Content
Introduction and Opening Remarks
The lecture begins with a welcome to students and an introduction of a special guest speaker, Christina Lundgren from the Institute on the Environment. The instructor notes that while some people are still arriving, it is time to get started with the day’s presentation. Christina is invited to speak about happenings at the Institute on the Environment and will take the first few minutes of the class.
Guest Speaker: Christina Lundgren and the Institute on the Environment
Introduction and Personal Background
Christina Lundgren begins by introducing herself and sharing that she uses she and her pronouns. She works at the Institute on the Environment, referred to as INE, and mentions that she was able to travel there via the Gopher Way despite the cold weather outside. She notes that the Institute is just a short walk up the stairs and over from the classroom. She asks the students if any of them have visited INE before, and upon receiving no clear affirmation, she decides to describe the space.
The Physical Space of INE
Christina describes INE as having a beautiful atrium space that offers great natural lighting and is an excellent place to study. She explains that this atrium space used to be an old facility for showing off livestock but is now an indoor part of the building. This historical transition from agricultural exhibition space to modern educational environment serves as a backdrop for understanding the institute’s mission.
The Mission of the Institute on the Environment
Christina advances to her next slide and explains that the Institute on the Environment focuses on understanding how people relate to and are included in the environment. She notes that the students in this economics class are already engaging with this concept by studying the economics aspect of environmental issues. She then explains that the main reason for her visit is that the course instructor sent out information about the Sustainability Studies minor, and the current class counts as an elective toward that minor.
The Sustainability Studies Minor Program
Christina emphasizes that the Sustainability Studies minor is super flexible and accessible. Even if students are taking another course that is environmentally related but is not technically listed as an elective, it is really easy to petition for it to count toward the minor. She highlights that the minor is particularly great for students interested in the people aspect of the environment. Taking the minor helps students meet people from across the university in different disciplines and hear how other people view sustainability from their unique perspectives.
Organizational Structure and Career Opportunities at INE
Christina explains how the Institute on the Environment conducts its work through several different teams and positions. The Institute has an education team, which is the team that Christina works on, focused on activating leaders. They also have a research team, and Christina notes that if anyone in the room is interested in research, there are often student positions that are posted on a regular basis. The Institute also works on communications and organizing, and these are student staff positions as well. Finally, there is a dedicated communications team.
Christina acknowledges that all the students are probably already interested in the environment, but if they are interested in additional classes, the Institute compiles a list of these courses. She notes that the slide deck she is using will be shared with the class later and is open to students of all degrees across the university. The idea behind this list is that if students are interested in sustainability and want to get a different lens on the topic, these courses will offer that alternative perspective.
Core Courses in the Sustainability Studies Minor
Christina asks if any students have taken SUS 3003, the introductory course, and notes that she sees at least one student who has taken it. She describes this as a really awesome course that is taught every fall and spring semester. It serves as a really great introductory course to thinking about how culture and sustainability fit together.
She then moves on to describe the capstone course, which is another core requirement. The first course she shared (SUS 3003) and this capstone course are the two core courses that students need to take for the minor. The remaining electives, like the current economics class, could be substituted in to count towards the minor. Students need to take three total additional electives to round out the minor, in addition to the two core courses of 3003 and 4004.
The Capstone Course and Community Engagement
Christina explains that the capstone course allows students to work with community partners on a project. She emphasizes that this kind of experience is great to add to a resume. In general, all the courses in the minor have some sort of component where students are doing community-engaged work. This focus on real-world application and community partnership is central to the minor’s philosophy.
Internship Opportunities Through the Minor
Christina describes a course that is great for anyone interested in doing an internship in something related to sustainability. The course instructor, Mary Hahnemann, works with many different community partners and compiles a list of host sites every year for internships. If students want to do an internship in the fall or next spring, the course is offered in both semesters. Some of the internships are paid from the beginning, while others have a scholarship that students can apply for. The process is pretty straightforward. As long as students have demonstrated financial need, they are pretty much guaranteed to get the scholarship to help fund that internship experience.
Upcoming Sustainability Events
Christina notes that one of the slides says to present at the Sustainability Symposium, but it should now say to attend. She explains that earlier in the week, on Monday, the presentation submissions for the symposium closed. However, if students want to meet students from all five campuses of the university system—Crookston, Morris, Duluth, Twin Cities, and Rochester—they will all be gathering at the Institute on the Environment, which she mentioned earlier in her talk. She describes it as a really cool event. There is free lunch, and students get to network with local professionals. Christina emphasizes that it is really a fun experience to be uplifted and see what cool things their peers are working on. She notes that sustainability can be kind of a downer sometimes when you are looking at what is happening in the world, so the symposium is a fun place to be inspired by others’ work.
Environmental Justice Event
Christina asks if anyone has heard of environmental justice and notes that it is kind of a jargony topic, but she sees head nods indicating that some students are familiar with it. For those who have not heard of it, she explains that environmental justice is the intersection of social justice and the environmental movement. The Institute has a really great event focused on this topic, and it will be their fourth or fifth year doing it. The event will be held over on West Bank at the Humphrey School of Public Affairs. At the event, there will be networking, job and internship tables where students can find out about opportunities. Students can pack some seeds if they are planning on having a spring garden, though this is optional. And once again, there will be lunch and really great community partners sharing about environmental justice in their local community.
Other Programs and Leadership Opportunities
Christina mentions that the Institute has so many other programs, and notes that the slides showing them do not even include all of them. Many of these are paid leadership programs, except for the Germany study abroad course. She asks if anyone has participated in Undergraduate Leaders, and receives no affirmative responses. She then asks about the Germany study abroad course and again receives no confirmations. Then she asks if anyone has participated in Clean Energy Leaders and notes that one or two students raise their hands. She comments that it is great that the Institute has a resident INE person who has done a lot of their programming, and notes that when someone does something with INE, they tend to come back for more programming because there are so many great continued opportunities for development.
Details About Leadership Programs
Christina provides details about the Undergraduate Leaders program, explaining that it has an equity focus, is year-long, and includes a one thousand six hundred dollar stipend. The Germany course, she notes, is super fun. It is a two-week study abroad program over winter break. So if students cannot take a whole semester to study abroad or want to squeeze in another study abroad experience, this one is really great. She explains that Germany is really far ahead in renewable energy, so it is fun to see what they are doing there and come back and make that transition in Minnesota, because Minnesota has been copying a lot of what has been happening in Germany’s renewable energy process.
Christina explains that Clean Energy Leaders is a year-round program that includes a summer internship with a focus on clean energy. She emphasizes that everything she has shared, even though it says clean energy or something like that, is open to students of all degrees. She notes that, as the students surely know, we need everybody when it comes to climate change. We need the artists telling the stories, we need the researchers doing the research, and we need every other discipline that one could imagine.
Partnership and Host Sites
Christina shows a final slide that displays a variety of host sites and partners that the Institute works with for internships and community engagement. Students can see a mix of nonprofits, government, and corporate partners. She notes that if students are curious about any of those avenues, the Institute’s programming touches these different areas. She highly recommends these opportunities if students are looking for resume experience and professional development.
Closing of Guest Presentation
Christina concludes by saying that this is all she has to share and asks for questions. When no questions are asked, she notes that she guesses she would just add that she loves INE. She came from working there for five years, and it is really an awesome thing to have just down the hallway. She thanks the instructor and class for having her. She mentions that she has a slide at the end for the newsletter, and if students decide to sign up, it basically shares everything she has shared with them, but when it is relevant for applications. She offers to send the slides around to the class, and the instructor thanks her for her time.
Main Lecture: Climate Change Economics
Transitioning to the Day’s Content
The instructor takes over and thanks Christina for her presentation. The instructor then announces that they are going to get started picking up where they left off yesterday. They note that they have updated the slides and will be using the same slides as they were before. They acknowledge that while the slides are the same, they have added a new slide for the Day Two Agenda.
The Challenge of Aligning Lectures with Topics
The instructor comments that it is always hard having the lectures line up perfectly with the topics, as topics are sometimes longer or shorter than a single lecture period. The approach of using the same slides for multiple days is explained as a workaround to this challenge.
Review of Previous Day’s Content
The instructor reviews what was covered the previous day. They explain that the class talked about the basics of climate change and the sort of irrefutable need to think about this issue. The class also set up the fact that there are different economists who think about climate change differently, and there is really interesting debate among them. The instructor notes that they then talked about the first and seminal piece of work in the area of climate economics: the Nordhaus DICE model. The instructor explains that they are going to finish that discussion up today, hence they are on the same slides.
