Analytical Studies of Global Warning

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Because the economics of climate change is so complicated, even the simplest multi-sector computer models that have been created to analyze the subject have themselves been relatively complicated. This research proposal is targeted at what is perceived to be a shortage of decent "super-simplified" analytical models of global warming. This project constructs a series of two- to three-sector sector referent models that will give simple sharp insights into the global warming problem and that a graduate student in economics would recognize and understand. In its essence, the global warming problem is a problem in capital theory. The core architecture of these new models is that of a dynamic optimal-growth production-stock externality having a special structure. This project answers such questions as: What is this special structure? Does it correspond to any standard "off-the-shelf' model of existing capital theory? What solution concepts does this special structure give rise to? And are such solution concepts useful for giving insights into the behavior of the more-complicated, more-realistic, multi-sector numerical models? More particularly, the project centers analytical attention on the key reduced-form relation between the private and social rates of return generated by a global-warming-type dynamic externality. The project shows that what looks like some fairly complicated models of economic dynamics describing, very roughly, "the global warming problem," reduce down to a particular kind of capital-theoretic structure, which permits an unexpectedly simple way of thinking about the relationship between social and private rates of return on capital. Understanding the relation between social and private rates of return may be important here because, as the proposed project shows, the "problem" of the dynamic global-warming externality and its "solution" can both be conceptualized readily when presented in this characteristic form. Social and private rates of return are important summary statistics, compressing down into two numbers a lot of information concerning levels of consumption or investment, concerning rates of growth, and concerning desirable government policy on emissions-abatement standards. So, if we understand or intuit well the relationship between social and private rates of return, we understand a lot, even if not everything, about the basic underlying problem and its solution. The proposed research shows when, how, and why a global-warming-type dynamic externality may collapse down to a relatively simple reduced- form relationship between social and private rates of return.