Climate Change

The Stern Report

The most comprehensive study of the economic impact of climate change was commissioned by the British government. It is know as the Stern Report after its principal author, the British economist Sir Nicholas Stern. The report's short executive summary makes the following assertions:

  • The cost of climate change is estimated to be 5% of global GDP each year
    • Reduced access to water
    • Lower food production (and hence higher food prices)
    • Health damage
    • "Environmental damage"
  • The cost of acting to reduce greenhouse gas emissions is estimated to be 1% of GDP

That is, if we choose to reduce greenhouse gas emissions the benefit is that the economy will be 5% larger than otherwise, at a cost of 1% of GDP. The report concludes that the world should act now because the benefit of doing so exceeds the cost.

Who Will Pay?

That cost of "1% of GDP" comes in the form of higher energy prices and lost jobs. Who will pay? Most people agree in principle that they'd like to reduce carbon emissions, but few are willing to pay more on their heating bill or see their job eliminated. The problem is exacerbated by the fact that those who get the benefits - residents of low-lying island groups like the Maldives and dry continents like Africa - are different from those who have to pay most of the costs - like US residents who would face higher heating bills.

Brazil's president suggested that gringos should pay to avoid deforestation in the Amazon. He makes the point that Europe destroyed its own forests, so why should Brazilians not make a living from their own?

A "cap and dividend" plan would distribute the money paid for emissions permits to the public. If everyone were paid an equal share, low-income people would receive more than they pay in higher energy costs.

Note that there are many erroneous numbers floating around about the cost of cap and trade. As Paul Krugman shows in a blog post called "The Textbook Economics of Cap and Trade", the cost is the deadweight loss to the polluters. Most of the higher prices paid by polluters are returned to the government.

Guess what? Eco-friendly stuff is more expensive! That should not be surprising to economics students. If it were the cheapest, we would be using it already.

Technology to the Rescue?

There are many proposed technology solutions to the climate change problem. One June 2008 news report described how combined heat and power plants could use heat produced in power generation that is often wasted.

There is wind power generation in the United States!.
This New York Times video on solar power says that there are huge technological challenges in increasing energy from solar power, and that a lot of government investment is needed.

How Should we Change Incentives?

The Wall St Journal reported in January 2009 that Exxon's CEO favors a carbon tax to reduce emissions. Others prefer a "cap and trade" approach. However, opponents have labeled this the "cap and tax" plan.

The errors we make when judging risks makes us less sensitive to the risk of climate change that to a more tangible and immediate risk (such as a snake).

How Much Should We Pay?

How much should people pay for emitting carbon? It depends on a lot of things, but one big one is the discount rate. Carbon emissions now produce damage in the future. Different discount rates can change the number substantially, as this article shows.

Carbon Offsets

With the carbon offsets market, you can get paid for avoiding carbon emissions you otherwise would have made. That's why one company is giving away free energy-efficient light bulbs in Mexico. But there's something a little fishy about this: the subjectivity of "what I would have done otherwise." For example, I plan to install a large power-hungry refrigerator, but if you give me a subsidy I will install a more efficient refrigerator instead. Yet my power consumption has still increased.

Are Businesses the Problem or the Solution

According to Jared Diamond, businesses have an incentive to reduce environmental damage and many are doing so.

Related News Articles

April 23, 2008: Europe to build more coal-fired plants!

April 26, 2008: NYT article on the pollution cost of shipping food. This article raises the issue but doesn't provide much data.

Climate Change Legislation

ABC news on climate change bill

Subsidies for Alternative Energy Sources

Alternative energy would not be "alternative" if it were cheaper than fossil fuels. Because it comes at a higher price, few will buy energy from alternative sources. So governments intervene in the market to make it cheaper, often using subsidies. However, subsidies are expensive, and when they disappear so do the alternative energy projects.

The Ridiculous Idea of Food Miles

See here.

Carbon Tax

Australia in 2011 is trying very hard to introduce a carbon tax, against substantial opposition. The legislation eventually passed, but was repealed in 2014 by a subsequent government. If eco-friendly Australia cannot sustain a cap-and-trade scheme to combat carbon emissions, what hope is there for the United States?

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