Climate economics support for the UN climate targets

1Potsdam Institute for Climate Impact Research, Leibniz Association, Potsdam, Germany. 2Department of Economics and Center for Earth System Research and Sustainability (CEN), University of Hamburg, Hamburg, Germany. 3CESifo, Munich, Germany. 4Division of Physical Resource Theory, Department of Space, Earth & Environment, Chalmers University of Technology, Gothenburg, Sweden. 5Department of Economics, Heidelberg University, Heidelberg, Germany. 6Department of Economics, University of Oslo, Oslo, Norway. 7York Management School, University of York, York, UK. 8Department of Geography and Environment and Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK. 9Dragon Capital Chair in Biodiversity Economics, Department of Economics, University of Exeter, Exeter, UK. 10Department of Economics, University of Gothenburg, Gothenburg, Sweden. ✉e-mail: B.Groom@lse.ac. uk Limiting global warming to well below 2 °C (let alone 1.5 °C) as decided in the UNFCCC Paris Climate Agreement is either unattainable or far from the economic optimal according to William Nordhaus1. Instead, his economic analysis implies a climate policy path that limits global warming to 3.5 °C by the end of the century and decarbonizes the economy only in the next century. According to Nordhaus, this reflects the economically optimal balance between future benefits and current costs. So, while both the UN climate targets and Nobel Prize winner highlight the need for a policy response to global climate change, they are strikingly different in the stringency of the recommended temperature goals and the implied emission pathways over the century2,3. Nordhaus’ recommendations are derived from the Dynamic Integrated Climate–Economy (DICE) integrated assessment model (IAM), which he created and developed in several steps4,5. The model seeks to find the optimal emission, temperature and carbon tax trajectories by balancing the costs of emissions reductions and the damages of climate change, measured in economic terms. Emissions reductions are justified provided the benefits of avoiding climate damages outweigh the costs; for example, higher costs associated with energy supply. Nordhaus was early in making his model readily available to the research community and it has become central in climate economic analysis and highly influential in policy discussions6–8. However, DICE has also been criticized on several grounds. These include the choice of discounting parameters9–11, the model’s omission of uncertainty and the risk for climate catastrophes12–15, the treatment of non-market damages16,17 and details of its climate model18–20. Notably the DICE model’s concept of economic optimality, that is maximizing a discounted utilitarian social welfare function, has been criticized for not reflecting the structure of optimal-control models that incorporate risk and uncertainty15 and for its reliance on a single conception of intergenerational welfare21–24. DICE has also been subject to general criticism regarding the use of cost–benefit analysis for climate policy purposes25–27. The Committee for the Prize in Economic Sciences in Memory of Alfred Nobel was well aware that the precise conclusions that Nordhaus draws from DICE are highly sensitive to specific assumptions. In its scientific background paper, the Committee stated that the 2018 Laureate was rewarded for the methodological contribution of integrated assessment modelling, not the specific policy recommendations following from the DICE model’s baseline calibration. In this analysis, we show that updates to the existing parameters of the DICE model, drawn from some of the latest contributions in social and climate science, lead to economically optimal climate policies and emissions pathways that are in line with the UN climate targets. Specifically, our updates to the basic DICE parameters draw from the latest findings on economic damage functions28, which Nordhaus1 includes in a sensitivity analysis, together with some of the latest climate science29,30 and a broad range of expert recommendations on social discount rates (SDRs)24. This is complemented by revised assumptions regarding non-CO2 GHG emissions31, the feasibility of negative emissions technologies (NETs)2,32 and constraints on the feasible speed of decarbonization2,33. While some of these individual updates have already been analysed in the existing literature, our innovation is to analyse their joint effect in DICE. This reveals that there is no inherent discrepancy between the method underpinning the 2018 Economics Nobel Prize and the UN climate targets.