Chapter III.
Slowing Climate Change: Science, Economics, Politics
.
Human beings are now carrying out a large scale geophysical
experiment of a kind that could not have happened in the past
nor be reproduced in the future.
-
Roger Ravelle (1957)
Introduction
We have seen in the first two parts how uncontrolled economic growth is leading
to vast changes in our climate systems – not quickly but like a long freight train
gathering speed and momentum. The impacts of these changes are difficult to predict
with precision, but they include many unwelcome changes. Some of the important ones
are up to a meter of sea-level rise in the next century and several meters in the longer
run, which are a mortal danger for many coastal communities; disappearance of glaciers
and snowpacks with major effects on fresh water systems; vast changes in the world
ecosystems, with particular damage to marine life; and the paradoxical “inevitable
surprises” that will accompany changes in such a complex system.
We now turn to a consideration of how nations and individuals can deal with the
threat of climate change. All the economic evidence suggests that it would be relatively
inexpensive to contain much of climate change if nations adopt efficient control
strategies in a timely and near-universal fashion. The necessary steps– which primarily
involve raising the price of carbon emissions – rely on economic mechanisms that have
been used effectively around the world for many years. What is new, untested, and
challenging is the need to bring countries together to coordinate their policies and make
investments today that will produce benefits to unborn people and unnamed nations in
distant future. It is difficult to think of any more important and formidable an issue.
These are the questions that are addressed in this part.
Figure III-1 shows the plan for the chapter in terms of our little diagram of the
circular flow of global warming.
I-1
Chapter 3’s coverage
Rising CO2 concentrations
along with other
greenhouse gases lead to
climate change
(temperature, precipitation,
sea-level rise, …)
Economic activity and
fossil-fuel use leads to CO2
emissions (driving, air
conditioning,
construction,…)
Climate-change policies
adopted to reduce
emissions and adapt to
warmer world (carbon
taxes, cap-and-trade,
regulations,…)
Climate change imposes
ecological and economic
impacts (farming, coastal
structures, species loss,…)
Figure III- 1. Plan for this chapter
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Control strategies
We have seen in the first two parts that uncontrolled climate change would lead
to massive changes in our climate and unwelcome impacts on unmanaged and
unmanageable human and natural systems. How can we deal with them?
We begin with a review of the major approaches. Alternative strategies are:
adaptation, which involves coping with climate change; preventing climate change
through reducing greenhouse gas emissions; removing CO2 and other warming gases
from the atmosphere; geoengineering, which is akin to causing artificial volcanic
eruptions to cool the earth; and technological miracles which will render fossil fuels
uneconomical.
Adaptation
Suppose that climate models are correct in their projections. Some would argue
that we can “adapt” to the changing climate. The term adaptation refers to investments
or other adjustments can reduce the damaging impacts of climate change. For example,
farmers can change their crops, planting dates, or irrigation systems – or even turn the
land over for other purposes. In some sectors, farming being one example, adaptation
can probably offset most of the harmful impacts of climate change for the warming that
would occur over the next century. Adaptation is not costless – farmers have to invest
in new technologies, after all – but estimates in the last chapter indicated that the costs
of the first 2 or 3 °C of warming including adaptation is relatively modest for farming.
In other areas, adaptation is difficult or perhaps impossible. For unmanaged or
unmanageable systems such as tropical cyclones, sea-level rise, threatened species, and
ecosystems, the adaptations are extremely costly or impossible. For example, we could
conceivable ship the excess water to the moon to prevent sea-level rise, but that would
be prohibitively expensive. Similarly, we might in principle store threatened species
until new biotechnologies could revive them, but there is no guarantee that we will
actually be able to perform this task. So adaptation is at best an incomplete solution to
the vast climate changes that are likely in the coming centuries.
We conclude that the only genuine solution to the large climate changes that are
likely to occur is to prevent them. This suggests that, with the exception of
geoengineering, to be discussed shortly, the only way to prevent climate change is to
slow or reverse the growth of greenhouse gas, primarily CO2, emissions.
Emissions reductions
What exactly is involved in reducing CO2 and other greenhouse gas (GHG)
emissions? Recall that GHGs are gases that allow incoming hot solar radiation to pass
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through the atmosphere but block outgoing cooler long-wave radiation. The most
important GHG is carbon dioxide, primarily derived from the burning of fossil fuels. A
second set of GHGs are also long-lived and include methane and halocarbons. A third
set of GHGs are short-lived and include particulate matter from burning of coal and a
variety of other human activities. All the different factors in 2005 contributed 1.6 watts
per square meter of radiation, of which 1.66 was CO2 and -0.06 was everything else put
together. [1] Most projections indicate that by 2100 the same general pattern will hold,
with CO2 being virtually the entire contributor to warming. We will therefore
concentrate this discussion on CO2. This discussion simplifies but does not oversimplify
the story.
