From Economic Fantasy to Ecological Reality on Climate Change

From Economic Fantasy to Ecological Reality on Climate
Change
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Economics Nobel winner Robert Solow to the US Congress
• After the “Great Recession”, the US Congress held a hearing into why economists
hadn’t seen it coming. Robert Solow was one of the witnesses. In part, he said:
• “When it comes to things as important as macroeconomics, I think that every
proposition has to pass a smell test: Does it really make sense?
• And I don’t think that the currently popular DSGE models … pass the smell test.
• They take it for granted that the whole economy can be thought of as if it were a
single, consistent person or dynasty carrying out a rationally designed, long-term
plan, occasionally disturbed by unexpected shocks but adapting to them in a
rational, consistent way. I don’t think that that picture passes the smell test.
• And the protagonists of this idea make a claim to respectability by asserting that it
is founded on what we know about microeconomic behavior; but I really think
that this claim is generally phony.
• The advocates believe what they say, there is no doubt, but they seem to have
stopped sniffing or to have lost their sense of smell altogether…
• A thoughtful person faced with that economic policy based on that kind of idea
might reasonably wonder what planet he or she is on.”
• Solow’s “smell test” applies in spades to Neoclassical climate change economics…

Some smelly Neoclassical climate change conclusions
• “a 3°C rise in global mean surface temperature… damages …[are] estimated to be
about 1/4% of output… unmeasurable impacts … might raise this … at most 2% …,
although these higher figures are no more than an informed hunch.” (Nordhaus 1991)
• “Including all factors, the damage equation in the model assumes that damages are
2.1 percent of global income at 3°C warming and 8.5 percent of income at 6°C
warming.” (Nordhaus 2018)
• “an increase in average global temperatures of 0.04°C [p.a. from 2020: 3.2°C total]
reduces world’s real GDP per capita by 7.22 percent by 2100.” (Kahn et al. 2021)
• [This is a 0.1% fall in the annual rate of growth—from say 1.5% p.a., to 1.4% p.a.]
• “Tipping points reduce global consumption per capita by around 1% upon 3°C warming
and by around 1.4% upon 6°C warming…” (Dietz et al. 2o21)

Meanwhile, on planet Earth, scientists fear 2°C warming
• Hansen 2015 “2°C global warming could be dangerous”
• Steffen 2018 “Risk of a Hothouse Earth Pathway … 2°C
warming could activate important tipping elements …that
could take the Earth System to even higher temperatures”
• Lenton 2019“tipping points could be exceeded even between
1 and 2°C of warming”
• Bottom line from scientists: catastrophic damages likely if
global warming approaches 2°C
• We should do everything possible to avoid even 1.5°C
• Economists & scientists are finally noticing the divide
between them…

The divide between scientists and economists
• Lenton & Ciscar 2013: “There is currently a huge gulf between natural scientists’
understanding of climate tipping points and economists’ representations of climate
catastrophes in integrated assessment models …”
• “they cannot all be ruled out at low (<2 °C) warming”
• But “the dominant framing of climate catastrophes in IAMs … is that they are
associated with high (> 4 °C) or very high (> 8 °C) global warming.”
• Stern & Stiglitz (2021): “The fact that the overwhelming consensus in the … scientific
community, differs so markedly from the results of the IAMs raises a key question:
• is it sloppy thinking … that has led the international community to irrationally
embrace a goal involving excessive costs from the perspective of a hard-headed
analysis of society welfare maximization; or is it
• that the IAMs have left something—or many things—out of their analysis?”
• It’s indisputably—except by economists!—the latter
• How “on Earth” did economists conclude 3 − 6°𝐶 increases would have trivial effects?