Today’s Agenda Overview
The instructor outlines what will be covered in today’s lecture. After finishing the DICE model discussion, they will contrast it with a different economist’s report: Sir Nicholas Stern’s Stern Report, which approaches climate change from the other end of the spectrum. The instructor explains that Nordhaus is essentially saying there is no really big need to worry about climate change and that a little bit of investment is all that is needed, with anything beyond that being too much. Whereas Stern uses a lower discount rate and finds that the situation is actually very dire, though the analysis goes much deeper than that simple characterization.
The instructor then explains that they will talk about how these contentions about what is the optimal amount of climate mitigation depend on a cool set of models that will be referred to as integrated assessment models. They note that the class started to see the basics of those models when they talked about Nordhaus and the idea of maximizing utility subject to the choice of how much to abate. The instructor explains that since Nordhaus came out with that basic approach, it has blossomed into a huge area of research with many different integrated assessment models. The instructor notes that Stern uses one of these models too, but it is part of a trajectory where climate and economic science is going.
Conclusion of the Day’s Topics
The instructor notes that they will conclude the lecture by showing how integrated assessment models connect to a really important policy-relevant number called the social cost of carbon. They explain that they will talk about the literature on the social cost of carbon and how it links to policy.
Administrative Notes and Questions
Before diving into the content, the instructor asks if there are any questions regarding timing or the two different assignments that they have outstanding. They remind students that there are the weekly questions due Friday and an assignment due Monday. They ask if there are any other questions, and when none are forthcoming, they indicate they are ready to proceed.
The DICE Model Results and Logic
The Punchline of the DICE Model
The instructor begins by noting that where they left off, they concluded with the punchline of the DICE model, but they did not dive into the results in more detail. The punchline is that in one of the more recent versions of the model with a three percent discount rate, it would be optimal to abate carbon emissions or other greenhouse gases if it was cheaper than fifty-one dollars per ton of carbon dioxide emitted. The instructor explains that this is the social cost of carbon, and they will formalize this concept more broadly in modern integrated assessment models. However, before they do that, they want to talk through the basic argumentation that Nordhaus used in developing his model.
The Basic Approach and Logic
The instructor explains that essentially, Nordhaus’s approach was to optimize and find the optimal amount of climate mitigation to maximize human happiness. The instructor notes that this is just like standard economic growth, where economists try to maximize growth. Here, Nordhaus is going to do the exact same thing, but with the added factor that there will be potential damages to the economy. The instructor explains that Nordhaus has the option to spend money on abating emissions, and maybe that will be beneficial in terms of having a positive return on investment in those emissions reduction programs.
The Central Tension
The instructor identifies the basic tension in Nordhaus’s approach: the economy can take steps to slow emissions, but that is going to be expensive. All that expense spent on abating emissions will come at the cost of less consumption today. The instructor notes that this fundamentally relates to the concept of intergenerational equity in the discount rate. Present generations would be asked to reduce their consumption in return for lower damages and thereby higher consumption in the future.
The DICE Model Framework
The instructor explains that basically, all the DICE model does is identify the optimal path for consumption, just like the Ramsey model they discussed earlier, but with these extra bits of information about climate and damages. With that context established, the instructor is ready to discuss what the actual results of the DICE model are.
The DICE Results
The instructor presents Nordhaus’s key findings from the DICE model. The DICE model says that the optimal path will have a two point eight percent loss in GDP. The instructor emphasizes that this is not saying what would happen if the world just did not do anything about climate change. This is with optimal mitigation according to Nordhaus’s framework. Nordhaus is saying that the world will lose some GDP, but this is the least amount of GDP that could be lost given the constraints of the problem. The corresponding temperature increase with this optimal mitigation is three point five degrees centigrade warming. Both of these figures are essentially by the year twenty one hundred, though Nordhaus centers on twenty ninety-five in this particular publication.
The Historical Significance of the Research
The instructor notes that this is a really old journal article, but it is the work that led Nordhaus to win the Nobel Prize. The instructor then shows the basic results in a table from the publication, which displays the impact of alternative policies and how they affect the discounted consumption, measured as the net present value of consumption going way out into the future.
Nordhaus’s Policy Comparison
The instructor explains that Nordhaus looked at a business-as-usual plan where society does not do anything at all with respect to climate change: no controls, no emissions abatement. Under this scenario, the discounted value of utility is measured in trillions of dollars. If society does not do anything at all on climate policy, the value comes to seven hundred thirty-one point sixty-nine trillion dollars. That is a lot of value.
The instructor notes that the critical value to examine is how that number compares with different policy options that Nordhaus considers. The first policy he presents is the optimal policy. When this policy is implemented, the discounted value of utility comes to seven hundred thirty-nine trillion dollars when discounted to the present. The instructor notes that this is a little bit better than the business-as-usual scenario, representing about nine trillion dollars more in value. This is measured as two hundred seventy-one billion dollars of extra value. The instructor notes that this is good, but it is remarkably small. The instructor explains that this is the basic finding in a lot of Nordhaus’s results: even the very best policy just is not going to do very much to improve welfare compared to doing nothing.
Analysis of Delayed Action
Nordhaus also examines the cost of delaying climate action by ten years. The instructor explains that according to Nordhaus’s model, delaying action does not cost that much. The discounted value of utility goes down just a little bit with a delay, but that might be useful because the world can spend more time gathering science. According to this logic, there is not much cost to that approach of delaying action.
The Real Punchline: Drastic Measures
The instructor notes that the real punchline of Nordhaus’s analysis came when he looked at what if society implemented drastic measures that were being debated at the time to reduce emissions. At the time, the idea was to reduce emissions by twenty percent. The instructor notes that this might sound antiquated now because current climate policy discussions are focused on getting to net zero, literally zero emissions. So Nordhaus was considering a very weak policy by today’s standards. But a twenty percent reduction is what he plugged into his optimization model.
The instructor explains that this scenario of reducing emissions by twenty percent has a massive impact in Nordhaus’s model. This lowers the value of GDP going forward by ten trillion dollars. In other words, optimizing gives a little bit of benefit, but doing the existing climate policy that was being debated at the time would be massively costly. Nordhaus’s conclusion was that implementing such a policy would be a very dumb idea from an economic standpoint.
The Controversial Nature of These Findings
The instructor notes that this was such a controversial finding because it was hated from both directions. People who did not like to admit that climate change was happening did not like Nordhaus’s admission that it was happening. But people who did care about climate change did not like his findings either, because he was arguing that nothing should be done, or very little should be done. The instructor emphasizes that this was a very controversial first foray into systematically combining economics and climate science.
Nordhaus’s Recommendation for Carbon Pricing
The instructor explains that despite all of this analysis, Nordhaus showed that greenhouse gases should be cut a little bit. He was not a climate denier. He was saying that climate change is happening and society should do something about it, just not very much. His main point was that this should be done with a very small carbon tax. The optimal carbon tax in Nordhaus’s model slowly ramps up to between twelve and fifty dollars per ton. The instructor notes that this is really different than the tax that would be required to get a twenty percent reduction in emissions. That would require massive taxes measured in dollars per ton of carbon. Nordhaus’s point is that these high carbon taxes would hurt the economy. High taxes mean that society pays the government for each ton of carbon emitted, and this money goes toward preventing emissions instead of being used for consumption. And from an economic standpoint focused on maximizing consumption, that is framed as a bad thing.
Evolution of Nordhaus’s Work
The instructor notes that Nordhaus’s work has evolved extensively. The work that has been discussed so far is the old work, which is why they wanted to show the seminal work. The latest release was the two thousand twenty-three version of the DICE model, which shows different results. The instructor shows a graph with the green line in the middle representing the optimal temperature policy pathway according to this latest model.
If one takes into account Nordhaus’s framing of the DICE model and tries to make all of humanity as happy as possible, society should be reducing emissions. But what do the results show? The equilibrium value in twenty one hundred is about three point one degrees centigrade warmer than today. It is not much different than Nordhaus’s very initial estimates from decades earlier. He has changed a lot in how the model is computed. One thing is that he has admitted that the future could be much worse. The difference between the optimal policy and doing nothing at all is bigger now because some of the extreme risks of climate change have become more evident.
But the instructor notes that even with these updates, Nordhaus’s recommended warming is still not very much compared to what many policymakers are thinking about. This is illustrated by the reference to the two-degree target. If society were to implement something that kept warming below two degrees centigrade instead of Nordhaus’s optimal policy, it would look quite different on the graph. The instructor notes that Nordhaus’s preferred option still has much more warming than what the two-degree target would allow.
