A critique of economic theory of climate change 

This year, half of Nobel Economic Prize goes to Nordhaus, a pioneer on the research of economics of climate change. 

Currently, the main recommendation of the climate change economists is to raise tax on carbon emission. But carbon tax, together with other climate related policies, burdens the society and therefore reduces the fertility rate. In all countries high on climate change agenda, such as Canada, fertility rates drop below replacement rate. The societies that are blissfully ignorant of climate issues have much higher fertility rates. Whoever adopt tight climate change policies will have themselves wiped out on the earth and leave the space to those who pay little attention to Al Gore and Nordhaus. Natural selection ensures that the climate change policies will have little overall impact on global carbon emissions.  

Resource constraint has great impact on the overall energy consumption and carbon emission. But the mainstream research has little to say about this. In Figure 3 in the scientific background of this year’s economic prize, it shows that carbon emission will continue to rise to the year 2100 with no climate-change policies. But due to the limited availability of fossil fuel, the level of carbon emission will most probably drop before the end of this century. Carbon policies likely have little impact on actual overall carbon emission.

The prominence of climate change theory covers up the truly important events in this world: the demographic change and ensuing wars and migration. Demography is destiny. But economists pay little attention to the destiny of the societies.

There are many technical issues with the papers of Nordhaus and others. I will briefly discuss the choice of discount rate and won’t dwell on other issues. In Stern Review (2007) on climate change, it used the discount rate of 0.1%. In Nordhaus models, the discount rate is around 1.5%. But the discount rates humans feel natural are much higher. Credit card lending rates are often higher than 20%. Discount rates in major financial markets, which are anchored to central bank rates, are mostly higher than 0.1%. This means that whoever adopt 0.1% discount rate in their climate change policies will put themselves into great disadvantage. For more details, please check out my paper,   The Nature of Discounting.