Glittering econometric palaces, built on empirical quicksand
• Latest example Dietz, Rising, Stoerk and Wagner (2021). “Economic impacts of tipping
points in the climate system.” Proceedings of the National Academy of Sciences
• “Tipping points reduce global consumption per capita by around 1% upon 3°C
warming and by around 1.4% upon 6°C warming…” (Dietz et al. 2o21)
• Tipping points considered?
• Arctic summer sea ice
• Greenland Ice Sheet
• West Antarctic Ice Sheet
• Atlantic Meridional Overturning Circulation
• (“Gulf Stream”)
• Amazon Rainforest
• Indian Monsoon
• Permafrost
• Ocean methane hydrates
• On Steffen “Hothouse Earth” map…
Methane hydrates not included because
scientists don’t expect them to tip before 2100

• The global economy on a world where all these tip would, they claim, have per capita
consumption just 1.4% lower than a world where none of them tipped—despite global
temperatures rising 6°C over pre-industrial levels!
• So, tipping points are trivial—impact even less than impact of global warming itself:
• “2°C warming in the absence of tipping points corresponds to 2.3C warming in the
presence of tipping points”
• This doesn’t just smell: it stinks to high heaven. There must be madness in their
method. Another Robert Solow quote:
• “Suppose someone … announces to me that he is Napoleon Bonaparte.
• The last thing I want to do with him is to get involved in a technical discussion of
cavalry tactics at the Battle of Austerlitz. If I do that,
• I'm getting tacitly drawn into the game that he is Napoleon Bonaparte.”
• Unfortunately, since politicians effectively think economists are the intellectual
equivalents of The Little Corporal, we have to discuss their cavalry tactics…

• Dietz et al. surveyed work by economists only on the impact of climate change:
• “Climate scientists have long emphasized the importance of climate tipping
points like thawing permafrost, ice sheet disintegration, and changes in
atmospheric circulation.
• Yet, save for a few fragmented studies, climate economics has either ignored
them or represented them in highly stylized ways.
• We provide unified estimates of the economic impacts of all eight climate tipping
points covered in the economic literature…
• We reviewed this literature and identified 52 papers that model the economic
consequences of at least one climate tipping point”
• They admit one weakness of their analysis:
• “Our main specification omits “nonmarket” impacts of climate change, such as
those on ecosystems and human health.”
• But they took precautions for this omission…
• “We include an estimate of these in our sensitivity analysis instead.”

• Their “sensitivity analysis” used the concept of “Willingness To Pay” to quantify damages
to the environment:
• “The above damages from temperature, SLR and the ISM can be regarded as ‘market’
damages. They do not include estimates of the welfare cost of climate change outside
markets, for example damages to ecosystems that can be priced at people’s
willingness to pay (WTP) to preserve those ecosystems’ existence”
• WTP is used in cost-benefit analysis, to put a price on, for example, preserving a (free)
nature reserve in a city versus building a (commercial) amusement park on the same land
• They used it to value damages to the global environment…
• How? They borrowed, without amendment, “the non-market damage module of the
MERGE IAM”
• They cited Manne et al. 2005, but MERGE damage function dates from Manne 1995
• Well before economists considered tipping points…

• Regardless, Dietz et al. praise MERGE’s method:
• “The MERGE model places particular emphasis on the representation of non-
market damages, with a willingness-to-pay (WTP) measure that depends on both
income and temperature.”
• “While the parameters of the MERGE non-market damages are speculative, its use
of an S-shaped elasticity of income seems like a sensible starting point…”
• Hmmm. “Speculative”: what does that mean?…
• It means Manne et al. made them up!
• Genuine WTP uses surveys, etc., to assess consumer value of non-market goods
• Manne et al. simply assumed that willingness to pay to avoid 2.5°C warming was 2% of
GDP
• Then valued the environment by assuming damages were quadratic!

• “Next we turn to non-market damages. Few issues in the greenhouse debate are
more challenging or have engendered more controversy.
• What value does society place on biodiversity? Environmental quality? Human health?
• … we take an approach based on willingness to pay (WTP). The issue is framed in the
context of how much consumers in each region would be willing to pay to avoid
ecological damages.
• The fraction depends both on temperature change and GDP per capita…
• For non-market damages, we begin with the willingness-to-pay function…based on
the assumption that consumers in high income countries would be willing to pay 2% of
GDP to avoid the ecological damages associated with a 2.5°C increase in temperature.
• Their justification for this assumption?:
• “As a point of reference, the USA currently devotes approximately 2% of its gross
domestic product to all forms of environmental protection.”

