Goals

• Recognize the role of human actions in determining the future of our climate
• Explain scientific concepts in language non-scientists can understand
• Find reliable sources of information on the internet
• Use numerical tools and publicly available scientific data to demonstrate important concepts about the Earth, its climate, and resources

Learning Outcomes

By the end of this module, you should be able to:

• Recognize that there is a cost to future society of emitting CO₂ to the air today.
• Describe how one might balance immediate needs against protection from future losses.
• Explain why growth cannot be infinite in a world of finite resources.
• Use an Integrated Assessment Model to determine the most economically beneficial approach to dealing with emissions and climate change.

Questions?

If you have any questions, please post them to Help Discussion. We will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.

Investments typically grow over time. But, if you don’t solve them, problems often grow too. And solving problems takes money, which could be invested now to solve problems later. Solve? Invest? Solve a little and invest the rest? Throw a party and worry about it later? What is a poor confused society to do? Call an economist!

Short version:

Using a calculation called discounting that is similar to interest-rate calculations, it is possible to estimate the present value or cost of future events. The discount rate, which is the real return you could get if you invested your money, is a function of the growth rate of the economy, as well as our preference for having things now rather than later (and thus us behaving as if our generation is more important than future generations). Actions to reduce CO₂ emissions have costs now but benefits in the future. Thus, discounting is an important part of the economic models, called "integrated assessment models," used to compare possible paths to the future. The path that optimizes the tradeoff between these costs and benefits calls for beginning now to slow global warming, but in a measured rather than panicked way.

Friendlier but longer version:

We all face choices between today and tomorrow. Should I buy an apple now, or invest the money and have enough to buy two apples in a few years? Should I throw a party, or save the money to help support future generations of my family? Should I pay off the dangerous person who has suggested that if I don’t pay him, he will punch my teeth out, or put the money into the hot new investment that will make me so wealthy that false teeth will seem cheap?

Economists have built a powerful intellectual framework for dealing with questions of this sort. The topic is usually discussed as discounting.

You can think of discounting as a tool to estimate the value or cost today of various future events. This allows you, or society, to compare the future results of possible decisions you could make today, and so choose the path that is least expensive or most beneficial overall.

Starting on the next page, we explain discounting with a little math. Note that we do not require that you master the math, or use it to calculate anything, but we owe it to you to show you how it goes. (And, we have found that knowing the math often helps, in many ways.) We then will apply the results to climate change.

We can choose to spend money now to head off future climate change. Or, we can ignore climate change and just go about our business, spending money on things we consume now, but also spending some money on investments for the future. Then, our descendants can use their great wealth from those investments to deal with the problems caused by climate change. We will find that the economically optimal path takes a middle road, spending some money to reduce climate change but investing some money to make our descendants wealthy and letting them deal with the problems of climate change. This raises many other questions, some of which we will address. But, hard-nosed economics recommends some actions now to head off climate change.

Suppose you go to a bank and deposit one thousand dollars (or euros, or yuan, or whatever currency you prefer), which the bank promises to return to you at some time in the future. You will expect the bank to return more than you deposited. Say they promise to give you $1040 in a year. The difference, $1040 - 1000 = 40$, is your interest. To get the interest rate, you need to divide the interest you received by the amount you put in the bank at the start, $40 / 1000 = 0.04$. Most people dislike talking about an interest rate of 0.04, so they multiply by 100 and say the interest rate is 4%. Your bank probably had a big sign out front advertising “4% interest rate on savings!” Clearly, if you had deposited more, you would have gotten more interest at the same interest rate—put in 1,000,000, get back 1,040,000, the interest is $1 , 040 , 000 - 1 , 000 , 000 = 40 , 000$, and the interest rate is $1 , 040 , 000 - 1 , 000 , 000 = 40 , 000$ or 4%, just as before.

But, there is no requirement that you compare the interest to the amount you started with. Suppose instead that you divided by the amount you finished with. Go back to your original investment of 1000 that becomes 1040 in a year, with interest of 40, and calculate $40 / 1040 = 0.038$ or 3.8%. That is the discount rate. (In the ENRICHMENT linked below we show that we could have set up the example so that the discount rate came out to be a nice easy number, with the interest rate harder to remember—a 4.17% interest rate gives a 4% discount rate, for example.)

