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THE ECONOMICS OF GLOBAL WARMING:

Not to Act at All, to Act Now or Later

(Ahmed M. Hussen, July 2007)

I. INTRODUCTION: Preliminary Facts about Climate Change and the Science behind it

Serious international discussion on global warming did not start until the singing
of the Framework Convention on Climate Change at the Earth Summit in Rio de Janeiro
in 1992. It was not, however, until five years later that the first United Nations
conference to enact a binding international agreement to control the emissions of
greenhouse gases was held in Kyoto, Japan—the Kyoto Protocol. This environmental
conference clearly indicated that climate change or in this particular instance global
warming (see Box 1, next page) is a very serious problem and the world community has
to take concrete steps to reduce the emissions of greenhouse gases (GHGs). The final
agreement reached under the Kyoto Protocol decreed an average of 5.2 percent cut in
greenhouse gas emissions from 1990 levels by the year 2012. Furthermore, the emissions
cut will be forthcoming entirely from the developed nations. The main message of the
Kyoto Protocol agreement has been that doing nothing about global warming is not an
option if the present generation of humanity is to avoid passing-on a world to future
generations that is going to be hostile and incompatible to pursuing a ‗normal‘ and
productive life as we know it today.

For the sake of clarifying some conceptual ambiguities right from the onset, it will
be helpful to begin with a formal definition of climate change and a brief description of
an organization that has contributed a great deal to the scientific understanding of the
causes and consequences of global warming; namely, the Intergovernmental Panel on
Climate Change (IPCC).

Climate Change: ‗refers to any change (cooling or warming) in climate overtime,


whether due to natural variability or as a result of human activity‘ (IPCC Report, 2007).
For example, there is now ample scientific evidence that the Earth has been in a warming
trend since approximately 1860. The estimate of the actual increase in global average
surface temperature ranges from 0.5 to 0.8 degree Centigrade.

However, it is important to note that the Earth has gone through several warming
and cooling trends during its long history of existence. For example, even over the past
1150 years, the Earth has already experienced one warming and one cooling period.
During the period 850 AD to 1350 AD the Earth‘s atmosphere experienced sharp and
pronounced warming with an average surface temperature increase in as much as 2.5
degrees Celsius. There was also a cooling period, historically known as ―The Little Ice
Age‖ that occurred between 1550 and 1850 (Wikipedia, 2007). However, what is new
and somewhat disturbing about the recent global warming trend is the fact it is caused
largely by human activities. How do we know this? The answer to this question requires
an understanding of the vital role played by the Intergovernmental Panel on Climate
Change (IPCC).

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BOX 1
The Greenhouse Gas Effect: Global Warming

Nearly half of the solar energy that approaches the planet Earth is reflected or absorbed by gases and
aerosols in the atmosphere, with the greatest amount, approximately 22 percent, being intercepted by
the white tops of clouds. The remaining solar radiation, most of which is in the form of infrared or
visible light waves, passes through the atmosphere to the surface of the planet. There it is either
reflected off light surfaces such as snow and ice, or absorbed by land, water or vegetation. Much of this
energy that is absorbed by the Earth is reradiated out from the planet toward outer space in the form of
longer-wave infrared rays. A portion of this escaping energy is absorbed by certain gases found in the
atmosphere, in particular carbon dioxide (CO 2), methane (CH4) and nitrous oxide (NO). In the process,
heat is released that warms the lower atmosphere. These substances that are so critical to the Earth‘s
climate account for only about 0.03 percent of atmosphere gases. Water vapor, which occurs in
concentrations of from 0 to 4 percent of the atmosphere, also intercepts outgoing infrared radiation.
This process has become known as the ‗greenhouse effect‘, because as with the glass walls of a
greenhouse, the atmosphere allows solar energy to pass inwards while blocking its escape, thus keeping
the space within it warm compared to outside conditions. Thus, it is the so-called greenhouse gases
(GHGs) – CO2, CH4 and NO – along with water vapor that account for the Earth‘s moderate climate.
Much larger amount of CO2 in the atmosphere of Venus explains its intensely hot climate, while the
frigid conditions of Mars are attributed to lesser concentration of GHGs (Fisher 1990).

IPCC was created in 1988 by the World Metrological Organization (WMO) and
the United Nations Environmental Programme (UNEP). The role of IPCC has been to
assess periodically the state of climate science as a basis for informed policy action
(IPCC, December 2004). These assessments were done on the basis of expert‘s peer-
reviewed and published scientific literature. So far, since 1990, IPCC has completed four
major assessment reports with an interval of approximately five years. The latest IPCC
report was released in April 2007. In these reports, IPCC has been able to affirm with
increasing confidence that the cause for global warming has been the anthropogenic
emissions of greenhouse gases, most notably carbon dioxide (Naomi Oreskes, 2004). In
fact, in its latest report, IPCC has gone as far as attaching a probability figure of 90
percent that the cause for global warming is the emissions of heat trapping GHGs arising
primarily from human activities. Furthermore, it is observed that over two third of the
CO2 built-up in the atmosphere has occurred since World War II—paralleling the era of
incredible global economic expansion (see Box 2 next page)

However, the existence of a scientific consensus on the anthropogenic sources for


climate change should not imply that we now know all we need to know about climate
change and its consequences. Many details about climate interactions are still not well
understood, and there are ample grounds for continued research to provide a better basis
for understanding climate dynamics (Naomi Oreskes, 2004). What this means is that,

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BOX 2
The Root Cause of Global Warming:
Biophysical Limits to Economic Growth

A case could be made that the root cause for global warming is the rampant growth of a
fossil fuel based human economy without due regards to ecological limits. To make this point
evident, let us look at the following facts and events:

 The global output of goods and services grew from just under $5 trillion in 1950 to
more than $47.8 trillion in 2006, an expansion of nearly ten fold (IMF, 2006).

