tag:theconversation.com,2011:/us/topics/economics-of-climate-change-60712/articlesEconomics of climate change – The Conversation2019-11-14T15:44:42Ztag:theconversation.com,2011:article/1258022019-11-14T15:44:42Z2019-11-14T15:44:42Z‘4°C of global warming is optimal’ – even Nobel Prize winners are getting things catastrophically wrong<figure><img src="https://images.theconversation.com/files/301727/original/file-20191114-26259-5axsru.jpg?ixlib=rb-1.1.0&rect=5%2C67%2C3445%2C2229&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some places are hotter than others – but what happens when they all heat up?</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/POqJeWrVfnU">Calvin Hanson/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>William Nordhaus was awarded the 2018 Nobel Prize in Economics for <a href="https://www.nobelprize.org/prizes/economic-sciences/2018/nordhaus/facts/">“integrating climate change into long-run macroeconomic analysis”</a>. </p>
<p>This implies that he worked out what global heating means for our economy, given what climate scientists say will happen to our planet. </p>
<p>But Nordhaus’s predictions of what global heating will cost the earth are dangerously at odds with the science.</p>
<p>In his <a href="https://www.nobelprize.org/prizes/economic-sciences/2018/nordhaus/lecture/">Nobel Prize lecture</a>, Nordhaus described a 4°C increase in global average temperature as “optimal” — that is, the point at which the costs and benefits of mitigating climate change are balanced.</p>
<p>In a <a href="https://doi.org/10.1257/aer.109.6.1991">subsequent academic paper</a> based on this lecture, he stated that “damages are estimated to be 2 percent of output at a 3°C global warming and 8 percent of output with 6°C warming”. This is a trivial level of damage, equivalent for the 6°C warming case to a fall in the rate of economic growth over the next century of less than 0.1% per year.</p>
<p>Nordhaus’s conclusions are based in part on the <a href="https://www.jstor.org/stable/2118029">simple but wayward assumption</a> that the weak relationship between temperature and GDP within the US today can be used to assume how future global temperature rises will affect the economy.</p>
<p>For example, the coldest state in mainland US is North Dakota, with an average temperature of 4.9°C and a high GDP per head – US$67,000 in 2018. Slightly warmer states such as New York (9.0°C, US$73,000) tend to have higher GDPs, while the hottest state – Florida, at 22.1°C – has a lower GDP (US$43,000). This implies that past a certain point, higher temperatures reduce GDP, but the relationship is very weak: huge changes in temperature result in relatively small changes in income.</p>
<p>If it were true that this weak relationship could be applied to global temperature change, then global warming would indeed be nothing to worry about. However, the relationship between temperature and GDP within one country today tells you absolutely nothing about how the world will change if global temperatures rise by 10°C.</p>
<p>This can be hard to grasp, since we’re talking about the truly unknown – humanity has never experienced global temperatures that high. But we can assess how unrealistic Nordhaus’s work is because it predicts exactly the same damages for a fall in global temperature as it does for a rise. It predicts, for example, that both a 4°C rise and a 4°C fall in temperature would reduce global GDP by 3.6%.</p>
<p>The average global temperature during the last Ice Age was <a href="http://prairieclimatecentre.ca/2016/10/four-degrees-of-separation-lessons-from-the-last-ice-age/">4°C cooler than today</a>. There’s no way we can accurately predict what GDP would be in such a cool world today, but we know that most of Europe north of Berlin, and of America north of New York, would be <a href="https://www.nature.com/articles/nature1091">under a kilometre of ice</a>. To argue that this would cut GDP by just 3.6% is simply absurd.</p>
<h2>Trillions at stake</h2>
<p>Indeed, estimates from climate scientists based on relatively conservative figures from the IPCC suggest that limiting global warming to 1.5C instead of 2C are likely to <a href="https://thebulletin.org/2018/06/benefits-of-curbing-climate-change-far-outweigh-costs/">save trillions of dollars</a> by 2100, even accounting for the costs of increased action. Uncertainties in climate modelling mean that this analysis is <a href="http://www.lse.ac.uk/GranthamInstitute/news/researchers-warn-of-big-increase-in-economic-costs-if-cuts-in-greenhouse-gas-emissions-are-delayed/">by no means definite</a>. But given the distinct possibility that 2°C of warming could <a href="https://theconversation.com/hothouse-earth-heres-what-the-science-actually-does-and-doesnt-say-101341">set off a cascade of “tipping points”</a> that cause the planet to irreversibly heat to catastrophic temperatures, can we afford to play with fire?</p>