Next, suppose you see a problem. Say, the roof on your house is leaking. Fixing the roof today will cost you the $1000 that you happen to have in your wallet. If you don’t fix the roof, then in 20 years the roof will still cost $1000 to fix. (We have ignored inflation because economists can correct for it before making the calculation, as described in the ENRICHMENT. And, you could spend the $1000 on many other things, including a party or a vacation, a point to which we’ll return soon. Just go along with us for now.) But, if you wait 20 years to fix the leak, the dripping water will cause another $1000 in damage to your house, so the total repair will cost $2000 in 20 years. Should you spend the money from your wallet to fix the leak now, or invest the money and fix the leak in 20 years?

To answer this question, you can calculate how much money you would need to invest now so that you have $2000 in 20 years to fix the roof—this is often called the present value of the future cost. If this present value is less than the $1000 needed to fix the roof now, then you could invest the present value in a “fix the roof in 20 years” fund, and have the rest of your $1000 to spend on other things; however, if the present value is more than $1000, you would be better off economically to fix the roof now.

In our example, with a 4%=0.04 discount rate and a future cost of $2000 in 20 years, the present value is $2000 / ( 1 + .04 {)}^{20 }= 913$. Hence, you can invest $913 in your “fix the roof in 20 years” fund, and use the rest of your $1000 for other things now. (If you prefer an equation with symbols, let the present value be P, the future cost F, the discount rate be D%, the number of years be t, and the equation is $P = F / ( 1 + D / 100 {)}^t$. D/100 turns the 4% into .04, add that to 1, raise the resulting 1.04 to the t ^th power, and divide F by all of that.)

The issue is similar for society dealing with fossil fuels. Fossil-fuel CO₂ emissions cause damages that are costly to us and to other people in the future, and those damages increase as more CO₂ is emitted. So, just as for your leaky roof, we could avoid future costs by spending money now to reduce CO₂ emissions. But, money spent reducing CO₂ emissions is money that is not used for other purposes, such as investing in growing the economy so that our grandchildren and their grandchildren are much wealthier than we are and can afford to solve the problems caused by the CO₂. The decision whether to fix the roof now or later is similar to the decision whether to reduce fossil-fuel emissions now or pay to fix the damages later.

If the discount rate is high, then the troubles our CO₂ causes for future generations of people have very little present value; then, if we behave in an economically optimal manner, we should spend only a little money trying to reduce our CO₂ emissions. If the discount rate is low, then optimal behavior now involves spending more to reduce CO₂ emissions.

We’ll discuss how this calculation is made later. But first, let’s take a closer look at what sets the numerical value of the discount rate—1% or 4% or 7%—because it is the most important control on what behavior is economically optimal if we look at the problem in this way.

The discount rate is usually taken to be equal to the real rate of return you can get from investments. And this is based on three parts: growth of the economy, how quickly more stuff satisfies our desire for still more stuff, and our preference for having stuff now rather than later. For a slightly more technical discussion, see the ENRICHMENT.

Economists know that sometimes recessions or depressions happen, the Dark Ages really did engulf Europe, and civilizations have fallen in many places. But, with a sufficiently broad view, the economy has always regrown even stronger from these setbacks, as people produced more and more goods and services. Some of this growth is linked to population growth—we have more workers—but some of the growth is the increase in economic productivity per person.

Video: World GDP Per Capita (1:17)

In mainstream economics, the assumption is often made that this growth per person will continue for a long time, so that we are so far from any limits on growth that they do not have a meaningful effect on economic activity now. If you expect the economy to grow rapidly, then the discount rate is high—your grandchildren will have the resources to address problems from climate change even if you don’t invest much to help them. (Some economists have explored alternatives to this; we’ll visit such issues soon.)