 According to a most recent IMF report (September 2006), the global economy grew at a
rate of 4.9 percent during 2005. Furthermore, this report forecast that this rapid
expansion would continue in 2006 and beyond. Even if the world economy is to grow
at 4 percent per year the global GDP would double within approximately seventeen
years.

 In recent years, the economies of the two most populous nations in the world, China and
India, have been growing at an alarming rate between 8 to 10 percent annually. If this
rate of annual growth is to be sustained even for a decade, the economy of these two
countries will be more than doubled.

 Since 1950, the world population has increased by 150 percent (from 2.5 to 6.2
billions). Next year alone nearly 90 million people will be added to the world
population.

 According to a recent comprehensive study on global warming commissioned by the


British government, the Stern Review (2006), the current stock of greenhouse gases in
the atmosphere is about 430 parts per million (ppm) CO2 equivalent compared with
only 260 ppm before the Industrial Revolution. Increased use of fossil fuels has been
the primary source for this marked change in the atmospheric concentration of carbon
dioxide. Furthermore, if nothing is done, in view of continued economic growth and
fossil fuel reserves, the stock of greenhouse gases in the atmosphere is projected to
reach double pre-industrial levels by 2050, that is, 550 ppm CO2 equivalent (Stern
Review, 2006).

The unfortunate reality is that while the economy continues to expand, the ecosystem in which
it depends does not—there is only one EARTH. What this has created is an increasingly stressful
relationship between the human economy and the natural ecosystem. A case could be made,
therefore, that rising global temperature or what is popularly known as ‘global warming’ is just one
of the most serious and visible symptoms of a fossil fuel based economy that is outgrowing the
natural ecosystems.

while we know that increased concentration of GHGs in the atmosphere has contributed
to recent global warming, there still remain a great deal of uncertainty on the nature,
severity, time horizon, and regional impacts of future warming trend. For example, it is
widely expected, under current conditions, by 2050, the greenhouse gas emissions will be
twice the level recorded before the Industrial Revolution (The Stern Review, 2006).

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Even if this projection of greenhouse gas emissions is taken as a fact, it is still difficult to
know what this heightened level of emissions means in terms of the actual increase of the
average global surface temperature. Currently, the estimates for the average global
surface temperature within the next 50 years (i.e., by about 2050) range from 1 to 3.5
degree centigrade (Cline, 2004). In addition, it is difficult to predict the regional impacts
of average global surface temperature changes of the above nature.

As will be evident in the next section, in many respects, uncertainties about the
actual increases in surface temperatures and their associated regional impacts are factors
that have contributed to the disputes among economists who have been conducting
academic studies on the economic, human health and environmental impacts of global
warming. It is also important to note that these uncertainties get magnified when
economic impact assessments of global warming are extended further in time (100, 200
and more years).

II. THE ECONOMICS OF GLOBAL WARMING: Basic Theoretical Concepts and


Framework of Analysis

A. Framework of Analysis:

From a purely standard economic perspective, concern for climate change is a


resource allocation problem. It deals with how much reduction in current consumption
society is willing to sacrifice today to mitigate environmental damages arising from
global temperature increases in the future. More specifically, at any given point in time,
society, at any level, is confronted with rationing its scarce resources (land, labor, capital,
etc) to satisfy competing ends. Thus, if a society decides to use more of its resources to
invest on projects intended to avoid future environmental damages (slow global
warming), it means less resources will be available to produce goods and services for
current consumption (such as cars, housing, apparels, furniture settings, public
recreational facilities, etc.)

Viewed this way, the economics of global warming starts with the recognition of
the trade-off that exists between two social costs; namely, greenhouse damage cost (the
costs of not reducing greenhouse gas emissions beyond the current level—maintaining
the status quo) and greenhouse abatement costs (the costs of cutting the level of
greenhouse gas emissions beyond the current level in order to slow future global
warming). The trade-off between these two costs is quite apparent since a higher
abatement cost (i.e., a reduction in greenhouse gas emissions) would be expected to cause
lower damage cost, and a lower abatement cost would have the opposite effect.

Once the trade-off between greenhouse damage and abatement costs is clearly
recognized, a standard cost-benefit analysis dictates that a rational decision regarding
climate change would warrant that a dollar spent on projects to slow global warming
today (i.e., abatement cost) must be justified by a dollar or more benefit that are expected
to be realized from avoiding future economic, human health, environmental and

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ecological damages (i.e., damage cost). This simple decision rule can be presented in
abbreviated form as follow:

$1(a.c.t.) → must bring at least → $1(a.f.d.)


where (a.c.t.) represents abatement cost today and (a.f.d.) conveys
avoided future damage.

Once the economic framework of analysis and the decision rule for investment on
projects intended to slow global warming is clearly understood, in the next two sub-
sections attempts will be made to discuss the nature and key determining factors of
greenhouse abatement and damage cost functions.

B. The Greenhouse Damage Costs

The greenhouse damage costs arise from the fact that, if no action is taken today,
global warming, despite the scientific uncertainties, is predicted to inflict significant
economic, human health and ecological damages. Damage costs, therefore, represent the
estimated dollar values of all these expected damages. These damages could be
physically manifested in various forms, such as flooded cities, diminished food
production, loss of biodiversity, land lost to oceans, increased storm damages, increased
human morbidity and mortality arising from heat stress and the expansion of the range of
tropical diseases, and so on. These are, therefore, the costs of doing nothing to slow
global warming. They measure the costs to the economy, human health and the natural
environment at some future time due to higher level atmospheric concentration of GHGs.
It is also important to recognize that while these costs arise from the side-effects of
activities undertaken by the present generation; future generations have no say in the
matter directly. Hence, to use a well-known economic jargon, these are ‗external‘ costs
imposed on future generations.