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<span class="caption">Recent research indicates that climate change will not only severely harm GDP, but greatly increase the frequency of banking crises too.</span>
<span class="attribution"><a class="source" href="https://www.nature.com/articles/s41558-019-0607-5.epdf?shared_access_token=Lnnd2-_BacL7QbG0gs87mNRgN0jAjWel9jnR3ZoTv0NuGmsDfPePDgSG52wnCi9REvWnBntSTVWBV0mx9ZljjlDTo2zZ45GkB0xWu5y6zZvvoaRURjDXhBYVj25dMDaFbZW75a8QOmhUJnK57SRuhA%3D%3D">Kai Pilger/Unsplash/Nature Climate Change</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>The risk to organised human civilisation of sending Earth into a nightmare <a href="https://theconversation.com/hothouse-earth-heres-what-the-science-actually-does-and-doesnt-say-101341">“hothouse” state</a> should be sufficient alone to justify the higher cost of a decarbonisation timescale compatible with 1.5°C. Even if letting warming reach 2°C or above turned out to be more cost-effective, the saved money is not worth the moral costs of species extinctions, habitat destruction, and forcing climate refugees from their homes.</p>
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<a href="https://theconversation.com/hothouse-earth-heres-what-the-science-actually-does-and-doesnt-say-101341">Hothouse Earth: here's what the science actually does – and doesn't – say</a>
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<p>The faith that William Nordhaus and others have in the <a href="https://stephenschneider.stanford.edu/Publications/PDF_Papers/NordhausSM.pdf">“incredible adaptability of human economies”</a> is almost admirable in a sense. But that adaptability has occurred in a remarkably stable climate where global temperatures have fluctuated by 1°C below or above the average for the last 10,000 years. If that climate stability breaks down, then human adaptability will almost certainly break down with it.</p>
<p><a href="https://www.pnas.org/content/115/33/8252">Many climate scientists</a> are now calling for the focus on economy efficiency and incremental change that economists have taken to global warming <a href="https://twitter.com/MichaelEMann/status/1163565539454783489?s=20">to be abandoned</a>. When supposedly respected experts disagree so fundamentally over an issue, it would be understandable for the public to switch off. But in this case, such a reaction would be wildly dangerous.</p>
<p>Just as energy companies have been accused of paralysing the political response to climate change, the trivialising of the dangers of climate breakdown by mainstream economists has <a href="https://books.google.co.uk/books?hl=en&lr=&id=ovbMCwAAQBAJ&oi=fnd&pg=PR2&dq=Economic+models+of+climate+change+:+a+critique.&ots=ZJNdRKnKBu&sig=Zoh-kzEZ1-D62Alru_Rtz7Pl3CE#v=onepage&q=Economic%20models%20of%20climate%20change%20%3A%20a%20critique.&f=false">paralysed bold and timely action on climate breakdown</a> for almost 50 years.</p>
<p>In that time, humanity’s population <a href="https://data.worldbank.org/indicator/sp.pop.totl">has doubled</a>, and the average amount each person consumes has <a href="https://data.worldbank.org/indicator/EG.USE.ELEC.KH.PC">more than doubled</a>. If we don’t challenge the naïve assurances of economists that all will continue to be well, the “human economies” they believed they were defending will tumble just as fast.</p>
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<p><em><a href="https://theconversation.com/imagine-newsletter-researchers-think-of-a-world-with-climate-action-113443?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=Imagineheader1125802">Click here to subscribe to our climate action newsletter. Climate change is inevitable. Our response to it isn’t.</a></em></p><img src="https://counter.theconversation.com/content/125802/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Keen receives funding for "Integrating Macroeconomics and Ecology via Energy and the Laws of Thermodynamics" from National Institute for Economic & Social Research via the Sustainability Hub of its ESRC-funded Rebuilding Macroeconomics project. See <a href="https://www.rebuildingmacroeconomics.ac.uk/integrating-macroeconomics">https://www.rebuildingmacroeconomics.ac.uk/integrating-macroeconomics</a> for details</span></em></p>William Nordhaus’ predictions of what the climate crisis will cost the earth are dangerously at odds with climate science.Steve Keen, Honorary Professor of Economics, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1220302019-08-20T20:05:07Z2019-08-20T20:05:07ZClimate explained: why we need to cut emissions as well as prepare for impacts<figure><img src="https://images.theconversation.com/files/288462/original/file-20190819-192215-i3net4.jpg?ixlib=rb-1.1.0&rect=35%2C212%2C5883%2C3727&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Research shows the cost of damage through climate change will be much greater than the costs of reducing emissions.</span> <span class="attribution"><span class="source">from www.shutterstock.com</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><figure class="align-left ">