Focusing on CO2 emissions, Figure 3-1 shows the breakdown among the
different fuels and other sources for 2008 for all countries. [2] Coal and oil are
approximately equal at about 40 percent of total CO2 emissions. There are other sectors,
such as CO2 from cement production and methane from landfills and cows, but it will
be useful to focus on the central issue of fossil-fuel use, which is where the economic
impact is largest and the stakes are highest.
other,
5%
coal,
40%
gas, 19%
oil, 36%
Figure III- 2. Sources of global CO2 emissions, 2008
==============================================
We can also examine the quantity of CO2 emissions on an economic basis. For
this comparison, we ask how many tons of carbon are emitted when $1000 of each of
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the three fuels are consumed. Figure III-2 shows the results for the United States for
2010. [3] The point here is striking. The emissions of CO2 from coal, on an economic
basis, are more than 7 times the emissions of either natural gas or petroleum. This has
the corollary that any restrictions on CO2 emissions will hit coal much harder than other
fuels. It has a further implication (which requires some further analysis but is correct)
that the most cost-effective sources of CO2 reductions in the United States will come
from reducing coal first and most sharply. It is interesting to note that petroleum and
natural gas have about the same content on a dollar basis; natural gas has only 60
percent of the carbon on an energy basis, but it is significantly cheaper and therefore
evens out the content per dollar.
16
14
12
10
8
6
4
2
0
Petroleum
Natural gas
Coal
Figure III- 3. Economic content of fuels.
This figure shows the carbon content of the CO2 emitted for fuels as measured by tons
per $1000 of expenditures. Data are for the U.S. in 2010.
==============================================
Carbon eating trees and post-combustion removal
A third approach would be to remove the CO2 after it has entered the
atmosphere. Natural processes will remove most of the CO2, but these processes
operate at a time-scale that is too long to prevent the major damages. For example,
suppose that we continue on a path of rapid emissions growth through 2100 and then
completely cease any emissions at that point. CO2 concentrations would remain 50 to 60
percent above preindustrial levels after a millennium, and global temperature would
stabilize at around 3 °C above 1900 levels. The slow return to pre-industrial levels
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comes because the migration of CO2 to the lower oceans or through sedimentation is so
slow. [4]
On possible solution to global warming is to find a way to accelerate the removal
of CO2 from the atmosphere or oceans. The distinguished physicist Freeman Dysan
made a suggestion for an approach:
I consider it likely that we shall have “genetically engineered carbon-eating trees”
within twenty years, and almost certainly within fifty years. Carbon-eating trees could
convert most of the carbon that they absorb from the atmosphere into some chemically
stable form and bury it underground. Or they could convert the carbon into liquid fuels
and other useful chemicals. Biotechnology is enormously powerful, capable of burying
or transforming any molecule of carbon dioxide that comes into its grasp…. If one
quarter of the world’s forests were replanted with carbon-eating varieties of the same
species, the forests would be preserved as ecological resources and as habitats for
wildlife, and the carbon dioxide in the atmosphere would be reduced by half in about
fifty years. It is likely that biotechnology will dominate our lives and our economic
activities during the second half of the twenty-first century, just as computer technology
dominated our lives and our economy during the second half of the twentieth.
Biotechnology could be a great equalizer, spreading wealth over the world wherever
there is land and air and water and sunlight…. After we have mastered biotechnology,
the rules of the climate game will be radically changed. In a world economy based on
biotechnology, some low-cost and environmentally benign backstop to carbon emissions
is likely to become a reality. [5]
Carbon-eating trees are only one of many potential technologies that could speed
up the natural processes. A “synthetic tree” to remove CO2 from the atmosphere
through has been proposed by Columbia University’s Klaus Lachner. [6]
All of these ideas face two major obstacles: They are likely to be expensive, and
the scale of the removal is so vast. These points can be illustrated with an example that
is possible today and does not have a futuristic ring. The Canadian province of British
Columbia has vast tracts of forests that are largely untouched. Suppose that BC were to
devote half of its forest land, or about 300,000 square km, to carbon removal. This
would produce a huge mountain of trees, but it would offset less than ½ percent of the
world’s CO2 emissions in coming years. [7] Perhaps, a sufficiently large number of
carbon-eating trees, BC tree harvests, and Lachner-style synthetic trees could tilt down
the trajectory of CO2, but it is a vast enterprise. It is likely to be a supplement rather
than a substitute for emissions reductions.
