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The Humble Economist:

What economics can – and can’t – tell us about climate change

James K. Boyce University of Massachusetts Amherst Paper prepared for the INET Plenary Conference Edinburgh, Scotland 21-23 October 2017

Global CO2 price in 2010 US dollars. Data from Nordhaus (2017a), Table 1.

Carbon price paths

$36.70 $43.50 $51.20 $103.60 $229.10 $284.10 $351.00 $1,006.20 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100 2020 2025 2030 2035 2040 2045 2050

SCC ($/ton CO2) Year

DICE optimum vs. 2.5 °C maximum

Welfare Optimizing 2.5 Degree Maximum

Temperature paths

Notes: Base = business-as-usual scenario (no climate policy); Opt = cost-benefit economic optimum from DICE model; T<2.5 = path that limited global mean temperature increase to 2.5 °C; Stern = policy with low discount rate recommended by Stern Review (2007). Source: Nordhaus (2017b), Figure 4.

Marginal Costs of Emission Reduction Options

Source: McKinsey & Company (2009) Pathways to a Low-Carbon Economy: Version 2 of the Global Greenhouse Gas Abatement Cost Curve.

Frequency distribution of estimated long-run price elasticities of demand for energy

Note: Distribution of 959 estimated long-run price elasticities of demand obtained from multiple studies. Source: Labandeira et al. (2017), Fig. 1.

Incidence of $200/t CO2 tax in U.S.

Note: Based on consumer expenditure survey data for 2012-2014. Quintiles based on equivalent household expenditures using the square root scale, where equivalent household expenditures = household expenditures/(household size^1/2). Source: Calculated from data presented in Fremstad and Paul (2017), Table 10. 12.5% 11.4% 10.6% 10.0% 8.7%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 1 2 3 4 5

Carbon tax as percentage of household expenditure Household expenditure quintile

Net incidence of $200/t CO2 tax coupled with dividends in U.S.

Source: Calculated from data presented in Fremstad and Paul (2017), Table 10. 20.4% 7.9% 3.0% 0.7%

• 3.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

1 2 3 4 5

Net transfer with dividends, as percentage of household expenditure Household expenditure quintile

Percentage of individuals receiving positive net transfers from $200/t CO2 tax coupled with dividends in U.S.

Source: Calculated from data presented in Fremstad and Paul (2017), Table 10. 88% 77% 65% 50% 28%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1 2 3 4 5

Percentage of individuals receiving positive net transfer Household expenditure quintile