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<p><em><strong>Climate Explained</strong> is a collaboration between The Conversation, Stuff and the New Zealand Science Media Centre to answer your questions about climate change.</em> </p>
<p><em>If you have a question you’d like an expert to answer, please send it to climate.change@stuff.co.nz</em></p>
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<p><strong>First, let’s accept climate change is happening and will have major negative impacts on New Zealand. Second, let’s also accept that even if New Zealand did absolutely everything possible to reduce emissions to zero, it would still happen, i.e. our impact on climate change is negligible. Third, reducing our emissions will come with a high financial cost. Fourth, the cost of dealing with the negative impacts of climate change (rising seas etc), will also come at a high financial cost. Based on the above, would it not be smarter to focus our money and energy on preparing New Zealand for a world where climate change is a reality, rather than quixotically trying to avert the unavoidable? – a question from Milton</strong> </p>
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<p>To argue that we should not act to reduce emissions because it is not in our interests to make a contribution to global mitigation is ultimately self-defeating. It would be to put short-term self-interest first, rather than considering both our long-term interests and those of the wider global community. </p>
<p>Our options on climate are looking increasingly dire, since we as a global community have postponed combating climate change so long. But in New Zealand – and indeed in any country – we should still do as much as we can to reduce the extent of climate change, and not, at this stage, divert significant resources away from mitigation into “preparing for” it. </p>
<p>Starting with the physics, it is clear that climate change is not a given and fixed phenomenon. It is unhelpful to say simply that “it is happening”. How much heating will occur will be determined by human actions: it is within humanity’s grasp to limit it. </p>
<p>Any significant action taken over the next decade in particular will have <a href="https://www.ipcc.ch/sr15/chapter/spm/">high payoffs in terms of reducing future warming</a>. The Intergovernmental Panel on Climate Change (<a href="https://www.ipcc.ch/">IPCC</a>) in effect says emission cuts of 45% or more over the next decade might just avert catastrophic change. Inaction, on the other hand, could condemn humankind to experiencing perhaps 3°C or more of heating. Each further degree represents a huge increase in human misery – death, suffering and associated conflict – and increases the threat of passing dangerous tipping points.</p>
<p>Climate outcomes are so sensitive to what we do over the next decade because eventual heating depends on the accumulated stock of greenhouse gases in the atmosphere. We are still adding to that stock every year, and we are still raising the costs of cutting emissions to an “acceptable” level (such as that consistent with 1.5°C or 2°C of heating). </p>
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<a href="https://theconversation.com/climate-explained-will-we-be-less-healthy-because-of-climate-change-115800">Climate explained: will we be less healthy because of climate change?</a>
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<h2>Limiting future warming</h2>
<p>Under President Obama, a <a href="https://obamawhitehouse.archives.gov/sites/default/files/docs/National_Security_Implications_of_Changing_Climate_Final_051915.pdf">report was published</a> which pointed out that every decade of delay in making cuts in emissions raises the cost of stabilising within a given target temperature (e.g. 2°C) by about 40%.</p>
<p>Each year’s emissions add to the stock of greenhouse gases in the atmosphere, even though some of the gases are absorbed into oceans, trees and soils. Until we can get global emissions down close to zero, atmospheric concentrations will rise. When the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement">Paris agreement</a> was adopted in 2015, it was expected that government pledges at the time might limit heating to under 2°C, conceivably 1.5°C degrees, if pledges were soon strengthened. It is now even more vital to cut emissions, as it reduces the risk of even higher, and nastier, temperatures. </p>
<p>What of New Zealand’s role in this? New Zealand is indeed a small country. Like most groups of five million or so emitters, we generate a small fraction of global emissions (less than 0.2%). But because we are a well respected, independent nation, with a positive international profile, what we do has disproportionate influence. If we manage to find creative and effective ways to cut emissions, we can be sure the world will be interested and some countries may be motivated to follow suit. </p>