• MERGE also assumes both
market & non-market
damages are quadratic.
• Why? Because it was easy:
• “If damages change
quadratically with
temperature, the
calibration requires
only a single point on
each function.”
• Combine the assumption
that WTP at 2.5°C=2% of
GDP with quadratic
damages and…
• You can “predict” that the environment isn’t totally
destroyed until ΔT = 𝟏𝟕. 𝟔𝟖°𝑪
2
 1
 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
10

5

0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
MERGE
Environmental Damages in MERGE from T
T °C
Damages
to
the
environment
in
percent
2
100
2.5 17.68
2
0.0032 T
´ D

• Dietz et al. regurgitate this:
• “Δ𝑇𝑐𝑎𝑡 is a catastrophic warming parameter set to 17.68°C… derived from the
assumption that economic losses rise quadratically, and are calibrated to a loss of
2% at 2.5°C warming.” (Dietz et al. Supplement 2021)
• How on Earth can you use a pre-tipping point model, which assumes damages are
quadratic, as a “sensitivity check” on your estimates of the impact of tipping points???
• A Hint… • How about that “Napoleonic”
2.5°𝐶 = 2% assumption?
• “As a point of reference, the USA
currently devotes approximately 2%
of its gross domestic product to all
forms of environmental protection.”
(Manne et al. 1995)

• This “predicts” that the environment isn’t totally destroyed until ΔT = 𝟏𝟕. 𝟔𝟖°𝑪
2
 1
 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
10

5

0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
MERGE
T °C
Damages
to
the
environment
in
percent
2
100
2.5 17.68
• But this is using just % of GDP from 1992
• Should have used ΔT in 1995 as well
• Roughly, ΔT1995 = 0.5°𝐶
• Then the coordinate is not
(2.5°𝐶, 2% 𝑑𝑎𝑚𝑎𝑔𝑒𝑠) but
(0.5°𝐶, 2% 𝑑𝑎𝑚𝑎𝑔𝑒𝑠)
• Assuming quadratic damages, this yields
2
 1
 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
10

5

0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
MERGE
(0.5°C,2%)
T °C
Damages
to
the
environment
in
percent
2
100
0.5 3.54
• This predicts total environmental
destruction at 3.54°C
• Still crazy function, but critical
temperature much closer to what
scientists actually expect…
2
0.0032 T
´ D
2
0.08 T
´ D
( ) 2
0.08
Env
Dam T T
D = ´ D

• But hang on, using a quadratic for environmental “tipping points”???
• A quadratic doesn’t have a tipping point!
• Better function is “logistic”
• Calibrated to Δ𝑇𝑐𝑎𝑡 = 3.54°𝐶:
• Still simplistic, compared to the
chaotic nature of actual climatic
tipping points
• But at least carries the implicit
warnings
• “Don’t let this get too much
momentum”
• “Best we stop well short of
ΔT = 1.5°𝐶”
0 0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.5 2.75 3 3.25 3.5 3.75 4
30

20

10

0
10
20
30
40
50
60
70
80
90
100
110
Quadratic Dietz actually used
Quadratic through 0.5°C, 2% GDP
Logistic with 2°C "tipping point"
Slope of Logistic
Quadratic vsLogistic Damagesto the Environmentwith Tcat=3.53°C
T °C
Damage
to
non-economic
factors
(Environment)
%
100
2
2
0.5

• Dietz et al. builds on work by other economists who also don’t understand the climate:
• E.g., Anthoff, Estrada & Tol (2016). “Shutting Down the Thermohaline Circulation”
• Huge oceanic current, driven by temperature & salt (“haline”) differences
• AMOC (“Atlantic Meridional Overturning Circulation”) carries warm water from
Equator to North America & (especially) Europe
AMOC
• If AMOC breaks down:
• No change in global
temperature
• But hotter Equator,
colder Europe:
• “cooling of 3°C in
summer and 5–10°C in
winter in southern
Germany” (Hansen
2016)

Glittering econometric palaces, built on empirical doo-doo
• Some effects of AMOC ending (Hansen 2015) at “just”
a 2°C increase:
• “North Atlantic cooling from AMOC shutdown
creates faster winds in our simulations, with a
seasonal-mean increment as much as 10–20 %.
• Such a percentage translates into an increase in
storm power dissipation by a factor 1.4–2, because
dissipation is proportional to the cube of wind
speed
• a stronger temperature gradient provides energy
for more severe weather events… popularly
known as superstorms...”
• Recent research finds evidence of AMOC slowdown
(Boers 2021)
• Tol’s reaction… “good”:

