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Chapter 9
The Economics of Climate Change
Chapter Summary
This chapter provided a comprehensive treatment of climate change from an economic perspective.
The discussion in the chapter covers the following: (1) The scientific consensus on the causes and
consequences of global warming (GW). It also highlights some of the key elements of the criticisms
against this consensus scientific view. (2) The basic theoretical framework that economists use to
gain insights into the costs and benefits of actions taken to slow future GW trends. (3) Three
competing worldviews about GW and its future economic and ecological impacts. The empirical
studies that have been used to support each one of these three views are also presented. (4) The
various attempt that the world governments have made through international treaties (mainly
sponsored by the United Nations) to limit global emissions of greenhouse gases (GHGs). (5) The
challenges and opportunities of using transferrable credit emission as a policy instrument to reduce
GHGs emissions.
Review and Discussion Questions
1. Part III of the textbook (p. 175) started with the claim that the problems associated with climate
change, loss of biodiversity and stratospheric ozone layer depletion represents a ‘new’ scarcity
reality. In what important ways are these emerging environmental concerns different from the
so-called old environmental problems, such as water pollution arising from agricultural runoff or
local and regional air pollution associated with auto emissions? Discuss. Please try to be specific.
2. Carefully delineate the difference between the following pair of concepts:
 Weather and climate
 Global warming and climate change
3. Some of the greenhouse gases that are well known for their high thermal warming potential
(TWP) are entirely manufactured by humans. Are you surprised to learn this? What does this tell
us about technology and humanity, in general? Discuss.
4. The following two features set carbon dioxide (CO2) apart from the other greenhouse gases: (i) it
is by far the most abundant, and (ii) it is very long-lived in the atmosphere, lasting as long as a
century or more. Thus, to slow future global warming the focus should squarely be on the
controlling of the emission of CO2. Do you agree with this conclusion? Why or why not?
5. When it comes to global warming, the best we can hope to do is to slow the future trend of
warming. In other words, global warming has become irreversible, that is, we can never stop
future global warming. Comment on the validity of this observation.
6. As discussed in Section 2 of Chapter 9, the scientific consensus on the causes of climate change
appears to gravitate towards human factors, most notably the increase use of fossil fuels since
the beginning of the industrial revolution. Are you satisfied by the available scientific evidence to
support this claim? Why or why not?
7. It is one thing to come up with a scientific consensus on the association of increased
concentrations of GHGs in the atmosphere and their contribution to recent global warming, but
it an entirely different matter to be able to predict with a reasonable degree of certainty the
© 2014 Ahmed Hussen
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future trends of global average temperatures. In other words, projecting future climate change
is an extremely difficult task. Why? Explain.
Global warming is not just about the increase in the average surface temperature of the earth. It
also implies that there will be variations of temperature and weather patterns on a regional
basis. In fact, some have used global ‘weirding’ instead of warming to indicate that one outcome
of GW is the unpredictable and often intense (hence damaging) regional weather patterns. How
would one explain this phenomenon? Speculate.
An economist with some level of frustration proclaimed this accusative remark about
climatologists, or the science of climate change in general: from a policy perspective, it will not
be useful for scientists to tell us that high concentration of CO2 will cause increases in the
average global temperature. What will be helpful is to know, with some degree of certainty, the
differences in the projected average global temperatures when alternative scenarios of carbon
emission policy strategies are under considerations. Is this a justifiable plea for economists who
are burdened with the task of assessing the damage costs of global warming to make? Explain.
Exhibit 9.1, page 185, in your textbook discusses the main sources for the scientific controversies
of climate change. What do you make of those scientists who are highly skeptical about the
consensus positions on scientific evidence for the causes and consequences of global warming?
Do you see any merit in their skepticism? Explain.
A distinguished British economist, Sir Nicholas Stern (2007) proclaimed that climate change
confronts economists with “the biggest case of market failure.” What were his justifications for
this claim? Be specific.
First, carefully read Section 9.3, pp.186–191, that views the concern from the perspective of a
resource allocation problem. More specifically, the problem is viewed as involving trade-offs
between two social costs: namely, greenhouse abatement and greenhouse damage costs. To
view the problem this way amounts to a theoretical ploy of meaningless practical value given the
insurmountable difficulties associated with obtaining realistic estimates of these two costs.
Would you support this view? Why or why not? Explain.
A well know Yale University economist, Nordhaus (1990) considered the effort to quantify
damage costs as “terra incognita of the social and economic impacts of climate change.” What
does this mean? Do you support Nordaus’s view on this particular issue? Explain.
In Section 9.4, pp. 191–198, the economic debates on what to do to slow global warming is
presented from three different approaches; namely, the ‘business as usual approach’, the
‘gradualist approach’, and the ‘precautionary approach’. It was observed that the proponents of
the business as usual approach completely ignore the damage costs. The only thing considered
in this case is the impact of the money diverted to programs designed to slow global warming
(i.e. global warming abatement expenditure) on the rate of growth of the economy. On the
other hand, the proponents of the precautionary approach tend to put a heavy weight on the
damage costs. This is done by a deliberate choice to use a very low discount rate and an increase
in the average global temperature that ranges between 3 to 4 degrees centigrade within the
next fifty years. The effect of this will be to make the possibility of irreversible environmental
damages a point of important focus.
Someone suggested that given the above two polar extremes perspectives, the more balanced
approach when it comes to dealing with global warming concerns should be to follow the
guidance given by the gradualist approach. Do you agree with this suggestion? Make sure to
© 2014 Ahmed Hussen
explain the basic assumptions under which the model of the gradualists’ approach has been
constructed. Are there risks associated with following this approach? What are they?
15. Read carefully Section 9.5 of your textbook (pp. 198–202) before making any effort to respond
to this question. Since the signing of the 1992 Framework Convention on Climate Change (FCCC)
at the Earth Summit in Rio de Janeiro, many international climate negotiations have come and
gone. What exactly these United Nations lead negotiations have actually accomplished is still an
open question.
Some would argue that the main contribution of the FCCC and the Kyoto Protocol over the past
decade has been the persistence with which its governing body, the Conference of the Parties
(COP), has been able to engage the world community in dialogues that have been carefully
crafted to confront what seems to be the biggest challenges of the twenty-first century. What is
really lacking is the will of the world leaders to act.
Others have taken the position that the accomplishments of the FCCC since the signing of the
Kyoto Protocol in 1997 have been disappointingly dismal. While the urgency of the problem may
require bold, immediate and substantive action in the reductions of global GHG emissions, the
UN-led climate change conferences, despite their ambitious goals, have yet to yield a
breakthrough in the climate change negotiation. Given this reality, it seems rather
extraordinarily unfortunate that it took fifteen years to arrive at no substantive and effectively
binding agreements in climate negotiations.
Take a side, and provide argument for your chosen position. Depending on the position you have
taken in this debate, what factors do you think contributed to the slow or even, as some claim,
lack of any progress in climate change negotiations? Be specific.
16. Explain how the so-called ‘flexible mechanisms’ to control GHG emissions, such as the transfer
Emissions Reduction Units (ERUs)and the Clean Development Mechanism (CDM), are supposed
to work. While these mechanisms can be cost-effective, is it realistic to assume that they are
workable? Explain.
17. Given the choice between two policy instruments, that is, carbon tax or emissions trading, which
one do you thing will be most effective if and when they are used to control the total
greenhouse emissions target (caps) at the minimum cost? Choose one and make the case for
your support.
© 2014 Ahmed Hussen