Climatic engineering
A final option is a geoengineering, which is genuinely different approach to
global warming. For our purposes, we consider primarily options that slow or reverse
warming by changing the energy balance of the earth. The underlying principle is that
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by making the earth “whiter” or more reflective, less sunlight will hit the earth. This
cooling will offset the warming that comes from the accumulation of CO2 in the
atmosphere. The process is similar to what occurs after large volcanic eruptions. After
Mt. Pinatuba blasted 20 million tons of particles into the stratosphere in 1991, global
temperatures fell by about 0.2 °C for two years. Geoengineering can be viewed as
“artificial volcanoes,” and we might need to create 10 or 20 Pinatubas every year to
offset the warming effects of CO2.
There have been many proposals for geoengineering in recent years. Almost all
of them involve putting mirrors, balloons, or particles into the stratosphere. Perhaps the
easiest to visualize is millions of little aluminum mirrors floating around 20 miles above
the earth. By putting the right quantity in the right place, we could reduce solar
radiation by a desired amount.
Cost estimates indicate that geoengineering is likely to be much less expensive
than reducing CO2 emissions. Early estimates by a report of the National Academy of
Sciences indicated that the cost of cooling would be in the range of $5 per ton of CO2
equivalent. You can think of it as $5 per ton of negative CO2. This is far lower than the
costs of removing most of the warming through emissions reductions. From a
conceptual point of view, it is useful to view geoengineering as essentially costless from
an economic point of view. The major issues revolve around its effectiveness and its
side-effects.
At present, there have been no large-scale geoengineering experiments, so the
estimates of its impacts and side-effects are based on modeling at best and guesswork at
worst. The major concern is that geoengineering is not really a perfect offset to the
greenhouse effect. It reduces incoming radiation, while the greenhouse effect decreases
outgoing radiation. The two effects balance out numerically but they are very different
physically.
So what is the net effect of CO2 warming and little-mirror cooling? The short
answer is that we don’t know. It is like taking an experimental cancer drug. It may cure
your cancer (but it may not); it will have unpredictable side effects; and some problems
it simply will not solve. In the case of geoengineering, it is completely untested. At the
correct dosage, it is likely to “solve” the temperature problem (in the sense of lowering
global mean surface temperature). It will definitely not solve the problem of ocean
acidification because it does nothing to lower atmospheric CO2 concentrations. Climate
scientists fear that there will be complicated side effects, such as changing precipitation
patterns and perhaps monsoons. And it will create a whole new set of problems because
any responsible geoengineering program will need to be negotiated among countries
with possible compensation schemes if some countries are damaged.
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In my mind, geoengineering is like what the doctors call “salvage therapy.” This
is a potentially dangerous treatment of last resort. It is used for people who are very ill
and for whom no other and less dangerous treatment is available. No responsible
doctor would prescribe a salvage therapy for a patient who has just been diagnosed
with the early stage of a treatable illness. Similarly, in my view, no responsible country
would advocate geoengineering as the first line of defense against global warming. It
should be studied carefully, and perhaps even tested, but it is the solution of very last
resort.
Technological breakthrough
When most rich countries are mired in a deep and prolonged recession, it would
seem bizarre to suggest that global warming will be solved by a revolution in energy
technologies that simply makes the problem disappear. We have seen that the carbon
intensity of production in the U.S. has over the last eight decades declined around 2
percent per year with only small variations around that trend. Perhaps a major set of
revolution in energy technologies would increase the rate of decarbonization to 10 or 20
percent per year. This would stop warming in its tracks. We first consider how such a
scenario might unfold and then discuss its implications for global-warming policy.
The most likely route for a revolutionary development in energy technology is
some combination of advanced computation, robotics, new materials, and advanced
energy technologies. One striking vision of a low-carbon but energy-rich future is that
of inventor-futurist Ray Kurzweil. He suggests that molecular nanotechnology can
reduce fabrication costs of solar power to a tiny fraction of current costs, at which price
we can place solar cells on buildings, vehicles, and even clothing. Solar power in space
could beam vast quantities of energy to earth by microwaves, with the materials lifted
to space using a space elevator. All these processes are the convergence of rapid
improvements in component technologies, leading to accelerating growth as our
capabilities accelerate sharply. [8]
As with all such forecasts of revolutionary breaks, it is hard to know what
probability we should attach to them over the coming decades. Is the likelihood of such
a breakthrough 20 percent? Or 2 percent? Or closer to 0.002 percent? Paradoxically,
unless such a breakthrough is virtually certain, the potential for such a happy outcome
has little relevance for global warming policy.
