An ambitious climate policy is economically beneficial

An economically optimal climate policy is in line with the Paris Agreement’s 2-degree temperature target. This is according to a new study involving the University of Gothenburg, Chalmers University of Technology and others. The study updates the cost/benefit analyses of climate measures made by Economics Laureate William Nordhaus.

The economist William Nordhaus was awarded the 2018 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his research on climate-related questions. In particular, the prize recognized his development of the DICE model (Dynamic Integrated Climate-Economy), which has gained widespread influence. When he calibrates his model, he found that an increase in the average temperature of 3.5 degrees until 2100 is economically most optimal. This new level was well above the Paris Agreement’s 2-degree target and would have resulted in extensive negative consequences for nature and society in large parts of the world.

In a new study published in Nature Climate Change, a team of researchers in Sweden, England and Germany has updated this DICE model.

“We made a number of important changes. In part, it was about an improved calibration of how much carbon dioxide and heat is absorbed by the oceans, and in part updating calculations of how much climate damage will cost in economic terms,” says Daniel Johansson, associate professor in physics resource theory at Chalmers University of Technology, and one of the authors of the study.

An important factor that determines what is economically optimal involves discounting or comparing future costs to current costs. Fundamentally, this is a value judgement, and in the study the research team used a large number of expert assessments of these ethical questions, which deal with how the current and future generations’ interests should be weighed against each other.

These changes to the model lead to the conclusion that a 1.5–2 degree increase in average temperature is economically optimal.

“Nordhaus has shown the way forward in these questions, like the need for a significant price on carbon dioxide emissions throughout the world, but compared to his previous analyses, our results show that more ambitious targets can be supported with economic arguments,” says Thomas Sterner, professor of environmental economics at the School of Business, Economics and Law at the University of Gothenburg.

According to the researchers, in wider international climate policy discussions, the study can support climate targets in line with those adopted in the Paris Agreement and thereby increase acceptance for setting a tax on emissions that meets the adopted climate targets. The model points to a carbon dioxide tax of around USD 100 per tonne, which is in line with the current carbon dioxide tax in Sweden and four times higher than the price in EU’s emissions trading scheme, ETS.

“Achieving ambitious climate targets requires politicians to introduce a significant tax on carbon dioxide, but it also requires investments in new technology like electric cars, solar cells, hydrogen and carbon capture, to name a few examples. If this is done, it is possible to achieve ambitious climate targets like the 2-degree target. But we also must be aware that there is significant political resistance in large parts of the world, presenting us with a major challenge. This is not a simple question,” says Christian Azar, professor of physical resource theory at Chalmers University of Technology.

Link to the article in Nature Climate Change: “Climate economics support for the UN climate targets”

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