A matter of degrees

For economists interested in climate change, some news.  The long awaited regional version of Bill Nordhaus'  DICE model is now out. (Actually it’s been out since February, but I just got to it...) It’s called RICE with the ‘R’ standing for Regional.  A quick overview of some of the key results can be downloaded here.

Nordhaus is one of the earliest and most prominent climate modelers in the economics profession.  He and Nicholas Stern are often set up as the two book ends of the climate change economists’ spectrum.  I believe their differences are not that great.

True, Stern is a passionate advocate for early and ambitious action, while Nordhaus supports a gradual approach to climate mitigation, as denoted by the title of his book A Question of Balance. Stern’s assumptions -- high climate sensitivity and climate damages, a long time horizon, combined with low discount rates and mitigation costs -- are also very different from Nordhaus’ -- lower climate sensitivity and damages, a shorter time horizon, and a higher discount rate.  


Yet, setting them up as polar opposites is wrong.  Why?  The two economists do differ in their definition of the economically optimal temperature at which to stabilize the climate with Nordhaus’ earlier model suggesting a much higher optimum concentration - 750 ppm- than Stern’s - 500 to 550 ppm.  But Nordhaus does carefully note the need for caution in his book.  Let me quote: “The final message of this book is a simple one: Global warming is a serious problem that will not solve itself.[…] There is no case for delay.” (p28). 

And as we discuss in the overview of the WDR2010 (box 3), a closer look at Nordhaus's results in A question of Balance also reveals that there is only a small difference in overall costs between   his and Stern’s optimum. Nordhaus points out that this difference can be thought of as an “insurance premium” and that those who are conscious of the tremendous uncertainty inherent to climate (and economic) modeling may well want to spend money on this insurance premium.

The new RICE results are important for at least two reasons. 

• First, they confirm the fact that Stern and Nordhaus are far from representing opposing schools.  The new RICE results suggest a much lower optimal CO2 concentration than previously presented in A Question of Balance (download pdf) —  581 ppm CO2, corresponding to temperature warming peaking at 2.7oC and declining thereafter.  This is not so far from to Stern’s 2.3oC. 
   
• Second, the RICE results show that even a 2oC scenario has a positive net present value relative to a base “do-nothing” scenario, and that the difference between his optimum and 2oC is very small.  Again, this confirms the notion that prudence (or the insurance premium) is affordable even under Nordhaus’ assumptions.

And of course RICE is one of the very few models out there that disaggregate results by region.  For the moment, the manuscript does not spell these out in great detail but presumably more will come.