The salient characteristics of the greenhouse damage cost function can be


explained using Figure 1 (see next page). The horizontal axis represents concentration of
GHGs in the atmosphere in parts per million (ppm) CO2 equivalent. It is important to
note that, as a group, greenhouse gases are stock pollutant because of the long life cycle
these gases have once they enter the atmosphere, especially carbon dioxide. Carbon
dioxide, the major component of the GHGs could stay into the environment for over a
century (Cline, 1992). Hence, the damage function is not only affected by the current
level of greenhouse gas emissions but also by the cumulative effect of past emissions
extending over a long period of time.

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Figure 1: Marginal Damage Cost

MDC

$ Major catastrophic and


irreversible environmental
damages & human death
and displacement may
occur.

B
0.5 to 0.8 C

1.5 to 4.0 C
A

280 ppmce 420 ppmce 550 ppmce Stock of


GHGs
(ppmce → parts per million CO2 equivalent)

The vertical axis is the dollar value of the expected future damages arising from
global warming. It is important to note, although this is outside the scope of this paper,
the estimation of the monetary values of the damages from future global warming is an
extremely difficult undertaking for a number of reasons. First, as discussed in the
introductory section of this paper, future damages from global warming are clouded with
uncertainty. Second, as discussed earlier, damage costs are externalities, hence, reliable
market information on these costs are not readily available—the case of market failure.
Last but not least, damage costs are not easily quantifiable since they include intangible
ecosystem services (such as the possible extinction of spices) that are impossible to
capture in monetary terms. As one economist put it, the effort to quantify damage costs is
‗the terra incognita of the social and economic impacts of climate change.‘

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Despite the difficult practical issues involved in estimating damage costs (more
on this later), as shown in Figure 1 above, it is theorized that the incremental (marginal)
damage cost is an increasing function of the greenhouse gas concentration. The rationale
for this argument comes from the simple fact that, other things equal, a higher
concentration level of GHGs in the atmosphere will be accompanied by a larger increase
in the average future global surface temperature (warming), hence, greater damage cost.

For example, in Figure 1, by design, the first segment of damage cost curve
represents the era between pre-industrial period and today. As discussed in the
introductory section of this paper, the atmospheric concentration was 280 ppm during the
pre-industrial era and 420 ppm today. During this period, the increase in the global
average surface temperature is estimated to fall within the range of 0.5 to 0.8 degree
Centigrade. On the other hand, as shown in Figure 1, by 2050 the atmospheric
concentration of GHGs is expected to increase from the current level (420 ppm) to 550
ppm (Stern Review, 2006). During this interval period, the average global temperature
is expected to increase between 1.5 and 3 degrees Centigrade. What is significant here is
that while the increase in the atmospheric concentration between these two time intervals,
from pre-industrial to present and from present to 2050, appears to be the same (about
130 ppm), the average surface global temperature increase associated in the years ahead
is expected to be much higher than the past. This should not be surprising given what is
already discussed about the cumulative effect of greenhouse gases. This phenomenon
clearly explains why marginal damage cost is expected to increase at an increasing rate.
Keep in mind, however, as discussed in the introductory section of this paper, prediction
of future global temperature increase is often clouded with uncertain.

As shown in Figure 1, it is postulated that a jump in the marginal damage cost


curve would occur at 550 ppm level of atmospheric concentration of greenhouse gases.
This is done to illustrate possible catastrophic and irreversible environmental damages
(such as the destruction of a large portion of the Amazon Forest by fire and the associated
loss of biodiversity) that may occur when a certain threshold of greenhouse gases
concentration in the atmosphere is reached. This may possibly happen if the
concentration of greenhouse gases reached to a level that precipitate an increase in the
average global surface temperature between 4 and 6 degree Centigrade.

Finally, it is important to note that because of the cumulative effect of greenhouse


gases, we can never stop future global warming. However, programs designed to cut
greenhouse gas emissions at the scale that is adequate enough to slow global warming
could avert possible future major catastrophic and irreversible damages. To illustrate this
point, in Figure 2 (see next page), the impact of a policy designed to mitigate global
carbon emissions is displayed by a downward shift in the marginal damage cost curve.
The new damage cost curve clearly indicates reduced costs at all levels of greenhouse gas
emissions that must have resulted from the lower increase in global temperature (i.e.,
slower global warming) achieved due to the steps taken to cut greenhouse gas emissions.
The important lesson here is this: although global warming cannot be stopped, measures
can be taken to slow future warming trend and in so doing avoid major future

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environmental catastrophes. This is, of course, the impetus for binding international
agreement to cut the emissions of greenhouse gases, such as, the Kyoto Protocol.

Figure 2: Possible Effect of GHGs Emissions Reduction on


Future Global Warming Trend

Important Lessons: MDC

$ →We can only slow but not stop


global warming.

→We can, however, prevent


irreversible ecological damages
from occurring

280 ppmce 420 ppmce 550 ppmce Stock


of
GHGs

C. Greenhouse Abatement Costs

Greenhouse abatement costs represent the social costs arising from the use of
resources for projects that are intended to reduce greenhouse gas emissions. Costs of this
nature may include: expenditures on carbon emission control devices, investments in
energy conserving technologies; investments on the development of alternative energy
sources; expenditures for raising coastal structures to prevent flooding; expenditures on
research projects to develop drought-tolerant crops; investment in afforestation projects
for expanded carbon sequestration capacity; and so on.