<p>Just as we notice Norway’s effective promotion of electric vehicles, and Denmark’s success with wind power, so too can New Zealand have an outsized impact if we can achieve breakthroughs in mitigation. Reaching 100% renewable electricity generation would be a significant and persuasive milestone, as would any breakthroughs in agricultural emissions.</p>
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Read more:
<a href="https://theconversation.com/climate-explained-why-plants-dont-simply-grow-faster-with-more-carbon-dioxide-in-air-115907">Climate explained: why plants don't simply grow faster with more carbon dioxide in air</a>
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<h2>Reducing emissions makes economic sense</h2>
<p>In economic terms, mitigation is an excellent investment. The <a href="http://siteresources.worldbank.org/INTINDONESIA/Resources/226271-1170911056314/3428109-1174614780539/SternReviewEng.pdf">Stern Review</a> crystallised the argument in 2007: unmitigated climate change will cause damage that would reduce worldwide incomes by substantially more than the costs of active mitigation. Since then, <a href="https://www.nature.com/articles/s41558-018-0282-y">further research</a> has underlined that the cost of damage through climate change will be much greater than the costs of mitigation. Put in investment terms, the benefits from mitigation vastly exceed the costs. </p>
<p>Mitigation is one of the best investments humanity will ever make. <a href="https://www.nature.com/articles/s41586-018-0071-9">Recent findings</a> are that increasing mitigation efforts to ensure that warming is limited to 1.5°C, rather than 2°C or more, will yield high returns on investment, as damage is averted. We also now know many energy and transport sector mitigation investments, such as in electric vehicles, generate good returns. </p>
<p>So why haven’t we invested enough in mitigation already? The answer is the free rider problem – the “I will if you will” conundrum. The Paris agreement in 2015 is the best solution so far to this: essentially all countries globally have agreed to cut emissions, so relatively concerted action is likely. Given this, it is worthwhile for New Zealand to act, as our efforts are likely to be matched by the actions of others. In addition, of course, we have an ethical duty to future generations to cut emissions. </p>
<p>The fact that New Zealand is a small country with limited emissions is irrelevant to these arguments. We must play our part in the global push to cut emissions. The reality is that it is worthwhile to mitigate, and we are committed to doing so. In this situation, it makes no sense to move mitigation resources away to preparation for climate change. We do of course need to plan and prepare for the impacts of climate change, in myriad ways, but not at the expense of mitigation.</p><img src="https://counter.theconversation.com/content/122030/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ralph Brougham Chapman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand is small and generates a tiny fraction of global greenhouse gas emissions, but investment in cutting emissions is important and could influence other, larger countries.Ralph Brougham Chapman, Associate Professor , Director Environmental Studies, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1045202018-10-09T10:46:10Z2018-10-09T10:46:10ZNobel award recognizes how economic forces can fight climate change<figure><img src="https://images.theconversation.com/files/239835/original/file-20181008-72130-jhyqk4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">William Nordhaus argues markets can help curb climate change.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Nobel-Economics/7292f0f3d4e843ad8061efeaf9743d64/5/0">AP Photo/Craig Ruttle</a></span></figcaption></figure><p>Yale economist William Nordhaus has devoted <a href="https://scholar.google.com/citations?user=1-lLv0QAAAAJ&hl=en&oi=ao">his life’s work</a> to <a href="http://carbon-price.com/william-nordhaus/">understanding</a> the costs of climate change and advocating the use of a carbon tax to curb global warming. </p>
<p>It’s no small irony, then, that on the same day his research <a href="https://www.nobelprize.org/prizes/economics/2018/summary">shared</a> in the <a href="https://theconversation.com/paul-romer-and-william-nordhaus-why-they-won-the-2018-economics-nobel-104588">Nobel Memorial Prize in Economic Sciences</a>, a United Nations panel released its <a href="https://www.theguardian.com/environment/live/2018/oct/08/ipcc-climate-change-report-urgent-action-fossil-fuels-live">latest report</a> on the mounting dangers of climate change. In fact, the report builds upon much of Nordhaus’ work and warns that we have only about a dozen years to keep temperatures below 1.5 degrees Celsius to avoid environmental catastrophe. </p>