The reason that such a miracle is largely irrelevant is that we need to take
measures to slow global warming for the bad outcomes, not for good outcomes. Fire
insurance is a useful analogy. We buy fire insurance in case our house burns down, not
for the more likely event that there is no fire. In the case at hand, suppose that there is a
20 percent probability that new technologies would not only reduce emissions to zero
but also eat up as much carbon in the atmosphere as we desired. Alas, that still leaves
I-8
us with an 80 percent chance of the potentially dire outcomes of unchecked climate
change. So, to the extent that global warming policies are largely insurance against
uncertain but very damaging outcomes, the possibility of benign outcomes may reduce
but will not eliminate the size of the desired insurance premiums.
Differentiating miracles from engineering
This discussion also shows the polar difference between geoengineering and
technological miracles. Geoengineering is particularly valuable exactly because it is
salvage therapy – it can be used in situations where it is most needed. In this respect, it
is like a fire truck rather than fire insurance. Suppose that scientists discover that the
feedback between warming and releases of frozen methane is much stronger than they
earlier believed. The fire truck of geoengineering can come to the rescue to slow or
reverse rapid and potentially dangerous climate change. But this is no panacea. When a
fire truck puts out a fire, there is much water damage and cleanup necessary. So fire
trucks and geoengineering are useful for the worst emergencies.
To use yet another analogy, this time from economics, climate engineering is like
the lender of last resort function that central banks used during the 2007-2010 financial
crisis. Normally, we would want to prevent financial crises and bank panics before they
happen. No sane economist would want the Federal Reserve in normal times to buy up
hundreds of billions of dollars of illiquid mortgage-backed securities, or the junk
securities of Bear Stearns, or buy a 79.9 percent stake in a catastrophically badly
managed insurance company. However, when a financial panic threatens to set off a
domino effect of bankruptcies and credit-market seizures, it would be desirable to use
“financial engineering” to nurse the system back to health. The prudent policy in the
case of climate change is to have a portfolio of measures available in case the equivalent
of a financial crisis occurs in the geophysical system.
Unfortunately, many people shy away from serious research on geoengineering.
They fear that considering geoengineering as a serious option would lead to “moral
hazard.” By this they mean that the existence of a geoengineering option would take the
pressure off the need to reduce CO2 and other GHG emissions. Moral hazard is present
in many government policies, but its force here is probably exaggerated. Society takes
many steps to reduce vulnerability that may increase risk taking. Fire stations, central
banks, deposit insurance, ski rescue services, free condoms, and needle exchange for
addicts all reduce risks and may increase risk taking. On balance, they reduce harms.
Some extreme libertarians, such as the late Milton Friedman, argued that society
had gone too far in the direction of the nanny state and should reduce such parentalistic
steps. [9] But there is no evidence of moral hazard in global warming policy. As with
many of examples of moral hazard, a careful balancing of costs, benefits, and induced
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increased risk taking would probably lead to the conclusion that preparing for
geoengineering would on balance reduce the risks of the most dangerous outcomes.
Targets or objectives
Let summarize what our journey up to this point. We have reviewed the science
of climate change and concluded that the globe is headed for major warming and other
changes. We have reviewed the impacts and concluded that unchecked warming will
bring major unwelcome and potentially dangerous impacts. Finally, in the last section,
we concluded that the only secure mechanism to slow or stop the freight train of global
warming is through reduction CO2 and other emissions.
The next step is to decide on the objectives of climate-change policy. We have
emphasized at several points that the objective will involve balancing costs and
benefits. In addition, a useful framework will be sufficiently flexible so that it can adjust
the objectives and policies with mid-course corrections as new scientific, economic, and
technological information arrives. This section reviews different approaches.
Baby steps at Kyoto
Surprisingly, for the first years of climate policy, the treaties had no explicit
goals. The first binding agreement, the Kyoto Protocol, cited the objective from the
Framework Convention that the goal of policy is to “prevent dangerous anthropogenic
interference with the climate system” but contained no more concrete objective. [10] The
actual outcome of the negotiations was to target a 7 percent reduction of emissions
below 1990 levels for high-income and transition countries for the period 2008-2012.