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A helpful way to look at abatement costs is to view it as an investment by current
generation to protect future environmental damages that clearly stands to benefit future
generations. When abatement costs are viewed this way, they may raise ethical
considerations of the following nature. First, why should the current generation be
obligated to care for future generations, especially given that the impacts of global
warming on the wellbeing of future generations remain uncertain? Second, why worry
about future generations when their living standards (per capita GDP), based on the
empirical evidence of the past two hundred years, is expected to be 3 to 4 times higher on
the average than people living now (Taylor, 1998)? Third, investments to avoid future
environmental damages often compete with current expenditure budget allocations to
improve the conditions of today‘s poor. Given this, would it be fair to care for the
environment that stands to benefit future generations, at the expense of today‘s poor?
For example, increased investment to slow global warming by the developed nations may
mean providing less money for international assistance to mitigate child malnutrition in
parts of Africa, Asia and Latin America.

Figure 3 is a graphic depiction of the abatement cost function. The horizontal


axis shows the stock of greenhouse gases in percentages, and the 100 percent represents
(where the marginal damage cost touches the horizontal axis of Figure 3) represents the
current level of GHG stock (concentration) in the atmosphere. A move from the current

Figure 3: Marginal Abatement Cost

MAC
Use of alternative
energy fuels and
transportation systems
in a massive scale
Minor changes in life style;
enforcing existing industrial
pollution regulations; planting
trees; minor changes in
transportation systems; etc.

0 80% 90% 100%


Stock of
GHGs

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level towards the origin represents successive percentage reduction in greenhouse gas
emissions from the current level. It is evident from Figure 3 that the abatement cost for
each successive percentage reduction of greenhouse gas emissions is increasing at an
increasing rate. The reason for this is that successive reduction in greenhouse gases
requires the use or implementation of more sophisticated and expensive technologies.
For example, as indicated in Figure 3, the first 10 percent reduction in greenhouse gas
emissions may require no more than minor changes in life style (such as the use of more
energy efficient light bulbs, stricter enforcement of existing industrial pollution
regulations, planting trees, and minor changes in the way we transport people (such as car
pooling) and commodities (such as the use of trains instead of tracks). On the other hand,
the second 10 percent reduction in greenhouse gases may require the development and
use of alternative energy fuels (such as ethanol) and the provision of public transportation
systems in a massive scale.

Clearly, the above discussion is done without considering the possibilities for
advances in greenhouse gas emissions abatement technologies. This is an important issue
since technological advances of this nature would precipitate a downward shift of the
entire curve in Figure 3, therefore, a lower abatement cost for each percentage reduction
in greenhouse gas emissions. As will be evident shortly, it is in anticipation of this kind
of cost reduction, arising from advances in emissions abatement technology, that some
economists continue to support a guarded (or wait and see) approach to any public policy
measure that tend to advocate for a sizeable reduction in greenhouse gas emissions in the
near term (Taylor, 1998).

What has been discussed so far is the anatomy (structure) of two important cost
functions, damage and abatement costs, economists use to perform cost-benefit analysis
relevant to global warming. Since the early 1990s, with various assumed conditions
about these two cost functions, economists have been conducting empirical studies that
allowed them to offer policy recommendations relevant to global warming—the amount
of cut annually on greenhouse gas emissions needed in order to slow global warming.
The analyses in these studies were done large simulation models and a framework of
standard cost benefit analysis. Based on the salient characteristics of the major findings
and the resulting policy implications, the economic studies that have been conducted on
global warming over the past two decades can be grouped into the following three major
categories:

1. The ‗business as usual‘ approach which advocates for the status quo over the next
15 to 25 years.
2. The ‗gradualist‘ approach which recommends for a modest actions in the
reduction of GHGs emissions in the near term and to be followed by sharp
reductions in the medium and long term.
3. The ‗precautionary‘ approach which favors an aggressive programs of
international abatement of GHGs in the near term.

The next section, therefore, explores the key arguments presents by these three groups.

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III. ALTERNATIVE EMPERICAL STUDIES ON GLOBAL STUDIES AND THEIR
POLICY IMPLICATIONS: Not to Act at All to Act Now or Later

A. The Business as Usual Approach (BAU)

The proponents of this approach are economists from conservative school of


economic thought; big businesses that heavily depends on fossil fuels; and conservative
Washington Think Tanks, such as the Cato Institutes, etc. Thus, the empirical studies
under this general category are conducted by economists and public and private
institutions who vigorously and openly attempt to rescue existing industries; principally
the energy sectors, from the potentially adverse economic effects of public policies
intended to significantly curtail carbon emissions. Such studies have focused on
estimating the effects of abatement costs (the current investment expenditure to reduce
greenhouse gas emissions) on the economy with the use of energy-economic simulation
model. The problem is simply viewed as analyzing the impacts of using alternative
energy resources (wind, solar, bio-fuels, etc.) on the economy if used as substitutes for
fossil fuels.

This economic approach is actually a cost-effective rather than cost-benefit


analysis since it does not at all consider the avoided damage costs (the benefits) from the
policy measures taken to slow global warming. The view taken here is that the world
should respond to global warming provided it is not too costly to society in terms of its
impact on near term economic activities. In these empirical studies, therefore, damage
costs (costs largely borne to future generations) are hardly considered. Thus, they
singularly focus on the current national and global economic loss (in terms of GDP) due
to mandatory reduction of carbon emissions.

