Henderson on Romer and Nordhaus in WSJ
Robert P. Murphy, an economist at Texas Tech, used Mr. Nordhaus’s work to show that setting too high a carbon tax can be worse than setting no carbon tax at all. Using Mr. Nordhaus’s 2009 calibration, Mr. Murphy calculated the present value of damages caused by carbon dioxide and abatement costs at $22.6 trillion. Mr. Nordhaus’s optimal carbon tax would have reduced damages but increased abatement costs, decreasing the impact of emissions to a total of $19.5 trillion—a relatively minor net improvement of just over $3 trillion.
Meanwhile, the Nordhaus model shows that the cost of a policy to limit the temperature increase to only 2.7 degrees Fahrenheit by 2100 would have been $37.03 trillion—$16.4 trillion more than the cost of doing nothing after accounting for the damage done by carbon emissions. Thus, Mr. Nordhaus’s work doesn’t support the recent announcement by the International Panel on Climate Change about the urgent need to limit warming to 2.7 degrees. Indeed, Paul Krugman castigated Mr. Nordhaus in 2013 for his belief that the optimal temperature increase is 4.1 degrees.
These two paragraphs are from my “A Nobel Economics Prize for the Long Run,” Wall Street Journal, October 8 (electronic) and October 9 (print). The article is gated but I’ll be able to post the whole thing in 30 days.
I faced a tight space constraint and so I didn’t have room for this further thought on global warming:
One major variable that affects the estimate of the SCC [Social Cost of Carbon] is the discount rate used to weight the well-being of future generations affected by global warming. The lower the discount rate, the greater the weight on future generations’ well being and, therefore, the higher the optimal tax rate. Interestingly, though, although few of the major participants in the debate point this out, taxing ourselves now to help future generations transfers resources from the relatively poor (us) to the relatively rich (future generations.) Why? Go back to Romer. With positive growth rates, the vast majority of people 50 or more years from now will be substantially better off than the vast majority of people today.
Or this. I could state my version but cue Donald Boudreaux, who said it well:
Yet, undoubtedly because of space constraints, Mr. Henderson did not mention one of Prof. Nordhaus’s most remarkable and important findings, namely, that nearly all – about 98 percent – of the benefits of technological innovation are captured, not by the entrepreneurs and businesses who introduce them, but by the general public. In his 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement,” Prof. Nordhaus wrote that “only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”
Note that I haven’t quoted from the part on Romer, but I’m constrained by my contract with the Journal. For some of the highlights of Romer’s work see my post yesterday.
HT2 Bob Murphy for catching a small numerical error and reminding me of Krugman’s criticism of Nordhaus. Bob gave me a quick comment on a draft when I was under tight time pressure.