The Climate Casino | Book Review

Nov 22, 2015Fall 2015

Risk, Uncertainty, and Economics for a Warming World
By William Nordhaus

The year 2015 is a critical year for climate change policy. Leaders, negotiators, nonprofits, and other stakeholders from most nations in the world will gather in Paris for the United Nations Climate Change Conference (COP21) to establish a binding and universal agreement on climate—a post-Kyoto Protocol agreement. The nations are charged with a decision so important that what will be agreed upon will have implications for generations to come. What makes it difficult to agree on climate change policy are the vast uncertainties:

How fast will the world economy grow?
What technologies 
will be available to reduce greenhouse gases?

These questions are difficult for any economist or energy technology expert to forecast. Perspectives on these questions are largely what drive the divergent estimates of CO2 emissions across simulation models from scientists all over the world, leading to a wide range in the predicted increase in the planet’s temperature. The decisions this year by global leaders need to be made in a world of deep uncertainty.

Can society wait to revolve the uncertainties before we act?

William Nordhaus, in his most recent book on climate change, brings together the best available scientific and economic evidence to answer the fundamental questions about climate change policy and concludes that global society needs to take immediate actions based on the best science and choose cost-effective policies. While there have been several books on the science behind climate change, this book fills in a significant gap dealing with the societal aspects of climate change—why climate change is an economic problem, the economic costs
and damage, comparison of policies to slow change, and international spill-overs and bargaining.

Essential questions of climate policy—how much, how fast, and how costly?

Nordhaus, a professor of economics at Yale University, is arguably the most well-known economist working on climate change and has made significant contributions. He is a pioneer in the development of integrated economic and scientific models to determine the most efficient (least costly) ways for coping with climate change, known as the DICE and RICE models. These models have been used in cost-benefit analyses of climate mitigation strategies in prestigious reports such as that of the United Nations. Interestingly, Nordhaus has been critical of the well-known Stern Review, which called for immediate, bold actions on climate change. In this book, he attempts to offer scientific and economic arguments in detail for why, when, and how of climate change policy.

Nordhaus’s logic and policy conclusions are clear and persuasive. The book starts by surveying the current science of global warming and concludes that the planet will experience warming greater than it has seen for more than a half-million years. It then analyzes the potential impacts from climate change on different sectors of the economy and concludes that the impact will be costly and grave for human and natural systems that are “unmanaged” in low-income and tropical regions, including rain-fed agriculture, seasonal snow packs, coastal communities, river runoff, and natural ecosystems. In contrast, “highly managed” sectors in developed economies, including irrigated and modernized agriculture, are likely to adapt to climate change at low cost.

These macro-level conclusions are courageous since there will be winners and losers even within the highly managed sectors and firms. However, it offers a broad-brush rule of thumb when societies need to prioritize in allocating limited resources for adaptation. Nordhaus alerts the readers to “tipping points,” which can lead to sudden or irreversible changes at a large scale that humans cannot manage with existing technologies. Nothing novel here.

The highlight of the book is in much of its second half, when Nordhaus digs deeply into the essential questions of climate policy—how much, how fast, and how costly. Nordhaus argues, and concludes convincingly, that we need to adopt policies targeting around +2 degrees Celsius. More importantly, to do so, we must raise the price of carbon and other greenhouse gas emissions.

Higher prices become an incentive for consumers to prefer low-carbon goods, for producers to curb emissions, and for entrepreneurs to develop low-carbon technologies—leading to a low-carbon economy. Nordhaus compares carbon tax and cap-and-trade to other existing and more politically palatable programs—including a gas tax, tighter auto standards, and weatherization tax credits—and shows that raising the price of carbon through a carbon tax and cap-and-trade are by far the most cost-effective among those policies.

The last few chapters discuss climate politics: denial of science among U.S leaders and ignorance of the public, society’s sensitivity to any taxes, nationalism, and free-riding—whereby some countries benefit from others’ mitigation efforts but don’t do their perceived fair share—being the obstacles to international agreement. He emphasizes that most nations must be part of the agreement for it to succeed. While this has been said by others before, Nordhaus’s suggestion of using trade sanctions as penalty for free-riding or neglecting climate agreements is interesting.

In this critical year for international climate policy, this book may be worthwhile for anyone who desires a practical and in-depth understanding of the economics of climate change.

Nordhaus covers the key concepts of economics related to climate change and policy, and does so in language clear enough for non-economists but also with enough details to give a wide range of readers food for thought.

— Emi Uchida


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