The Problem With Nordhaus

Friday, August 27, 2021
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William D. Nordhaus, one of the leading economists in studying the effects of global warming, is a first-rate economist. Indeed, he was co-winner of the 2018 Nobel Prize in economics for his work on global warming. Unfortunately, he sometimes abandons economics and even basic reasoning to make his case that global warming is likely to do great harm and that the only solution is a global tax on carbon. I noticed this tendency in his 2012 article in the New York Review of Books. In it, he challenged a Wall Street Journal article by sixteen scientists who were/are global warming skeptics. There’s nothing wrong with challenging them, but Nordhaus did so, in part, by responding to claims they hadn’t made.

Earlier this year, Nordhaus published The Spirit of Green: The Economics of Collisions and Contagions in a Crowded World. In it, he advocates a global tax on carbon, but his style of arguing has, if anything, gotten worse. At various points, he makes his case well, arguing that carbon usage creates a negative externality: a cost imposed on others that users of carbon don’t take account of in their decisions. He distinguishes his own thinking from that of advocates of the Green New Deal, pointing out that the GND is not primarily about environmental policies but about taking income from some and giving it to others. Nordhaus calls this redistribution “fairness,” but at least he doesn’t claim that it’s about the environment or global warming.

Unfortunately, Nordhaus doesn’t seriously consider the arguments of global warming skeptics and instead calls them “deniers.” He also gives short shrift even to his own Dynamic Integrated Climate-Economy (DICE) model, a model whose bottom line is that too high a carbon tax can be more destructive than a zero carbon tax. He also, disappointingly, makes the obligatory attack on the Koch brothers, something I had not seen him do in his previous work. Moreover, Nordhaus claims, incorrectly, that the only way to have an effective policy of global warming is to raise the price of carbon.

What’s to Like

As mentioned above, Nordhaus is a first-rate economist. He has done pathbreaking studies, not just on global warming, but also on the measurement of economic growth and on innovators’ contributions to consumers. Nordhaus showed the enormous contribution to economic growth from just one factor: a decline in the price of light. Lightbulbs, of course, are a huge part of the reason. The price of light in 1992 adjusted for inflation, he showed, was less than one-tenth of 1 percent of its price in 1800. What happens when, all other things equal, the price of an important good or service falls? Economic growth increases. By failing to account fully for this price reduction, he argued, economists have understated the growth rate of the economy and also understated growth in real wages.

Not just light bulbs but innovation generally has contributed to economic growth and economic well-being. But how is the growth from innovation split between the innovators and the consumers who benefit from innovation? In a 2004 study published by the National Bureau of Economic Research, Nordhaus wrote:

Only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

How minuscule? Nordhaus estimated the innovators’ gain to be only 2.2 percent of the overall value they create. The rest is competed away.

Just as there’s much to like in Nordhaus’s work generally, there’s a fair amount to like in his recent book.

In a chapter titled “Green National Accounting,” Nordhaus argues, quite reasonably, that economic growth is mismeasured because it doesn’t take account of the harm that pollution does to people’s well-being. You might think that taking account of this would reduce our estimates of economic growth. Au contraire. Nordhaus points out that because we have so successfully reduced pollution in the past fifty years, economic growth is actually somewhat higher than the official GDP estimates.

Nordhaus also points out that it’s a bad idea to eliminate greenhouse gases as much as technologically feasible because doing so would mean implementing policies that have “extreme costs and minimal benefits.” Instead, he advocates getting rid of greenhouse gases when the costs of doing so are less than or equal to the benefits.

What’s in Between

A big issue to address in advocating a substantial tax on carbon, as Nordhaus does, is what to do with the revenues. Nordhaus estimates that his preferred $40 per ton carbon tax would yield government revenues of $180 billion annually. Earlier in the book, Nordhaus had pointed out that one of the taxes that distort the economy the most is a tax on capital. Such taxes reduce the incentive to invest in capital and, thus, hurt not only owners of capital but also workers and consumers; with less capital, workers are less productive and therefore earn lower wages than otherwise and with less capital there is less output than otherwise, hurting consumers. Taxes on labor income, writes Nordhaus, are less distortionary. So it seems that a ripe target for what to do with the $180 billion would be to substantially reduce taxes on capital, something that could be achieved by cutting the tax rate on corporate income even below the 21 percent rate that was achieved in the 2017 tax reform.

But Nordhaus doesn’t mention that. Instead, he points out that taxes on carbon would be regressive: they would take a higher percent of income from low-income households than from high-income households. And he approvingly cites a study whose bottom line is that the regressivity could be offset by reductions in payroll taxes and personal income tax rates. That’s not a bad choice because those taxes, as noted, are distortionary also. Moreover, it’s way better than per-person rebates, which don’t reduce distortions at all. But it would have been nice to see an economist who has pointed out the tremendous consumer gains from innovation advocate using at least some of the carbon tax revenue to reduce taxes on corporate income, much of which is a payment for innovation that helps consumers of all income classes.

