reasons to wait for decades to take the appropriate steps.

Second, nations must establish policies that raise the price of CO2 and other greenhouse-gas emissions. While such steps meet resistance— like our aversion to taking foul-tasting medicine— they are essential elements for curbing emissions, promoting low-carbon technologies, and thereby inoculating our globe against the threat of unchecked warming. Moreover, we need to ensure that actions are global and not just national. While politics may be local, and the opposition to strong steps to slow warming comes from nationalistic attitudes, slowing climate change requires coordinated global action.

Third, it is clear that rapid technological change in the energy sector is central to the transition to a low-carbon economy. Current low-carbon technologies cannot substitute for fossil fuels without a substantial economic penalty on carbon emissions. Developing economical low-carbon technologies will lower the cost of achieving our climate goals. Moreover, if other policies fail, low-carbon technologies are the last refuge for achieving our climate goals. Therefore, governments and the private sector must intensively pursue low-carbon, zero-carbon, and even negative-carbon technologies.

In The Climate Casino: Risk, Uncertainty, and Economics for a Warming World will help you be more informed and thoughtful in the climate change arena.