Coal is Worthless; a commentary on William Nordhaus and “The Commons”

William Nordhaus, Sterling Professor of Economics at Yale University

When I received the January newsletter from an alma mater, Yale University, there was a tribute to economist William Nordhaus. He was already waxing on the issues of the day when I was doing postgraduate study and working in the Yale University Medical Centre in 1965.
Nordhaus is central to DEA interests and aims and indeed to all our lives and the future, they are the issues of coal and the Commons. Nordhaus’s work is about the economics of the Commons.

The Tragedy of the Commons

Garrett Hardin in his seminal paper, The Tragedy of the Commons, published in the journal Science in 1968, exposes the defect that makes liberal democracy unsustainable in its present form. The Commons of Anglo Saxon culture was the pasture open to the cattle of all villagers. Hardin explained:-

As a rational being, each herdsman seeks to maximise his gain. Explicitly or implicitly, more or less consciously, he asks ‘What is the utility to me of adding one more animal to my herd?’ This utility has one positive and one negative component. The positive component is the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly +1. The negative component is a function of the additional overgrazing created by one more animal. Since however the effects of overgrazing are shared by all herdsmen, the negative utility for any particular decision making herdsman is only a fraction of minus 1. Each herdsman concludes that it is sensible to add another animal to his herd, and another, without limit… Therein is the tragedy, and in a world that is limited, freedom in the environmental commons brings ruin to all.

There lies the division in the world today. One herdsman epitomises neo-liberalism and individual right to maximise self-interest. He operates by the rule of the market and treats the environment as a resource. The rest of the herdsmen recognize their loss and want to join in. Clearly regulation to preserve the resource would be an option – but doomed to fail because of the overriding value of personal liberty. No doubt most current economists have flirted with these thoughts but they embrace the market which pays their salary. However, there is an alternative economics sheltering in some universities but it holds no sway against the power of the market which, according to Thomas Piketty, has delivered a 20:1 disparity between private wealth and national income.

So the “World Commons” is the stability of resources of land, sea, air and fresh water necessary for the health and wellbeing of humanity. The “ruin” to all predicted by Hardin is the confluence predicted this century of the above problems; population growth, depletion of resources and the ravages of climate change. All our problems can be placed in the context of The Commons.

“Managing the Global Commons: The Economics of Climate Change” was written by Nordhaus in 1994. Twenty five years later we have not yet 'got it'.

In his book, Nordhaus provides a detailed analysis of the DICE model (Dynamic Integrated model of Climate and the Economy). He observes that even with major technological breakthroughs and stringent controls, the momentum of past greenhouse gas emissions, coupled with great inertia in climate change policy, will lead to an inevitable rendezvous with massive climate change.

From our point of view his most important paper was published in 2011 in American Economic Review, the leading economics publication, and the findings have not been contested by any other economists.

The study presents a framework to include air pollution into a system of national accounts i.e. calculations of gross domestic product and other macroeconomic statistics. It estimates the value of air pollution damage created by several industries in the United States. 

The impacts of six pollutants (sulphur dioxide [SO2] nitrous oxide [NOx], volatile organic compounds, ammonia, particles at less than 2.5 microns [PM2.5], and particles less than 10 microns [PM10-2.5]) are estimated on human health, agricultural yield, visibility, accelerated depreciation and human recreation. Air pollution concentrations are related to human illness and death and the economic loss estimated.

This is what the study found: several industries cause damages greater than their "value added" - i.e. the difference between the value of the inputs they take in and the value of the output they produce. Coal fired power generation was found to produce damages from 0.8 to 5.6 times its value added. In other words, the damage caused is worth, at best, 80 per cent of the net value of the industry and at worst, 5.6 times greater.

These are remarkable findings which indicate at best that coal fired power generation has no economic value to the community. At worst the industry is a huge economic burden.

These findings were reported by DEA in How Coal Burns Australia.

The political battles today continue over the Commons for development and growth and are the basis for a successful market under the present self- perpetuating economic system. Development almost always means that the Commons is consumed in some way and thereby lies the political battle we all fight on a daily basis whist we participate of necessity in the market system! Ah, but there are alternatives as I will describe in a subsequent article.

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