Four Economic Questions About Global Warming
The Four Economic Questions
1. How Much Pollution is too Much?
2. Is Government Up to the Job?
3. How Can We Do Better?
4. Can We Resolve Global Issues
Introduction

Global Warming
 Arises from the accumulation of greenhouses
gases (e.g. carbon dioxide) and the resulting
“carbon blanket” warms the earth
 Poses a potentially severe threat to human
welfare and natural ecosystems
A Hotter Planet

2010 on track to be the hottest year on record.
Potential Consequences of Global
Warming
Reductions in agricultural output due to
changing temperature & rainfall
 Major changes in natural ecosystems

 Higher disease rates
 Accelerated species extinction
Sea Level Rise-- +1 m by 2100
 A warming of more than 4 degrees F
increases the probability of catastrophic
outcomes

“How far can it go? The last time the world was
three degrees warmer than today – which is what
we expect later this century – sea levels were
25m higher. So that is what we can look forward
to if we don't act soon…I think sea-level rise is
going to be the big issue soon, more even than
warming itself…
How long have we got? We have to stabilize emissions of
carbon dioxide within a decade, or temperatures will warm by
more than one degree. That will be warmer than it has been for
half a million years, and many things could become
unstoppable.…We don't have much time left.”
Dr. James Hansen, Director, NASA Goddard Institute for Space
Studies.
– The Independent 2/
17/2006
Growing Concern
Global Warming
Scientists agree that global warming is
already a reality
 The magnitude of this warming will
largely depend on positive and negative
feedback effects (acceleration and
deceleration of warming, respectively)

How hot will it get?
Atmospheric CO2 levels in 1880:
280ppm. Now: +390 ppm.
 Global temperature rise since 1880:
more than 1.5 degree F.
 2100: +2.5 to + 10.5 degrees F.
 Last Ice Age: Avg. global temp
~ 9 degrees F colder than today.

1. How Much is Too Much?
The efficiency standard relies on formal
benefit-cost analysis
 The safety standard requires reducing
pollution to “safe” levels, unless the costs of
doing so are prohibitive
 The ecological sustainability standard
requires protecting natural ecosystems from
major changes, unless the costs of doing so
are prohibitive

How Much Pollution is too Much?
Global Warming

Kyoto global warming treaty requires
participating countries to reduce
greenhouse emissions to below 1990
levels by 2010. It is based on a
safety/sustainability goal of preventing
dangerous interference with the climate.
How Much Pollution is too Much?
Global Warming

One application of the efficiency
approach, based on formal benefit-cost
analysis of global warming calls, for cuts
of 10% below the business-as-usual
baseline. This is less stringent than
Kyoto.
An Ethical Debate

The debate over which standard is
“right” depends on how society chooses
to both measure and weigh the costs
and benefits of pollution reduction and
resource protection
2. Is Government Up
to the Job?
Government action is necessary to
reduce pollution in a market economy
 Two obstacles to effective government
intervention

 Imperfect information
 Opportunity for political influence
The Conservative View
Traditional conservatives view
governmental intervention as a
necessary evil and argue for a limited
government role.
 They believe government actors
primarily serve special interests

The Progressive View
Progressives believe government can
promote an activist agenda to serve the
general interest of the public
 They believe government failures result
from unequal distributions of wealth and
power in society.

The Role of Economics

Economists try to objectively assess the
costs and benefits of cleaning up the
environment and protecting resources,
and to make recommendations to
achieve social goals as cost-effectively
as possible.
3. How Can We Do Better?

Today, the current method of
environmental protection is commandand-control regulation
 Government mandates the adoption of certain
abatement technologies
 Widely criticized as centralized and inflexible,
and more costly than necessary
Incentive-Based Regulation
Incentive-based regulation approaches
set emission reduction targets and leave
it to industry to decide how best to
comply
 The government provides firms with
incentives to reduce emissions (e.g. a
tax on pollution, or a cap-and-trade
system)

Promotion of Clean Technologies

Government can also directly promote
the adoption of clean technologies
through
 Research and development funding
 Infrastructure investment
 Efficiency Standards
 Technical Assistance
4. Can We Resolve
Global Issues?
Reducing global poverty
 Slowing population growth
 Halting unsustainable exploitation of
natural resources
 Developing effective international
agreements

Global Issues?
Global Warming

Agreements like Kyoto face two major
obstacles:
 They are “public goods” and face incentives
for “free-riding” : US & Australia are major
polluters, and non-participants.
 Poor countries cannot afford emission
reductions: developing countries are not
participants.
Emission Reduction Profile
to achieve 450 PPM
The Kyoto solution: Marketable
Permits
 Promoted by US Economists during the
Clinton Administration
 Caps rich country emissions; provides
incentives to develop clean technologies
 Funds the transfer of technology to poor
countries
 Europeans have successfully implemented
cap-and-trade as part of their strategy to
reach the Kyoto targets
On to Part 1:

How Much Pollution is Too Much?