• Why “good”? Anthoff, Estrada & Tol (2016) modelled AMOC shutdown using
economic IAMS
• Considered only impact of shutdown on national temperatures
• Not other climate effects, nor interactions (hotter Equator, colder North)
• “As is common, we use the change in the average annual temperature as an
indicator of the severity of climate change…
• The impact of warming (or cooling) depends on whether it pushes a country
toward or away from its climate optimum…
• THC cooling is best seen as reduced warming. The effects on welfare are
therefore by and large positive…
• If the THC slows down a little, the global impact is a positive 0.2 − 0.3 percent
of income. This goes up to 1.3 percent for a more pronounced slowdown…
• Furthermore, in FUND, people are assumed to be richer in 2085 than they are
now and therefore, by and large, less vulnerable to climate change.”

• This is climatically ignorant
drivel … which Dietz et al.
regurgitated:
• “Slowdown of the
AMOC reduces the
expected SCC [“Social
Cost of Carbon”] by
1.4% by reducing
damaging warming in
some countries.”
• They also use a study
which “shows” that losing
Arctic summer sea ice
would be good…

• Economists’ empirical papers on climate change…
• Mistake the weather for the climate: Nordhaus 1991:
• “The most sensitive sectors are likely to be those, such as agriculture and
forestry, in which output depends in a significant way upon climatic variables.
• At the other extreme are activities … which are undertaken in carefully
controlled environments that will not be directly affected by climate change.
• Our estimate is that … of United States national output … about 87 % in
sectors that are negligibly affected by climate change.” (p. 930)
• “for the bulk of the economy—manufacturing, mining, utilities, finance, trade,
and most service industries —it is difficult to find major direct impacts of the
projected climate changes over the next 50 to 75 years.” (p. 932)
IPCC 2014 Economics Chapter

• Nordhaus’s Table 5:
87% of GDP
• Only thing these industries have in common is they take place indoors (or underground)
• Nordhaus is mistaking the weather for the climate

• Mistake space for time:
• Mendelsohn assumes that the observed variation of economic activity with climate
over space holds over time as well; and uses climate models to estimate the future
effect of climate change.” (Tol 2009, p. 32)
• This is insane. Main causal effects behind temperature at a given location are:
• 1. Solar cycles, distance from Sun, orbital variations (irrelevant on GW time scale)
• 2. Solar energy retention via additional greenhouse gases (at issue in GW)
• 3. Distance from Equator, from Oceans, above Sea Level (irrelevant to GW)
• “Cross-sectional approach” derives parameters for 3rd factor, and applies them to 2nd!
• Like having detailed North-South map of a mountain & then advising on safety of
crossing it East-West in the dark

(3) Cross-sectional: Map East-West & advise on North-South
• Indicative method: US GDP and temperature data as deviations from averages:
10
 8
 6
 4
 2
 0 2 4 6 8 10
40

20

0
20
40
60
Data Points
Quadratic Fit (Correlation 0.31)
Nordhaus 6°C Prediction
USA Temperature and GSP percapitadeviations
Temperature deviation from USA average (11.5°C 1970-2000)
Percent
deviation
from
USA
GDP
average
($33206
in
2000)
0
0
10
 8
 6
 4
 2
 0 2 4 6 8 10
40

20

0
20
40
60
Data Points
USA Temperature and GSP percapitadeviations
Temperature deviation from USA average (11.5°C 1970-2000)
Percent
deviation
from
USA
GDP
average
($33206
in
2000)
0
0
• Very weak correlation between
temperature and GSP
• 0.31 correlation coefficient with
𝐷𝑎𝑚𝑎𝑔𝑒(Δ𝑇) = −0.00318 × Δ𝑇2
• This is larger than the quadratic
coefficient in DICE 2018 (−0.00227)
• Implies GW will have trivial impact: 6°𝐶
increase, just 11.5% fall in GDP
• Nordhaus’s figure is −7.9%
• Supports GW trivializers like Lomborg
• How, exactly, are economists assisting
humanity with climate change, when
their work is providing climate change
deniers with talking points???

