1. Economics and the Geosciences
William D. Nordhaus AAAS Annual Meetings
Yale University February 18, 2011

2. Outline of presentation
Economics and geography (GEcon)
Economics and luminosity
Integrated modeling of economics of climate change (DICE/RICE)

3. The GEcon project
Purpose is to develop matched geophysical and economic data at geophysically scaling
Purposes:
Many processes are geophysically based (e.g., climate)
Much higher resolution (circa 100x): like Hubble telescope
Can be matched with geophysical, environmental data (climate, elevation, distance from coast or market, pollution, etc.)
Nordhaus, Macroeconomics and Geography, PNAS, 2007; Nordhaus and Chen,
G-Econ presentation: October 5, 2005

4. Derivation of Data Set GEcon gross cell product (GCP) data
GPW grid cell
estimates of
population, area, RIG
National or regional
gross output,
population data
National and provincial
GIS grid data (RIG,
area, boundaries)
Regional (e.g., county)
estimates of
output per capita
Proportional allocation
from political
to geophysical
boundaries
GEcon gross cell
product (GCP)
data
G-Econ presentation: October 5, 2005

5. Countries and grid cells for Europe
G-Econ presentation: October 5, 2005

6. Luminosity as a Proxy for Output
Xi Chen
William Nordhaus

7. Combining socioeconomic and luminosity data
Economic data on developing countries is very weak. Question for this project: Can we use luminosity (nighttime lights) data as a proxy for standard accounting data for low-quality regions? Allows use of regional GEcon data for rich regional data set.

8. Key elements in evaluating luminosity as a proxy
The key elements in determining the value of a proxy are:
The quality of the luminosity data
The errors of measurement of the standard GDP data
The statistical relationship between luminosity and GDP
The background paper shows the optimal weighting as a signal-extraction statistical problem.
Chen and Nordhaus, The Value of Luminosity Data as a Proxy for Economic Statistics, NBER Working Paper, 2010

9. Problems illustrated for southern New England
Bleeding
Saturation 9

10. Stable lights and output by 1° x 1° grid cell (n = 14,287)

11. Results on optimal weight on luminosity
Chen and Nordhaus, in process.

12. Main Results
For most countries, luminosity is essentially useless as a proxy for GDP and output measures.
Possible information value in statistical basket cases.

13. Economic Integrated Assessment (IA) Models in Climate Change

14. Integrated Assessment (IA) Models in Climate Change
What are IA models?
These are models that include the full range of cause and effect in climate change (“end to end” modeling).
Major goals of IA models:
Project trends in consistent manner
Assess costs and benefits of climate policies
Estimate the carbon price and efficient emissions reductions for different goals
Nordhaus, “Copenhagen Accord,” PNAS, 2010.

15. The emissions-climate-impacts-policy nexus: The RICE-2010 model
Fossil fuel use
generates CO2
emissions
Carbon cycle:
redistributes around
atmosphere, oceans, etc.
Climate system: change
in radiative warming, precip,
ocean currents, sea level rise,…
Impacts on ecosystems,
agriculture, diseases,
skiing, golfing, …
Measures to control
emissions (limits, taxes,
subsidies, …)

16. RICE-2010 model structure*
Economic module:
Standard economic production structure
GHG emissions are global externality
12 regions, multiple periods
CO2/Climate module:
Emissions = f(Q, carbon price, time)
Concentrations = g(emissions, diffusion)
Temperature change = h(GHG forcings, time lag)
Economic damage = F(output, T, CO2, sea level rise)
* Nordhaus, “Economics of Copenhagen Accord,” PNAS (US),

17. Policy Scenarios for Analysis
using the RICE-2010 model
1. Baseline.
2. Economic cost-benefit “optimum.”
3. Limit to 2 °C.
4. Copenhagen Accord, all countries.
5. Copenhagen Accord, rich only.

18. Temperature profiles: RICE -2010
Source: Nordhaus, “Economics of Copenhagen Accord,” PNAS (US),

19. An interesting byproduct: CO2 shadow prices
Shadow prices (social costs) were discovered by developers of linear programming techniques (Kantorovich and Koopmans, Nobel 1974). Originally thought useful for central planning prices. Today, useful because they reflect the marginal cost, or prices, of a constraint when efficiently imposed. For example, IA models can calculate the price associated with the 2 °C temperature target as a byproduct of the economic models. Can be used as guidelines for setting CO2 taxes or prices.

20. Carbon prices for major scenarios from RICE-2010 model
Source: Nordhaus, “Economics of Copenhagen Accord,” PNAS (US),

21. Where are we today? Actual equivalent global carbon price = $1 / tCO2
Source: Nordhaus, “Economics of Copenhagen Accord,” PNAS (US), 21

22. A new scientific renaissance of social and natural sciences?