<p>This warning – and the award – come at a time when it appears that some Americans are not listening. The U.S. <a href="https://theconversation.com/why-trumps-decision-to-leave-paris-accord-hurts-the-us-and-the-world-78707">is no longer a signatory</a> of the Paris accord to address climate change, a <a href="http://climatecommunication.yale.edu/visualizations-data/ycom-us-2018/?est=happening&type=value&geo=national">broad swath of the country</a> still denies the existence of the problem, and <a href="https://www.nytimes.com/2018/09/12/us/north-carolina-coast-hurricane.html">some state</a> and <a href="https://www.nytimes.com/2018/10/08/us/fema-disaster-recovery-climate-change.html">federal policymakers</a> don’t incorporate climate science into their decision-making. </p>
<p>But Nordhaus’ work is not about whether or not people and policymakers “believe” in climate change. It’s about the market and its ability to address the most serious issue facing humanity in the coming years. </p>
<p>As scholars of <a href="https://energy.umich.edu/leadership/profile/ellen-hughes-cromwick/">economics</a> and <a href="https://scholar.google.com/citations?user=wGt9rX8AAAAJ&hl=en&oi=ao">management</a> who are passionate about finding smart solutions to the challenge of a changing climate, we believe his research offers hope that humans can still prevent global calamity.</p>
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<img alt="" src="https://images.theconversation.com/files/239842/original/file-20181009-72127-b6nshx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/239842/original/file-20181009-72127-b6nshx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=343&fit=crop&dpr=1 600w, https://images.theconversation.com/files/239842/original/file-20181009-72127-b6nshx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=343&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/239842/original/file-20181009-72127-b6nshx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=343&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/239842/original/file-20181009-72127-b6nshx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=431&fit=crop&dpr=1 754w, https://images.theconversation.com/files/239842/original/file-20181009-72127-b6nshx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=431&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/239842/original/file-20181009-72127-b6nshx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=431&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Nordhaus’ research offers hope that humanity can avert catastrophe.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/South-Korea-Climate-Ambitious-Goal/0f33d60ba8a2407b96264f8d722faa74/12/0">AP Photo/Ahn Young-joon</a></span>
</figcaption>
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<h2>The economics of climate change</h2>
<p>One of Nordhaus’ most significant contributions was perhaps his ability to unpack and explain the complex issues surrounding climate change. </p>
<p>In “<a href="https://yalebooks.yale.edu/book/9780300212648/climate-casino">Climate Casino</a>,” for example, Nordhaus explained the many interrelated topics when talking about climate change, from science and energy to economics and politics, while clearly identifying the steps necessary to prevent catastrophe. Or as The New York Times <a href="https://www.nytimes.com/2013/12/01/business/climate-casino-an-overview-of-global-warming.html">put it</a>, “It is a one-stop source on global warming, seen through the prism of a brilliant economist.”</p>
<p>Although his writing was accessible, he showed that he was still grappling with the uncertainty of his and other projections, allowing us to see the honest complexity of outcomes related to how humans harm the environment through greenhouse gas emissions. </p>
<p>A premise of his research was that the environment is a <a href="http://www.econ.yale.edu/%7Enordhaus/homepage/OldWebFiles/DICEGAMS/dice_mss_072407_all.pdf">public good</a>, shared by all and yet not paid for in any adequate or appropriate way. </p>
<p>In other words, we all benefit from it, though we don’t necessarily pay for it. And we are all harmed by its degradation though the value of that damage is not captured in standard market exchange. </p>
<h2>Modeling the economy and climate</h2>
<p>Nordhaus argued a <a href="http://carbon-price.com/william-nordhaus/">tax on carbon</a> – say US$25 a ton – or a <a href="https://www.c2es.org/content/cap-and-trade-basics/">cap and trade</a> scheme that allows companies to exchange pollution credits – offers the best and most economically efficient way of putting a value on that public good and thus doing something about the problem. </p>
<p>Nordhaus showed this by perfecting models that simulated how such taxes and other inputs affect both the economy and climate, depicting how they co-evolve – known as <a href="http://www.nber.org/reporter/2017number3/nordhaus.html">“integrated assessment” models</a>.</p>
<p>A noteworthy example is his <a href="https://ideas.repec.org/p/cwl/cwldpp/1009.html">Dynamic Integrated Climate-Economy Model</a>, which provides a consistent framework for using knowledge borne from economics, ecology and the earth sciences. The model allowed for a deeper understanding of how certain policy changes affect long-term economic and environmental outcomes.</p>
