Transcript The Economics of Global Climate Change

The Economics of Global Climate
Change
Climate Change
• My comments on the power of the market and
the lack of past change with redistributive
policies may have hit a nerve with some, but
climate change
• It is a shame that someone with a higher
education degree would fall for the scam of
global warming
• If is a shame that someone with a higher
education degree would dare question whether
global warming is a looming economic issue
Science of Climate Change
• A majority of those that work in the field
believe that we are experiencing global
warming, but there is a vocal minority
• Basic story
– Sunlight hits the earth—some of the sunlight is
absorbed into the earth as heat and some is
reflected back into space
– If the amount reflected back into space is reduced
then the earth will get warmer
More of the Story
• Some gasses absorb outward infrared
radiation
– Carbon dioxide, methane, nitrous oxide, and
chlorofluorocarbons CFCs) Greenhouse gasses
– Venus has so much greenhouse gasses that water
can not exist as a liquid—steam
– Mars has so few greenhouse gases that water can
not exist as a liquid—ice
–
Thomas Schelling
• Nobel prize winner now as University of
Maryland
• The science about greenhouse gasses is not
really about greenhouses—they trap air that is
warmed by the ground which is warmed by
the sun
• A better illustration is the smudge pots used
by citrus and wine grape growers
Smudge Pots
• These little pots burn crude oil to help keep
the crops warm nearby on cold nights
• It is not the heat from the pots that matters,
but rather the pots produce a layer of carbon
dioxide that captures some of the heat that
radiates from the ground, including the pots.
• Not great for marketing, but better
Intergovernmental Panel on Climate
Change
• They are often in the news both because of
their reports and because the organization
won a Peace Prize in 2007
• Set up by the World Meteorological
Organization and the United Nations
Environmental Programme
– With these parents, the group is a bit conflicted
– Scientific intergovernmental body
Middle Range Estimates
• IPCC estimates that world temperatures will rise
by 2.8 C by 2100
• If this happens, many possible changes will follow
– More precipitation at higher latitudes, less in tropical
areas
– Melting snow and sea ice
– Extreme weather like heat waves, droughts, and
tropical cyclones
– Costs to agriculture, health, water supplies. And
coastal protection
Economic Losses
• They are smaller than many would expect
• Standard estimates could lead to a fall in world
GDP of 3%
• The reason that it is so small is that warming will
help some areas and hurt others
– Benefit—Russia, North America, and China
– Suffer—Africa, Latin America, South Asia, and Western
Europe
– Remember that many areas are not that dependent
on rainfall for their economy
Range
• Range is often 1.8 C to 4 C by 2100
– At the upper end we should have some difficult to
describe extreme weather changes
• Could for example change the circulation patterns of
the oceans
• Melt polar ice caps
• This could dramatically increase the economic costs
Costs of Global Warming May Rise
Over Time
• 1% of world GDP by 2050
• 3% of world GDP by 2100
• 13% of world GDP by 2200
– Huge amounts of uncertainty in these types of estimates
– They start off with models of economic growth and the energy
industry and how those interact to produce carbon emissions
– Then you add on models about how carbon emission affect
climate
– Then you add on models about how climate affect economic
output
– This may be the best we can do but there must be so weak
areas—it is easy to find scientists on both side
Could be Better or Worse
• A majority of the experts indicate that there is a
potential problem—they may all be wrong but it
is not economic sound to plan under that
condition
• When there is a risk the first response of an
economist is to buy insurance
– I buy car insurance, but I do not expect to have an
accident
– It is time to start thinking about what global warming
insurance would be like
Insurance
• To make sound decisions about insurance, we
need to decide how is the risk and how much
insurance we should buy
Problems of Valuing Costs and Benefits
• Let us start by thinking about some of the
events that would have a very low probably of
happening, but could have very high costs
• Richard Posner
– Catastrophe: Risk and Response
• It was about how you should respond to low risk high
cost events
– What is the chance that an asteroid will hit the earth in the
next 100 years
– What about the chance of a severe bio-terror attack or a
worldwide epidemic
What is the Appropriate Response
• The obvious
– If the probability of the event goes up spend more
– If the cost of the event goes up spend more
• Note that we are not very good at these types of
estimates—we may be moved by fear and do too
much or we brush it aside and spend nothing
– Look at the boomers and long-term health care
insurance
What Should We Do
• The economist in me says that we should try to
reduce the megarisk, but you would not try to
eliminate all risk because there is a relative low
chance of it happening
• Stick to relative low cost approaches in the
present, but build up over time
– Think about what if we took the asteroid risk seriously
• You might start an agency to explore how to divert one
• Start early monitoring
• You do not start by blowing up all asteroids
What They Say
• Most say that we are experiencing global
warming
• There is a small probability of high cost in the
future
• But it is more likely that we will experience
moderate costs
• Balance the costs of action with the
reductions in risk and the reductions in harm
The Big Timing Issue
• The costs will be incurred in the near future
and the benefits will be realized in the distant
future
– Talking about global warming here and not
pollution even though they are connected
• Sir Nicholas Stern
– Climate change would reduce world GDP by an
average of 1% per year over the next century, but
the total loss over time would be equal to 14% of
world GDP
How
• When you look at Stern’s calculation more
closely you will see that half of the loss is after
20800
• YES
• If we are going to reduce carbon emission
right now should we be paying attention to
benefits that are many hundreds of years into
the future
Yes*
• You do want to count benefit in the future,
but the further off in the future benefits
should be weighted less
• I know that in some ways I am saying that a
life in the future is worth less than a life today
• Some say that they just do not want to mess
up the environment and then they show me a
report on their Ipad
I Do Not Want to Place the Same
Weight for the Future
• Is it the problem of this generation to pay for
every possible action that might affect the
entire future of the human race?
• Sure we have a responsibility to start and pay
our share, but they have responsibilities too
• After all, people in the future will probability
live long and have better technology as well as
a better standard of living
Discount Rate
• Discount Rate—the amount by which you count
the future less than the present
• If you ignore the difference between the present
and the future your discount rate is zero
– That is anything that happens in 20800 should be just
as important as something that happens today
– If you assume the rate is 1, 2 or 3%, that small number
discount the very distant future to a very small
amount
Crazy Irony
• Many environmentalists have a very low discount
rate and they value highly future generations
• But when it come to war to prevent a “crazy”
from obtaining weapons that might kill many in
the future, this same group tends to value the
present over the potential future person
• This example is not presented to belittle a group
but rather to show just how complex it is. (people
are not as rational as Econ 202 implies)
The Shape of Climate Change Policy
• Focus on market-oriented environmental tools
• Respect the time dimension of the problem
• Have an international dimension
Economic Categories of Environmental
Policies
• Command and control
– When you set a level there is no incentive for anyone
to improve
• Market-oriented approach
– Pollution tax
• If you can figure a way to pollute less you will pay less tax
– Cap and trade
• Government could issue permits on how much pollution is
allowable, but the permits can be traded. If you can reduce
pollution you can sell your permits
Politicians
• Rarely are very serious
• Imagine a 1 cent tax on gasoline and then
announce that it will increase 2 cents every
three year
– This allows for the time dimension
• Any politician who claims to be worried about
global warming should not be afraid of a few
cents tax on gasoline, but I doubt very many
would be willing to pass this.
International
• I left the most difficult for the last.
• China is now the largest polluter in the world
• The third-world countries can be very dirty
– But are you going to ask a very poor country to spend
money to clean up when its citizens maybe are hungry
• The US and Europe need to start the process, but
we can not force other to follow. The income
effect says that as they get rich they will
eventually follow.