How to Be a Green Economist, Nordhaus-Style

William Nordhaus, of Yale University, won the Nobel Prize in Economics in 2018 for his long-standing work on environmental economics. For decades, he analyzed the economic impact of environmental change, built models to integrate long-run economic processes with long-run environmental processes, and became a staunch proponent of carbon taxes. As a well-educated and devoted economist, he saw his contribution to this emerging field as ensuring that economic processes with negative external effects (“externalities”) internalize these damaging spillover effects on others. 

This year, Professor Nordhaus came out with an ambitious, all-encompassing yet somewhat confused book: The Spirit of Green: The Economics of Collisions and Contagions in a Crowded World. Ambitious because he tries to condense into three-hundred-odd pages everything about a good society, about the green mentality, the science of climate change, the economic issues of externalities and public goods, political philosophy, behavioral economics, as well as specific policy recommendations like carbon taxes and global climate agreements. He describes it as focusing “on the science and economics of climate change,” but we get a minimum of science, and lots of appeal to scientific authority.

The book is confusing because Nordhaus deals with every topic under the economic sun and it’s not quite clear what his central argument is. Besides, its relatively short and well-structured chapters are interrupted by the occasionally unrelated topic – like the 20-plus page dive into the pandemic and the many errors of the Trump administration. As a theme relating to the green ethics of deep ecology or economic rationales for government-provided public goods, it’s odd and uncomfortable. The chapter hangs on by a thread, only because, like CO₂ emissions, a pandemic includes “external costs” when an infectious person operates in society. 

Nordhaus sketches a “well-managed” society that is vague enough and hand-waving enough to pass as a campaign slogan for most (left-leaning) political movements: equality, corrective taxation, and interventionist government to address shortfalls and unfairness in private affairs. Wealth gaps are too big, animal rights not sufficiently advanced, political decisions not taken at the right levels, and current processes too unsustainable to leave our descendants at least as well off as we are: “A fair society would ensure that everyone up and down the income ladder would enjoy clean water, healthy air, green space, public parks, and similar aspects of an environmental living standard.”

This is a progressive wish list, not a serious academic investigation into the economics of climate change. That’s permissible as it’s meant to be a big picture book, introducing the topics to a wide audience and describing fundamental ideas and how to think about green issues. Still, one would expect a little more delving into the weeds of climate models or the economics of climate change from a recently minted Nobel Laureate. 

What’s good is Professor Nordhaus’ relentless emphasis on prices doing the heavy economic lifting. He’s not opposed to government regulations of pollutants or subsidies for promising technologies – indeed, he often trumpets their value – but he comes back to the sound economic point that prices could and should do most of the work. Economists have investigated externalities for decades and centuries, and the best solutions for those that cannot be litigated or assigned property rights are to increase the market price. Funds raised from carbon taxes ought to be used either to subsidize other technologies, or to alleviate the pain for lower-income households, as green taxes overwhelmingly hurt the poor more than the rich.

Prices are informationally efficient; they’re easily manageable, and they coordinate the actions of millions and millions of people that appeals to behavior or conscience never could. “We don’t need to know anything about the butcher or the brewer or the baker to be confident that our actions are ethically neutral or positive,” writes Nordhaus, echoing the famous line from Adam Smith. A consumer does not need to know how an object was produced, where its components came from, or what energy source was used in the process – all he or she needs is to pay the price, much like we do for other goods in the economy. He even favors pricing unowned public resources, like water or public lands, arguing that the government’s current mispricing squanders these resources. 

What’s even more welcome in an otherwise hostile climate debate is Nordhaus’ acceptance of electricity sources that your average climate activist hotly opposes. He’s happy to include nuclear, indeed praising it for its extraordinarily low CO₂ emission, and even on occasion natural gas, which he quietly lumped together with wind as “low carbon” energy inputs. In a single line in a technical section on electricity prices under various carbon taxes, he rightly points out that “renewables have severe limits in terms of technical issues (such as load curves) as well as long-run supply limitations” – which is to say they’re low-density, highly intermittent, and cannot match the timing of modern society’s electricity demands. It’s stunning to see how he glosses over this crucial obstacle, waving it away with notions that a renewable electricity grid “would be a massive undertaking.”

