29 November 2021

The Spirit of Green

the economics of collisions and contagions in a crowded world

William D Nordhaus
2021, Princeton University Press, 368 pages,
ISBN 9780691214344

Reviewer: Keith Wade, Chief Economist, Schroders

Ahead of COP26 in Glasgow the pandemic had highlighted the challenge of tackling climate change. Even with much of the world in lockdown and economic activity close to a standstill the UN estimated that emissions of CO₂ only fell by 7% in 2020. Such a change will bring a reduction in global warming of just 0.01 degrees centigrade by 2050. To limit global warming to the 1.5 degrees set out in the Paris Accord, recently endorsed by COP26, we would need to see a reduction in emissions of 7% every year until 2030.  

The Spirit of Green by Nobel laureate William Nordhaus offers a primer on the economics of the environment and some key steps to limit global warming. It is wide-ranging covering economics, politics and the ethical issues which surround creating a Green Society, the term Nordhaus uses to describe a society that identifies and remedies the harms created by environmental damage whilst balancing the needs of current and future generations. In this respect it is ambitious and comprehensive, bringing insights from areas beyond economics.

As would be expected from the author, the book contains entertaining and original analysis such as the use of lumens and the evolution of lighting to illustrate the growth of productivity going back to 1750 BCE. One example I particularly enjoyed was his analysis of the economic cost of colonising Mars, presumably as a future alternative to living on our own over-heated planet.

Although the author shows the success of regulation in reducing pollution in the US, he emphasises market solutions and economic efficiency in his analysis. This puts the focus on taxes as a means of internalising the externality of carbon emissions. Without putting a price on CO₂ it is not possible to steer consumers away from carbon intensive forms of energy, or to create the incentives for firms to develop the new technologies needed to de-carbonise our transport and energy systems.

Investment is particularly important as the author shows in reviewing potential projects for a zero-carbon energy sector where the required technologies such as carbon capture and storage (CCS) are not sufficiently developed. Greater progress clearly needs to be made, but I was surprised that there was not more on the promise of wind power which has seen falling costs and made such an impact on energy supply in Europe and China.

After setting out the principles for a Green society, touring the current state of thinking on the science of climate change and examining the arguments of sceptics, the book takes a sobering look at the progress toward limiting global warming. For all the discussion on regulation and carbon taxes the author is clear that effective policies have not been introduced in any major country or for the world as a whole: “whether the goal is policies that keep temperatures near 2, 3 or 4 degrees centigrade, we must be realistic and realise that the world is not close to attaining those goals.”

This is the real challenge for policymakers and Nordhaus has some strong words for the role of politicians, particularly the Trump administration which took the US out of the Paris Accord and branded climate change a Chinese invention to advance its manufacturing sector.

However, the book is not a counsel of despair. More can be done and Nordhaus proposes a four point plan to meet the challenge of global warming. First there has to be greater public acceptance of the science and impact of global warming to gain political support. Otherwise, the scale of the action needed plays into the hands of those (often with vested interests) who cast doubt on the causes of global warming. The electoral cycle and politicians’ time horizons are short thus increasing the temptation to kick the problem into the long grass. Delay, however, only means subsequent action has to be more drastic if it is to succeed.

Second, nations must establish a global carbon tax on emissions of CO₂. At present this is close to around $2 per ton and zero in many economies. Nordhaus suggests $40 as a target, although even this would be inadequate unless accompanied by other policies and developments.

Third, there needs be a climate compact whereby countries commit to reducing emissions, agree the level of carbon taxes and create mechanisms that penalise those which do not participate. And fourth, substantial government support is needed for developing the new technologies to speed the transition to a low carbon economy.

In the light of COP26 we are some way from taking these steps. There may be greater acceptance of the threat of climate change (helped by the publication of the UN’s latest Assessment Report ahead of the conference) and governments seem more committed to investing in the infrastructure needed for reaching net zero. However, there was no progress on a global carbon tax or a climate compact: new technologies and regulation rather than taxes and penalties on those who miss their targets.

We should not be surprised as the COP meetings and agreements are voluntary. Nonetheless, without an enforcement mechanism to punish free riders on emissions targets we will probably make little progress. Similar arrangements have been shown to work in areas like trade with the World Trade Organisation (WTO) policing agreements for example. Although the author is not specific on how enforcement would be implemented in a climate compact the recent EU proposals on Carbon Border Adjustments give an idea of possible actions.

Arguably, the WTO emerged from a different world and proposals today to punish countries could well result in a significant collision between the developed and emerging economies. Nonetheless, the Spirit of Green may well indicate the direction of travel beyond COP26.