Criticisms of the DICE Model
Introduction to Criticism
The instructor says that the DICE model is controversial, and here is a good way to think about the main criticism. If there is a catastrophe coming—oh no, this is going to hurt the economy—well, as Keynes famously said, in the long run everyone is dead. If there is a catastrophe, it does not matter much if society loses out on a little bit of luxury consumption today if the whole system collapses. The instructor notes that of course, if one has a really high discount rate and does not think that catastrophe will happen until after one is dead, maybe it does make sense economically to let that catastrophe happen and worry about the economy instead. The instructor compares this to worrying about an incoming asteroid.
A Humorous Illustration
The instructor makes a side note about modern AI capabilities. They mention that there is a copyrighted comic they were basing their criticism on that they could not use directly. So instead, they typed into artificial intelligence software: make an image about dinosaurs talking about how the economy would be wrecked from a meteor. They got back an image that, while not quite as good as the original comic in terms of the humor and artistic quality, serves the same purpose and is not copyrighted. The basic idea of the comic and the AI image is the same: even if it is true that an asteroid would hurt the economy, that is a pretty small concern compared to the asteroid hitting and destroying all life.
The Discount Rate as Primary Criticism
The instructor turns to discuss the actual criticisms of the DICE model more seriously. They note that in upcoming problem sets, exams, and quizzes, the class is going to shift more toward arguing intelligently about issues like climate policy. Rather than just doing supply and demand and solving basic algebra, students will be expected to construct arguments about complex policy choices. The instructor notes that they are foreshadowing that if they were to write down some criticisms of the DICE model, it would not be off-target for them to ask a question like: what are the two most persuasive arguments against the DICE model in your perspective? The instructor advises students to keep this sort of analysis in mind as they proceed.
The instructor identifies the first major criticism: the discount rate. This has really been the primary criticism of the DICE model. The instructor explains the criticism by returning to the asteroid analogy. We should not care about the asteroid if we are going to die before it hits us. In other words, with a very high discount rate, we do not value future generations enough. Nordhaus had such a high discount rate that potential future damages mattered almost nothing in the model. So the criticism is that the discount rate is too high.
The Moral and Philosophical Dimension
The instructor then asks a provocative question: who is Nordhaus to choose how much society should care about future generations? That is ultimately his opinion. The instructor notes that there is much more behind the logic of how Nordhaus gets to his discount rate choice, but it is fundamentally a value judgment. Some people care a lot about their kids. There is literature out there trying to estimate behaviorally how much people actually care about future generations’ well-being, and one of the key events in a person’s life that increases how much they care about future generations is having children. And then the next one is having your children have children. These life events drastically reduce the discount rate that people apply because now people are getting utility from knowing that their grandkids are going to be alive rather than scavenging for meat in an apocalyptic landscape. The instructor emphasizes that this is a moral issue around sensitivity to the discount rate.
The Second Criticism: Damage Functions
The instructor presents the second major criticism of the DICE model: damage functions. The instructor recalls that the damage function that Nordhaus used was essentially temperature plus temperature squared. He had some coefficients to say how much temperature and temperature squared mattered in the damage function, but this was really simplistic. There are dozens, hundreds, thousands of ways that the economy will be affected by climate change. Many of them cannot even be expressed just as temperature. For example, sea level rise is a function of temperature, but it matters drastically whether society implements seawalls, has mangroves protecting the coast, and so on. The instructor notes that there is a whole body of work showing that the damage functions in the DICE model were artificially low, incorrectly low, or just wrong.
Tail Risks and Catastrophic Scenarios
One key issue that the instructor identifies is that the damage functions underestimated what are called tail risks. Tail risk is something that is not in the center of a distribution but in the tails of the distribution. With a normal distribution, extreme events are really improbable. But if the distribution had fatter tails, suddenly there would be non-zero probabilities that continue out quite far in the tails. Many people worry that climate change has fat tails because the world has only been experienced at current temperature conditions. We do not know what it is going to look like at much higher temperatures. If the distribution of climate outcomes does have fatter tails, then everything in Nordhaus’s damage function could be wrong.
Tipping Points and Feedback Mechanisms
Related to the tail risk issue is the absence of tipping points in the DICE model. The damage function just stays smooth—there is no feedback mechanism included. If it gets warmer, the permafrost might melt. If the permafrost melts, all the methane trapped there might start releasing, accelerating damages and warming further. This kind of feedback is terrifying because humanity has never seen it happen. We have never been at temperatures where permafrost melts, so scientists simply do not have direct observations or comprehensive science about what happens in those scenarios. But there is enough science to know that this kind of tipping point might matter a lot.
Technical Criticisms: The Global Agent Problem
The instructor notes that there are a few other technical criticisms of the DICE model. It is a super simple model, and the biggest challenge is that it is a single global agent, sort of like the Ramsey model from earlier in the course. There is no trade between regions, no regional inequity, no distributional effects. The instructor poses a hypothetical: what if the optimal policy is that ninety percent of countries should stop all agriculture and starve so that one country representing ten percent of the population becomes really happy? That would be unfair, but the Nordhaus model does not say anything about that kind of distribution of harms and benefits.
Technology Assumptions
Finally, the instructor identifies a criticism related to technology assumptions. Technology matters massively in determining the costs of addressing climate change. In the DICE model, there is no endogenous way that the model captures how we learn to mitigate carbon better or even get better air conditioners. Critically, the model does not represent how technology might evolve to make it cheaper to reduce emissions. This has been a critical oversight. When Nordhaus wrote the original DICE model, coal-fired power plants were producing at roughly six cents per kilowatt-hour, and solar was something like twenty-eight cents per kilowatt-hour. Given this cost structure, the idea that society would have to harm the economy to emit less matched the technology of the time.
The Technology Cost Revolution
The instructor notes that, fast forward to the present day, coal is still about six cents per kilowatt-hour. But what is solar now? The instructor asks if any students know, and then answers that it is way less than coal. Solar is now about three cents per kilowatt-hour, and it drastically depends on location. There are other challenges like distribution and getting the power grid up to specification to handle large amounts of renewable energy, so it is not trivial. But the fundamental equation has changed. The instructor notes that when the news is saying that the government is going to deregulate coal-fired power plants, they do not care that much because even the most selfish person would be pretty dumb to invest in coal right now. Even if someone had a guarantee that there would never be another negative law about coal, it would be like investing in whale oil for lights. Whale oil can be burned, and it was used extensively in the past for illuminating cities, but it is probably not a good investment, even if someone hates the environment and loves fossil fuels.
The Implications for the Model
The instructor explains that solar is just cheaper now, and wind is similar. There are going to be a lot of changes in the energy system. The way this affects the DICE model is that Nordhaus assumed really expensive mitigation because mitigation was expensive at the time. But what happens if mitigation is cheaper than not mitigating? It is kind of a paradox. It should happen automatically through profit incentives, right? Nonetheless, this has been a huge criticism of the DICE model. The model’s assumptions about technology costs have become substantially outdated as renewable energy has become much cheaper.
The Spectrum of Climate Economics Perspectives
Positioning the DICE Model on the Political Spectrum
The instructor turns now to contextualize the DICE model within the broader spectrum of economic thought on climate change. On the slide, the instructor shows a line representing the spectrum of political debate. On one end, all the way to the right, is where the instructor places Nordhaus’s position. The instructor then says that they are now going to talk about the other end of the spectrum: the Stern Review. The instructor notes that they would say that Nordhaus is farther to the right than the Stern Review is to the left. The Stern Review is definitely more to the left of consensus economics, but it definitely has much more emphasis on intergenerational equity and considers many of the real criticisms of the DICE model that have just been discussed.
The Stern Review
The Core Recommendation
The instructor explains that Stern’s basic recommendation was to spend one percent of global GDP per year on mitigation of climate change. The instructor notes that this was huge—hugely more than the Nordhaus approach suggested. This is a central and striking difference between the two models’ recommendations.
The Key Findings of the Stern Review
The instructor moves next to the key findings of the Stern Review. The biggest key finding of the Stern Review is that inaction is really bad. As economists, damages are measured based on loss of GDP. According to the Stern Review, inaction would result in loss of five to twenty percent of global GDP by the year twenty one hundred. This is in stark contrast to the two point eight percent loss in the Nordhaus work. This is a massive difference in the estimated costs of climate change between the two models.
The instructor notes that the other big part of the Stern Review is that although one percent of global GDP is a lot, and Stern is saying that a higher amount should be invested in climate mitigation than Nordhaus suggested, Stern also found that this level of investment is much more effective. Basically, for the Nordhaus assumptions about technology, to get the same level of emissions reduction that Stern recommends, it would have been more expensive. Here, Stern is saying invest one percent of global GDP per year, and that will have a huge impact on reducing climate change damages.
