What Is Uncertain in Climate Economics?

One of the central problems of a majority of economic integrated assessment models of climate change is that they mostly ignore or at best underplay all the uncertainty around the problem they try to analyse. Meanwhile, these models are mostly presented in calibrated form, i.e. including concrete values for different variables – just what a cost-benefit analysis is expected to do. Even if there are some confidence intervals specified, they are mostly rather crude and are a kind of sherry-picking of “meaningful” uncertainties. However, the dynamics of the climate itself and the consequences of his changing are profoundly uncertain and full of feedback mechanisms. In the following I would like to present and discuss some major sources of uncertainty in economic climate modelling, arguing that it is even deeper than in “just” climate modelling and that the consequences for standard approaches are profound. Continue reading

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Discounting in the Economics of Climate Change

It was frequently argued that the discount rate is the most important single figure in the economics of climate change. Due to this figure we observe large differences in policy recommendation between different economists of climate change (most notably, the choice of the discount rate determines the difference in what William Nordhaus on the one hand, and Nicholas Stern, on the other, call for). There is no concrete recommendation in standard economics how to discount long run benefits and losses. But it is clear that, if you want to compare benefits from the future with costs today, you need a discount rate. So far agreement prevails. The problem is the definition (or: choice) of the “right” discount rate, which involves economic forecasts as well as ethical decisions. In the following I shall present an overview about the main arguments in the discussion. Continue reading

William Nordhaus’s Preference for Moderate Warming

In many models of the economics of climate change you may find the assumption that moderate warming (mostly something in the range of 2-3° centigrade) would be beneficial in some way or another. One line of argumentation is that people, at least those living in higher latitudes, would prefer this “slight” rise in global mean temperatures. One of the economists working with this assumption is William Nordhaus, who built it into his integrated assessment model DICE. Continue reading

Why Climate Scientists and Economists Cannot Agree

Most climate scientists are calling for immediate and decisive action of the global community needed if we want to prevent global warming from devastating our world. Since they are people who have dealt with the subject professionally for years, there is no reason not to believe them. Nevertheless, distinguished economists who work on climate change (e.g. William Nordhaus or Richard Tol) are calling to slow down, claiming that immediate and decisive action not only is not necessary – it could be harmful to the world economy as well. Whom should one trust? And why the differences? Continue reading