Cool Head on Global Warming

As the world's foremost economist on climate change, William D. Nordhaus, a professor at Yale University, has long held the planet's distant future in mind. But right now, paddling a canoe on a salt lagoon in late August, his thoughts were more immediate. They were fixed on his elementary-school-age granddaughter, crouched midship. She was hunting jellyfish.

Their summer rental home, all shingles, porches, and salt, had a beach nearby. Red jellyfish had swarmed it the day before, his granddaughter said. The lifeguard had resorted to hurling the jellies back into the ocean. It was to little avail.

"Now that's an unmanaged system," said Nordhaus, steering aft.

It's a distinction he had mentioned earlier. Two worlds inhabit this planet: The one humanity found, and the one we made. Most of modern economic life—medicine, buildings, even forests—depends on human management. But not everything. We cannot stop a coalescing storm. We cannot control all wild species. We are often at the ocean's mercy. Sometimes the jellyfish invade.

When thinking about the damage that warming will inflict, human control is paramount, Nordhaus said. Most of the U.S. economy will be resilient to climate change. We can adapt. Farmers, foresters, and coastal residents will not be so lucky, however. And the harshest toll will be taken on the most-unmanaged systems: acidifying oceans; intensifying hurricanes; vanishing species.

Action is needed, but thoughtful action. "Good policies must lie somewhere between wrecking the economy," Nordhaus has written, "and wrecking the world."

Those are the types of reasonable distinctions Nordhaus has long made in an increasingly unreasonable world. For four decades, he has wrestled with the demands of compounding uncertainty and compound interest, a tension he chronicles in his new book, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World (Yale University Press). His research deeply influences the decisions of policy makers, grappling with questions like how quickly to enforce carbon-capture controls at power plants. And like his past work, there's little doubt his new book will annoy activists in the climate debate.

"People on the alarmist and dismissive sides of the coin, both of them dislike what he does," says Gary W. Yohe, an economics and environmental-studies professor at Wesleyan University. "So he must be doing something right."

Most of all, Nordhaus wants to see a tax on carbon emissions. It's a step he has recommended, with little success in the United States, since the 1970s. Before the ozone hole. Before James Hansen's influential Congressional testimony. Before the United Nations' climate reports.

"You would not just say he was farsighted," says Jesse H. Ausubel, director of the Program for the Human Environment at Rockefeller University. "You would say he had Galileo's telescope."

Warming has never been Nordhaus's sole interest, even if he created the field of climate economics. His name has been familiar for decades to economics students as a textbook author. He made an influential stab at incorporating environmental assets into economic statistics. He even predicted, in 2002, the real costs of invading Iraq. Next year he will be president-elect of the American Economic Association. He's perennially mentioned as a Nobel candidate.

Nordhaus has also taken his share of criticism. He regularly scolds people who make claims that go beyond what the research bears: He'll upbraid climate contrarians at The Wall Street Journal; activists warning of excess threats; and other economists. Does your model imagine a farmer who never adapts to changing rainfall? He'll let you know. Even sitting on his deck, in autumnal beachwear, including high socks, brown loafers, and Ray-Bans, he is genial but sharp in correction.

"To his credit, he keeps on an even keel. He's open to new ideas," says Martin L. Weitzman, an economics professor at Harvard University who went to graduate school with Nordhaus. "Like most of us, he has become humbler over time."

Economics has never faced a problem quite like climate change, says Weitzman. Nordhaus inaugurated the field, but it's hard going. The speed of warming is uncertain. Humanity's response is uncertain. And the damage that each degree of warming will cause is uncertain.

"It's pushing the limits of our ability," Weitzman says.

Though his roots are in New Mexico, where he was born, Nordhaus and his family have been coming to these salt ponds for decades. Three years ago, he spent the summer here writing a primer on climate-change economics for general readers, especially college students. As summer waned, his ambition for the book grew.

Covering economics wasn't enough.

"The idea was, as best I could, to do an end-to-end survey," he told me.

The Climate Casino is a summation of Nordhaus's career, which was already off to a hot start when, in 1975, at the age of 33, he spent a year in Vienna, sharing an office with Allan H. Murphy, a climate scientist. They started talking about how the economy and climate were related. One weekend they went skiing, and Nordhaus brought along all the library's books that touched on warming. By the weekend's end, they were on the way to a simple model of how economic growth leads to increased carbon-dioxide emissions, which lead to climate change.

The model aided his thinking. The climate's influence on economics, and vice versa, is "too complex a process for people to think through intuitively," he said. "There's too many moving parts. What the modeling does is help you clarify the important forces."