The instructor notes that other points in the Stern Review are that addressing climate change is urgent and very necessary to consider equity, but the key findings are that there is much more at stake from not acting than Nordhaus suggests, and the efficacy of investing in mitigation is really quite high.
Comparing DICE and the Stern Review
The Central Question
The instructor notes that they have been building to this point throughout the discussion. Why do Nordhaus and Stern have such different opinions on the optimal amount of GDP to spend on climate mitigation? The answer comes down to one key variable: the discount rate. That is why the instructor spent so much time on the discount rate earlier: it is fundamentally important to understanding this comparison.
The Discount Rate Comparison
The instructor presents a basic comparison of the two reports side by side. The Nordhaus DICE model has a pure rate of time preference of one point five percent. The Stern Review, by contrast, has a pure rate of time preference of zero point one percent, basically saying that the future matters a lot to society. This much lower discount rate leads to substantially higher estimates of the present value of future damages that Stern thinks would be optimal to abate. Stern in twenty oh six was saying that there is eighty-five dollars of damage per ton of carbon dioxide, while Nordhaus said that there is only thirty dollars of damage. Because all those damages are going to happen in the future, and when they are discounted back to the present using a higher discount rate, they do not matter as much. The key difference comes down to that discount rate and what that implies about how much society should care about its grandchildren.
Beyond the Discount Rate
The instructor notes that it is not just the discount rate, though. The Stern Review also includes other things that broaden the comparison. The instructor shows a visual with contributions from different factors. Five percent is Stern’s most conservative estimate of damages. But he also, and the instructor agrees with this assessment, identifies other types of damages like non-market damages—things that are not just saying that industry produces less output. Non-market damages include the fact that people die or suffer from consequences that do not filter through production functions. He also considers equity and the idea of fat tails, including some sort of risk of catastrophe. These all contribute to the much higher levels of losses that Stern estimates.
The Impact of the Stern Review
The Influence on Policy
The instructor notes that the influence of the Stern Review was essentially transforming the policy landscape into really caring about climate change. This review was behind the Kyoto Protocol, which was the first real substantial policy investment in addressing climate change, and then finally the Paris Accord, which is what is most binding on international policy today.
Summary of the Stern Report
To summarize, the instructor explains that Stern argued that the benefits of strong, early action on climate change outweigh the costs of not acting. The fundamental framework is the same as Nordhaus—utility maximization, cost-benefit analysis—but done differently, with different assumptions that the instructor argues are more realistic and defensible. This is a challenging debate, but a very, very important one for society to have.
Transition to Integrated Assessment Models
Recognizing the Range of Opinion
The instructor now moves toward the next section of the lecture. They note that the discussion has covered the space of different opinions and different ways to use models to analyze climate change. But the instructor asks: what should society actually do? Both Nordhaus and Stern are saying what their optimal choice is based on their models, but there is a range of optimal choices. On one hand, some economists argue that society should not do anything about climate change. On the other hand, others argue that society should do a whole lot right now. How is society going to make an informed decision? How can policymakers come up with the best estimate for the best policy?
Truman’s One-Handed Economist
The instructor references a famous quote from President Truman. Truman once said he really wants a one-handed economist because they always have this problem. They give you two hands. This is true with climate economics. There are two hands here: one saying do a little, one saying do a lot. How is society going to make an informed decision?
Shifting Slide Decks
The instructor notes that they want to dive into more detail about how economists come up with these numbers. To do that, they are going to switch to the next slide deck. The class has been on Chapter fifteen on climate change. Now they are switching to the next one, which talks about the social cost of carbon and how it is calculated in different integrated assessment models.
Integrated Assessment Models
Defining Integrated Assessment Models
The instructor now asks: so first, what is an integrated assessment model? It is going to combine models on each of five steps, and it is important to understand each of these steps. Society is trying to figure out the correct social cost of carbon, so it needs to consider each one of these steps carefully.
Step One: Baseline Emissions
The first step in an integrated assessment model is determining what is going to happen with baseline emissions. Given assumptions like population growth or technology, how much emissions will make it into the atmosphere? The instructor notes that this is not easy to figure out because if everyone switches to solar power, there will be a lot less emissions into the atmosphere. Climate scientists and economists make reasonable projections of things like economic growth, population, and technology, but also harder things like the preferences of consumers for meat versus vegetables. This matters because it determines the equilibrium level of meat production and the methane that cattle produce. The instructor notes that there are different emissions trajectories based on different assumptions of what type of economic activity is going to happen in the future.
Step Two: Emissions to Concentrations
The second step in an integrated assessment model is the emissions-to-concentrations step. Emitting is measuring it at the smokestack, essentially—how much carbon dioxide and other greenhouse gases get emitted into the atmosphere. But concentrations are actually more complicated because they involve biophysical detail. The carbon model shows what happens if humanity emits a bunch of carbon. Higher temperatures cause more plants to grow, like more algae in the ocean. This algae grows off carbon, so some of the emitted carbon gets photosynthesized by plants and removed from the atmosphere as a problem. Some of the carbon gets dissolved into the oceans, and of that, some sinks to the ocean floor and becomes mineralized—trapped forever. But some of the carbon gets emitted back out into the atmosphere. Going from the relatively easy-to-observe thing—emissions—to concentrations requires detailed modeling of these biophysical processes.
Representative Concentration Pathways
The instructor notes that the punchline here is that the scenarios community has defined something called Representative Concentration Pathways, or RCPs. The class has seen this before, and they are going to use it again for the rest of the course. Essentially, RCPs combine the assumptions that go into emissions with a model of what happens to those emissions to get the concentration of greenhouse gases that humanity is going to have in the atmosphere.
Step Three: Temperature from Concentration
The third step is temperature. From concentration, it is not obvious what happens to temperature. This step is driven by a very controversial number called climate sensitivity. Climate sensitivity measures what happens when carbon dioxide concentrations double. It measures what percentage increase in temperature results from that doubling of CO two concentrations. This is one of the very controversial numbers in climate science. If someone has a climate sensitivity parameter that is low, it means that society can emit lots of carbon dioxide and it will not really matter much because Earth’s system is not very sensitive to emissions and the planet will not get really hot. If climate sensitivity is high, each ton of carbon dioxide has a large effect on temperature and future warming. How much will temperature go up from an increase in carbon dioxide concentrations? There is a whole set of models trying to estimate climate sensitivity.
Step Four: Temperature to Damages
The fourth step is damages. How does temperature change damage the economy? The instructor notes that this is typically expressed as a fraction of GDP lost. As mentioned earlier, Nordhaus used a damage function of temperature plus temperature squared, but that is hilariously simple. Damages are probably going to depend on many different damage pathways. But the damage calculations account for many different things that matter beyond just temperature. Things like labor productivity matter. It is really hard to work in an agricultural field when it is super hot. The instructor shares a personal anecdote about doing corn detasseling as a youth. They were paid minimum wage to go pull the tassels off corn in a field. It required a ton of temporary staff, and the instructor’s high school class all did this. It felt like a lot of money to a sixteen-year-old, but it was awful because you are just standing out in the heat in the sun all day. Well, the instructor notes that experience gets much more painful if it is hotter out. So damages are really important, and there will be more discussion of that later.
Step Five: Discounting Future Damages
The final step is what the instructor has been emphasizing throughout: intergenerational consideration. How does society care about future value? How does society discount that stream of benefits back to the present?
Moving Forward with Analysis
The instructor notes that from here, society is going to take this basic pathway through the five steps and look at the data. They will rely on a very new article. The instructor is going to assign this as a reading for the next class. The article is Renert et al., and students should read it carefully. The instructor notes that the class is going to walk through the logic of computing the social cost of carbon and what the best evidence is on this thing. The instructor will send out an email to remind everyone of the reading, so students should not worry about that.
The Goal: Correct Estimate of Total Damages
The instructor explains that the class will step through each of these five steps, and they will conclude with what is the correct estimate of the total value of damages from one extra ton of carbon. This is important because it is essentially the benefit and cost ratio that society cares about. Society is trying to figure out the right amount of climate action. It is not zero because that is super expensive and it is not going to happen anyway, but it is probably also not this extreme of having three point five degrees centigrade warming that Nordhaus’s original model suggested.
Conclusion and Administrative Notes
Wrapping Up the Lecture
The instructor notes that they are going to leave it there for today. They will email out information about the Renert et al. reading that students need to do before the next class. The instructor reminds students to do their assignment and their weekly questions. The instructor notes that they should have said this in the assignment instructions, but Canvas defaulted to the questions being due by the end of the day on Friday. The instructor clarifies that they will not change this because that would be unfair to students who may have already completed the work. It is still technically due by the end of the day Friday, but if students can do it before class on Friday, that might inform the class discussions better. So the instructor informally advises students to aim for completing the weekly questions before Friday’s class.