• Distorting scientific research when they do read it. Lenton 2008:
Critical Δ𝑇 °𝐶 Transition
Climatic element Min Max Years
Arctic summer sea-ice 0.5 2 10
Greenland ice sheet 1 2 300
West Antarctic ice sheet 3 5 300
Atlantic thermohaline circulation 3 5 100
El Nino 3 6 100
Indian summer monsoon
Sahara & West African monsoon 3 5 10
Amazon rainforest 3 4 50
Boreal forest 3 5 50
• Key conclusions of this research
• You should not use smooth functions to
model climate change:
• “Society may be lulled into a false
sense of security by smooth
projections of global change.” (p.
1792)
• Arctic & Greenland likely to tip this
century, 5 others may:
• “The greatest threats are tipping
the Arctic sea-ice and the Greenland
ice sheet, and at least five other
elements could surprise us” (p.
1792)
• Arctic may already have tipped:
• “a summer ice-loss threshold, if not
already passed, may be very close”
(p. 1789)

• Nordhaus’s “summary” of this paper in The Climate Casino (Nordaus 2013):
• The most important tipping points, in their view, have a threshold temperature
tipping value of 3°C or higher … or have a time scale of at least 300 years…
• Their review finds no critical tipping elements with a time horizon less than 300
years until global temperatures have increased by at least 3°C. (p. 60)
• In the manual for DICE, Nordhaus cites Lenton to justify using a quadratic damage function!:
• “The current version assumes that damages are a quadratic function of
temperature change and does not include sharp thresholds or tipping points,
but this is consistent with the survey by Lenton et al. (2008)” (2013, p. 11)
• Why do economists do this???

Because economists are inherently Global Warming “deniers”
• Not denying Global Warming is happening, but denying that it really matters…
• “capitalism can cope with anything, so Global Warming can’t be an existential threat”.
• Some actual quotes from this literature:
• Nordhaus 1991, p. 930: “human societies thrive in a wide variety of climatic zones. For
the bulk of economic activity, non-climate variables like labour skills, access to markets,
or technology swamp climatic considerations in determining economic efficiency”
• Nordhaus 1994, p. 48: “for most respondents the best guess of the impact of a 3-degree
warming by 2090, in the words of respondent 17, would be ‘small potatoes’”
• “‘it takes a very sharp pencil to see the difference between a world with and
without climate change or with and without mitigation’”
• “Natural scientists’ estimates were 20 to 30 times higher than mainstream economists’”
• IPCC Economics Chapter 2014 Executive Summary (Arent 2014, p. 662): “For most
economic sectors, the impact of climate change will be small relative to the impacts of
other drivers (medium evidence, high agreement).”
• Denialism is built into core model of production, the “Cobb-Douglas Production Function”

Integrating economics, energy, and ecology
• Larry Summers at the IMF Economic Forum 2013:
• “I always like to think of these crises as analogous to a power failure…output
would of course drop very rapidly.
• There'd be a set of economists who’d sit around explaining that electricity was
only four percent of the economy, and so if you lost eighty percent of electricity,
you couldn't possibly have lost more than three percent of the economy,
• and there'd be people in Minnesota and Chicago and stuff who'd be writing that
paper... but it would be stupid. It would be stupid.
• And we’d understand that somehow, even if we didn’t exactly understand in the
model, that when there wasn’t any electricity there wasn’t really going to be
much economy…” (Summers 2013)
• Explaining why Larry was right (for once!) in the model…
• Standard economic production function ignores energy (𝐸):
• 𝑌 = 𝐴 × 𝐾𝛼
× 𝐿1−𝛼
• Exponent 𝛼 based on share of GDP: 𝜶 = 𝟎. 𝟑

