The Economics Of Climate Change

THE ECONOMICS OF CLIMATE CHANGE

Nobel Economics Prize winner William Nordhaus has passed away. He won the Nobel Prize in 2018 for integrating climate change into long-run macroeconomic analysis.

He extended the Solow growth model by including the effects of global warming. He built a model called Integrated Assessment Model (IAM) to analyse the two-way relationship between the economy and the climate:

1. How the economy affects the climate

2. How the climate affects the economy 

The IAM has 3 parts:

1. Carbon circulation module: A chemistry model that shows how CO2 emissions determine the CO2 level in the atmosphere

2. Climate change module: A physics model that shows how the CO2 level in the atmosphere determines the earth's temperature

3. Economic growth module: An economics model that shows how different climate policies (like carbon tax/credits) determine GDP and CO2 emissions

The IAM has 2 versions:

1. Dynamic Integrated Climate Economy (DICE) model: Treats the world as one region

2. Regional Integrated Climate Economy (RICE) model: Divides the world into 8 regions

The graph shows the IAM's calculations for CO2 emissions over time under different scenarios:

1. Top curve: 2015's carbon tax

2. Middle curve: Carbon tax that maximises global welfare

3. Bottom curve: Carbon tax that stops global warming from crossing 2.5°C

Mastering one subject is hard enough. William Nordhaus learnt two new subjects (physics and chemistry) to build his model. He was truly a great researcher . . .

Info-source: Nobel Prize Org