Analyses showed that these steps would have virtually no impact on future climate
change. [ 11]
How can we rationalize this approach? Perhaps the best way is to see the Kyoto
Protocol as taking baby steps on the road toward an international climate agreement.
Under the Kyoto Protocol, important institutional features were established, such as
reporting requirements and protocols, highlighting issues such as how to measure the
relative importance of different greenhouse gases, experimenting with the cap-andtrade approach to emissions reductions, as well as testing the political and economic
implications of emission trading. One of the useful features of the first round of the
Kyoto Protocol was that the stakes were relatively low. So it was like testing a drug at
low dosages to see how the political organism reacted to exposure to this new
institution.
I will return later to an evaluation of the cap-and-trade approach to climate
policy, but a preliminary verdict would conclude that an international climate policy
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did take its baby steps in the 2008-2012 period. The policy did not fall on its face, but it
neither was it an Olympic performance.
Two degree C target at Copenhagen
Most recently, with the Copenhagen Accord in December 2009, nations adopted
a quantitative target for climate change of limiting average temperature increases to 2
°C. The statement is as follows: [12]
To achieve the ultimate objective of the Convention to stabilize greenhouse gas
concentration in the atmosphere at a level that would prevent dangerous anthropogenic
interference with the climate system, we shall, recognizing the scientific view that the
increase in global temperature should be below 2 degrees Celsius, on the basis of equity
and in the context of sustainable development, enhance our long-term cooperative
action to combat climate change.
A careful reading of this reveals that the policy makers recognized the “scientific view”
on a temperature limit, but the policies only “enhanced cooperative action.”
How then did the 2 degree target reach such a central position? I was surprised
to learn of its lineage. [13] According to two scientists who have studies the subject, the
first suggestion that temperature is an appropriate target comes in a study that I
authored in 1977. The reasoning was the following: [14]
As a first approximation, it seems reasonable to argue that the climatic effects of carbon
dioxide should be kept within the normal range of long-term climatic variation.
According to most sources the range of variation between distinct climatic regimes is in
the order of ±5°C, and at the present time the global climate is at the high end of this
range. If there were global temperatures more than 2 or 3° above the current average
temperature, this would take the climate outside of the range of observations which
have been made over the last several hundred thousand years.
More recent observations would suggest that the during last major warm period
– about 124,000 years ago – global temperatures were about 3 °C warmer than today.
[15] Figure ? shows a reconstruction of global temperatures looking at different proxy
measures over the last half million years. There are suggestions that Antarctic
temperatures may have been as much as 3 °C higher than today, but only for short
intervals, and not much more than that in the last million years. It would be necessary
to go far back in geological and biological history to find periods that are as warm as the
period that is projected by climate models. [16]
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Estimated temperature Antarctica (deg C)
4
2
0
-2
-4
-6
-8
-10
0
100,000
200,000
300,000
400,000
Years before present
Figure III- 4. Estimates of Antarctic temperatures for the last 450,000 years
Setting targets with reference to historical trends is an approach adopted by the
influential German Advisory Council on Global Change. Their statement is worth
quoting at length:
In order to arrive at an approximate but sound assessment of the possible impacts of
climate change, despite the highly complex mechanisms involved, the Council applies
the principles of preservation of Creation [and] prevention of excessive costs. The first
principle, preservation of Creation in its present form, is presented within this scenario
in the form of a tolerable “temperature window”. This window is derived from the
range of fluctuation for the Earth’s mean temperature in the late Quarternary period.
This geological epoch has shaped our present-day environment, with the lowest
temperatures occurring in the last ice age (mean minimum around 10.4 °C) and the
highest temperatures during the last interglacial period (mean maximum around 16.1
°C). If this temperature range is exceeded in either direction, dramatic changes in the
composition and function of today’s ecosystems can be expected. If we extend the
tolerance range by a further 0.5 °C at either end, then the tolerable temperature window
extends from 9.9 °C to 16.6 °C. Today’s global mean temperature is around 15.3 °C,
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which means that the temperature span to the tolerable maximum is currently only 1.3
°C. [17]
An alternative approach, based on ecological arguments, was provided in a
report an advisory group to the World Meteorological Organization. The argument
there was that a global warming of 2 °C would be “an upper limit beyond which the
risks of grave damage to ecosystems, and of non-linear responses, are expected to
increase rapidly.” There was relatively sparse support for this statement at that time.