• When Limits to Growth was published, economists responded by temporarily
incorporating resources as a third “factor of production” (Stiglitz/Solow 1974)
• Engström 2016 applied same template to energy:
• 𝒀 = 𝑨 × 𝑲𝜶
× 𝑳𝟏−𝜶−𝝂
× 𝑬𝝂
• Exponent 𝜈 based on share of GDP: 𝝂 = 𝟎. 𝟎𝟑
• Keen 2019: “labour without energy is a corpse, capital without energy is a sculpture”
• Energy not an independent “factor of production”, but essential input into 𝑲, 𝑳
• Replace 𝐾, 𝐿 with K 𝐸 , L 𝐸 : 𝐿 → 𝐿 𝐸 = 𝐿 × 𝐸𝐿 × 𝑒𝐿; 𝐾 → 𝐾 𝐸 = 𝐾 × 𝐸𝐾 × 𝑒𝑘
• 𝐸𝐿, 𝐸𝑘: energy input per 𝐿, 𝐾; 0 < 𝑒𝐿, 𝑒𝐾 < 1: efficiency of conversion into work
• 𝐸𝐿 × 𝑒𝐿 = Λ constant ~100 Watts/hour; 𝐸𝐾 exponential growth since James Watt
• 𝒀 = 𝜦 × 𝑬𝑲 × 𝑒𝐾 × 𝑲 𝜶 × 𝑳𝟏−𝜶
• 𝜶 replaces 𝝂 as exponent for energy where 𝜶 = 𝟏𝟎 × 𝝂
• Consequence: standard Cobb-Douglas drastically understates impact of energy

• Consider Larry’s example:
• Standard “factor of production”
treatment of Energy:
• 80% fall in electricity
• 5% fall in GDP
• Substitute 𝐾 and 𝐿 for 𝐸, no big deal
• Energy-as-input treatment of Energy:
• 38% fall in GDP
• There is no substitute for energy
• But this is still not enough…
• Mankiw 1992,1995: cross-country
statistics show exponent for K should
be at least twice as high…
0
90 80 70 60 50 40 30 20 10 0
0
10
20
30
40
50
60
70
80
90
100
Standard CDPF
Energy input CDPF
Energy input decline and outputpredictions
Energy input as % of pre-crisis level
GDP
as
percent
of
pre-crisis
level
62
95
20

• “Although the [Solow/Cobb-Douglas] model correctly predicts the directions of the
effects of saving and population growth, it does not correctly predict the
magnitudes…”
• The value of 𝛼 implied by the coefficients should equal capital’s share in income,
which is roughly one third.
• The estimates, however, imply an 𝜶 that is much higher. For example, the 𝜶 implied by
the coefficient in the constrained regression for the intermediate sample is 0.59…
• Thus, the data strongly contradict the prediction that 𝛼= 1/3.” (Mankiw 1992, p. 415)
• “each of the three problems with the neoclassical model of growth would disappear
if the capital share were much higher than is conventionally understood…
• when calibrating the neoclassical model, the capital share, 𝜶, should be set at about
0.8.” (Mankiw 1995, p. 294)

• My solution: standard model (&
Mankiw’s stats) omit energy
• Include it with 𝛼 = 0.8 in
• 𝒀 = 𝜦 × 𝑬𝑲 × 𝑒𝐾 × 𝑲 𝜶
× 𝑳𝟏−𝜶
0
90 80 70 60 50 40 30 20 10 0
0
10
20
30
40
50
60
70
80
90
100
Standard CDPF
Energy input CDPF
Mankiw: alpha=0.8
Energy input decline and outputpredictions
Energy input as % of pre-crisis level
GDP
as
percent
of
pre-crisis
level
28
62
20
• 80% fall in energy
• 72% fall in GDP
• This is why Larry was right
that “when there wasn’t any
electricity there wasn’t really
going to be much economy”
• This is what economists—and
politicians who listen to them—think
would happen
• This is what would actually happen
• Energy:GDP link even stronger
than this implies…

• Larry’s example (80% fall in energy) relevant to climate change because…
1970 1980 1990 2000 2010 2020
12
13
14
15
16
Data
Extrapolation of 2015 growth rate
Renewable Energy percentage of Total Energy
Renewable
Percent
of
Total
Energy
• Non-Carbon energy sources
still contribute less than 20% of
energy extraction
• If undeniable climate
catastrophes force instant
shutdown of carbon-based
energy extraction, energy
availability could fall by ~ 80%
• 1971-2017 correlation of Δ𝐺𝐷𝑃
to Δ𝐸𝑛𝑒𝑟𝑔𝑦 = 0.83…

Production functions with energy
• Change in Energy to Change in GDP virtually linear and 1:1
GS 1970
 GE 2020
 GT 7
 GB 2


