The Economics of Inaction on Climate Change: A Critique

Economic models of climate change often take the problem seriously, but paradoxically conclude that the optimal policy is to do almost nothing about it. We explore this paradox as seen in the widely used DICE model. Three aspects of that model, involving the discount rate, the assumed benefits of moderate warming, and the treatment of the latest climate science, explain the timidity of the model's optimal policy recommendation. With modifications to those three points, DICE shows that the optimal policy is a much higher and rapidly rising carbon tax. Our modifications exhibit nonlinear interactions; at least at low discount rates, there is syne rgy between individual changes to the model. At low discount rates, the inherent uncertainty about future damages looms larger in the analysis, rendering long-run economic modeling less useful. Costeffectiveness analysis, focusing on the generally shorter-term cost side of the problem, reduces this problem and may make a greater contribution than economic optimization modeling.