Next, a single apple is more valuable to a starving person than to an overfed billionaire; the apple may be as valuable to the poor person as a yacht is to the billionaire. If you believe that economic growth per person can continue for a long time, then investing now to help future generations means that you’re taking apples from you, a poor person, and giving apples or yachts or dollars to your incredibly wealthy grandchildren. If this transfer of money to wealthier future generations doesn’t bother us very much, then the discount rate is low and we try to help them; if we object to giving money to rich people, then the discount rate is high, and we tend to spend more on us now.

Finally, we tend to behave as if now is more valuable than later, and our generation is more valuable than future generations. We won’t give the bank a dollar unless they promise to give us more than a dollar back, and we demand a greater extra payment than can be explained by the expected growth of the economy and our objections to giving money to the wealthy, even if the “wealthy” person is just us getting our money back from the bank a year later. This extra demand is just us saying that we matter most. The more we are focused on us, the higher the discount rate, and the less we invest to help the future. This is sometimes called the “pure rate of time preference”. For a person, preferring a reward now to the same reward sometime in the future is well-known. But when we choose the reward rather than giving it to future generations, some people harrumph and refer to it as “selfishness”.

Economists do NOT tell us that this is good or bad; they tell us that they have watched people buying and saving in the real world, and this is how we behave. Rather clearly, this raises large ethical issues, which we will consider later in the course—regardless of whether you call it “pure rate of time preference” or “selfishness”, some people don’t like it. For now, please don’t worry about the ethics, or the limits to growth. Because, perhaps surprisingly, even if we assume that the economy can grow forever, and we don’t want to help the future generations very much because they will be so wealthy, and we are more important than they are anyway, we still should be spending money to head off global warming if we wish to be economically efficient!

So, we have a framework to help us choose today the path that gets the most economic value (the utility of consumption) by estimating the current value of various future events. With the appropriate numerical model, a skilled economist can test various possibilities to find the optimal path, the one that gives the most good from the things we use.

The modeling is normally done with integrated assessment models. We enjoy consumption today, but investing rather than consuming now gives more consumption in the future. Writing the equations for this, as they work through the whole economic system, is a well-developed branch of economics. The integrated assessment models add a representation of the climate system, its response to the CO₂ generated by the greenhouse gases that now power most of the economy, and how those climate changes, in turn, affect the economy.

Video: Earth System (1:29)

For example, if we decide to ignore climate change, then the economy will hum along making greenhouse gases, we will initially consume a lot (good, in the model). But, the damages from the CO₂ will cause economic losses that rise rapidly, so as the model is run into the future it projects greatly reduced consumption (bad, in the model). Hence, ignoring climate change is not an optimal path.

However, if we outlawed fossil fuels today, thus avoiding much future climate change and its associated costs, we would greatly reduce economic growth. (Actually, we would have an economic crash.) This would lower consumption (bad, in the model). So, the optimum must be somewhere between do-nothing and do-everything to stop climate change from our greenhouse gases. (We’ll return in Module 11 to the possibility that modern policies are actually serving to accelerate global warming by promoting fossil fuels, and thus are further from the optimum than simply doing nothing.)

Looking at all the possible choices (or at least a representative sample, using sophisticated techniques to narrow the search) between consuming, investing in actions that will slow climate change, and investing in other ways, the integrated assessment models can be used to find the best path. In the great majority of published cases, and including cases that explore the uncertainties in our knowledge, the models find that a measured response to reduce global warming is best. The result from William Nordhaus’ DICE model is probably the best known and is quite representative: put a small price on emitting carbon dioxide into the atmosphere now, and increase it at a specified rate per year (2-3% in recent work). In his book A Question of Balance (Yale University Press, 2008), this spends $2 trillion to avoid $5 trillion in damages but allows $17 trillion in damages to occur. (We will revisit these issues! Bear with us. And, all of this is in present value.)

Please note that because the model attempts to simulate the whole economy, other possible uses of that $2 trillion (curing malaria, or feeding starving children) are implicitly included in the assessment. If curing malaria is an investment (it would greatly increase the economy, for example), it is part of the investment portfolio; if we want to spend more on curing malaria than would be justified on purely economic grounds, that is a choice we make and so is a type of consumption. Any use of money, whether it is curing malaria or heading off climate change, can be treated in the same way, as long as the use is not a large fraction of the whole economy. Thus, use of the $2 trillion to head off climate change over the coming decades is appropriate because other money is available from the whole huge economy to do other things.