Still, he admits that natural gas and nuclear are part of a crucial low-carbon electricity mix, and that renewables are deficient. Although it’s hidden deep into Chapter 18, I’ll take the win. 

What’s so refreshing about Nordhaus’ overall account of climate economics is that the goal is to maximize benefits, not just minimize the cost of climate change (which is the single-minded goal of many policymakers and most green activists). Both abatement costs and climate damages matter. To achieve that we shouldn’t do more than shift what we’re currently doing in the green direction rather than completely overhaul society or bankrupt our grids. Nordhaus happily scolds so-called green investment funds for excluding nuclear from their investments, and he shows how arbitrary and unhelpful many of their investment criteria are. 

The Not-So-Good-Stuff

A skillful and persuasive investigator takes his opponents’ arguments in their best form, and tries to rebut these – i.e. strongmanning rather than strawmanning. In The Spirit of Green, Nordhaus hopelessly fails at this task. He addresses two counter-arguments against the climate hysteria notion (or three, if you count references to President Trump’s “It’s a China hoax.”). First, what’s known as the global warming hiatus where, between 1998 and 2012, global temperatures didn’t rise even though CO₂ emissions continued to pour into the atmosphere. Second, he cites arguments that CO₂ isn’t technically a pollutant, and may have accidental benefits such as global greening. 

As rebuttals of criticism to Nordhaus’ core argument, these are weak. First, the warming pause is by now very old news; it was a reasonable thing to ask dead-certain scientists when the relation between CO₂ and global temperatures didn’t seem to be as linear as they suggested, but it was hardly strong proof that climate change wasn’t happening, or strong actions to protect societies against its effect were not needed. 

It was a call for scientists to investigate where the heat had gone (the oceans), and what was missing in their models (a lot). 

Second, it is undeniable that higher atmospheric CO₂ has contributed to global greening in recent decades, but the proper counterargument is to show that the dangers outstrip these minor benefits – not, like Nordhaus, engage in a half-page discussion of what the U.S. Supreme Court considers a pollutant. We are not lawyers, and this is not primarily a legal dispute. Climate impacts from CO₂ emissions have benefits as well as costs, and it’s our job as scientists and economists to appropriately account for them. 

Third, none of the good arguments against Nordhaus’ own position makes an appearance: that climate modelers are horrifically imprecise, tilted always to the catastrophizing upside; that technology and wealth have swamped any negative event that a changing climate has thrown at us (indeed, has actually made us much safer), and is likely to do so again; that adaptation, that much-reviled excuse for climate inaction, makes current and future damages from climate change orders of magnitudes lower than in most models. Besides, Nordhaus mostly ignores that the theoretically simple addition of a global carbon tax is fraught with difficulties, from political horse-trading to implementation, to assessment, and how to ensure the funds are used to finance the right stuff. And that’s assuming we get the level of the tax right, and most countries globally on board. 

Yes, global climate change is a threat and a challenge for the world, but it’s not the only issue – not in the rich world, and most profoundly not in the poor world. A single-minded focus on combating climate change is not only misguided, but inefficient in the proper economic sense of the world. 

Even so, Nordhaus deserves credit for favoring market solutions in a political field where the Overton window ranges between abolishing capitalism and banning fossil fuels in the next decade: “[T]he useful message of free-market environmentalists is this: do not overdo your Green enthusiasm. Regulations can be too hot as well as too cold.”

Is there a way to be a concerned environmentalist without falling prey to the “It’s all a scam” on one side and “It’s the apocalypse” on the other? I believe so; deep down, I believe Professor Nordhaus does so too. The Spirit of Green shows it, but you need to dig a bit to find it.

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