For example, a representative study carried out by proponents of the BAU


approach suggested that because of the cost of switching to alternative fuels, a 10 percent
reduction below the 1990 emissions levels could cost the United States up to 3 percent of
its gross domestic product (Taylor, 1998). A similar outcome was expected to hold for
the global economy as a whole. The implication being that these kinds of policy
measures, if implemented, would have profound effects on for near term economic
growth in the United States and else where in the world. Clearly, the United States‘
continued reluctance to sign the Kyoto Protocol (a reduction of greenhouse gas emissions
by 7 percent below the 1990 level by the year 2012) is partly based on studies of this
nature.

In general, therefore, proponents of the BAU approach argue that any policy measure
that requires abatement costs that causes substantial reduction in current global economic
growth will be hard to justify for the following reasons.

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 First, the science of global warming is far too uncertain to justify mandatory
reduction of carbon emissions at a level that would significantly affect near and
long-term global economic growth.

 Second, climate change is likely to produce a combination of gains and losses


with no strong presumption of substantial net economic damages. For example,
several studies suggest that greenhouse warming will lower yields in agriculture
(Shushan). This impact is, however, offset by the fertilization effect of higher
levels of CO2. This is how Professor Robert O. Mendelsohn of the Yale School
of Forestry and Environmental Studies, expressed this viewpoint,

―Countries in the polar region are likely to receive large benefits from warming,
countries in the mid-latitudes will at first benefit and only begin to be harmed if
temperature rises above 2.5 degree Centigrade. Only countries in the tropical and
subtropical regions are likely to be harmed immediately by warming and be
subject to the magnitude of impacts first thought likely. Summing these regional
impacts across the globe implies that warming benefits and damages will likely
offset each other until warming passes 2.5 degree Centigrade and even then it will
be far smaller on net than originally thought.‖

 Third, even if the anticipated damages of global warming occur, it would be


cheaper to wait as long as a quarter of a century before instituting any CO2
reductions because, in all likelihood, safer alternative energy technology will be
less expensive in the future than at present time (Taylor, 1998). Furthermore, a
study by Wigley and his associates (Nature, 2006) suggested that ‗waiting more
than 20 years before taking action to limit anthropogenic greenhouse gas
emissions would result only about a 0.2 degree Celsius temperature increase
spread out over a 100 year period.‘ In other wards, by waiting, society is far more
likely to minimize regrets.

 Fourth, although an extreme position, some proponents of the BAU approach


simply deny the scientific evidence that global warming is caused by
anthropogenic emissions of GHGs (Sheehan, Adler). This claim was defended, as
mentioned in the introductory section of this paper, by pointing out that the
history of our planet clearly indicates that the Earth‘s atmosphere has gone
through periodical warming and cooling periods independent of human actions.
The implications of this kind of argument is that there is nothing that can be done
about global warming since it is a factor outside human control – blame nature!

Thus, given all the above arguments, what seems to emerge is a very guarded and
often business as usual policy recommendation intended to avoid costly expenditures on
the development and implementation of alternative energy technologies to reduce
anthropogenic greenhouse gas emissions. It is important to note that this conclusion is
reached with no consideration of damage costs.

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B. The ―Gradualist‖ Approach to Global Warming Concerns:

The economic analyses in this situation are different from the ―business as usual‖
approach, discussed above, in two important ways. First, proponents of the gradualist
approach do not intentionally attempt to discredit or distort what appears to be the
scientific consensus on global warming. Second, at least in principle, they accept that
cost-benefit analysis intended to evaluate the desirability of proposed projects or policy
actions to slow climate change should explicitly consider both the damage and abatement
costs.

Once a decision is made to include damage costs in the cost-benefit calculus of


global warming, the major challenge becomes finding reliable methods to estimate these
costs. This is because such an endeavor involves the estimations of several anticipated
economic impacts of climate change and, as discussed earlier, chief among them are:
agricultural losses from heat stress and draught, losses from sea level rise, increased
demand for space cooling, losses from runoff in water basins, increased urban pollution
associated with warmer weather, increased incidence of mortality with heat stress, loss in
amenity values of everyday life and leisure, increased hurricane and forest damages, loss
in biological diversity, and deterioration in environmental quality. Of course, as
discussed earlier, not all of these costs are easily quantifiable. Furthermore, the fact
damage costs are externalities make market information, even if it exists, unreliable.

However, despite these apparent difficulties, several estimates of damage costs


exist and as would be expected they differ widely, by a factor of two to three. In general,
the economic analyses that characterize the ‗gradualist‘ approach to global warming base
their modeling on estimates of damage costs with the following underlying assumptions
concerning future warming trends, economic conditions, and time horizons:

 First, 50 years from now all emissions and concentrations of greenhouse gases will
plateau; and the climate impacts of industrial activities will stabilize.

 Second, the impacts (damages) of global warming on the economy, human health and
the natural ecosystems will be limited to the next 100 years. That is, by 2100, the
global average temperature will attain a steady state equilibrium and as such will start
to have neutral effect on the economy and the environment. Furthermore, no
consideration is given to the likelihood that, in the long run, an irreversible
catastrophic environmental damage could occur if policy responses to global warming
concerns are found to be inadequate due to either timing or scale.

 Third, when the steady-state equilibrium is achieved (100 years from now) the
median global surface temperature would increase by 2.5 degree Celsius; and it
would be highly unlikely that it will exceed 3 degree Celsius.

 Fourth, a discount rate of 3 percent is used to perform cost-benefit analysis. This is


the rate at which the present value of future environmental damage costs is assessed.
This assumption is not to be taken lightly since the effect of a high discount rate is to

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reduce (compress) benefits or costs coming in distant future. In the case of global
warming, significant portions of the damage costs occur in distant future (50, 100,
200 years from now). If the discount rate is high, the value of these projected damage
costs will be considerably reduced. This factor alone could be sufficient enough to
cause the rejection of investment projects intended to abate GHG emissions on the
basis of cost-benefit analysis. As we shall see soon, this is one fundamental issue that
differentiates the ‗gradualist‘ from the ‗precautionary‘ approach to global warming.

