How much will climate change cost, and how much should we – or anyone – spend to avoid that cost? One answer that’s received a lot of attention in the past few days is contained in the work of Bill Nordhaus, who won the economics Nobel, in part for his work developing the Dynamic Integrated Climate Economic (DICE) model to answer pressing questions about how policymakers should respond to climate change.
DICE, like similar “integrated assessment models”* such as PAGE and FUND, attempts to identify the rate at which policymakers can apply a price on greenhouse gas emissions, by calculating a “social cost of carbon” (SCC). A key component of that SCC is the discount rate. As Brendan pointed out yesterday, this is basically choosing how much or how little we care about our children’s futures, and putting it into a model with the guise of objectiveness and precision. This idea – that our wealth today is more important than risks to others tomorrow – equates to a low SCC that justifies limited action to cut emissions (Nordhaus’s recent work lands on a $31/tonne rate for the US; consistent with about 2.5°C of warming).
The SCC number, of course, is the result of numerous inputs, variables, and assumptions. The discount rate is the most obviously troubling one, but there are more. A paper by MIT economist Robert Pindyck titled “Climate Change Policy: What do the models tell us?” begins with the sentence “Very little.” It goes on to provide a brief list of IAM problems: