The DICE model (Dynamic Integrated Climate-Economy), developed by William Nordhaus, is one of the first integrated assessment models (IAMs) to link economics with climate science. It combines:
- Economic Growth: Projects future economic output and consumption.
- Carbon Emissions: Tied to energy use and economic activity.
- Climate Dynamics: Simulates how carbon emissions affect atmospheric CO₂ concentrations, global temperatures, and climate damage.
- Policy Interventions: Examines costs and benefits of policies like carbon pricing to mitigate climate impacts.
The model calculates the “social cost of carbon” (SCC)—the economic cost of emitting one additional ton of CO₂—and identifies optimal carbon prices to minimize long-term economic and climate harm.
How the EU ETS Uses Insights from DICE
The EU Emissions Trading System (EU ETS) is the world’s largest carbon market, setting a cap on emissions and allowing trading of allowances. While the EU ETS doesn’t directly use DICE, it aligns with similar principles:
- Carbon Pricing: DICE supports carbon pricing as a tool to reflect the economic cost of emissions, and the EU ETS implements this via market-based pricing of allowances.
- Cost-Benefit Analysis: Policymakers use models like DICE to evaluate if ETS allowance prices are sufficient to drive emissions reductions in line with EU climate targets (e.g., net-zero by 2050).
- Long-Term Planning: DICE informs debates on optimal carbon price levels, helping the EU refine its ETS to align with global temperature goals (e.g., keeping warming below 2°C).
In essence, while the EU ETS doesn’t explicitly rely on DICE, the model’s outcomes—like optimal carbon prices and economic impacts of climate action—help shape policies that integrate economic and climate priorities.