Final Questions and Dismissal
The instructor asks if there are any questions about the material covered. When no questions are forthcoming, the instructor indicates they are good and thanks everybody for their attention during the lecture.
Course Overview and Administrative Updates
Midterm Exams and Grading
The class began with the distribution of midterm exams, which the instructor noted had been intentionally designed to be difficult, with scores then curved upward to provide more realistic grades. The instructor explained that this approach serves an important pedagogical purpose: if exams are too easy and everyone receives perfect scores, it becomes impossible to distinguish between students who truly understand the material and those who do not. Students were given time to review their exams and the answer key immediately following the distribution. The instructor directed any students with questions about grading to contact Ryan McWay, the teaching assistant responsible for grading, whose email address was available on the course website.
Course Schedule and Trajectory
The instructor provided a detailed overview of the remaining course schedule, noting that while preliminary, the basic structure would remain consistent throughout the semester. The schedule was presented to give students a sense of how the course was pivoting toward more applied questions and practical tool usage. The course had just completed spring break and was currently positioned at the unit on the social cost of carbon and climate integrated assessment models, which represented Part B of this topic.
Upcoming Course Content and Practical Components
Scheduling and Learning Objectives
Looking ahead, the following week would introduce future scenarios, building upon the representative concentration pathways that had already been introduced. The concept of shared socioeconomic pathway scenarios would be explored in greater detail, with particular emphasis on how these pathways define changes in land use, deforestation, and cropland expansion. On Wednesday of the following week, the instructor would introduce Geographic Information Systems, or GIS, and requested that students bring laptops to class for hands-on practice. The instructor acknowledged that two students had indicated they had tablets instead of laptops and asked whether they could arrange to bring a laptop, as GIS work on tablets, while possible, is considerably more difficult. For students without laptop access, the instructor offered to work out alternative arrangements and requested that they contact him early.
Natural Capital and Ecosystem Services
Following the introduction to GIS and its foundational concepts, the course would transition to discussing natural capital and ecosystem services. The instructor emphasized that these topics are spatially explicit in nature and that most of them depend directly on land use patterns, which explained the sequence of the course structure. After introducing these concepts in general terms, the course would then address the original application of these frameworks: placing a price on nature through valuation methods. The instructor explained that economists use various methodologies to estimate the monetary value of ecosystem services, such as quantifying the worth of pollination or the value of wetlands.
Ecosystem Service Models and Applications
With the valuation toolkit in hand, the course would then spend considerable time examining specific ecosystem service models in depth. The focus would begin with carbon storage, then move to sediment retention, and would include pollination as a major area of study. The instructor noted that mid-week on April 8th would provide time for discussion and application exercises specifically focused on how these concepts would apply to the country reports that students would be developing throughout the course. This practical connection would be reinforced throughout the remainder of the semester. The course would further explore ecosystem services and uncertainty, then return to scenario analysis, examining not only the shared socioeconomic pathways but also emerging positive vision scenarios. The instructor noted that even the most optimistic shared socioeconomic pathway scenario available tends to be quite depressing, and that these positive vision scenarios would offer more encouraging possibilities for the future.
Policy and Guest Lectures
The course would transition to discussing both market-based and real-world policies designed to help society progress toward these positive visions. The instructor had arranged two guest lectures as part of the course. The first would feature Colleen Miller, the senior ecologist at NetCap Teams, who would address biodiversity and its foundational role in enabling ecosystem value. While biodiversity is not itself an ecosystem service, the instructor explained, it is the essential basis upon which ecosystem services depend and which allows ecosystems to thrive. The second guest lecturer would be Dr. C. Ford Rungi, who had previously taught the climate class at the university and would discuss land as an input to production from an economist’s perspective.
Course Conclusion and Student Presentations
The final portion of the course would focus on connecting all of these various topics into a combined framework for Earth economy modeling. On the second-to-last day of class, students would present their country reports in what the instructor called “lightning talks.” These rapid presentations would be an important part of the grading for the final project. All student slides would be combined into a single slide deck, and each student would have just three to five minutes to present the key findings about their assigned country. The instructor explained that keeping all presentations to one day would require them to be brief but impactful. A concluding lecture would follow on the last day of classes, and then students would take the final exam.
Hands-On Tools and Applied Economics
The instructor emphasized that many of the upcoming course components would be decidedly hands-on. For the GIS module, students would actually learn to use the software rather than simply study it conceptually. For the ecosystem service components, the course would use a tool called InVEST, which actually computes ecosystem service values for a given landscape. The instructor explained that these hands-on exercises would form the basis of the country reports and represented the applied nature of being within an applied economics department.
Step One: Emissions
Measuring Current Emissions
The first step in the integrated assessment process addresses how we determine emissions levels. While it might seem straightforward to simply report current emissions by measuring what is being emitted today, the process is actually considerably more complex than this suggests. Comprehensive tracking requires monitoring all different plants and industrial sources and accumulating emissions data across all of them, which represents a significant research and administrative task. However, modern technology has made this increasingly feasible. Satellites can now be used to keep track of where carbon is being emitted from various sources, and can similarly monitor other chemicals such as methane. The instructor noted that a recent article, published just a day or two before the lecture, had demonstrated that satellites can now pinpoint specific firms that are major methane emitters. These appear as tiny dots on satellite maps marking locations where enormous quantities of methane are being released, and observers can actually see the plume of methane blowing downwind from these particular plants.
Satellite Monitoring and Enforcement
The instructor found this technological development particularly compelling because satellites offer novel mechanisms for enforcing methane controls. It is much more difficult for polluters to get away with violating methane emission standards when such violations are detectable from space and can be constantly monitored. However, the instructor added an important side note regarding the artificial intelligence boom and its environmental implications. Data centers are being built in massive numbers and, according to the instructor, are driving increases in methane emissions. Many of these data centers are installing off-grid power plants, mostly powered by natural gas, and locating them right next to the data center to avoid the complexities of connecting to the grid. However, this approach has a significant downside: it resembles the Wild West, with many different entities rapidly building generators without proper coordination or standards. The instructor observed that this uncontrolled installation boom is unlikely to result in state-of-the-art methane emission control systems, and so these emissions can often be detected from space, which ideally provides a mechanism to identify and potentially control these emissions.
Projecting Future Emissions
Measuring current emissions is one challenge, but projecting future emissions is substantially more difficult. Future emissions cannot be simply observed with satellites; instead, they require making projections about numerous interconnected variables. The instructor noted that the paper highlighted three particularly important categories of projections.
The first projection category concerns population dynamics. The paper presented a central estimate, represented by a dark blue line, which comes from various sources but is fundamentally based on demographic models. These models track and incorporate factors such as fertility rates and death rates across different countries. However, enormous uncertainty surrounds population projections. The darker shaded area around the central estimate represents the range within which roughly two-thirds of all population estimates would fall, while the lighter outer boundary represents the range capturing about 95 percent of estimates. The central projection suggests that global population will peak at slightly above ten billion people around the year 2100, representing an important variable in determining future emissions because each additional person represents an additional consumer who drives a car and purchases goods and services.
The second critical set of projections involves the average per capita GDP growth rate in different countries. This matters substantially because countries that experience rapid economic growth will see increases in consumption levels, which directly drives emissions upward. The instructor made a somewhat provocative observation: being poor is environmentally beneficial from a climate perspective because poor people consume less. This observation connects to frequently cited statistics showing that people in the United States produce approximately eight times more emissions per capita than people living in India. The instructor explained that this disparity essentially comes down to the fact that Americans consume eight times more in economic value of goods and services. While the composition of consumption matters, the instructor emphasized that the dominant factor determining emissions levels is fundamentally the quantity of consumption, which is modeled through the GDP per capita growth rate.
The third and final major category involves translating all of these socioeconomic projections into an actual emissions pathway. More consumers and greater purchasing of energy-intensive goods and services inevitably leads to higher emissions. While many additional projections feed into emissions models beyond these three, the instructor explained that these three categories represent the fundamental basis for arriving at a given emissions projection path. The central estimate from the models examined in the paper shows emissions peaking approximately at the present time, which must occur because if the peak were delayed and emissions continued rising, the consequences would become extreme. However, the instructor noted that this projection aligns with what is currently being observed in the real world. China, for the first time in its modern history, is actively reducing its total emissions rather than merely slowing the rate of growth in emissions. This reduction is occurring because solar power is rapidly displacing coal-fired power generation, with coal plants operating at substantially reduced capacity. The instructor characterized this moment as the climax of the environmental story: if the story began at the start of the Industrial Revolution, humanity is now at the critical juncture where success or failure will be determined.
