roll the DICE: the risks of environmental economics

by haydon etherington, 3rd year government and economics at LSE

courtesy of anton vietrov, unsplash

courtesy of anton vietrov, unsplash

Last year, environmental economist William Nordhaus won the Nobel Prize in Economics for incorporating the environment into economic models.

Nordhaus’ success was built on a complex model of the economy and the environment, called DICE. It measures the impact of future climate change alongside the costs of reducing carbon output today. Through this, policymakers can find the most efficient way to cut carbon. DICE is a breakthrough in economics and well-regarded across the discipline. But it also highlights the places economics fails.

In 1991, Nordhaus dismissed the idea that the US economy was reliant on the environment. He said, “90 percent of US economic activity has no interaction with… ecological changes”. He explained that agriculture only accounted for three percent of US output, so ecological changes would not drastically affect US GDP. We have no reason to doubt these figures. But as it stands today, 85 percent of US food is domestically grown. So, this three per cent of GDP is rather more important than it seems. This exemplifies the role of economic models in the climate crisis. By focusing on such specific information, they miss the point. Economics cannot guide us alone – to assume so creates a huge risk for our environment.

DICE itself suffers from a narrow focus. As is the case with any attempt to model the future, it has to put a number on how much we care about tomorrow compared with today. This is called the discount rate. DICE has been criticised by several climate scientists, notably Nicholas Stern, for valuing the present too highly. In 2013, Nordhaus found that the most efficient measures would see the earth’s temperature rise by a maximum of three degrees Celsius. This is one degree higher than the target set by the Paris Accord. Even at two degrees, the world will suffer profound changes. Sea levels will rise. Catastrophic weather events will happen more often. Changing temperatures will affect the abundance of food and water.

It is worrying that the foremost environmental model in economics suggests we could surpass three degrees to continue high economic growth. Nordhaus himself accepts that DICE doesn’t consider a point of no return. By not acknowledging a tipping-point, we risk sleepwalking into disaster. Even if DICE reflected the need for more radical action, it doesn’t account for inequality. The model calculates a social cost of carbon for the world, not for individuals. But the world does not suffer as one – global warming impacts developing nations, islands, coastal and dryland regions the most.

William Nordhaus. Courtesy of  Bengt Nyman , source: Wikimedia Commons

William Nordhaus. Courtesy of Bengt Nyman, source: Wikimedia Commons

In response, Nordhaus and others developed RICE, a regional model. Here, the world is split into 11 regions. These include the US, the EU, China, Japan and the former Soviet Union. The others, India, Indonesia/Brazil, and a series of unnamed large, medium and small countries, are sometimes simply aggregated into the ‘rest of the world’. It doesn’t consider huge population centres, such as India, as main regions. Nor does it single-out the most at-risk countries; Bangladesh, Fiji or the Maldives are not once mentioned as a main consideration.

RICE also fails to account for class inequalities; the poorest in society are likely to suffer the most in a climate catastrophe. The rich have the means to mitigate and adapt to some changes – but this is a privilege for the few. Here, Nordhaus is not radical or sensitive to inequality. He focuses on maintaining current growth across the globe. Nevertheless, his work is a step forward. As economists begin to look away from current GDP and towards sustainable growth, the planet can only benefit.

But we cannot kid ourselves that economic models are the only way to solve our problems. Particularly ones which contravene our previous commitments such as the Paris Accord. Policymakers can use DICE and other models as tools to fight climate change. But they cannot gamble on high-growth economic policy as the only solution.