This concise book provides the gist of a policy analysis by the distinguished economist william Nordhaus. The author is a pioneer in environmental economics and a member of the National Academy of Sciences. The analytical tool used is an integrated model of environmental and economic impact. Nordhaus accepts that anthropogenic global warming (AGW) is a real and serious problem. His concern is attempting to develop a policy prescription that balances addressing the problem with economic impact. Using a standard framework, Nordhaus quite reasonably points out that inefficient investment in combating global warming now will result in impaired long term economic growth, a cure as bad as the disease. Nordhaus and colleagues have run their model with different scenarios in an effort to estimate an "optimal" path and the costs/benefits of alternative scenarios. He is quite honest about the uncertainties involved and clarifies some of the assumptions involved in the modeling.
The model estimates a substantial impact of AGW on economic output by the end of the century - about a 2.5% reduction in global output. The optimal path favors instituting a relatively moderate global carbon tax now with gradual increments over the course of the ensuing decades. Alternative policies are less attractive; the Kyoto accords because they will not control AGW (to be fair, these were supposed to be initial steps, not a final policy) and other proposals, such as that put forward in the controversial Stern Report, as being very inefficient. This is a thoughtful analysis, and given all the uncertainties involved, probably about as good as can be done at this time. Nordhaus' argument for his optimal policy is strong.
That said, both the presentation of the analysis and Nordhaus' arguments have some probable defects. I'm not entirely sure what audience Nordhaus had in mind for this book but its brevity suggests he wanted to reach a broad audience. Parts of the book are difficult to read because Nordhaus uses quite a bit of technical language without really explaining it particularly well. This will be an obstacle for general readers. The comparison with Nicholas Stern's recent book aimed at broad readership is revealing. Stern does a much better job of getting his points across. At the same time, I suspect his fellow economists will find it insufficiently technically detailed to be really useful.
As a policy analysis, I think Nordhaus' approach is simultaneously very useful and open to criticism. I think its useful to think of the recommended optimal path as a point of departure rather than a final solution. If there are reasonable justifications, even qualitative ones, for modifying some of Nordhaus' assumptions, then the policy recommendation will alter. I suspect the estimates of the impacts of AGW are underestimates. The IPCC estimates have tended to be relatively conservative and in terms of at least one major effector of AGW, sea level change, likely to be significant underestimates. A quick look at Nordhaus' website suggests that his group is updating their model in terms of sea level changes but no results are reported. If this is the case, then AGW impacts will be higher and a more aggressive approach is needed. I think also that this type of modeling doesn't account for irreversible effects. The discounted cost analysis, I think, is transitive in the sense that it assumes the ability to purchase a similar basket of goods across time. But if there are irreversible substantial losses, then this assumption is incorrect and a more aggressive approach is warranted. I believe there has been at least one effort to model this issue and it suggests a more aggressive approach than Norhaus' optimal path. There has also been a major controversy between Nordhaus and Stern about the role of discounting. Interested readers can get a idea of the argument by looking up a pair of short essays by Stern and Nordhaus published in Science. I think both sides make good points. My own sense is that the moral arguments against discounting have merit and that the choice of market interest rates for discount rate, while plausible, are too high. With lower discount rates, a more aggressive policy is warranted. Nordhaus' equally eminent fellow economist, Martin Weitzman, has argued that this conventional approach to forecasting is inadeguate to capture the dangers of low probability but catastrophic (rapid loss of the Greenland icecap, for example) events. Finally, as Nordhaus frankly acknowledges, his model may overestimate the economic costs of responding to AGW. The model doesn't take into account increased technical innovation in response to AGW and market incentives driven by an appropriate regulatory framework.
Given these concerns, I think its reasonable to regard the Nordhaus optimal path as a lower limit and pursue a more aggressive approach. But how aggressive? This is impossible to know. Proposals to limit temperature changes to 2 degrees by the end of century, or as Stern has proposed, CO2 concentrations to 500 ppm by mid-century, are reasonable hedges. In Nordhaus' modeling (see his website for an update in a recent lecture he delivered) these policies would not result in qualitatively different carbon pricing trajectories to what he has proposed as optimal though the escalation of carbon prices is significantly faster.
Nordhaus' preference for regulation is a universal harmonized carbon tax. He is very clear that only universal participation will work and makes a good argument for the tax approach. He has a good critique of trade and cap measures though he feels a well constructed hybrid approach would be a close second. I think his arguments make a lot of sense though I suspect he is too pessimistic about some forms of regulation such as more rigorous building standards. I'm also not sure that increased carbon taxes will deal well with one important aspect of AGW, deforestation. Nonetheless, I think Nordhaus's advocacy of a universal harmonized carbon tax as the optimal regulatory approach is the strongest part of this book.