Whether or not to invest $2 trillion to reduce climate change more or less depends on the discount rate used. Let’s go back to your house, as a simpler case, and suppose instead of 20 years, we think about 100 years, a time-scale that matters in climate change. Suppose that there is a problem in your house that in 100 years will cost $1000 to fix. Our equation for calculating present value, from above, is $P = F / ( 1 + D / 100 {)}^t$. With t=100 years, and F=$1000, if the discount rate is D=4%, then the present value is $19.80. Bizarre as it may seem, spending $20 now to fix a problem that will cost $1000 is not a wise investment; better to invest the money and let future generations solve the problem with the wealth you give them. Raise the discount rate to 7%, and the current value is down to $1.15; if you have a pocket full of change, you would be economically inefficient if you spent it to head off a $1000 problem. But, drop the discount rate to 1%, and you should spend as much as $370 to head off the problem. Changing the discount rate from 1% to 7% changes the current value more than 300-fold. And, you can find reasons why either value might be used.

This highlights the reality that in these integrated-assessment economic-optimization exercises, the discount rate is typically the most important issue. We will look at that soon, including the perhaps surprising result that our uncertainty about the discount rate translates into a lower discount rate over longer times. But first, a word about costs of emitting carbon.

In most of the world, it is absolutely illegal to go to the bathroom in your neighbor’s yard. Instead, people are legally required to do such things in special places (bathrooms, loos, water closets, toilets, or whatever you want to call them), and pay for sewer or septic services to assure safe disposal. Similarly, most people are required to pay someone to haul away household trash (just under 1000 pounds or 500 kilos per person per year in the US), and businesses are required to pay to dispose of their wastes. Dumping your waste in your neighbor’s yard is strictly forbidden.

If your wind turbines or solar cells break and you can’t fix them, you must pay to recycle or dispose of them. But, the roughly 20 tons of CO₂ per person per year from the US economy are dumped into the air with no cost at all to the people or businesses that produce CO₂. The same is true for much of the world, although some places have used policy actions to place taxes or fees on CO₂ emissions, but still generally less than the damages caused (see below). And, we have high confidence that the CO₂ does hurt other people.

The ability to use discounting to estimate the present value of future events means that the costs or benefits associated with emitting CO₂ can be estimated. CO₂ does fertilize plants, and in especially cold places warming may be economically beneficial, but the costs come to dominate. The cost today of the damages caused by emitting CO₂ is called the social cost of carbon.

The 2007 IPCC (Working Group 2, ch. 20 and Summary for Policymakers) reported on more than 100 estimates of this social cost of carbon, running from $-2 per ton of CO₂ (very slight benefit) to $86 per ton of CO₂ (moderately large cost). For comparison, burning just over 100 gallons of gasoline will release 1 ton of CO_2. Recently in the US, this has been about $300-$400 in gasoline. A car getting 25 miles per gallon and driven 10,000 miles per year would make 4 tons of CO₂ per year, costing the driver about $1500 for gasoline and costing society perhaps 10% of that, if you take the average of the high and low values just above. (The numbers here are all in 2000-pound short tons of CO₂. You will see different numbers if you go look at the IPCC report because they were quoted in 1000-kg metric tons, and were for tons of carbon instead of tons of CO₂; we have made the conversions for you.)

Additional estimates noted by the IPCC were as high as almost $400/ton for the social cost of releasing CO₂. Many factors contributed to this large range; again, the discount rate is often the most important control. In 2013, the US government reevaluated the cost of carbon used in calculations, and found that the cost of emissions in 2020 (not that far in the future) would be $12/ton for a 5% discount rate, $43 for 3%, and $65 for 2.5% (in 2007 dollars) and rising for emissions further in the future. The government also checked what would happen if the parameters in the calculation are near their most-expensive end rather than in the middle of the possible range, and found with the 3% discount rate a cost of $129 per ton.