What’s not to Like

I noted earlier that Nordhaus misled his readers in a 2012 article in the New York Review of Books. Here’s one of the ways. In a January 2012 Wall Street Journal op-ed titled “No Need to Panic About Global Warming,” sixteen scientists had written, “Perhaps the most inconvenient fact is the lack of global warming for well over ten years now.” Although Nordhaus claimed this was one of six statements that were either incorrect or misleading, he was the one who was misleading. Nordhaus obfuscated by pointing out that recent temperatures were above those in 1880. The sixteen scientists had not disputed that.

While Nordhaus has never been particularly fair in his treatment of those he disagrees with, he has become even less fair. In a chapter titled “Green Corporations and Social Responsibility,” one of the corporations that he consigns to Dante’s “ninth circle of hell” is ExxonMobil. Why? He claims that the company suppressed the science of climate change and funded “climate deniers.” Nordhaus never tells the reader exactly what a “denier” is, but in context it seems to include those who doubt that global warming is occurring, those who doubt that it will be very harmful, and those who are skeptical about government solutions. In one passage, Nordhaus writes, “I have studied climate science for decades and find it solid and convincing. But there are skeptics.” He seems to be saying that because he, William Nordhaus, finds climate science persuasive and convincing, that should be enough to persuade us. Yet in a 355-page book, Nordhaus hardly discusses the science at all, apparently expecting that an argument from authority is sufficient. And he makes the case against skeptics not by quoting the large number of climate scientists who are skeptics but, rather, by quoting only one scientist and mentioning Donald Trump, US Senator James Inhofe, and an adviser to Vladimir Putin.

Nordhaus doesn’t let up. In a chapter titled “Skeptics of Green,” he introduces the term “incentivized skeptics.” These are people or companies, he writes, “who have economic or political motives to be skeptical of the science, economics, or ethics of Green thinking.” A company that fouls the atmosphere may, for example, “hire hungry scholars to back its activities.” There’s no doubt that there are such scholars. But he doesn’t name any of them. That leaves the careless or credulous reader thinking that almost all scholars who disagree with Nordhaus must be bought off. It’s disturbing enough to see a prominent person make an ad hominem argument. It’s even more disturbing when that person is a Nobel Prize winner who has shown himself capable of making nuanced arguments.

Nordhaus devotes only two pages of his book to his dynamic integrated model of climate and the economy, DICE for short. That’s too bad because one of the conclusions that pop out of the model is that it can be better to have no carbon tax than to have an overly ambitious reduction of carbon. As Robert P. Murphy of the Institute for Energy Research put it:

The 2007 DICE model contains simulations not just of the baseline (no controls) and the optimal carbon tax scenarios, but of many other policies as well. These calculations show that the dangers of an overly ambitious or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted one (that is, the optimal carbon tax scenario). As table 4 indicates, Nordhaus’s optimal plan yields net benefits of approximately $3 trillion (consisting of $5 trillion in reduced climatic damages and $2 trillion of abatement costs). Yet some of the other popular proposals have abatement costs that exceed their benefits. The worst is [Al] Gore’s 2007 proposal to reduce CO2 emissions 90 percent by 2050; DICE 2007 estimated that Gore’s plan would make the world more than $21 trillion poorer than it would be if there were no controls on carbon.

That finding would probably surprise most readers of Nordhaus’s latest book.

When it comes to solutions to global warming, Nordhaus does not even consider an approach different from his, one that has generated substantial interest. He writes, “For any [climate] policy to be effective, it must raise the market price of CO2 and other GHG [greenhouse gas] emissions.” That’s false. Another way to offset global warming is geoengineering, which is the use of technology to prevent a given amount of carbon dioxide from warming the earth.

One thing we learned from the 1991 eruption of Mount Pinatubo in the Philippines is that sulfur dioxide in the stratosphere—the eruption discharged more than twenty million tons—could cool the world. In the two years after the eruption, the earth cooled by 0.5 degrees Celsius. What if, some scientists started to wonder, we could put enough sulfur dioxide in the stratosphere to cool the world or at least offset warming? In their 2009 book, Superfreakonomics, economist Steven D. Levitt and journalist Stephen J. Dubner devote a whole chapter to the idea. They highlight the work of Nathan Myhrvold, who made his fortune as an early employee of Microsoft, in exploring the various technologies. While none of these technologies is yet being used, if any of them worked it would cost a small fraction of the cost of a carbon tax. But we don’t learn any of that from Nordhaus.

But wouldn’t geoengineering intentionally alter the natural state of the earth? Of course it would. But as Myhrvold points out, that’s what burning fossil fuels does too. I would add that that’s what any manmade solution to global warming—nuclear power, solar power, or something else—would do.

It’s possible that Nordhaus wrote his book not to persuade people who are skeptical about government solutions but, rather, to persuade people on the left who want inefficient government solutions and have no understanding that one can cut carbon usage too much. If that was his goal, he may have succeeded. But in doing so, he has advocated a global warming policy—a carbon tax—that may well be orders of magnitude more expensive than other potential policies.