MAGYAR NEMZETI BANK present economic activity, how warming will impact other The growth models integrating the entire social and parts of the biosphere or at what horizon climate change will economic environment determine a pollution emission path, exert its impact. Thus, under the numerous factors of uncer- from which the atmospheric concentration of particles is tainty, it is also rather difficult to estimate whether the calculated, yielding the future temperature, precipitation result of environmental regulation will be slower growth or and sea level. Based on the damage function derived from green reforms are able to support positive growth even the environmental results, the degree of economic damage upon stopping pollution. and the expected growth dynamics can be calculated both at regional and global levels. The social cost of carbon determines the optimal carbon tax path, based on which environmental policy can encourage the internalisation of the costs of pollutant emissions. Thus, the government not only manages CO2 emissions to limit global warming, it also fosters innovations implemented in cleaner technologies.
3.2 What kind of climate policy fosters sustainable growth? 3.2.1 THE NORDHAUS APPROACH
Initially, Nordhaus (1975, 1977) also examined the growth effect of innovation and technological progress. He believed that the exhaustion of resources did not restrain long-term growth, since scarcity enforces more efficient production and the use of alternative, renewable resources. Having examined the carbon dioxide cycle and the economic effect of limiting emissions, Nordhaus turned to the increasingly more complex presentation of the geophysical relations. Thus, he built a neoclassical Ramsey model extended by geophysical relations, the DICE model (Dynamic Integrated Climate–Economy; Nordhaus, 1992b) that describes the economic effects of climate change, supplementing it with material flow and settlement equations. The model equations also include equations capturing the emissions and concentration of pollutants, and the effect of that on climate, as well as those describing the harmful effect of the climate pollution that curbs economic growth. Nordhaus includes agricultural and health effects, as well as the effects on recreation services in the economic effects. The effects, time profile and economic consequences of climate change are most often captured in public policy analysis by Integrated Assessment Models, developed on the basis of Nordhaus’ DICE model. One of the most important elements of these analyses is estimation of the effects of climate change, one indicator of which is the social cost of carbon14 emitted during consumption or production, returned by the individual estimates.
Based on the theories of the 1990s, although environmental pollution is harmful, the emission of greenhouse gases has no long-term effect on the sustainability of growth. According to the calculations of Nordhaus (1991, 1992a, 2008), although economic growth entails CO2 emissions, warming of 3 degrees Celsius would only reduce the gross domestic product of the United States by one quarter, or a maximum of 1 percentage point. He estimated the damages related to the global economy, calculated at 2018 prices, to be roughly USD 80 trillion, hardly 1 percent of global GDP, and thus in his opinion warming only hinders future economic growth in the developed industrial countries to a small degree. Based on the results of the DICE models, he estimates the present value of the cost of emitting one tonne of carbon hardly at USD 21; thus, he proposes the introduction of only a moderate carbon tax to resolve the externalities. In a later analysis, he revises the former results, but still estimates the social cost of carbon only in the amount of USD 31 (Nordhaus, 2017). Thus, the Nordhaus approach acknowledges the negative impact of climate change (although it does not deem the degree thereof to be major), and he argues for growth that is sustainable even without strong environmental protection. However, the optimistic approach has been criticised in recent decades. Among other things, critique has been levelled in relation to underestimation of the importance of the future, underdevelopment of the specification of the damage function, underestimation of the likelihood of catastrophes, and the extent of the damage it causes.
14 The social cost of carbon is the discounted present value of costs caused by one additional tonne of emitted carbon dioxide, which increases in time, since due to the rising level of greenhouse gases in the atmosphere each additional emission generates increasing damages. To illustrate this: the degree of one tonne of emitted carbon dioxide corresponds to the volume of pollutants emitted by a car on the route of roughly 3,500 kilometres between Madrid and Kiev or San Francisco and Chicago.
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GROWTH REPORT • 2019