Video: Social Cost of Carbon Graph (1:44)

The IPCC also noted that it is likely that all of these estimates of the cost of carbon are too low (which would probably shift the slight benefit estimates to being costly as well), because many of the damages of CO₂ are not “monetized”. Suppose, for example, that climate change from rising CO₂ causes the extinction of species that are not being used commercially. Some of those species may have had economic value that had not yet been realized, and many people may have valued those species for other reasons. But, if those species are not contributing to the economy now, their loss is not a cost of global warming in these studies. Other issues, such as the possibility of long-term catastrophic events (making the tropics uninhabitable for unprotected large animals, for example) are also not included in the costs of global warming. The IPCC notes that the calculated costs are based on only “a subset of impacts for which complete estimates might be calculated” (ch. 20, WGII, p. 823, 2007).

Video: 10 Pikas (3:22)

The social cost of carbon, if it is not offset by a tax or other fee on emitting the carbon, is essentially a subsidy from society for fossil-fuel use. We will return to this topic when we consider policy options in the next module.

Recall that the discount rate is often taken as being large if the economy is expected to grow rapidly, or if we behave as if we don’t like giving money to future generations because they will be so much richer than we are, or if we prefer things now rather than later (so, essentially, we behave as if we are more important than future generations). The last of these is often the starting point for ethical critiques of such modeling, and will come up again in Module 12. We won’t say too much here about our willingness to transfer money to wealthier people in future generations; but, that willingness won’t matter if future generations aren’t wealthier than we are. So, let’s take a look at the assumption of continuing economic growth.

Economists are surely correct—if you take a sufficiently broad and long view, the economy always has grown, as we have become better and better at providing goods and services for each other. Local reversals occurred, but the broadest trend has been upward.

The mere existence of this trend does not prove it will continue—when Dr. Alley was 20, he had been getting stronger and faster his whole life, and merely extrapolating those trends to today would make him a world-record holder in numerous athletic events, which did NOT occur.

But, economists not only see the trend, but they understand how new scientific discoveries and commercial innovations make economic progress possible as we invent and build, and pass on to future generations the roads and buildings, and the knowledge. Think of a smartphone, which is nothing but a little sand, a little oil, and a few appropriate rocks, plus an immense amount of accumulated know-how. Even with the recent shortage of rare-earth elements, there is little doubt that the world can produce far more smartphones than have been made to date, with more apps, contributing to economic growth in many ways.

However, some parts of the economy, such as fishing and forestry and farming and fossil fuels, are supported by much larger parts of the Earth. We have already seen that our energy system is grossly unsustainable—if we keep doing what we’ve been doing, the highly concentrated fuels that yield more energy than needed to extract them will run out as practical resources, possibly in decades, almost certainly before many centuries pass. Economists will rightly point out that resources don’t really run out; as prices rise, substitutes are found. But, an energy system that looks a lot like our current one is almost guaranteed to become impractical within a time frame that is short compared to the written history of humanity.

Many other human activities are unsustainable as well. We rely heavily on phosphorus for fertilizer (as well as nitrate; see below). The Earth has huge amounts of phosphorus, but almost all of it is very widely scattered and not even vaguely commercial at modern prices. We are using the concentrated deposits very rapidly. With enough energy, we could re-concentrate phosphorus we have scattered, or that nature has scattered, but that takes us back to the unsustainable energy system.

Many scholars have attempted to calculate the “ecological footprint” of our lifestyle—how much land and ocean is required to grow the food we use or the fish we catch, process our wastes and provide the other things we rely on. Typically, these estimates find that with our current practices and technologies, the Earth cannot support the population already here with the lifestyle we are living. And, with expectations of improved lifestyle, and the population growing, many people expect this imbalance to increase.

Video: Rabbits - Exponential Growth (2:50)

Technology is surely improving, as it always has, helping us deal with such challenges. But, as we bumped up against limits in the past, we used improved technologies, but we also used unoccupied space. Thus, when a shortage of natural sodium nitrate made fertilizing crops difficult, Fritz Haber figured out a new technology, using energy to convert the nitrogen from the air into nitrogen fertilizer. But, when the Yankee whalers could no longer find right whales in the Atlantic, the fleet moved to the Pacific and then into the Arctic. And for whales, when the whole ocean was utilized, that option was no longer available. True, we might have some huge breakthrough and start mining asteroids, or we might get nuclear fusion working to provide power. But without major jumps in technology, we are increasingly finding that wherever we go, someone is already there and using the resources.

