Wednesday, 28 May 2008

Global Warming - Optimist or Pessimist?

Review by Freeman Dyson of A Question of Balance: Weighing the Options on Global Warming Policies by William Nordhaus

Dyson writes a lucid account of Nordhaus' work, which uses the methodology of economics to cost our options for dealing with global warming. In particular, Nordhaus uses "inflation-adjusted dollars", so that losses or gains at any time over the next 100 years can be compared by expressing them in year-2005 dollars.

Dyson has a great many interesting things to say, and his analysis of Nordhaus' results is that the "ambitious" proposals of Al Gore and Sir Nicholas Stern would prove prohibitively expensive, and instead we should develop the science and technology for a low-cost backstop (a technological fix or "silver bullet"), and also pursue an "optimal" policy of a gradually increasing global carbon tax in case the backstop is not discovered.

The overall tone is optimistic; but there is a pessimistic reading of Nordhaus' data as well as an optimistic one: it all depends where you set your datum. If, following the book review, we choose "business as usual" as the reference point (zero), and we present the options in the same order as in the review, then measuring wealth in trillions of inflation-adjusted dollars ($T):

OptionRelative Outcome ($T)
Business as usual0
Kyoto incl US+1
Kyoto excl US0
Low-cost backstop +17

In economic terms, the Stern/Gore policies are the worst possible choices, and this remains true no matter how you present the data.

The "optimal" policy seems relatively benign, compared to "business as usual", but it seems to me that this is the wrong comparison. "Business as usual" includes the considerable economic cost of the environmental damage and lost business opportunities caused by global warming. What we should really compare with is the "low-cost backstop" - this means business as usual but with a low-cost "silver bullet" that will offset the problems of global warming. Without that mitigation, "business as usual" will make the world $17 trillion worse off. Here are the same figures relative to the low-cost backstop, and this time in numerical order:

OptionRelative Outcome ($T)
Low-cost backstop0
Kyoto incl US-16
Kyoto excl US-17
Business as usual-17

The Stern/Gore solutions are still the worst possible choices, and are most unlikely to be adopted. The other results do not give cause for optimism: all the other choices have a much worse outcome than the low-cost backstop or "silver bullet". "Low-cost backstop" really means the wealth that we would be able to create if global warming were not a problem: large deviations from this figure will be economically and politically disruptive. Furthermore, among the other choices there is not a large difference in global financial outcome between the most beneficial solution ("optimal") and the least benefical ("business as usual" or "Kyoto excluding the USA").

There will be a large difference in the details of the different outcomes, particularly in the distribution of the resulting wealth, because the measure of total wealth hides growth in some countries if it is offset by destruction elsewhere. This strongly suggests that each country will pursue the policies that are most favourable to itself, even if they are least favourable to other countries; that the outcome for total global wealth will be only slightly worse than if all countries agreed and implemented an optimal treaty; and that all major and emerging economies will adapt to the new circumstances, but will take a share of the $17T of pain. In this picture, the biggest losers are likely to be the countries whose economic health is determined more by decisions outside than inside their borders: countries that are already poor and have an inflexible rather than an "emerging" economy.

However, the main result is unmistakeable: if global warming occurs, the world will be much less wealthy than if it does not occur. $17T is no small amount - it is the total market capitalisation of all the companies listed on Wall Street.

A further reason for pessimism is that, absent a silver bullet, none of the choices that we can make will cause a large increase in Nordhaus' measure of global wealth over the next 100 years.

If the destruction wrought by global warming will cost $17T in today's prices, then by far the best thing we can do is to invest in the discovery and development of the "silver bullet" technologies that Dyson describes.

The most valuable contribution of Nordhaus' work is to tell us precisely how much more we should spend on that research and development (R&D) before listening to complaints that the total amount spent (rather than the quality, direction, timing and importance of the research) is a waste. $17T buys an awful lot of R&D, even if it spread over 100 years: $170B per year worldwide. By way of comparison, the International Thermonuclear Experimental Reactor (ITER), the global research project into nuclear fusion power, receives $0.5B per year. Under the sustained onslaught of additional R&D, funded at this scale for several decades, many of the problems of global warming will surely yield.