#5: Can Someone With Good Intentions Still Be A Villain?

The world lost two decades in the decarbonisation fight, but the person arguably responsible is the most revered figure in all of climate economics. How can this be?

PRESSED FOR TIME?

The most significant climate economist (and the only Nobel recipient in economics for climate modelling specifically) is a man named William Nordhaus. You’ve probably never heard his name, but he’s affected all our lives. In the early 1990s, he made a calculation that according to many, put the world’s efforts to combat climate change back a generation.

It prompts the difficult question: how do we assess people who had good intentions but did immeasurable damage? Reflecting on five lessons from a part-hero, part-villain like Nordhaus teaches us the power (and danger) of compound effects.

Share Climate and Money


ONE OF THE CLIMATE FIGHT’S FIRST H̶E̶R̶O̶E̶S̶ (VILLAINS?)

On December 8th, 2018, William Nordhaus moved slowly up to the stage at Stockholm University, with his back to an auditorium full of applause. His speech was laced with honour and humility:  

‘I am up on the podium today, but I am one person.. [representing] an invisible college, of people around the world, and over time; not just in economics, but many disciplines… not just with climate change, but the interaction of the economy with our natural world.’ 

Like all Nobel recipients, Nordhaus had good cause to reflect. His lifelong wife and partner Barbara was seated in the audience, along with his children, grandchildren, students and even some of his critics. He graciously acknowledged all of them, and continued: 

‘We have a climate problem because markets fail, and fail badly: particularly in energy markets. They fail because one of the byproducts in the use of energy — fossil fuels — is unpriced, and therefore underpriced.    

The Royal Swedish Academy of Sciences typically provides a single sentence explanation at the top of their annual press release for why any economist (or a small group of collaborators) is deserving of a Prize in Economic Sciences. In 2018, William Nordhaus received his for ‘integrating climate change into long-run macroeconomic analysis’.

The economics profession’s highest honour reflected his four decades of work on environmental assessments and economic forecasting. The global media largely applauded the Swedish Academy’s decision, seen as long overdue recognition of the climate’s impact on economic growth.

This is the story the world knows. This is not the whole story.

THE NEED TO INTEGRATE

Through the 1970s and 1980s, scientists began to have greater and greater confidence of a connection between human activities, the growing concentration of atmospheric pollutants, and a warming climate.

When NASA scientist James Hansen sat before Congress in 1988 and declared ‘99% confidence’ in a damaging greenhouse effect, a sincere question came back from U.S. politicians in both parties — what do we do about it?

More research was needed to understand how a change to the climate might impact the economy. Who was asked to look into this question? A Yale professor named William Nordhaus. He and a Harvard colleague named Tom Schelling were perfectly qualified: both professors knew that economics and nature spoke different languages, and translating the same message for two audiences would be complex. Both men possessed the type of imagination needed for such a new and difficult problem. But only one of them really worked with data. That was Nordhaus. 

In the years after Hansen’s speech and through into the early 1990s, Nordhaus made an enormous contribution to climate science and economic theory. With too much data for the ordinary economics professor to absorb, he devised integrated assessment models (IAMs) — these act as they sound, taking lots of assumptions in a computer model, and integrating new information to form assessments as the information changes.

Consider how a computer looked in the 1980s, and intuitively this feels an impressive feat (in fact, the IPCC works off many of the original Nordhaus models to this day). For the first time, IAMs helped to lay out an explanation for how economic growth affects carbon emissions, and how carbon emissions in turn affects economic growth (Plain English: If you grow, you’ll pollute. If you pollute, you need to measure how that creates a feedback loop back into the growth).

When formulating his Nobel prize-winning IAM model (known as DICE), William Nordhaus tried to solve the problem by performing an extensive review of the (scarce) existing studies on climate-induced damages. He made many assumptions from the results. 

In making those assumptions, Nordhaus devised a calculation that will impact our generation, and our children’s and grandchildren’s in tragic ways.

TO SLOW OR NOT TO SLOW: THE FATAL ERROR…

In 1991, Nordhaus published a landmark paper, ‘To Slow or Not to Slow: the Economics of the Greenhouse Effect’, which presented the first analysis of the costs and benefits of policies to abate greenhouse gases.

It’s important to have the context, and reiterate the world in 1991 was not where it is now. Finland and Sweden had just introduced carbon taxes. Advanced economies around the world were waiting on evidence to begin pricing in climate-induced damages. The fossil fuel industry had its areas of opposition, but from the public’s perspective, the greenhouse effect polled similarly to acid rain and the hole in the ozone layer — big externalities the world needed to come together and solve. Taxes are never popular, but they’re also rarely repealed once governments start receiving the money: just ask the income tax of 1861, or the capital gains tax of 1913.

