With the Paris UN climate negotiations in December and Senator Whitehouse’s reintroduction of a carbon tax bill, it seems every day we are being hit with some new pro-carbon tax item in the media. This includes political affairs such as the recent G7 announcement on fossil fuel targets, but also academic volleys such as economist William Nordhaus’ review of a hot new climate change book. Yet as we’ll see, Nordhaus unwittingly shows just how weak the case for an aggressive carbon tax really is.
Specifically, Nordhaus reviews Climate Shock: The Economic Consequences of a Hotter Planet, by Gernot Wagner and Martin Weitzman. Now Weitzman is a Harvard economist and one of the leading figures in the pro-carbon tax community, who has provided the intellectual rationale for focusing on the unlikely but catastrophic “tail events” when it comes to climate change.
In the present post I do not want to tackle Weitzman’s claims head-on; earlier I have critiqued the attempted justification of a carbon tax as “insurance,” and in a future IER post I will return to Weitzman’s EconTalk interview. For now, I want to focus on two things that Nordhaus—who is himself a world-renowned pioneer in the economics of climate change—casually mentioned in his book review. These are dirty little secrets in the climate change debate that not many on the pro-tax side discuss.
U.S. Carbon Tax a Bad Deal For Americans
First let’s look at Nordhaus’ candid admission that by its very nature, even if we stipulate the framework of the interventionists a U.S. carbon tax would not pass a cost/benefit test for Americans. Here’s Nordhaus:
For climate change…the temptation of free-riding will push policies toward minimal investments in slowing emissions.…
An illustrative calculation will show why. Suppose that, as the US government estimates, the total global cost of CO2 emissions (called the “global social cost of carbon” or SCC) is $40 per ton. This is calculated from models that trace the impact on all countries of higher carbon emissions on the climate, in the rise of sea levels, in agricultural production, health, storms, and many other factors. In other words, the $40 is the sum of the different national social costs per ton of carbon. Perhaps the national numbers might be $4 per ton for the US, $7 per ton for China, and $1 per ton for Japan. The $40 estimate is uncertain, but the exact number does not matter for this discussion.
A policy to optimize the global benefits of emissions reductions would require a universal carbon price of $40 per ton. Under this policy, countries might set a carbon tax of $40 per ton on all carbon-emitting activities. This would lead to significant reductions in emissions…
Contrast the globally optimal policy I have just described with a free-riding policy. Suppose Japan decides to invest in abatement of CO2 emissions to optimize its own national interest. It would reduce emissions only to the point where the cost would be justified by its national benefits; on this basis, the cost would be no more than its social cost of $1 per ton reduced. It might have a carbon tax of $1 per ton. This would produce far smaller investments than would be justified if Japan had global interests in mind, where it would invest up to a cost of $40 per ton reduced.
If the same logic based on national interest is followed by all countries, then the average level of abatement would be only a tiny fraction of what would be involved in the global policy. Economic models suggest that the average carbon tax based on national interest would be closer to $4 than $40. In other words, when countries look only to their national interest in setting their climate policies, the level of abatement will be close to zero. And this is approximately where we are today. [Nordhaus, bold added.]
Here Nordhaus is simply echoing a point that we at IER have been making for years: When the Obama Administration announces that the “social cost of carbon” is a particular figure, that is a global estimate. The relevant figure for the “social cost of carbon” to people in the United States—using the Obama Administration’s own numbers—could be as low as 7 percent of the global number. It violates standard Office of Management and Budget (OMB) guidelines when analysts plug the official “social cost of carbon” numbers into analyses of federal regulations, because they are supposed to tally up the costs and benefits to Americans of such policies.
Other Responses to Climate Change Far Cheaper Than Emission Cutbacks
In this post, allow me to focus on another dirty little secret in the climate change debate: Using their own numbers, the interventionists implicitly admit that there are far cheaper solutions to containing the catastrophic scenarios, should the need arise in the coming decades. Again, let’s quote from Nordhaus’ own discussion:
There are two ways to slow climate change, and thereby to reduce the likelihood of catastrophic damages. One is the hard slog of reducing emissions. The other is to use geoengineering that attempts to offset the CO2-induced warming.
Wagner and Weitzman provide an illuminating discussion of the dilemmas of geoengineering. Geoengineering here means management of solar radiation—techniques that reflect sunlight back into space and prevent it from warming the earth’s climate. You can think of the process as making the earth “whiter” or more reflective, so that less sunlight is absorbed by the surface of the earth. This cooling effect will offset the warming that comes from the accumulation of CO2 in the atmosphere.