<p>This is how he realized that schemes that rely on markets with some guidance from governments – such as by instituting carbon taxes – would work best to tackle the problem. </p>
<p>And thus he was able to show, with great clarity, that the most cost effective way to reduce greenhouse gas emissions is by lifting the price of fossil fuels with a carbon tax. This in turn would provide the appropriate incentives for consumers and businesses to use less of those fuels. </p>
<p>Nordhaus was also able to estimate the economic damage from climate change if such policies weren’t adopted. He found that the people who would lose the most were the poor and those living in tropical regions. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/239841/original/file-20181009-72106-aycgjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/239841/original/file-20181009-72106-aycgjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=315&fit=crop&dpr=1 600w, https://images.theconversation.com/files/239841/original/file-20181009-72106-aycgjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=315&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/239841/original/file-20181009-72106-aycgjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=315&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/239841/original/file-20181009-72106-aycgjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=396&fit=crop&dpr=1 754w, https://images.theconversation.com/files/239841/original/file-20181009-72106-aycgjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=396&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/239841/original/file-20181009-72106-aycgjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=396&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Nordhaus showed how putting a carbon tax on fossil fuels would be one of the most efficient ways to fight climate change.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Carbon-Tax-Washington/6cc9cb04214e4a458dbf8db88c8952bb/2/0">AP Photo/Ted S. Warren</a></span>
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<h2>Markets and a guiding hand</h2>
<p>Fundamentally, Nordhaus recognized that solutions to the great challenge of climate change can most efficiently and effectively come from the market, one of the <a href="https://theconversation.com/capitalism-must-evolve-to-solve-the-climate-crisis-47338">most powerful systems</a> on earth. </p>
<p>While he understood markets needed to take the lead, at the same time, they needed assistance from informed government policy. Carbon pricing, Nordhaus found, is one powerful tool for bringing those solutions to the fore. </p>
<p>Even Adam Smith, the 18th-century economist who coined the “invisible hand of the market,” knew that market capitalism needed “rules imposed upon it by legislators who understand its workings and its benefits.” As National Affairs editor <a href="http://www.nationalaffairs.com/publications/detail/recovering-the-case-for-capitalism">Yuval Levin</a> reminded us in 2010, markets need a guiding hand.</p>
<p>That is, Nordhaus has showed how <a href="https://theconversation.com/capitalism-must-evolve-to-solve-the-climate-crisis-47338">capitalism is capable of rising to the challenge</a> of climate change, just as it has to other problems in the marketplace, such as <a href="https://www.economicshelp.org/microessays/markets/regulation-monopoly/">monopolies</a>, <a href="https://www.epa.gov/history/epa-history-montreal-protocol">ozone depletion</a> and the <a href="https://doi.org/10.1136/tobaccocontrol-2011-050338">dangers of cigarette smoking</a>.</p>
<p>On a day when the world’s leading scientists have issued their latest dire warning on the impending doom of climate change, Nordhaus’ deeply thoughtful, methodical work – for which we are thankful – is a reminder that there is hope. That human ingenuity and resourcefulness can guide the market to a solution and a better form of capitalism for structuring our commerce and interaction.</p><img src="https://counter.theconversation.com/content/104520/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ellen Hughes-Cromwick is affiliated with
Member of the National Assn for Business Economics (NABE) ; American Economic Assn; Chair of NABE Foundation; Board member of the Clark University; Member of the Int'l Energy Economics Assn; Senior Advisor of Macro Policy Perspectives LLC.</span></em></p><p class="fine-print"><em><span>Andrew J. Hoffman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>William Nordhaus showed that the market offers the best chance for preventing global catastrophe form climate change.Andrew J. Hoffman, Holcim (US) Professor at the Ross School of Business and School of Environment and Sustainability, University of MichiganEllen Hughes-Cromwick, Senior Economist and Interim Associate Director of Social Science and Policy, University of Michigan Energy Institute, University of MichiganLicensed as Creative Commons – attribution, no derivatives.