Suppose we ask the question “Are there practical limits to growth, that will cause economic expansion to slow down, soon enough to affect the present value of events considered in the integrated assessment models?” You could probably find well-respected scholars making convincing but conflicting arguments that would give different answers to this question. The correct answer might be “No, there aren’t”, or “Yes, there are very strong limits that cannot be breached and that will be reached soon.” Or, the correct answer may be somewhere in-between, with the limits making growth more difficult in some areas.

Economists are well aware of these issues, and many informative discussions are available. You may be interested in the essay by R.M. Solow, 1991, Sustainability: An Economist’s Perspective, presented as the Eighteenth J. Seward Johnson Lecture to the Marine Policy Center, Woods Hole Oceanographic Institution, and available at many libraries and at sites on the web when we checked. Also see Nordhaus, W.D., 1994, Reflections on the Concept of Sustainable Economic Growth, in Economic Growth and the Structure of Long-Term Development, L.L. Pasinetti and R.M. Solow, eds., Oxford University Press, p. 309-325.

Some integrated assessment models, such as the DICE Model mentioned earlier (which you will work with in the summative assessment for this module), do consider the influence of limits to growth on economic expansion.  Indeed, the version of the DICE model we will use has the global GDP growing at increasingly slower rates as we move through the next century. Uncertainty about how GDP will grow means that such models may overestimate or underestimate the present value of future damages from emitting CO₂. However, other models have worked with the assumption that there are no practical limits to growth that will affect us soon enough to be included, using a constant discount rate over a century, for example. If we do hit limits to growth before then, such studies are underestimating the optimal effort to reduce warming now.

An extreme application of discounting can lead to absurd results. For example, with a constant discount rate, you could show that investing a penny now to stop the destruction of civilization 10,000 years from now would not be economically efficient. Such apparent silliness again is recognized in the research community, and motivates interesting scholarship, including the work by R.G. Newell and W.A. Pizer, 2003, discounting the distant future: how much do uncertain rates increase valuations, Journal of Environmental Economics and Management 46, 52-71. They found that uncertainty about future discount rates translates into a lower discount rate over longer times. Importantly, this in turn almost doubles the estimated value of taking actions now to reduce global warming from fossil-fuel CO₂. See the Enrichment linked below.

As discussed earlier, the economic studies in this field often seek to identify the optimum path to maximize the utility of consumption. Consumption is often estimated by subtracting investment (in the economy or in avoiding climate change) from the Gross Domestic Product (GDP), the sum of the goods and services in the economy.

But, total consumption as estimated through GDP is a very imperfect measure of the good, or enjoyment, we get from the economy. Consider an odd example. If family A has children and raises them, and family B has children and raises them, then no economic activity has occurred. But if family A pays family B to raise the A kids, and family B pays family A to raise the B kids, then raising kids is part of the GDP. Many economic studies would find that people are better off in the second case because GDP has risen, but few people would agree, especially if taxes were extracted from the payments in the second case.

Perhaps more relevant, after a hurricane destroys a city, economic activity is lost because people are not working their usual jobs for a while, but economic activity is gained because people must clean up and rebuild. Very few people would agree that money spent fixing hurricane damage is good, but such money appears in the GDP. On the other side, if technological progress means you get a better computer for the same cost, GDP misses the improvement.

Video: Hurricane GDP (1:38)

Various alternatives to the GDP have been developed by economists, such as the Measure of Economic Welfare (MEW; Nordhaus, W. and J. Tobin, 1972, Is growth obsolete? Columbia University Press, New York), or the Genuine Progress Indicator (e.g., Lawn, P. and M. Clarke, 2010, The end of economic growth? A contracting threshold hypothesis, Ecological Economics 69, 2213-2223). These alternatives seek to more accurately characterize real growth, or sustainable growth, in some fashion. There is much interesting and important scholarship, and much more than we can cover here.

