Some People Are Just Lucky

In a review of William Nordhaus' new book, Climate Casino: Risk, Uncertainty and Economics for a Warming World,  Paul Krugman reveals that he was Nordhaus' undergraduate research assistant at Yale for the first Integrated Assessment Model. 

Forty years ago a brilliant young Yale economist named William Nordhaus published a landmark paper, “The Allocation of Energy Resources,” that opened new frontiers in economic analysis.¹ Nordhaus argued that to think clearly about the economics of exhaustible resources like oil and coal, it was necessary to look far into the future, to assess their value as they become more scarce—and that this look into the future necessarily involved considering not just available resources and expected future economic growth, but likely future technologies as well. Moreover, he developed a method for incorporating all of this information—resource estimates, long-run economic forecasts, and engineers’ best guesses about the costs of future technologies—into a quantitative model of energy prices over the long term.

The resource and engineering data for Nordhaus’s paper were for the most part compiled by his research assistant, a twenty-year-old undergraduate, who spent long hours immured in Yale’s Geology Library, poring over Bureau of Mines circulars and the like. It was an invaluable apprenticeship. My reasons for bringing up this bit of intellectual history, however, go beyond personal disclosure—although readers of this review should know that Bill Nordhaus was my first professional mentor. For if one looks back at “The Allocation of Energy Resources,” one learns two crucial lessons. First, predictions are hard, especially about the distant future. Second, sometimes such predictions must be made nonetheless.

Of course, these models have both their uses and abuses like any model.  One of the problems, of course, is that damages are a non linear function of the warming and that is hard to capture if the economic world, the one we function in has never experienced such conditions.  For example, since progress, encapsulated as an increase in world GDP, is assumed to grow, one finds that economic damage in IAM models tends, shall one say, to be charitable, to be limited for even global warmings of 10 C.  There is a lot of misplaced confidence by practisioners of IAMism.  Krugman explains

However it’s done, how ambitious should an emissions reduction program be? There’s an international consensus that we should aim to limit the temperature rise to 2°C; sure enough, Nordhaus goes into full debunking mode here: “The scientific rationale for the 2°C target is not really very scientific.” Instead, he argues for cost-benefit analysis—but this leads him to an only slightly higher target: his best estimate of the optimal climate policy if done right would limit the temperature rise to 2.3°C.

The qualifier “if done right” is important. Stabilizing temperature rise in the 2–3 degree range already requires very large reductions in CO2 emissions, albeit reductions that Nordhaus (and just about all serious energy economists) believe can be achieved at only moderate cost, given sufficient lead time.

While the NYRB does not have a comments section, Krugman has written a lead in on his blog where bunnies can comment