COWLES FOUNDATION FOR RESEARCH IN ECONOMICS AT YALE UNIVERSITY Box 2125, Yale University New Haven, Connecticut 06520 COWLES FOUNDATION DISCUSSION PAPER NO. 1009 NOTE: Cowles Foundation Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. Requests for single copies of a Paper will be filled by the Cowles Foundation within the limits of the supply. References in publications to Discussion Papers (other 1 acknowledgment that a writer had access to such unpublished material) should be cleared with the author to protect the tentative character of these papers. The "Dice" Model: Background and Structure Of a Dynamic Integrated Climate-Economy Model of the Economics of Global Warming by William D. Nordhaus February 1992Preface ‘This study is designed to present the methodological and technical assumptions and the results behind the Dynamic Integrated model of Climate and the Economy (the DICE model). It is a model that attempts to use the tools of modern economics to determine an efficient strategy for coping with the threat of global warming. The fundamental premise behind this study is that societies should undertake environmental policies only when their benefits, broadly construed, exceed their costs and that the level of environmental control should be at that point where the incremental benefits of additional controls no longer exceed the incremental costs. In the area of global warming, this general strategy is easy to articulate and difficult to execute. The work embodied in this study lays out one approach — the use of dynamic economic optimization ~ to the construction of an efficient control strategy. The present study differs from earlier ones by the author and other researchers in two respects. First, it attempts to integrate both the economic costs and benefits of greenhouse-gas controls with a simple aggregate model linking economic growth with climate change. The primary new development here, however, is the inclusion of both economic and climate dynamics, Because of the long residence times of greenhouse gases and the long time lags in both economic activity and in climate change, dynamics are of the essence, Any study which overlooks the dynamics may produce misleading conclusions for the steps that we should take at the dawn of the age of greenhouse warming, ‘The present study represents the technical background and documentation for a model of economic growth in the presence of global warming. The model itself is relatively small by the standards of both economics and the related natural sciences, but many of the components will be unfamiliar to those outside the disciplines from which the individual components are derived. The purpose of this study, therefore, is to lay out in detail both the assumptions and the underlying derivations of the relationships underpinning the DICE model. Pl‘This study consists primarily of the background equations of the DICE model rather than analyzing the policy implications or analyzing the impacts of alternative specifications of the model, These further refinements remain on the agenda of future research. The present study was supported by the National Science Foundation. It has benefitted from an invisible college of scholars who have contributed to the development of the field of the economics of global environmental issues. Early co-workers in the economics of the greenhouse effect who imparted their wisdom included Jesse Ausubel, William Clark, William Cline, Jae Edmonds, Howard Gruenspecht, Dale Jorgenson, Geoffrey Heal, William Hogan, Lester Lave, Alan Manne, Richard Morgenstern, David Pearce, John Reilly, Richard Richels, Thomas Schelling, John Weyant, the late David Wood, and Gary Yohe. The author is grateful for helpful suggestions from colleagues at Yale, including William Brainard, Richard Levin, and Herbert Scarf, as well as for comments on earlier versions of this work by Edward Barbier, Richard Cooper, Peter Diamond, Herbert Giersch, and Leo Schrattenholzer. Scientists in other disciplines have tutored me on innumerable occasions, and I am particularly indebted to Robert Chen, Thomas Lee, Thomas Malone, William Nierenberg, John Perry, Roger Ravelle, Stephen Schneider, Karl Turekian, and Paul Waggoner. Finally, I am enormously grateful to Zili Yang for dedicated and patient research assistance. All errors that have survived the interchanges with these colleagues are my sole responsibility. P22