But, if a general conclusion can be drawn from this work, it is that the recent growth of well-being probably has been slower than indicated by the recent growth of GDP. And, if this general summary is correct, then economically optimal behavior now involves greater actions to reduce climate change than indicated because our descendants will not gain wealth and thus the ability to solve the problems from global warming as rapidly as indicated above.

One also might ask whether it is really accurate that wealth allows the solution of all problems. What if global warming generates crises that wealthy future generations cannot solve? The optimizations now generally assume that this will not happen, but if problems that resist money can arise, more action now to head off climate change may be economically justified.

Even bigger questions of whether economic growth is even desirable, or whether our future goals should be very different from our past, are beyond the scope of the instructional materials of this class. However, such questions are not beyond the scope of interest of the class participants—you might wish to think about it.

Modeling the Economics of Climate Change Activity

The global climate system and the global economic system are intertwined — warming will entail costs that will burden the economy, there are costs associated with reducing carbon emissions, and policy decisions about regulating emissions will affect the climate. In the language of systems thinking, this means that there are important feedback mechanisms in this system — a change in the economics realm will affect the climate realm, which will then influence the economics realm. These interconnections make for a complicated system — one that is difficult to predict and understand — thus the need for a model to help us make sense of how these interconnections might work out. In this activity, we’ll do some experiments with a model (a modified version of Nordhaus' DICE model mentioned earlier in this module) that will help us do a kind of informal cost-benefit analysis of emissions reductions and climate change. As with the other STELLA-based exercises you've done, this one will help you develop your abilities as a systems thinker.

Instructions

Read the following pages for an introduction to this model (this introductory material& is also on the worksheet you download below) and then run the experiment using the directions given on the worksheet. As before, there is a practice version, with answers on the worksheet, and a graded version. Once you have completed the graded version and entered your answers on the worksheet, go to Module 10 Summative Assessment: Graded to enter your answers.

Files to Download

Download worksheet to use when working on your assignment

Submitting Your Assessment

Once you have answered all of the questions on the worksheet, go to Module 10 Summative Assessment: Graded. The questions listed in the worksheet will be repeated in this Canvas Assessment quiz. So all you will have to do is read the question and select the answer that you have on your worksheet. 

Grading and Rubric

The part of economics dealing with climate change goes much deeper than we have covered here. If you are interested, check out some of the references in this module. But, you should now have a working sketch of many of the main results.

Because the climate changes driven by the CO₂ from our fossil fuels will make life harder for people in the future, as well as for at least some people now, there is a social cost of emitting carbon dioxide to the atmosphere. This cost can be understood by first discounting the future damages to their present value. But, if we spend money to reduce CO₂ emissions and thus lower the damages from climate change, we are not spending money on consumption today, or on other investments for the future.

By using integrated assessment models, economists can compare the economic costs and benefits of different possible divisions of money among consumption, investment in the broad economy, and investment in reducing climate change. The optimal path is almost always found to involve doing some of all of those. Thus, rather surprisingly to some people, hard-nosed economics motivates serious responses to climate change, beginning as soon as possible. Typically, this response involves small actions now, increasing over the next decades, and relying on consistency in policies.

Because some of the damages of climate change are not yet accounted for quantitatively in these studies, they probably underestimate the size and speed of the optimal response. Similarly, if future economic growth is going to be more limited by the finite nature of the planet than assumed in the models, or by other issues, or if current calculations are overestimating the good that comes from increasing economic activity, then it is likely that more action to limit climate change would be recommended now. On the other hand, if future economic growth is faster than expected, or if we are underestimating the good from increasing economic activity, less action would be recommended now to reduce climate change. However, the balance of the literature seems to suggest overall that following the optimal path from the models or doing a little more now to reduce climate change is the economically best path.

Reminder - Complete all of the Module 10 tasks!

You have reached the end of Module 10! Double-check the to-do list in the Module Roadmap to make sure you have completed all of the activities listed there before you begin Module 11.