The Economics of Global Climate Change 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 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.