Economics of global warming

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The economics of global warming relates to the size and distribution of the economic costs and benefits of global warming and of a variety of actions aimed at the mitigation of global warming. Estimates come from a variety of sources, including integrated assessment models, which seek to combine socio-economic and biophysical assessments of climate change.

McKibbin and Wilcoxen (2002) cite the United Nations IPCC as concluding with 33 to 67 percent confidence that the aggregate market sector effect of a small increase in global temperatures could be "plus or minus a few percent of world GDP". Developed countries are more likely to experience positive effects and developing countries are more likely to experience negative effects. Larger temperature rises would be more adverse across the board. McKibbin and Wilcoxen do not endorse GDP as a welfare measure.

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[edit] Mitigation

The costs of mitigating (reducing) global warming depend on a number of factors. One fundamental factor is the target level of atmospheric carbon dioxide: the lower the level, the sooner action must be taken. The sooner action must be taken, the shorter the period over which costs must be spread, and the higher the absolute costs, as cheaper technologies which could be used are not yet available. A common target level (assumed by the United Kingdom) is 550ppm (current levels are around 380ppm, and rising at 2-3ppm per year).

Another crucial factor in estimating the costs of climate change is the discount rate to apply. Normally a relatively high rate (eg 8%) is applied, reflecting the cost of capital. However, where intergenerational issues involve potential irreversibilities such as climate change, a low discount rate (eg 4%, a typical rate for social issues) may be applied. The difference is dramatic: at 4%, avoiding $1m worth of climate change damage in 100 years' time is valued at nearly $20,000 today (net present value), whereas at 8% it is valued at less than $500.

Another area for debate is the relationship between technological development and regulatory incentives: if regulation can induce substantial technological change, the costs of mitigation may be much lower.

[edit] Cost estimates

IPCC TAR (Synthesis Report) suggested values of $78bn to $1141bn annual mitigation costs, amounting to 0.2% to 3.5% of current world GDP (which is around $35 trillion), or 0.3% to 4.5% of GDP if borne by the richest nations alone. As economic growth is expected to continue, the percentage would fall. In terms of cost per tonne of carbon emission avoided, the range (for a target of 550ppm) is $18 to $80. (House of Lords 2005)

These cost estimates refer to reductions achieved through tradable emissions permits when those permits are given away to polluters. If the reductions are achieved through emission taxes or auctioned permits, and the revenue is used to reduce distortionary taxes, the TAR III synthesis report concludes that "[depending] on the existing tax structure, type of tax cuts, labour market conditions and method of recycling... it is possible that the economic benefits may exceed the costs of mitigation." This is in contrast to McKibbin and Wilcoxen's (2002) report that Nordhaus and Boyer calculated that the present value cost of the Kyoto Protocol would be $800 billion to $1,500 billion if implemented as efficiently as possible. They also cite a study by Tol that estimated the net present value cost to be more than $2.5 trillion.

Azar and Schneider (2002) observe that global output in 1990 was around $20 trillion. If it grew steadily at 2.1 percent per annum it would be just short of $200 trillion by 2100. They thereby make the point that the calculated present value costs of mitigation would look smaller if scaled against 2100 output than if scaled against 1990 output. However, neither comparator is relevant to the question of whether the likely benefits from mitigation exceed the costs.

[edit] Benefits

McKibbin and Wilcoxen also report that Nordhaus and Boyer calculated that the present value of benefits from mitigation under the Kyoto Protocol would be $120 billion, far below the likely costs. McKibbin and Wilcoxen report that "[o]ther studies reach similar conclusions". They cite Tol as concluding that "the emissions targets agreed in the Kyoto Protocol are irreconcilable with economic rationality."

However, the Stern Report produced much larger benefit estimates, of between 5 per cent and 20 per cent of GDP. The difference reflected a number of factors, the most important of which were the choice of discount rate, the use of welfare weighting for effects on people in poor countries, a greater weight on damage to the natural environment and the use of more up-to-date scientific estimates of likely damage.

In addition to avoiding the costs of the business-as-usual scenario, mitigation actions can bring other benefits, depending on factors such as the technology used. These include, for example, the reduced economic impact from oil supply disruptions and/or price rises, if mitigation reduces oil dependence. This may be of particular benefit to non-oil-exporting developing countries, which suffer greater economic impact from oil price rises.[1]

[edit] Costs of business-as-usual

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[edit] Non-economic costs

[edit] Optimal strategies for mitigation

Financial and technological strategies can have a major impact on reaching a particular target atmospheric CO2 concentration.

  • Carbon tax
  • emissions cap-and-trade
  • hybrid systems of permits and user fees (e.g. the Brookings McKibbin-Wilcoxen Blueprint[2])
  • regulation
  • nuclear power

"no regrets" policies - notably reducing fossil fuel subsidies, which is predicted to increase growth whilst reducing CO2 emissions. Article 2 of the Kyoto Protocol specifies a progressive removal of subsidies and reform of taxes as a means of achieving reduction commitments. [3]

McKibbin and Wilcoxen (2002) argue that a combination of long term carbon price signals and short terms caps on economic cost is needed to address both economic efficiency, equity sharing and political feasability.

[edit] Distribution

The costs and benefits of global warming are distributed quite unequally.

  • low-lying countries' risk of floods
  • many countries subject to increased drought are poor African countries
  • ability of poor countries to mitigate / adapt (margin)
  • GW increases variability of weather, which implies greater capital requirements for water storage systems, flood defenses, etc as well as individual requirements to cope with wider variation in weather patterns

The costs of mitigation may also be distributed unequally, both within and between countries. [4] Wier et al (2005) showed that carbon taxes, particularly direct taxes on households, are regressive (more so than VAT), suggesting that in order to maintain social acceptance the regressive effect needs to be compensated for either within the environmental tax structure, or in other parts of the tax system. Indirect taxes (on business) are less regressive, and petrol taxes are found to be progressive.

[edit] Inter-relationships

[edit] Between gases

Brink et al (2005) showed that the costs of mitigation can be reduced by considering the inter-relationships of different greenhouse gas, and the differential impact that different technological decisions may have on their emissions.

[edit] Between countries

Bastianoni et al (2004) note the differences between methodologies for assigning responsibility for greenhouse gas emissions, which include the geographical approach, based on the IPCC guidelines for GHG inventory; the consumer responsibility approach, based on the Ecological Footprint methodology; and the Carbon Emission Added (CEA) approach, which resembles the accounting of a Value Added Tax. Different methodologies can produce quite different results in terms of responsibility for emissions, with consequent impact on policy.

[edit] Gradual change vs climate surprises

Baranzini et al (2003) conclude that "(i) gradual, continuous uncertainty in the global warming process is likely to delay the adoption of abatement policies as found in previous studies, with respect to the standard CBA; however (ii) the possibility of climate catastrophes accelerates the implementation of these policies as their net discounted benefits increase significantly."

[edit] References


[edit] See also

[edit] External links


Global Warming
Subtopics
Scientific opinion | Attribution of causes | Effects | Mitigation | Adaptation | Controversy | Politics | Economics
Related topics
Global dimming | Greenhouse effect | Greenhouse gases | Temperature data | Kyoto Protocol | Long-term climate change |
Intergovernmental Panel on Climate Change
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