Download The Economics of Climate Change

The Economic Perspective
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Economists are not concerned with whether it
exists, but whether/what should be done about
it.
Even though climate change exists, this does not
necessarily mean we should take action to
reduce it’s impact (reduce GHGs).
Only do something if the benefits > costs
The costs of reducing GHGs
 Mitigation - taking strong action to reduce emissions -
must be viewed as an investment, a cost incurred now
and in the coming few decades to avoid the risks of
very severe consequences in the future.
 “An estimate of resource costs suggests that the annual
cost of cutting total GHG to about three quarters of
current levels by 2050, consistent with a 550ppm CO2e
stabilisation level, averages approximately 1% of GDP.”
 Stern Review, 2007
What if we don’t do anything?
 Doesn’t mean GDP is 1% higher!
 Incur damages much higher than 1% of GDP, including:
 Rising sea levels
 More extreme weather
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Floods, droughts, and storms
 Damage to ecosystems
 Damage to food supply
 Harder to do business
 Hundreds of millions or billions of people suffer coastal
flooding; property damages; hunger; water shortages, etc.
 All countries/people are affected. Poorest suffer earliest and
most.
What if we don’t do anything?
 Already seeing some impacts:
 California drought: top agricultural state in terms of farm
income.
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Prices of large number of fruits, vegetables, nuts and beef are
increasing as farmers deal with drought conditions.
 Property damages from hurricanes are much higher.
 Florida homeowners insurance rates have doubled in last decade.
 Countries like Bangladesh and Maldives have already seen
major damages from inland flooding.
 Everyone, regardless of whether they live in an area that is
particularly susceptible to damages from climate change or not,
will pay more for food, water, energy, basic products, tourism,
etc.
What if we don’t do anything?
 “Using the results from formal economic models, (the
Stern Review) estimates that if we don’t act, the overall
costs and risks of climate change will be equivalent to
losing at least 5% of global GDP each year, now and
forever.”
 Costs about 1% ($870 billion) to save about 5% ($4.35
trillion).
What do most economists think?
 500 top economists were asked “Do you believe that
climate change presents a significant risk to the
economy?”
 84% agreed.
 Same economists were asked “Do you believe that the
U.S. should take action to reduce Greenhouse Gas
Emissions?”
 94% agreed.
Other benefits of reducing GHGs
 By reducing fossil fuel consumption:
 Reduce dependency on foreign oil ($300 billion annual
transfer of wealth from U.S. to other nations)
 Increase viability of renewable energy
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More labor intensive and uses more domestic content
Studies suggest 3x as many jobs associated with renewable
energy investments compared to fossil fuel investments
 Less pollution, which means better health, regardless of
climate change.
What could it be done?
 Put a price on carbon (tax), and make it revenue
neutral
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A $15/ton tax could generate enough revenue to eliminate all payroll taxes.
$3600 per worker, or $1500 per citizen
Tax pollution, something we want less of
Subsidize work, something we want more of
 Advantages: least cost method of reduction, incentive
to innovate, revenue can be used to reduce other taxes
 Disadvantages: can be costly to firms, don’t know how
much pollution abatement will take place.
 Would it damage the economy?
 Finland implemented a $30/ton tax on CO2 in late 90s.
 Since 2000, Finland’s per capita GDP has increased at
twice the rate as U.S. per capita GDP
What could be done?
 Cap and trade
 Distribute set number of permits, allow firms to buy and sell, and
gradually reduce number of permits.
 Advantages: lowest total cost of abatement, less costly
to firms compared to taxes, set quantity of emissions
 Disadvantages: initial distribution can be tricky, can
present a barrier to entry, prices can be volatile.
Policy Issues
 Global Problem = Global Solution
 Temporal separation between emissions and
damages (discount rate)
 Uncertainty of exact costs and benefits – based on
probabilities
 Not just carbon, multiple GHGs
 Equity issues
Clean Air Act, Acid Rain Program
 In 1990, Acid Rain was a major environmental
problem.
 16 million tons of Sulfur Dioxide emissions.
 Goal was to cut emissions by approximately 50%
within 20 years.
 Used cap and trade program
 What’s happened to emissions?
Sulfur Dioxide Emissions
 Emissions have been reduced by approximately
70%.
 What’s happened to the economy?
Relative to Economic Indicators
What else should be done?
 Like with any natural disaster:
 Government is needed to protect and manage public
goods
 May not directly provide profit, but necessary for the
economy to function
 Take steps to make adaptation easier.
 Provide financing to adapt buildings, construction of
stormwater wetlands, improve drinking water, reduce shore
erosion, improve water use efficiency and increase storage
capacity, R&D in high temp seeds, desalination of water,
identify vulnerabilities and inform decision making.
 All in addition to mitigation.
Have a happy day!