On October 8th the Royal Swedish Academy of Sciences announced the winners of the 2018 Nobel Prize of Economics. This year, two American economists, Paul Romer of NYU and William Nordhaus of Yale University, will share the prestigious award for their work on understanding how we “create long-term sustained and sustainable economic growth”[1]. Nordhaus’s research is particularly interesting since it focuses on the relationship between economic growth and climate change. His work on the topic began in the 1970’s as climate scientists were beginning to understand the effects that emissions from burning fossil fuels have on the climate. Nordhaus was concerned about these findings and as an economist, he set out to forecast the future economic damages associated with each emitted ton of carbon dioxide, which he called the Social Cost of Carbon (SCC). In the 1990’s, Nordhaus developed his Dynamic Integrated model of Climate and the Economy (DICE), which allowed him to model the estimated total costs of reducing emissions according to different scenarios and the ensuing environmental damages.
Many climate advocates support the implementation of carbon pricing schemes as a way to force companies to internalize the cost associated with their emissions – either by imposing a carbon tax or through an emission trading system, where companies can buy and sell “emission allowances” in an open marketplace. Such a system provides an incentive for companies to reduce their emissions in the most cost-effective ways and effectively promotes the development of cleaner technologies by making it more expensive to emit CO2.[2] Critics of these emission trading schemes, on the other hand, point out that Nordhaus’ model actually shows that the costs of making the emissions reductions required to meet the IPCC’s target of a 1.5 Celsius warming of the atmosphere would far outweigh the economic damages of a “business as usual” scenario.[3] Even though Nordhaus’ optimal carbon tax (from a purely economic perspective) would reduce the total cost of climate change by more than 20%, it would lead to a 3.5 Celsius warming by the year 2100.[4] While some point out that the economic cost of climate change with an “optimal” carbon tax is only 2% of total world income, the significant consequences to our natural environment as well as to vulnerable populations around the world are impossible to put a price on.
While these scenarios may seem discouraging, there is still hope. For example, Nordhaus’ DICE model assumes relatively modest technological advancement and that “negative emissions” technologies will be introduced eventually, but not until the year 2150.[5] If such technologies can be fast-tracked and implemented at scale much sooner, the negative environmental impacts may be significantly reduced. One of the ways Abacus is “expanding what’s possible with money” is by investing in some of the companies advancing these technologies.
Resources:
[1] www.nobelprize.org/prizes/economics/2018/press-release/
[2] www.edf.org/climate/how-cap-and-trade-works
[3] https://www.instituteforenergyresearch.org/climate-change/william-nordhaus-vs-the-u-n-on-climate-change-policy/
[4] https://www.nber.org/papers/w22933.pdf
[5] https://www.nber.org/papers/w22933.pdf
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