Breakthrough Institute: What Climate Economics Can't Tell Us

Our latest for Scientific American.

With an economically optimal carbon price in place, global carbon emissions would actually continue to rise through the rest of this century, increasing about 50 percent from current levels. Atmospheric concentrations of carbon would stabilize at almost 600 parts per million, about 15 percent below what they would otherwise be but well above the 450 ppm level that scientists and political leaders have targeted as key to avoiding catastrophic climate change.

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Squaring our desire to mitigate climate change with the stubborn realities of the global energy economy will require that we accelerate the rate at which our technologies improve, a process that economists still don’t understand very well and their models have little capability to predict.
China, India and the rest of the world will start building clean-energy technologies when they offer a clear economic advantage in the present, not generations hence. Imagining that climate mitigation might proceed under any other circumstances represents no less a denial of reality than does pretending that climate change doesn’t exist. 

"Allay or Adapt? The Real Climate Change Debate Is about Technology"

Oct 2, 2014 |By Ted Nordhaus and Michael Shellenberger

In the run-up to the United Nations climate meetings in New York City last week the media served up two seemingly contradictory studies. The first concluded that global carbon emissions over the last decade have risen, thanks mostly to rapid economic growth in China and India. The second, put out by Lord Nicholas Stern and a cast of international luminaries and entitled The New Climate Economy, claimed that the transition to a clean-energy economy will be positive—short-term benefits associated with cleaner air and long-term benefits associated with a cooler climate will overwhelm the cost of moving away from fossil fuels.
How do we resolve the cognitive dissonance created by these two reports? If clean energy is really such an obvious economic choice, why are China and India still building coal-fired power plants as fast as they can? For that matter, why is Germany?
The answer lies in what models can and can’t tell us about the economics of climate change. Despite claims to the contrary, most sources of clean energy are still more costly than fossil fuels. Sure, the cost of solar and wind energy have dropped, but their continuing reliance on heavy subsidies says all you need to know about their real cost. Nuclear has proved surprisingly cheap to build across much of Asia but remains in most places a hedge against overdependence on imported coal and natural gas. And the ability to capture carbon from fossil-fuel plants at costs that are remotely economical remains to be demonstrated.
You wouldn’t know any of this from looking at leading climate economic models, which treat technologies as mostly undifferentiated inputs and innovation as a smoothly occurring process that materializes, literally, from nowhere. For instance, these models couldn’t have accounted for the shale gas revolution in the U.S., which has led to rapid reductions in emissions at great benefit to its economy nor for the costs and difficulties of integrating highly intermittent renewables into Germany’s electrical grid.
Using standard economic approaches to bounding uncertainties and projecting technological change, climate economic models find that climate mitigation is a zero-sum game: How much economic growth should we sacrifice today to avoid costly climatic impacts a generation or two hence? Optimal policies to mitigate and adapt to climate change, economists tell us, won’t cost the global economy very much in the grand scheme of things—on the order of 1 percent of total global GDP over the course of the next century. But that is in no small part because they won’t reduce emissions very much either.
With an economically optimal carbon price in place, global carbon emissions would actually continue to rise through the rest of this century, increasing about 50 percent from current levels. Atmospheric concentrations of carbon would stabilize at almost 600 parts per million, about 15 percent below what they would otherwise be but well above the 450 ppm level that scientists and political leaders have targeted as key to avoiding catastrophic climate change.
More significant emissions cuts—on the order of those advocated by economists like Stern—cost significantly more to implement. But it doesn’t take much twisting of the dials on the models to conclude that deeper emissions cuts will be a boon economically. Assume greater climate damages or a lower social discount rate—meaning how much we discount the value of future social returns in relationship to present-day investments—and models will tell you that higher levels of current spending are justified. Assume higher rates of technological change and the trade-offs between the costs and benefits of present-day action disappear entirely. Stern, notably, has done all three in recent years.
These debates are unlikely to be resolved empirically anytime soon. But they are being resolved rather decisively in the real world. Developing countries, faced with a choice between energy development for poor populations and mitigating climate risk for future generations, have consistently chosen the former; they are building new, fossil-based energy infrastructure as fast as they can.
Indeed, the discussions about climate policy among economists have begun to take on a similar surreal quality to those that have characterized policy discussions at the U.N.’s climate confabs. Climate economists argue, for instance, for a globally harmonized carbon tax even as they acknowledge the extraordinary moral, political and economic obstacles to asking the average African to pay the same toll on her emissions as the average European. The solution, some have suggested, is large income transfers from wealthy nations to poor ones, an even more unlikely measure than a global tax on carbon.
Beyond the spin, much of The New Climate Economy study is a good deal more pragmatic than what has passed for conventional economic wisdom about climate change in recent years. The report acknowledges that pricing policies in the real world are likely to be much less efficient and far-reaching than the ones economists depict in their models. This suggests we should not be so quick to dismiss alternative pathways, such as old-fashioned command-and-control regulations and direct subsidies for clean-energy technologies, as unnecessarily costly and inefficient.
The report also says that most of the benefits of climate mitigation policies in the short term will come in the form of public health co-benefits from reduced air pollution, suggesting that climate advocacy will be well served to move away from debates over climate science and apocalyptic doomsaying, instead focusing on the multiple benefits in the near term of moving toward cleaner energy sources. It acknowledges that any plausible path toward climate mitigation will involve a lot of nuclear energy, carbon capture and natural gas, pushing back against the delusional claims of the mainstream environmental movement that deep reductions in emissions can be accomplished with present-day wind, solar and energy-efficiency technologies alone.
Most important, the report recognizes explicitly that cost-effective climate mitigation hinges on continuing significant innovation across all available low-carbon energy sources. Squaring our desire to mitigate climate change with the stubborn realities of the global energy economy will require that we accelerate the rate at which our technologies improve, a process that economists still don’t understand very well and their models have little capability to predict.
China, India and the rest of the world will start building clean-energy technologies when they offer a clear economic advantage in the present, not generations hence. Imagining that climate mitigation might proceed under any other circumstances represents no less a denial of reality than does pretending that climate change doesn’t exist.

Ted Nordhaus and Michael Shellenberger are chairman and president, respectively, of the Breakthrough Institute and co-authors of Break Through: From the Death of Environmentalism to the Politics of Possibility (Houghton Mifflin, 2007).

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