Based on the above set of assumptions and using a simulation model known as the
Dynamic Integrated Model of Climate and the Economy (DICE), several academic
studies (1991, 1992, 1996, 2006) were conducted by Professor Nordhaus, a Yale
economist noted for his pioneering works on the economic consequences of global
warming. The most representative outcome of the economic studies performed by
Nordhuas and his associates has been:

First, the net damage costs from a 3 degrees warming by 2100 will be
approximately 1 to 2 percent of global GDP. The word ‗net‘ refers here that both the
positive and negative effects of global warming are considered in calculating damage cost
at a global level. Thus, the loss in some parts of the world (such as the continent of
Africa) is compensated fully or in part by the gains realized in some other parts of the
globe (such as Greenland, Siberia, etc.)

Second, abatement costs were shown to vary considerably depending on the level
of emissions reduction sought:

 About 10% of GHG emissions can be reduced at extremely low cost.


(Area ‗A‘ in Figure 3, page 9, may be assumed to demonstrate such an
outcome.)

 However, above this level, the incremental (marginal) cost of greenhouse


gas emissions reduction raises sharply. (Area ‗B‘ in Figure 3, page 9, may
be assumed to represent this scenario.)

Thus, in light of these sharply rising marginal (therefore, total) abatement cost
estimates and given that the estimate of the net damage cost is not that high (only 1 to 2
percent of global GDP), the conclusion reached by Nordhaus and his associates was to
recommend only a modest reduction in greenhouse gas emissions--around 10 percent in
the near term (or by about 2015). Nordhaus and his associates also look favorably on the
idea of a gradual tightening of greenhouse gas emissions through increased carbon taxes
as the scientific evidence for increased future global warming becomes more evident

According to the proponents of the gradualist approach to global warming,


therefore, to go beyond a modest cut in GHGs emissions suggests a very pessimistic
assessment of damages, and this will be unnecessary given in the long-run, global
warming is unlikely to be so catastrophic to the extent of reducing world income sharply
below today‘s levels. Furthermore, it was argued that if drastic cut in emissions is to be

14
recommended, where would the necessary reductions in near term consumption come
from? From today‘s poor! If so, to reduce current consumption sharply in order to
prevent a decline in the wellbeing of future generations would hardly seem equitable or
ethically defensible, especially given that future generations are expected to be much
richer than today (Nordhaus, 2007).

The gradualist‘s are aware of the criticisms often voiced by various environmental
groups for recommending modest and incremental policy measures to slow global
warming. Nordhaus, the leading gradualist, responded to these critics by echoing his
sentiment this way: ‗while the findings of such mainstream economic assessments may
not satisfy the most ardent environmentalists, if followed, they would go far beyond
current global emissions reductions and would be a good first step on a journey of many
miles.‘ (Nordhaus, 2007). Of course, this seemingly conciliatory remark by Nordhaus
would not stop other economists from constructing models that support drastic cuts in
carbon emissions in the near term. This will be the subject matter that will be pursued
next.

C. The Precautionary Approach to Global Warming Concerns

Some economists spearheaded by William Cline of the Institute for International


Economics have questioned the validity of the conclusions (policy recommendations)
reached by economic studies of the gradualist school to global warming concerns. Cline
who has won several prestigious awards for his numerous academic studies on the
economic consequences of global warming argued that, first, valid policy decisions
cannot be made about global warming without taking into account the very-long term
implications of the phenomenon over a horizon of three centuries, up to 2300. This is
warranted because the greenhouse effect is cumulative and long lasting. That is, the effect
of a ton of carbon emitted today will be felt in 200 or more years from now. Secondly,
to account for the risk of irreversible consequences of global warming on distant
generations, Cline argued for using a very low discount rate, 1 instead of 3 percent.

Recently, the Stern Review on the Economics of Climate Change, a major study
on global warming commissioned by the British government, used an approach
remarkably similar to Cline. The Review, like Cline, weighed the very long term impacts
of global warming heavily by extending the analysis of damage costs up to 2300. The
discount rate used by the Review was even lower than Cline‘s, only 0.1 percent.

In both Cline and the Review studies it was argued that when damage cost
assessment is extended to 2300 (instead of the usual 2100), it is conceivable that
temperatures could rise as high as 5 to 6 degrees Celsius far higher than the 2 or 3 degree
Celsius range usually considered by Nordhaus and most other mainstream economists.
As a result of this, the risk of future damages would be much worse than expected and
probably catastrophic, that is, some of the damages could be irreversible.

15
Cline in one of his earlier studies (1991), using a simulation model very much
similar to Nordhaus‘s DICE but modified to reflect his own assumption, recommended a
50 percent reduction from baseline (i.e., the 1990 level of global carbon emission) by
2015, 71 percent cut by 2050, 82 percent reduction by 2100, and a 90 percent reduction
by 2200. According to Cline these are the kind of cuts needed to stabilize the carbon
emission of the atmosphere by 2300. In terms of the carbon taxes needed to achieve this
end, using the DICE 99CL model, Cline estimated the optimal carbon tax to be about
$200 per ton in 2015 which is much higher than Nordhaus‘s recommendation of carbon
tax per ton of $17 by 2005 and $84 by 2050 (Cline, 2004).

