JOIN USPrediction is hazardous, but must be made nonetheless
Forty years ago a brilliant young Yale economist named William Nordhaus published a landmark paper, “The Allocation of Energy Resources,” that opened new frontiers in economic analysis.
Nordhaus argued that to think clearly about the economics of exhaustible resources like oil and coal, it was necessary to look far into the future, to assess their value as they become more scarce -- and that this look into the future necessarily involved considering not just available resources and expected future economic growth, but likely future technologies as well. Moreover, he developed a method for incorporating all of this information -- resource estimates, long-run economic forecasts, and engineers’ best guesses about the costs of future technologies -- into a quantitative model of energy prices over the long term.
The resource and engineering data for Nordhaus’ paper were for the most part compiled by his research assistant, a 20-year-old undergraduate, who spent long hours immured in Yale’s Geology Library, poring over Bureau of Mines circulars and the like. It was an invaluable apprenticeship. My reasons for bringing up this bit of intellectual history, however, go beyond personal disclosure - although readers of this review should know that Bill Nordhaus was my first professional mentor. For if one looks back at “The Allocation of Energy Resources,” one learns two crucial lessons. First, predictions are hard, especially about the distant future. Second, sometimes such predictions must be made nonetheless.
Looking back at “Allocation” after four decades, what’s striking is how wrong the technical experts were about future technologies. For many years all their errors seemed to have been on the side of overoptimism, especially on oil production and nuclear power. More recently, the surprises have come on the other side, with fracking having the biggest immediate impact on markets, but with the growing competitiveness of wind and solar power - neither of which figured in “Allocation” at all - perhaps the more fundamental news. For what it’s worth, current oil prices, adjusted for overall inflation, are about twice Nordhaus’ prediction, while coal and especially natural gas prices are well below his baseline.
So the future is uncertain, a reality acknowledged in the title of Nordhaus’s new book, “The Climate Casino: Risk, Uncertainty, and Economics for a Warming World.” Yet decisions must be made taking the future -- and sometimes the very long-term future -- into account. This is true when it comes to exhaustible resources, where every barrel of oil we burn today is a barrel that won’t be available for future generations. It is all the more true for global warming, where every ton of carbon dioxide we emit today will remain in the atmosphere, changing the world’s climate, for generations to come. And as Nordhaus emphasises, although perhaps not as strongly as some would like, when it comes to climate change uncertainty strengthens, not weakens, the case for action now.
Yet while uncertainty cannot be banished from the issue of global warming, one can and should make the best predictions possible. Following his work on energy futures, Nordhaus became a pioneer in the development of integrated assessment models, or IAMs, which try to pull together what we know about two systems - the economy and the climate - map out their interactions and let us do cost-benefit analysis of alternative policies. At one level “The Climate Casino” is an effort to popularise the results of IAMs and their implications. But it is also, of course, a call for action. I’ll ask later in this review whether that call has much chance of succeeding.
Reasonable people
Stylistically, “The Climate Casino” reads like a primer rather than a manifesto -- something that will no doubt frustrate many climate activists. This is, one has to say, something of a characteristic position for Nordhaus: Within the community of reasonable people who accept the reality of global warming and the need to do something about it, he has often taken on the role of debunker, criticising strong claims that he doesn’t think are justified by theory or evidence. He has raised hackles by expressing relative optimism about our ability to adapt to moderate global warming. He harshly criticised Nicholas Stern’s widely publicised report on the economics of climate change for arguing that we should not discount the costs imposed by fossil fuel consumption on future generations at all compared with cost imposed on the current generation. And he has taken a sceptical line toward the widely circulated arguments by Harvard’s Martin Weitzman that the risk of catastrophic climate effects justifies very aggressive and early action to limit greenhouse gas emissions.
As I said, Nordhaus’ part in these controversies has frustrated some climate activists, not least because opponents of any kind of climate action have seized on some of his work in support of their position. So it’s important to realize that “The Climate Casino” is in no sense the work of someone skeptical about either the reality of global warming or the need to act now. He more or less ridicules claims that climate change isn’t happening or that it isn’t the result of human activity. And he calls for strong action: His best estimate of what we should be doing involves placing a substantial immediate tax on carbon, one that would sharply increase the current price of coal, and gradually raising that tax, more than doubling it by 2030. Some might consider even this policy inadequate, but it’s far beyond anything currently on the political agenda, so as a practical matter Nordhaus and the most hawkish of climate activists are entirely on the same side.
Throughout this book, Nordhaus’ tone is slightly cynical but basically calm and optimistic: This is ultimately a problem we should be able to solve. I only wish I could share his apparent conviction that this upbeat possibility will translate into reality. Instead, I keep being haunted by a figure he presents early in the book, showing that we have been living in an age of unusual climate stability - that “the last 7,000 years have been the most stable climatic period in more than 100,000 years.” As Nordhaus notes, this era of stability coincides pretty much exactly with the rise of civilization, and that probably isn’t an accident.
Now that period of stability is ending - and civilization did it, via the Industrial Revolution and the attendant mass burning of coal and other fossil fuels. Industrialisation has, of course, made us immensely more powerful, and more flexible too, more able to adapt to changing circumstances. The Scientific Revolution that accompanied the revolution in industry has also given us far more knowledge about the world, including an understanding of what we ourselves are doing to the environment.
But it seems that we have, without knowing it, made an immensely dangerous bet: namely, that we’ll be able to use the power and knowledge we’ve gained in the past couple of centuries to cope with the climate risks we’ve unleashed over the same period. Will we win that bet? Time will tell. Unfortunately, if the bet goes bad, we won’t get another chance to play.