Uncertainty in Emissions Projections
The instructor introduced an important conceptual point about representing uncertainty in projections, noting that the paper demonstrated distributions around the central emissions estimates but that he would explain two fundamentally different ways of thinking about uncertainty, which would be contrasted in the subsequent lecture.
The first approach to representing uncertainty is through distributions. In this method, a central estimate is presented, with uncertainty represented through an envelope around that central line. This envelope shows what is considered most likely, though an even broader envelope representing less probable but still possible outcomes typically extends beyond. The instructor explained that in principle, if a third dimension were added to the graph, there would be a bell-shaped distribution centered on the central estimate. As one looks further into the future, these distributions become progressively wider. The reason for this widening is fundamental: the further one projects into the future from the present, the less accurate predictions become. Because this three-dimensional representation would create an unattractive and difficult-to-read visualization, one typically represents uncertainty in two dimensions using the envelope approach. However, the instructor emphasized that understanding the underlying three-dimensional distribution is critical: uncertainty starts relatively narrow based on what is currently known and expands progressively with time as our predictions become less certain.
The second approach to representing uncertainty involves scenarios. Rather than presenting a central estimate with a distribution of uncertainty around it, this method develops several distinct, explicit projections of what might occur under different circumstances. Instead of one large envelope representing all possible emissions trajectories, specific driver assumptions are selected, and the resulting single emissions pathway is traced under those particular assumptions. This approach is useful because it makes transparently clear what combination of factors produces what outcome. The instructor illustrated this with five representative concentration pathway scenarios. RCP 8.5 represents the very concerning scenario of fossil fuel-based development trajectories continuing forward. This can be contrasted with alternative scenarios such as RCP 7.0 or more optimistic scenarios such as RCP 1.9. The instructor noted an interesting feature: some scenarios actually show negative emissions values, which reflects the possibility that humanity might successfully remove carbon from the atmosphere through technological means and sequester it. The fundamental point the instructor wished to make was that uncertainty can be expressed quite differently through scenarios than through distributions. Rather than saying there is a wide range of possible emissions, one instead says there are multiple scenarios, and society does not yet know which scenario it will end up following. This scenario approach can provide a more useful framework for understanding how different drivers produce different outcomes, because one can ask directly: what is different about the RCP 8.5 scenario that produces such high emissions?
The instructor concluded this discussion by noting that throughout the Nature paper being examined, the discussion mixed and matched these two types of uncertainty representation, sometimes using distributions and sometimes using scenarios.
Step Two: Concentrations
Atmospheric CO₂ Concentrations and Carbon Pools
The second step in the integrated assessment model pipeline involves translating emissions into atmospheric concentrations. The instructor presented the same plots shown earlier but added another plot illustrating atmospheric CO₂ concentrations. This new plot takes into account the different carbon pools in the Earth system and models how emitted carbon is partitioned among them. A portion enters the atmosphere directly, while other portions are absorbed into the ocean or converted into trees through photosynthesis. Once a model of these processes is developed, scientists can attempt to project how a given emissions trajectory will translate into a concentrations trajectory. As with the emissions projections, this step introduces additional uncertainty into the model chain.
Recent Updates to Carbon Cycle Science
The instructor presented important recent findings that had changed the understanding of carbons cycles compared to assessments from approximately five years earlier. New evidence suggests that the ocean is not performing its carbon absorption function as effectively as previously thought. Specifically, as global temperatures increase, the ocean appears to absorb carbon less efficiently, which means that for any given level of human emissions, the resulting atmospheric CO₂ concentration will be higher than previous models had projected. The instructor characterized this as an example of science updating itself as new evidence emerges. The implication is that uncertainty bands in this particular step should perhaps be shifted upward as scientific understanding improves.
Climate Science and Uncertainty
The instructor took a moment to explain how this kind of updating represents how science is supposed to progress. Scientists slowly learn what the better parameter values are and gradually narrow the bounds around their uncertainty. However, the instructor noted that climate skeptics sometimes misuse this fact to claim that climate scientists were wrong in their previous assessments. The instructor clarified that this reasoning misunderstands the nature of scientific progress. The point is not that previous scientists were wrong, but rather that scientists did not know what was going to happen, and they are continuously improving their understanding. This is precisely how scientific knowledge advances: through gradual refinement and improved parameter estimates based on accumulating evidence.
Step Three: Temperature
Climate Sensitivity and Temperature Trajectories
Step three of the integrated assessment model uses the climate sensitivity parameter, which addresses a fundamental question: how much does global temperature increase in response to a doubling of atmospheric CO₂? This is a critical variable in the model. Using this climate sensitivity parameter, researchers project the different trajectories that global temperatures would follow under different emissions scenarios. The plots showing these temperature trajectories replace the concentration plots from the previous step, and now visualize the actual temperature increase expected to occur.
Temperature Projections Under Different Scenarios
Under the fossil fuel-intensive RCP 8.5 scenario, the models project that by the year 2100, global temperatures would be approaching five degrees Celsius above pre-industrial levels. The instructor noted that this temperature increase becomes even more alarming when expressed in Fahrenheit. In contrast, more optimistic scenarios such as RCP 1.9 and RCP 2.6 actually show slight decreases in temperature, with peak temperatures occurring sometime in the second half of the century and then declining somewhat thereafter.
The Business-as-Usual Scenario
One particular temperature scenario, SSP2-4.5, has become widely used and cited in climate policy discussions. This scenario has become important because it represents what would happen if humanity pursued a business-as-usual policy approach—that is, what if no additional climate policies beyond those already implemented were put into place. This scenario assumes that all climate policy gains achieved to date would be maintained but that no additional policies would be adopted. The instructor explained that this scenario is valuable because it is less pessimistic than the uncontrolled warming scenarios, given that significant climate policies have already been implemented, yet it is more realistic than assuming continued rapid emissions growth. The instructor observed that policy discussions typically focus on comparing future scenarios to this business-as-usual baseline rather than comparing different mitigation scenarios to the absolute worst-case scenario. This business-as-usual framing is where much of the actual policy action and debate occurs.
Nordhaus and Current Climate Modeling
The Nature paper being discussed presents the full range of temperature possibilities that might occur, with the central estimate being 3.4 degrees Celsius of warming. The instructor noted that this central estimate is essentially aligned with what the Nordhaus DICE model projects. This alignment suggests that the Nordhaus model may be reasonably accurate in projecting what would happen if humanity did not implement additional climate policies beyond those already committed to.
Step Four: Damages
From Biophysical to Economic Models
Up to this point, the integrated assessment model has linked together a series of biophysical models: emissions lead to concentrations, concentrations lead to temperatures. Now the model introduces an entirely new category of modeling: the damages model, which translates physical climate changes into economic losses. The instructor noted that in Nordhaus’s original DICE model, the damages function was remarkably simple. It was represented simply as a percentage loss in GDP as a function of temperature, specifically using the functional form of temperature plus temperature squared times some coefficients.
However, the instructor explained, substantial research since Nordhaus’s original work has produced far more detailed damage models. Rather than a single simple relationship between temperature and economic loss, contemporary models recognize that there are many different pathways through which climate change creates economic damages. The most recent graph in the Nature paper addresses this question: for any given increase in global temperature, what is the corresponding change in global mean sea level compared to 1900, and what are many other possible damage pathways?
Multiple Damage Pathways
The critical point emerging from this expanded approach to damages, compared to the Nordhaus DICE model, is the incorporation of many different damage pathways that collectively capture the full linkage between environmental changes and economic consequences. One important example the instructor provided is that temperature alone may be an insufficient proxy for climate damages. For instance, climate change is expected to produce not only increases in average temperature but also increases in precipitation and, importantly, decreases in climate stability. As the climate becomes less stable, extreme and unusual weather events become more likely. These extreme events—intense rainstorms, severe droughts, unprecedented heat waves—create sudden, localized losses that would not show up in simple average temperature data. Understanding which specific geographic locations are most vulnerable to increases in flooding or other extreme events becomes critical to understanding the true economic impacts on the economy.
Insurance and Risk Assessment
The instructor used the insurance industry as a concrete illustration of how climate damages are manifested in real economic markets. He noted that he owned a home with insurance and observed that obtaining homeowner’s insurance has become increasingly difficult in recent years. Insurance companies are withdrawing from whole regions of the United States where insurance markets are collapsing. While insurance companies are not primarily motivated by climate change concerns, they are very good at accurately assessing the risk that the assets they insure will suffer losses. This is essential to the functioning of the insurance business model: insurance companies must make accurate projections about how many claims they will pay and at what cost in order to set premiums appropriately and identify which customers are higher risk and which are lower risk.