1970 1980 1990 2000 2010 2020
2

0
2
4
6
Energy
GDP
Annual Change in World Energy and GDP
Years
Percent
change
per
year
0
OPECII GFC
• Ignorance of the role of energy in
production has led economists to
drastically underestimate the
economic impact of climate
change…
• Economists should leave
measurement to the scientists
• Instead, to be useful, they should
work out how to finance not
exceeding the temperature rise
scientists set—𝟏. 𝟓 − 𝟐°𝑪

(1) Make economics useful: financing mitigation
• Mainstream economists don’t have a clue about how to do this—turn to MMT instead
• Insights from MMT: government deficit creates money & reserves
• Reserves buy bonds—“bond vigilantes” are people who turn down a free lunch
• Bonds sold to public reduce consumption, rather than finance construction
Deficit creates Money & Excess Reserves
Excess Reserves used to buy Bonds
Bond sale to public reduces spending power
• Relearn what WWII taught economists: Beardsley Ruml, Chairman New York Federal Reserve
(1946), “Taxes for Revenue are Obsolete”.

(2) Make economics useful: resourcing mitigation (minerals)
• Aggregate Production Functions have blinded economists to resource depletion
Zinc, Silver, Neodymium, Helium critical
Phosphorus—essential for life
Vital for existing technologies
• “industrial scale
transition away from
fossil fuels … is a much
larger task than current
thinking allows for.”
Michaux (2021). “The
Mining of Minerals and
the Limits to Growth”
• Government funding
needed for vital
technological advances
given these shortages

(3) Make economics useful: resourcing mitigation (energy)
• Much waffle in economic papers on “decoupling” GDP from energy …
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
15000
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
World Energy
World GDP
World Energy andGDP since 1970
Year
Energy
MTOE
(Million
Tons
of
Oil
Equivalent)
GDP
US$
2010
Billion
1970 1980 1990 2000 2010 2020
2

0
2
4
6
Energy
GDP
Annual Change in World Energy and GDP
Years
Percent
change
per
year
0
OPECII GFC
• Correlation of change in GWP with change in energy since 1970 is 0.83
• At the global level, decoupling is a pipedream
• Fossil fuels still 85% of energy generation… Rapid non-Carbon energy transition needed

(4) Make economics useful again: rationing consumption
• Work out how to impose wartime-like energy/CO2 rationing
in fairest way possible
• One proposal: parallel currency system via Central
Bank Digital Currencies, with Universal Carbon Credits
distributed on equal per-capita basis
• Start with UCC equal to national average consumption
• UCCs needed to purchase goods (as well as money)
• 95% of population would have excess UCCs
• Top 5% would need to buy UCCs off bottom 95%
• UCCs would be
• Politically popular (benefit majority)
• Let the market set the price—not economists
• Pressure rich to buy/develop low CO2 goods
• Structure for rationing if/when catastrophic
climate damages make everyone—even
economists!—realise that “shit, this is serious!”
• See https://carbonwatchdog.org/proposal/

Conclusion
• Mainstream climate change economics has negligently and drastically underestimated
economic damages from climate change
• Consequently:
• Humanity has delayed action on climate change for far too long;
• Far too late now for market mechanics alone to inspire mitigation/adaptation
• Adaptation arguably impossible even at 1.5°C warming
• Forces unleashed by tipping points far greater than humanity can address
• Wartime mobilization/rationing probably inevitable as tipping points cascade
• Economists could help by developing financing and rationing methods as in WWII
• All mainstream climate change economists (Nordhaus, Tol, Mendelsohn, Dietz,
Wagner, etc.) and their models should be excluded from future policy advice

https://www.patreon.com/ProfSteveKeen

References
• Arent, D. J., R. S. J. Tol, E. Faust, J. P. Hella, S. Kumar, K. M. Strzepek, F. L. Tóth and D. Yan (2014). “Key economic sectors and services”. Climate Change 2014:
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analysis." Energy Economics: 105624.
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575(7784): 592-595.
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References
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policies." Energy policy 23(1): 17-34.
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Loulou, J.-P. Waaub and G. Zaccour. Boston, MA, Springer US: 175-189.
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• Nordhaus, W. (2013). The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. New Haven, CT, Yale University Press.
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