Nordhaus distilled the entire carbon emission reduction problem down to one simple question: how much should one be willing to pay for it?

No has ever disputed the challenge Nordhaus faced in the late 1980s and early 1990s. Studying climate change was complicated. There were a multitude of greenhouse gases. Moreover, greenhouse policies involved decisions in 1991 to reduce damages in the distant future (2020, 2050, 2100 and the like). Nordhaus acknowledged more work was needed in the years ahead. 

And yet: embedded deep in the arguments of his 1991 paper was an assumption no one had entirely agreed on, but had the long term consequences of putting global momentum into quicksand. Nordhaus had settled on one key point: reducing greenhouse gases should not slow down the rate of economic growth.

Ever-increasing riches is the baseline assumption for the people of the world. If the model produced clear tradeoffs between growth and emissions, the ‘optimal policy’ shouldn’t sacrifice growth.

WHAT WE DO VALUE? WHAT SHOULD WE VALUE?

In other words, Nordhaus built a prior into his model: the ever-rising tide of living standards was more important to people than the stability of the environment. It would be wrong to make a decision for a future generation on their behalf, without the foresight of knowing their investment choices, their livelihoods, their willingness to act. This is a point we will return to at Climate and Money regularly, because it touches on a problem for which there are no easy answers —

Climate policies are costly for the present generation, yet will benefit future generations in the decades, centuries and millennia to come. Intuitively, where do you think the priority should be?

In the early 1990s, in a world where economists had lived through the post-WWII years, with high rates of interest in bank accounts, and long periods of barely interrupted growth, the thought for Nordhaus or Schelling that ever-extreme climate events would disrupt that growth didn’t factor into their thinking.

Quite simply, they underestimated the risks and assumed the stability of the past would continue.

By now, the ending to the Nordhaus story might be clear to you. The economics and policy fraternity did what they had done for decades: they heard out the credible arguments of an expert who’d look deeply into a question, and acted on the advice. By leaving economic growth to rise as it had, Nordhaus believed the world would be richer and better equipped to handle any carbon problem when the models had more data in them. The problem was real: just not worth dealing with in 1991. It was better to wait until something like 2020, when the rise in global average temperatures would be clearer.

No need to tax the release of carbon into the atmosphere. No case to change course.

Nordhaus made many great contributions after 1991. He fought global skeptics, eventually came around publicly to a carbon tax, and also now agrees that that the potential harms from climate change are worse than he believed prior to 2007. But criticism of his model in 1991 can be found here, here, here, here and here.

It’s really important we reflect on the impact of a man with good intentions, and many positive contributions, who also made a damaging assumption.

FIVE LESSONS

The story of William Nordhaus should make us think about the following:

ONE: People only have one life, and often choose to make investments and consume their own savings before they die. But climate change is a global and intergenerational problem, and it has been argued we should care for future generations as much as for ourselves. If more long run investments are viable, we live in a very different world.

TWO: The American policy establishment in 1991 liked the Nordhaus findings because it gave them licence to carry on with the status quo and delay difficult decisions. How often does that still happen? How often do we put off hard choices in our own life each and every day?

THREE: The Nordhaus models assume that environmental changes will occur linearly. It’s not that simple. Climate research has shown there is a risk of self-generating effects on the climate that we cannot predict. This affects money every way imaginable. Self-generating feedback loops are new beta, or new volatility. We need to expand the range of non-zero probabilities in all our investment decision making.

FOUR: Reading about flaws in someone’s logic isn’t always fun. But it’s important to understand what is built into the way influential people think, and ask what can be done better. One error made in Year Zero can have enormous consequences in Year 20 or Year 100.

FIVE: Good people with good intentions can make costly assumptions. That was true in 1991, and it’s true for our current choices in 2021.

Let’s continue trying to build mental models that look out for the problems we know as well as the projections we don’t.

Optimistically,

Owen C. Woolcock


3 Questions I Am Asking Myself This Week

1. What is the worst assumption that a number of my own actions are based on?

2. What would investing in equal measure for my benefit and and my children’s benefit actually look like? What financial products would I choose or reject?

3. At what point does a data tool become close to useless, or even harmful? What if it pretends to give precise instructions to decision makers when in fact it’s struggling with huge uncertainty?


If You Read Or Listen To One Thing This Week

A fantastic NYT Interactive on the perils of a changing Gulf Stream in the Atlantic Ocean:


References:

CarbonBrief: https://www.carbonbrief.org/qa-how-integrated-assessment-models-are-used-to-study-climate-change