The findings of the Stern Review (2006) on the expected impacts of global
warming on the economy, human health and the natural environment are even more
ominous than Cline‘s. The Review ―estimated the total cost over the next two centuries
of climate change associated under BAU emissions involves impacts and risk that are
equivalent to an average reduction in global per-capita consumption of at least 5%, now
and forever.‖ This is without including the impacts on the environment, human health,
and the negative feedback of the cumulative impacts of GHGs concentration on the
atmosphere, and the unequal burden of global warming to poor nations. ―Putting these
additional factors together would increase the total cost of BAU climate change to the
equivalent of around a 20% reduction in consumption per head, now and into the future.‖
In light of this, the Review recommends strong mitigation (abatement) policy without
delay and to view mitigation as a highly productive investment. It is important to point
out that critics of the Review have been quick to note that the difference between the
results of this study and others (including Cline) was largely due to the very low discount
factor used by the Review (Varian, Desgupta). The risk of considering an almost zero (to
be exact, 0.1 percent) discount rate is the possibility that action of this nature may hinder
important technological advances in the near term (Desgupta). Of course, the implication
here is that this will have adverse effect not only to the present but also future
generations.

Despite this criticism, the main message that proponents of the ‗precautionary‘
approach to global warming is that when cost-benefit analysis is conducted from a very
long-term perspective, a more aggressive GHGs emissions abatement program is
justified. This should be the case since failure to take strong action in the near term may
have the potential for irreversible consequences or for sever limits on the options for
future generations. Furthermore, such actions should be taken even if there is as yet no
incontrovertible scientific proof that serious consequences will ensue. In other word, the
justification for aggressive international actions to slow global warming should be based
not only on the basis of traditional cost-benefit analysis but also on the precautionary
principle of resource management where uncertainty cannot be used as an excuse for
inactions.

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IV. Concluding Remarks

One could argue that the starting point for the international debate on what to do
about global warming goes as far back as 1972 at the first United Nations conference on
the environment held in Stockholm, Sweden. One important agreement that emerged out
of this conference was the need for more reliable scientific information on global
warming. The recognition of this need ultimately led to the establishment of the
Intergovernmental Panel on Climate Change (IPCC) in 1988. By early 1990s, progress in
the science of global warming appeared to have facilitated the pioneering works of
William Cline and William Nordhaus on the economics of global warming.

Global warming confronts economists with new and daunting challenges. First,
global warming is an externality on a global scale—the atmosphere as a global commons.
In this respect, economic analysis of global warming is confronted with the biggest case
of market failure. Second, the problem involves long-run economic analysis looking as
far ahead into the future as 50, 100, 200 or even more years. Third, a serious economic
analysis of global warming has to consider risk and uncertainty explicitly. In addition,
the economic analysis needs to incorporate non-marginal changes since irreversible
outcomes could not be ruled out. Last but not least, consideration of intergenerational
equity, hence, decision on discount rate, is unavoidable.

Despite these challenges, as is evident from the discussion in this paper, there has
been significant advance in the development of analytical models for the assessment of
the economic impacts of global warming. Unfortunately, these positive developments in
methodology and analytical models have not lead to consensus opinions on the specific
policy measures to be taken to slow global warming. The recommended cut in
greenhouse gas emissions varies from doing nothing because of the fear of what a cut in
GHGs may do to the economy today or in the near future to taking aggressive action now
to avoid irreversible and catastrophic impacts on future generations. This should hardly
be surprising, given that economic impact assessments of global warming rely on
scientific information that are subject to dispute, and that economic impact assessments
of this nature involve consideration of normative issues that require making subjective
judgments, principal among them being how much caring should present generation
provide to posterity.

After Thought:

So far, I have discussed the various positions mainstream economists have taken
on what specific action(s) to take to slow down global warming. I would like to end this
paper with a discussion of a particular unorthodox economic perspective on global
warming. I do this partly because this perspective embraces fresh ideas and implications
to public policy measures relevant to global warming that are seldom addressed (or
simply ignored) by mainstream economists.

17
The fundamental issue here is the approaches mainstream economists have chosen
to take to address ‗large scale‘ environmental concerns which include global warming.
Mainstream economists seem to hold a strong belief with the notion that society can
always find technical solutions to all environmental problems. In addition, modern
economists seem to take that continued economic growth (as measured by per capita
GDP) for granted; an economic event that will be with us to perpetuity. For example, in
all the three economic impact assessments on global warming discussed in this paper, it
was assumed that each succeeding generations will be materially richer than its
predecessors. The fact that there may be biophysical limits to both technological and
economic growth has yet to be registered in the psychology of modern economic
practitioners. For this reason, it is not in the mind set of mainstream economists to
consider alternative paths to economic growth (development) as a possible remedy to
major environmental problems, a case in point global warming.

It will be an unorthodox economic position, therefore, to suggest that the


resolutions to modern large scale environmental problems, among others, require: (i)
fundamental changes in human relationships with nature, and (ii) the recognition that a
biophysical limit to economic growth is a real possibility. A prominent economist who
saw the environmental problems of the 21st Century through this novel perspective was
the late Kenneth Boulding. In his classic article ―the Economics of the Coming Spaceship
Earth (1966), Kenneth Boulding forcefully articulated the nature of the new
environmental era and the necessity for an alternative path to economic development in
this manner.

He started by reminding us that our past is characterized by a frontier mentality,


i.e., the strongly held belief that there is always a new place to discover ‗when things got
too difficult, either by reason of the deterioration of the natural environment or a
deterioration of the social structure in places where people happened to live‘ (p. 297).
The Earth, therefore, is viewed as an open system or unlimited plane. Boulding uses the
metaphor ‗the cowboy economy‘ to describe the economic system that is compatible with
this scenario of resource availability. In this scenario, where resource availability is
taken for granted, both consumption and production are regarded as good things.
Accordingly, nature is recklessly exploited with little or no concern. Moreover, the
success of an economy is measured by the amount of matter and energy used to produce
the desired goods and services, without regard to depletion or pollution. Thus, according
to Boulding, reckless exploitation of nature, which is symbolic of cowboy-like behavior,
characterized our past.