Its clearest result? By applying a modest "carbon tax," starting at 0.14 cents per ton of carbon dioxide in 1980, the world could have begun to attach the real costs of climate change to burning fossil fuels.

That didn't happen, of course. "If we actually did what Bill proposed in the late 70s, we'd be so much better now," says John P. Weyant, a professor of management science and engineering at Stanford University.

Nordhaus slowly improved the model, balancing that work with other commitments. He served a couple of years on President Jimmy Carter's Council of Economic Advisers and became a regular contributor to reports produced by the National Research Council. In New Haven, he was famously parsimonious: When students would creep into his office, asking for a minute, he would turn over an egg timer and say: "You have three."

"The message was, manage your time," Wesleyan's Yohe says. "Manage what it is that you're thinking about."

Still, by the mid-80s, Nordhaus still did not have a satisfactory dynamic model of the economy and climate. Among the stumbling blocks: He needed to estimate warming's eventual economic damage. For that, he tried to look at existing research.

"There was nothing, just zero there," Nordhaus says.

By 1992, he had gotten the model to work. It spit out a solution for that sweet spot between wrecking the planet and wrecking the economy. His model now underlies thousands of research projects. And to this day, its answers are known as the "Nordhaus optimal."

"What's the benchmark?," Yohe says. "The benchmark is what Bill Nordhaus said."

That truism held until 2006, when the British government published a new review of climate change, led by Sir Nicholas H. Stern, a noted economist. The report was a sensation. Unlike the "ramp" of slowly increasing carbon penalties that Nordhaus advocated, the new report called for rapid action to halt global warming.

"It felt like a hot-fudge sundae for the climate-concerned," says Ausubel, of Rockefeller University.

The report was an equal sensation inside economics; the field was shocked at its details. Economic prediction hinges on the discount rate, the notion that a dollar today is more valuable than a dollar in the future, even when adjusted for inflation, because today's dollar, invested, generates returns. Nordhaus's favorite example is Manhattan Island; the $24 spent on the island in 1624, invested, would today equal the value of modern Manhattan. He had long used discount rates that reflected the returns a government might see from a typical investment.

The Stern report used a much lower, near-zero discount rate; doing otherwise discriminated against future generations, it argued. Much debate ensued; it hasn't really ended, though you're likely to find more critics than supporters of Stern's approach.

Nordhaus revisits the debate in The Climate Casino. It's possible to discount the goods of future generations without discounting the people, he argues. Besides, discounting reflects how the world actually works: A country is unlikely to invest in wind farms that produce a 1-percent annual return when it borrows money at a 5- or 10-percent interest rate. Such calculations reflect the cold hand of analysis, but that cold hand is human.

"The basic point is not discrimination against future generations," Nordhaus said. "It's looking for high-yield investment."

The Stern report was a useful provocation. It has helped spur a consensus that, at the least, discount rates might decline over time, reflecting uncertainty about long-term growth, a reality that Nordhaus reflects in his new work. The report also contributed to a focus on extreme, unlikely events, like unprecedented rapid warming; even a tiny chance of an extreme could make climate controls infinitely valuable, as Harvard's Weitzman has argued.

Then there are tipping points, thresholds like the collapse of the Atlantic circulation or the ice sheets; each could exacerbate warming to a point of no return, and we don't know when or if they might happen.

They've proved particularly difficult, says Stanford's Weyant. "Bill, in his heart of hearts, thinks that's the weakest part of his analysis."

Indeed, there's so much uncertainty that some economists have questioned the utility of models like Nordhaus's; their precision suggests a level of knowledge that is "illusory," Robert S. Pindyck, an economist at the Massachusetts Institute of Technology, has said. Weitzman and Stern have made similar remarks.

But then, Nordhaus has never recommended blind faith. Consider the original reason for his model, back in Vienna: to clarify his thinking, not to do the thinking. There's a reason for his book title, for the dice on its cover. The climate is a roulette wheel, and it's sensible, he writes, to pay a premium on predicted damages to avoid the double-zero uncertainties, like tipping points. The model can't capture it all.

How much should we pay? Nordhaus and his peers may help us make that decision, but they'll continue to disagree. And in the end, that's a debate society needs to have. It's why we have politics.

For now, Nordhaus has more work to do. His recent analysis has shown that few things are more important in setting a temperature-rise target than full, global collaboration on climate action. He is coming to the view that countries should be penalized through tariffs if they don't curb emissions, something that Nordhaus and other economists are loath to do. The effectiveness of sanctions hasn't been shown empirically, however. That's his project for 2014.

"I suspect it's true," he said. "But I don't know for sure."