Transcript Reflections on the Economics of Climate Change

Reflections on the Economics
of Climate Change
William D. Nordhaus
Journal of Economic Perspectives
7(4): 11-25 Fall (1993)
Understanding the Causes
• As economists, we need to understand the
human sources of global changes, the
potential damages they cause to natural
and economic systems, and the most
efficient way of eliminating them.
• We can call this process: managing the
global commons.
• Economists are relatively new to the
impacts of climate change.
Scientific Background
• What is Greenhouse Effect? It is where CO2 buildup
causes heat absorption by the planet.
• Using standard, but problematical, metric of “CO2
equivalent”, the concentration of gases has risen by
over half of the preindustrial level of CO2.
• IPCC projection is about 4 degrees C increase from
1900 to 2100
• His DICE model shows slightly lower projected
temperature changes than IPCC due to rising relative
energy prices and slowing economic growth
• Due to the fact that all models show temperatures rising
out of the known norms from human history, this could
cause various unknowns with possible horrible
consequences.
Impacts of Climate Change
• Due to technology, man and his economy have
been insulated from nature more and more.
• So when a firm decides to build in Hong Kong
instead of Moscow, it rarely considered the
environmental impact.
• With climate change in the equation, the effects
on the economy will affect different sectors and
countries. However, the third world nations will
bear the brunt of the problem.
• Highly developed nations will not be as hurt as
other nations that depend heavily on sustainable
agriculture.
Climate Change on the USA
• 85% of U.S. GDP is not affected by climate
change
• U.S. has been studied more extensively.
• A 2.5 to 3 degree rise in Celsius has
different effects (in 1998$) according to:
– Nordhaus estimates a loss of $50.3 billion .
– Cline, who also sees the loss of the spotted
owl, estimates $53.4 billion loss.
– Fankhauser estimates $66.9 billion loss.
Problems
• Studies need to address other countries
other than the United States.
• Also, the studies might have
overestimated the problems.
• In fact, it might be a good thing for the
American West and South because the
climate will become more abundant with a
warmer climate.
Balancing Act: The Policies
• Most policy discussion focuses on
reducing CO2 through alternative energy
sources using carbon taxes or permits.
• Another option is climate engineering to
combat climatic change.
• Economists stress that we must find the
most efficient policy.
Empirical Modeling of Optimal
Policies
• Dynamic Integrated Model of Climate (DICE) asks
whether to consume, invest in productive capital, or slow
climate change via reducing greenhouse-gas emissions
• Since it optimizes, it gives optimal levels for each.
• Economic model – use carbon tax rising from $5 per ton
to around $20 per ton by end of 21st century.
• Stabilize emissions- carbon tax of $0 per ton rising to
$500 per ton
• Stabilize climate: carbon tax of $100 per ton rising to
$1,000 per ton
• See Figure 3.
Uncertainties and Anxieties
• Should it be high on the international agenda?
Other issues are more pressing. But…
• Massive Starvation and Migration
• It could cause civil wars due to changes in weather and
food supply
• Europe could suddenly have more Alaska like weather
• When debate is opened to the gravest
possibilities, simple solutions seem to pale in
comparison.
• However, it is best to let the uncertainties stay
since such things exist in all decision making,
but at the same time, don’t dwell on them.