The whitening process is similar to what occurs after large volcanic eruptions. After Mount Pinatubo in the Philippines blasted 20 million tons of sulfur dioxide into the stratosphere in 1991, global temperatures fell by about half a degree centigrade because the particles reflected sunlight away from the earth. Geoengineering can be understood as creating artificial volcanic eruptions, where several artificial Pinatubo-sized eruptions may be needed every year to offset the warming effects of CO2 accumulation.
Many proposals have emerged to whiten the earth. These, along with many of the ethical, political, national security, and environmental dimensions of such projects, are discussed in a recent report by the National Academy of Sciences. The standard approach is to deliver sulfur-bearing compounds, presumably specially engineered ones that would act as small mirrors, into the lower stratosphere. A number of techniques have been proposed to do this, such as using naval guns, aircraft, or rockets. Recent studies indicate that such geoengineering can lower global temperatures at very low cost relative to other approaches, such as reducing carbon emissions.
Even though the costs are low and the average impacts on temperature are clear, the dangers are frightening, as is emphasized by Wagner and Weitzman as well as by the National Academy report. The NAS committee concludes that climate “modification strategies are limited primarily by considerations of risk, not by direct costs.” Among the risks are the facts that geoengineering does nothing to reduce the ocean acidification caused by increased CO2; that countries would need to keep a program going virtually forever; that there is a mismatch between the cooling and heating effects; and that there is a high likelihood for redistribution of precipitation in the different regions of the world. An effective program would require virtual unanimity in international governance so as to reduce political frictions among countries. [Nordhaus, bold added]
What is fascinating is that if you go to the actual book review and read the full discussion, you will see that Nordhaus wonders whether scientists should even be conducting cursory experiments to learn more about geoengineering options.
Why in the world would interventionists who think the fate of humanity hangs in the balance not want scientists to broaden the options at our grandchildren’s disposal? What they fear is that if the public realizes there are techniques “on the shelf” that could very quickly and cheaply bring down global temperatures, then it would be hard to get humanity whipped up into a frenzy in spending trillions of dollars to merely reduce the probability of a future unlikely “fat tail” catastrophe.
Remember, the cutting-edge case for aggressive intervention against emissions has stopped trying to claim that a high carbon tax will likely produce large net benefits. For example, in this post I use the latest IPCC report to show that in the most likely future scenario, the economic costs of limiting temperature to 2 degrees Celsius of warming will exceed the benefits of avoided climate change damage.
So already the aggressive interventionists have to make the “fat tail” argument of Weitzman and others—they have to say a disaster might occur if humans keep pumping lots of carbon dioxide into the atmosphere. But then in that case, it becomes very relevant to know that one of the leading geoengineering proposals would cost $250 million total to limit Earth’s warming. That’s less than Al Gore’s foundation is spending to “raise awareness” on the issue of climate change.
In contrast, if governments around the world implemented Nordhaus’ suggested “optimal carbon tax,” then his own model (in the 2008 calibration which I study here) shows that it would impose economic costs on the world of $2.2 trillion (see Table 4 at the link) in present-value terms.
Does anyone like that deal? Spending $2.2 trillion (in the form of forfeited conventional economic growth) merely to reduce the probability of catastrophe—because after all, we still might have a disaster even with a carbon tax—rather than waiting a bit longer to get more information, knowing that we’ve got the ability to indefinitely postpone global warming for a total cost of $250 million?
Conclusion
William Nordhaus is a pioneer and expert on the economics of climate change. His discussion of a new book reveals two items that should surprise the average American. First, if the U.S. were to implement the type of carbon tax that is being discussed in policy circles, all of the economic costs but less than 10 percent of the benefit would accrue to Americans. If Americans want to engage in foreign aid via a carbon tax, then political officials will no doubt cater to that choice—but this is hardly the way things have been described to the voters.
Second, Nordhaus alludes to the awkward fact that there are technological proposals in the wings for dealing with the unlikely “fat tail” climate outcomes at a cost of about one-ten-thousandth of the “optimal” carbon tax. Yes, there are all sorts of potential downsides with such proposals too, but on the other hand crippling economic growth for billions of people in poor countries is a downside of a large carbon tax, too.
The simple reality is that climate change is not the existential crisis requiring immediate government action that the alarmists have been trying so hard to invent. The careful reader can learn this reality by simply reading the very materials put out by the IPCC, Obama Administration, and leading experts on climate change economics.
NOTE: An earlier draft of this article erroneously said that both Weitzman and Nordhaus questioned the value of geoengineering research, but it has been edited to reflect that the concerns were only Nordhaus’.