The instructor noted that substantial economic opportunities exist for those who understand how climate change affects the insurance industry’s profitability. Insurance companies are developing highly detailed damage functions that examine factors such as where critical infrastructure and valuable real estate are located in regions where damaging storms historically occurred once every thousand years but are now projected to occur every hundred years or even every ten years. This understanding directly affects insurance company profitability by allowing them to calculate expected costs and set premiums appropriately. The instructor identified this as an emerging contentious political issue, noting that many insurance companies are simply withdrawing from certain high-risk areas entirely. Obtaining homeowner’s insurance in hurricane-prone regions has become quite difficult, with relatively few insurance companies willing to offer coverage independently.
Spatial Distribution of Climate Damages
The Nature paper analyzed by the instructor illustrated the translation of climate changes into specific damage pathways very clearly. The paper presents two main types of plots. The first shows temperature trajectories over an extended time horizon extending to the year 2200, with simulations that wiggle somewhat around the central estimate. The second plot, for each different RCP emissions scenario, displays a distribution of the expected costs to the economy. For the RCP 8.5 high-warming scenario, the frightening climate scenario, the estimate is that a risk premium of thirty-two trillion dollars would be added as a cost to the economy. The instructor clarified that this represents not simply direct damages but the additional costs that insurance companies would need to charge as a risk premium to cover expected damages. This represents a real cost that would be borne by society.
The nature of the damage distribution differs under each different climate scenario, but the figure powerfully illustrates why climate mitigation is economically valuable. As society reduces emissions and follows lower-temperature pathways, the distribution of expected damages shifts progressively to the left, toward lower dollar figures. For instance, under more optimistic scenarios, total damages might be three trillion dollars. While three trillion dollars still represents an enormous amount of money, those damages would be substantially lower than under the high-warming scenario, and the crucial point is that even after discounting, sufficient investments in climate mitigation could be economically justified if the social cost of carbon is sufficiently high. From an economist’s perspective, the key insight is that reducing emissions shifts the damage distribution leftward, reducing expected future economic losses.
Breakdown of Damage by Economic Sector
The Nature paper examined by the instructor included detailed analysis of the central estimates and distributions of which sectors of the economy would experience the most damage from climate change. A common public assumption is that the energy sector would experience the largest damages, given the need to transition away from coal-fired power plants and fossil fuel-based energy systems. The paper does account for these energy sector effects, but the damages to energy represent a relatively modest contribution to the total social cost of carbon of only nine dollars per ton of CO₂.
The two largest contributors to the projected social cost of carbon are agriculture and mortality, each representing substantial but highly uncertain damage estimates. Agriculture is estimated to contribute eighty-four dollars per ton of CO₂ to the social cost of carbon, but this estimate comes with a huge distribution of uncertainty. Some models in the plausible range even suggest that agriculture might actually benefit from climate change in certain scenarios.
Geographic and Geopolitical Considerations
The instructor interjected a side note about agriculture and climate winners. He asked whether students could think of any countries that possess large tracts of currently unproductive land. He suggested Canada and Russia, noting that Russia’s relatively low engagement with climate change policy may partly be explained by the fact that Russia stands to benefit substantially from warming. Much of Siberia has been thought to potentially become productive agricultural land if temperatures increase. However, the instructor added important recent qualifications to this assessment. The most recent studies suggest that the potential agricultural benefits to Russia have been greatly overestimated. Siberia currently lacks the soil necessary for high productivity. The region has very thin topsoil layers, which has developed because Siberia has been forested for an extremely long time, unlike the American Midwest, which was prairie for a prolonged period. Prairie land creates rich, deep topsoil through different ecological processes than forest land. Therefore, Siberia might become somewhat more productive initially, but this productivity gain would likely be much less substantial and more limited in duration than initially hoped.
Mortality and Climate Damages
Mortality represents the other major component of projected climate damages. This mortality comes from many different sources. Direct mortality from severe storms is one component, but the health impacts extend well beyond storm-related deaths. Heat waves and other extreme weather events contribute substantially to excess mortality. The relationship between elevated temperatures and mortality is particularly important when considering how climate damages are distributed across different populations.
Inequitable Distribution of Climate Damages
Climate change is not only damaging; it is also unjust. This injustice is particularly evident in examining the distribution of climate-related mortality burdens. The Nature paper presented an analysis of the distribution of increased deaths per hundred thousand people across different income deciles at the global level. This analysis revealed that while climate damages are borne by all income groups, they are not borne equally. The distribution shows a notable spike in the mortality burden falling on the second global income decile—that is, the portion of the global population that is poorer than eighty percent of the global population. This group (and the very poorest global decile) bears a disproportionately large share of climate-related mortality.
The instructor questioned why this pattern might emerge. One possible explanation is that many wealthy people also live on coastal areas and thus face exposure to sea-level rise and storm surge. However, even accounting for this factor, there remains a clear inequitable component to how climate damages are distributed. The poorest segments of the global population bear a larger burden of climate-related mortality than their proportional share of global population.
Adaptation Costs and Inequality
Another important dimension of climate inequality emerges when considering adaptation costs. The figure presented in the Nature paper shows how much different income deciles would need to spend to adapt to climate change and avoid the projected damages. This represents a different but related aspect of climate justice. Wealthy people possess the financial resources to purchase protection from climate damages. They can afford to install air conditioning systems, purchase homes with climate protection features, build seawalls, or invest in climate-resistant construction. The data show that wealthier deciles spend more on adaptation, which is advantageous for them but raises profound ethical questions. People in lower-income brackets would presumably wish to have access to the same adaptation options, but they simply lack the financial resources to secure equivalent protection. This difference in adaptive capacity based on wealth represents another important dimension of climate injustice.
Spatial Variation in Climate Damages
Agricultural Damage Functions and Regional Impacts
The instructor presented an interesting recent paper examining the spatial distribution of climate damages across geographic regions. The upper left graph from this paper showed agricultural yield impacts for the United States as a representative example, with the same principles evident in many other regions. The analysis revealed that agricultural yields would decline substantially, particularly in the southern and central regions of the American corn and soy belt. The instructor explained that this pattern occurs because corn and soy crops are particularly exposed to the negative effects of climate change, whereas other crops have different sensitivities.
The instructor pointed out that wheat is grown more extensively in the northern regions of the agricultural belt. This crop distribution pattern matters because wheat is one of the crops that may actually benefit from climate change in many scenarios. Wheat is limited not by excessive heat or water stress but rather by the insufficient number of warm growing days. In a warmer climate with an extended growing season, wheat productivity could increase. Therefore, the crops grown in the north might experience benefits, while those grown in the south face damages. However, the instructor emphasized that the vast majority of current agricultural economic value in the United States is concentrated in the southern and central regions, which are precisely where projected damages are largest. This geographic mismatch between where production is currently concentrated and where benefits would accrue represents a serious economic challenge.
Multiple Damage Functions and Economic Impact
The instructor explained that all of these various graphs represent different components of the overall damage function. Collectively, they describe how climate change translates into economic damages for each degree of temperature increase. The damage functions encompass multiple pathways. Crop damage is one major pathway, with regional patterns as described above. Mortality damages from heat and other climate-related causes represent another major pathway. Increased energy expenditure is yet another, with interesting geographical patterns.
The instructor noted that energy effects vary by location. In northern Minnesota, for example, people would actually reduce their use of energy for heating—specifically natural gas for radiators and furnaces—even as air conditioning use increases slightly. The net effect for such regions might actually be decreased energy expenditure and thus a regional benefit. However, other regions would experience net increases in energy costs.
Specialized Damage Functions
Beyond these major categories, numerous other damage functions contribute to the overall assessment. Labor damages fall disproportionately on high-risk occupational groups, particularly those working in agriculture or construction, who face direct exposure to heat stress and other climate hazards. Coastal damages represent another substantial category, reflecting how storms and flooding damage buildings and infrastructure in vulnerable regions. These coastal damages can be measured in concrete terms as a percentage of county GDP.
The instructor noted that the paper identified additional damage relationships that, while perhaps less obvious, are empirically significant. One such relationship is the strong correlation between increased temperatures and property crime and violent crime. To illustrate this relationship, the instructor noted that Minnesota has relatively low crime rates overall, but crime rates are particularly low when temperatures are very cold. The instructor suggested several possible explanations for this relationship. One possibility is that criminals themselves dislike cold weather just as ordinary people do, and when it is very cold, the costs of committing crimes—for instance, breaking into garages—increase substantially. Another possibility draws on the observation that heat affects people’s moods, making them more irritable and potentially more prone to aggression and violence. The instructor joked that he himself becomes cranky when it is hot out. While this particular damage relationship might be less obviously speculative than some of the others, the instructor emphasized that it has been measured empirically and included in comprehensive damage assessments.
