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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.