The Climate Casino
By William Nordhaus (2013)
Nordhaus is a Sterling Professor of economics at Yale. He has worked on integrating climate change and economics for over 45 years and in 2018 was awarded a Nobel prize for his efforts. He pioneered the first integrated assessment models (IAMs) which connect projections of population, incomes, and carbon emissions with climate change modelling, damages, and emissions abatement to try and find solutions which will maximise global welfare.
The Climate Casino walks the reader through the workings of IAMs such as his DICE model and highlights why Nordhaus believes limiting warming to less than 2⁰C is not possible and that shooting for 3-4⁰C provides the best socio-economic outcome. Nordhaus tells us why capital markets left alone will not solve climate change and he champions a carbon tax as his policy solution of choice. He estimates equivalent damages at just a couple of percentage points of GDP using his descriptive discount rate. These conclusions don’t sit well with many climate scientists and environmentalists who believe he underestimates future damages and aggressively discounts the welfare of future generations.
Climate Casino is an accessible introduction on integrated modelling (if you want the detail see his manual for DICE) and, regardless of your viewpoint, offers a clear understanding of how traditional economics deals with climate change. It also provides a basis to better understand the limitations of IAMs, many of which use aggregated damage functions (missing many climate impacts and tipping points risks) or exogenous technology cost assumptions (forced upon the model by the user). Perhaps it was fitting that the co-recipient of the Nobel Prize went to Paul Romer whose work has been to incorporate endogenous technological change in economic models; where human labour is not simply treated as mechanical work, but can also generate new ideas and increase productivity. Later versions of IAMs (such as WITCH) have begun to include ideas of endogenous change such as technological experience curves or R&D: a development which I believe will show switching to net-zero will be cheaper than fossil fuels.
*Book cover credit: iStockphoto /Jason Lugo