Aggregate Damage Distribution Across Regions
The final analysis in the paper presents a spatial aggregation of all these various direct damages into a single map showing regional damage distributions. The south and southwest of the United States are projected to experience particularly severe damages across all categories combined. In contrast, northern regions face much lower damages, or in some cases, even experience benefits. The instructor observed that the audience lived in a fortunate geographic location. Minnesota’s location means that it would experience less severe climate damages than many other regions, and would possibly even experience net benefits in some impact categories. Additionally, Minnesota possesses substantial fresh water resources that provide protection against water scarcity—a challenge many other regions face. The instructor noted that he selects Minnesota’s climatic resilience to climate change as an illustrative example when making the case for why Minnesota is an exceptional place to live.
Computational Exploration of Integrated Assessment Models
GDP and Climate Damages
The instructor explained the first computation step: calculating GDP damages under two scenarios: one highly optimistic but false world in which climate damages do not occur, and a realistic world in which actual climate damages are accounted for. Under the scenario without damages, GDP grows at a particular rate. When accounting for actual climate damages, this growth rate is reduced. The instructor noted that this figure obviously depends on numerous quantitative relationships included in the full model. Once fully developed, the web application would allow users to adjust discount rates or the projected cost of solar energy and observe how these changes affected the GDP comparison. The fundamental insight is that the difference between these two GDP trajectories—the world without climate damages and the world with climate damages—represents an enormous amount of wealth, measured in trillions of dollars, that could theoretically be preserved or recovered through better climate policy.
Why These Differences Occur
The source of these large GDP differences becomes evident when examining how damages change over time as temperatures increase. As global temperature rises, damages grow as a percentage of total GDP. The instructor presented a figure showing this relationship, with damages projected to cap out at something in excess of fifteen to seventeen percent of global GDP by the year 2200. This implies that in the absence of climate mitigation, economic output would shrink by fifteen to seventeen percent or more in the long run due to climate damages.
Dynamic Policy Trajectories
The critical output from a full integrated assessment model is a time path of the social cost of carbon across multiple decades or centuries. According to the model presented, the current social cost of carbon is approximately ninety-three dollars per ton of CO₂ emitted. This value increases over time, primarily because the global economy grows larger and is therefore more valuable, meaning that damages to a larger economy represent larger dollar figures. Eventually, the social cost of carbon trajectory falls to zero. The reason for this decline is that the discount rate takes effect over very long time horizons, causing damage values far in the future to approach zero in present value terms.
Optimal Carbon Policy
The practical application of the integrated assessment model to policy is straightforward in principle, the instructor explained, following standard government methodology that has been mandated since the Reagan administration: conduct a cost-benefit analysis of environmental policy. The question addressed is whether there exists a policy intervention to mitigate climate damages, and if so, whether the benefits of reduced damages exceed the costs of the policy. The instructor illustrated this with a graph comparing GDP trajectories. The blue line represents GDP without any climate damages, while the red line represents GDP with climate damages. In a scenario where optimal policy is implemented, a gap would emerge between these two lines representing the damages that still occur despite mitigation efforts. However, the optimal policy would minimize the total area between these two curves—in other words, minimize the total present value of unmitigated damages and policy costs combined.
Short-Term Costs and Long-Term Gains
The particular optimal carbon policy path emerging from integrated assessment models reveals an important pattern: in the short run, the policy actually makes the economy perform slightly worse because the policy imposes costs (for instance, through carbon taxes) that reduce the resources available for consumption. These short-term losses manifest as a reduction in economic output in the near term. However, by constraining emissions in the near term, the policy prevents the accumulation of CO₂ in the atmosphere and the subsequent severe damages that would otherwise occur in the long run. Therefore, the near-term costs produce substantial long-term benefits by avoiding catastrophic damages. The instructor exaggerated slightly by suggesting that without mitigation, “society would collapse,” but noted that he might not be entirely off base in this characterization.
Optimal Climate Policy and Carbon Pricing
The fundamental implication of this cost-benefit analysis is straightforward: the optimal climate policy would involve setting a carbon tax equal to the social cost of carbon. This straightforward policy would incentivize emission reductions wherever they can be achieved at costs less than the social cost of carbon, which precisely captures what society should want: emission reductions that are cost-effective. However, the instructor noted candidly that economists rarely get to implement such elegant policies. Instead, more conventional cost-benefit analysis is applied project-by-project, examining which specific investments and policies pass a benefit-cost test using the social cost of carbon as the relevant damage valuation. This more applied approach can potentially achieve similar efficiency results to the elegant carbon tax approach.
The Positive Outlook: Falling Energy Costs
Renewable Energy Cost Trajectories
The instructor concluded the technical discussion with a more optimistic perspective than might normally accompany discussion of climate damages. He presented data on the profitability of different energy sources, measured using the levelized cost of energy, which he identified as the correct metric for such analysis. This metric shows that solar and wind energy have become dramatically less expensive over time. The instructor emphasized that he had made this point previously but believed it warranted deeper examination and explanation.
Economics of Renewable vs. Conventional Energy
The source of this cost advantage relates to the different economic structures of renewable and conventional energy sources. Renewable energy sources, particularly solar and wind, require very large upfront capital investment, but once built, require almost no fuel costs. In contrast, conventional energy sources, particularly coal, have relatively lower upfront costs but require continuous fuel purchases. A coal plant must constantly supply itself with coal through mining and transportation operations, generating ongoing costs that accumulate over the system’s lifetime. The true lifecycle cost to society of different energy systems must account for all these expenses. When levelized cost accounting captures all these factors, solar and wind have become increasingly cost-competitive and now offer lower-cost energy than conventional sources.
Climate mitigation as a cost-effective investment
This energy cost development has profound implications for the economics of climate change. The traditional narrative surrounding climate policy has been that society must make a sacrifice today—giving up consumption now—in order to save for the future through reduced climate damages. This narrative is logically sound but depends on the premise that renewable energy is expensive. The cost of renewables is what makes climate mitigation expensive and therefore makes the narrative of short-term sacrifice for long-term gain valid.
However, as renewable energy costs have fallen, the economic calculus has shifted fundamentally. With cheap renewable energy now available, solving climate change has actually become cheaper than continuing on the current pathway. When fossil fuels become more expensive than clean alternatives per unit of energy produced, then the economically optimal policy is to switch to clean energy not because of environmental idealism but because it makes financial sense. The instructor suggested this transformation represents a critical turning point in climate policy: rather than asking what sacrifices are necessary to address climate change, society can now ask how to profit from the transition.
Implications for Long-Term Projections
This cost trajectory has important implications for long-term climate policy projections. While policy changes like EPA regulatory rollbacks are negative developments, their timing may matter substantially. Had these policy changes occurred five years ago, they would have severely impeded renewable energy development, slowing the pace at which solar costs declined and reducing the pace of deployment. Five years later, when renewable energy has already become cost-competitive with fossil fuels, the same policy changes will still increase emissions on the margin relative to what would happen with proactive climate policy, but the increase will be modest compared to the additional emissions that would have resulted if the same policy changes had occurred earlier in the renewable energy cost trajectory.
Technological Progress in Transportation
The instructor illustrated this broader point about technological progress by discussing the electrification of the vehicle fleet. Long-standing predictions about when electric vehicles would begin to significantly penetrate the American vehicle market predicted a slow transition occurring decades into the future. In practice, the adoption of electric vehicles has dramatically outpaced these predictions. The energy and engineering communities have made substantial technological progress in battery technology and power electronics, driving down electric vehicle costs and improving performance while increasing range. The market is responding to these improvements, with rapid acceleration of EV adoption compared to historical predictions.
The instructor concluded this section with a personal note, observing that electric vehicles are also simply more fun to drive. The technological transitions now underway are driven not only by climate and economic imperatives but also by technology that produces tangible consumer benefits.
Remaining Course Content and Conclusion
Final Module on Country Reports
The instructor noted that while he had intended to discuss country reports in this lecture, time had not permitted such discussion. He explained that in the following class, he would conduct a matching exercise to assign each student to a specific country. These country reports would become increasingly important as the course progressed, incorporating the various concepts, tools, and frameworks being introduced throughout the remainder of the semester.
Closing Remarks
The instructor concluded by wishing the students a good weekend and noting that the remaining course content would address scenarios and then transition into other environmental aspects before shifting toward discussing natural capital and ecosystem services. With this overview of the social cost of carbon and the current state of integrated assessment modeling complete, the course was ready to move forward into these new topics. The instructor thanked the students and dismissed the class.