However, Boulding views the future quite differently. Specifically, he alerts us to


the fact that we are now in a transition from the open to the closed Earth. We were able
to fully realize this only recently when we entered into the space age and vividly
observed that the Earth is a finite sphere. Thus, the ‗Earth has become a single spaceship,
without unlimited reservoirs of anything, either for extraction or for pollution.‘ (p. 303)

18
This new reality has significant economic implications. The economy of the
future, the ‗spaceman‘ economy, requires economic principles that are different from
those of the open Earth of the past. ‗In the spaceman economy, matter and energy are
…indeed to be regarded as something to be minimized rather than maximized. Hence, the
essential measure of the success of the economy is not production and consumption, but
the nature, extent, quality, and complexity of the total physical outputs and stock of
capital, and the state of the human bodies and minds included in the system.‘ (p. 304).

With this in mind, Boulding‘s messages are quite clear. First and foremost, for all
practical purposes the Earth is a closed ecological sphere. When the human population
was small and its technological capabilities were not overpowering, viewing the Earth as
unlimited plane might have been, if not correct then certainly understandable and
permissible. However, current human conditions with respect to population, technology,
and habit of consumption and production warrant a fresh look at our social values and
economic systems. We need to espouse social values and build economic systems that
reinforce the idea that –in a material sense—more in not necessarily better.

While this call for a materially sustainable economy appears to be more relevant
now than 40 years ago, are there signs that the world community is finally taking
Boulding‘s message seriously? If I limit my responses only to the on-going worldwide
initiatives to slow global warming, my answer to this question would be both YES and
NO.

On the positive side, there have been several recent encouraging steps that have
been taken by countries, business enterprises, and individuals with significant political
and financial influence that appear to be quite consistent with Boulding‘s call for energy
conservation and for the dematerialization and decarbonization of the production
processes of our industrial society as a way of responding to the growing concern of
global warming.

 For example, on September 27, 2006, the State of California, the sixth largest
economy in the world, passed a legally enforceable legislative act known as ‗the
Global Warming Solutions Act.‘ This Act caps California‘s greenhouse gas
emissions at 1990 levels by 2020. On March 8, 2007, another landmark decision
was made by the European Unions (EU) countries. These countries agreed on a
legally binding 20 percent GHG emissions cut by 2020. They also agreed that 20
percent of their energy consumption will come from alternative fuel energies (not
fossil fuels) by 2020.

 On the business front, there are several companies worldwide who are now taking
major steps in producing ‗environmentally friendly‘ products. A prime example
of this is a leading United States office carpet producing company, Interface. For
over two decades, this company with its Headquarters in Atlanta, Georgia, has
been demonstrating to the world that a business enterprise can remain strong and
profitable while continuously striving to minimize its utilization of energy and the
dematerialization of its production process in a major way. Another example is

19
the leading Japanese car manufacturer, Toyota. Toyota has demonstrated that
building a product that is durable and taking a lead in the production of energy
saving cars pays handsomely.

 We are starting to observe that many private individuals and government leaders
with significant influence are starting to voice about their commitment to do
something about global warming. A prime example of this would be former Vice
President of United States Al Gore who is mounting a serious and effective
publicity campaign (more like a crusade) worldwide to spread the awareness of
the long term dangers associated with being complacent about global warming.

 Lastly, there are also several recent developments that indicate the proponents of
BAU approach on global warming are losing ground. Even the Bush
administration (that still refuses to sign the Kyoto Protocol agreement on the basis
of its exclusion of China and India) is pushing hard for the development of
alternative energy resources, in particular, bio-fuel (ethanol), as a means of
reducing carbon emissions.

On the negative side, China and India the two most populous countries in the world
continue to march ahead at full speed to catch-up with the material progress of the
Western world. In recent years, the economies of these two countries have been growing
at an annual rate that ranged between 8 and 10 percent. This growth rate implies a
doubling of the GDP for these two countries in less than a decade. While these are
significant economic achievements for China and India, the implication of this economic
success stories to global warming hardly needs explanation given that: (i) over 25
percent of the world population resides in these two countries, and (ii) these two
countries use relatively inefficient industrial production technologies from the standpoint
of their fossil fuel consumption (Lorenz and Wagner). Despite this, India and China
continue to refuse to take actions to limit their growing greenhouse gas emissions. They
reason that they are in very early stage of industrialization and that the rich countries of
the world (the West) should take the lead in curbing greenhouse gas emissions (Yardely).

Of course, it will be unwise and unfair to put the blame only on China and India
alone. In general, the world community remains rather complacent and as such reluctant
to take legally binding actions to cut greenhouse gas emissions. What else could explain
that 80 percent of the countries who have already signed the Kyoto Protocol agreement
are actually taking no concrete measures intended to slow global warming. Of course,
this is without even considering the continued refusal of the United States (by far the
major contributor to global greenhouse gas emissions) to sign the Kyoto Protocol.

In the final analysis, it is paramount to recognize that climate change is global in its
causes and consequences; and binding international collective action will be needed to
implement an effective, efficient and equitable response on the scale that is required (The
Review, 2006). Given this, at least in principle, no country that claims to be a member of
the United Nations should attempt to find an excuse to do nothing about global warming,
however small the contribution might be. At the same time, it is also fair to expect that

20
the industrialized nations of the western hemisphere should take the major burden (in
terms of initiative and cost) in controlling global greenhouse gas emissions. Not only
that these countries are in better position to absorb the costs but also responsible for
significantly large portion of the greenhouse gases built up in the atmosphere.

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