The most comprehensive study supporting the 2 °C target was prepared by the
EU Climate Change Expert Group, The 2°C target: Background on Impacts, Emission
Pathways, Mitigation Options and Costs. [18] The report finds a wide array of potential
dangers from climate change, with increasing threats as the level and pace of change
increases. Most damage functions are convex in their shape (like the trajectory of an
airplane taking off). This means that the damages tend to rise gradually at first and then
more rapidly. As an example from the EU report, between 0 and 3 million people are at
additional risk of flooding with 2 °C warming, while 2 to 15 million people are at risk
with 3 °C warming. The convex shape is apparent in the overall damage function
shown in Figure II-11 of Chapter 2. But the expert group points to no single threshold or
combination of major disruptions that would occur at 2 °C. Rather they make the case
that 2 °C seems a reasonable and prudent upper limit to aim for if it is feasible and not
ruinously expensive.
Finally, you may want to go back and look at the tipping points and associated
warming shown in Table I-1 in the last chapter. We saw that many of the most
worrisome points were potentially triggered when warming reaches 3 °C.
How do these different approaches stand up in the light of impact analyses? It
should be noted that the semi-official scientific body called the Intergovernmental Panel
on Climate Change (or IPCC) never endorsed a 2 °C limit. Moreover, the Copenhagen
meeting in December 2009 did not produce a background document that established
the rationale for that limit. So the statement that “the scientific view that the increase in
global temperature should be below 2 degrees Celsius” seems a strange way to set
policy.
One way of testing the proposition for a clear threshold can be seen in Figure III4. This diagram comes from the IPCC Fourth Assessment. I have removed the
temperature label on the diagram for this purpose. I suggest you look at the diagram to
see if there is any clear point at which climate policy should aim. The test is whether to
the left of some vertical line the damages appear acceptable, while to the right of that
line the damages or impacts are unacceptable. If such a line exists, then that level of
warming is a candidate for the climate target. While this is a simplified test, it gives a
useful way to judge the approach of hard climate targets that are imposed without
reference to costs and benefits. The footnote will provide the key for the temperature
increases. [19]
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Figure III- 5. Potential dangerous interferences according to recent studies
______________________
Each scientist and citizen can provide his and her answer to the difficult question
of establishing a climate limit for policy. My own reading is that there is little basis
among the identified impacts to conclude that a 2 °C target is clearly justified. There is
no obvious bright line, no well-defined sharp cliff, and no well-established singularity
that has been found at or near a 2 °C change in global temperature to justify a hard
target. An examination of the shape of impact functions for agriculture in Figure ? or in
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the aggregate in Figure ?, or in the list of impacts in Figure ?, shows no obvious
discontinuity around 2 °C. The only evidence that seems at all compelling is the
evidence that there may be multiple tipping points that are encountered around 3 °C.
As I review the evidence, I would conclude the following (these are my words):
Well, if the costs are small, then surely we would want to keep all the way to the left in
that scary impacts Figure III-4. Why risk any damage to ecosystems, small islands, and
species? On the other hand, if keeping way to the left involves cutting back drastically
on other central priorities, such as education, social security, health, and safety, then I
would need to take a careful look at the tradeoffs. I might be willing to run some risks
on wheat yields or migration rather than spend a fortune limiting warming to the lowest
feasible level. After all, we might be able to spend that money more fruitfully on
improving seeds and water management and infrastructure. So, short of catastrophic
impacts, I would want to look at the price tag before sighing up irrevocably to any
specific target.
The costs of slowing climate change
Given the conclusion at the end of the last section – the need to look at the price
tag on any target – this requires us to look at costs. And it is here that economics takes
center stage.
To slow global warming requires reducing the emissions of CO2 and other
greenhouse gases. I focus on CO2 because it is the major culprit. There are three primary
ways to reduce emissions. To begin with, we can produce our energy services with lowcarbon or no-carbon energy sources. For example, we can generate electricity with
natural gas or nuclear energy rather than coal. The carbon emissions per kilowatt hour
will decline. Second, we can change the energy intensity of the goods and services we
buy. For example, we might choose to continue to drive 10,000 miles a year, but we can
by a hybrid car that uses less gasoline (and therefore emits less carbon). Or finally we
can change the bundle of goods and services we consume. We might decide to stay
home for our vacation rather than fly to Mexico, saving the carbon from the jet fuel.
The purpose of climate-change policies is to affect billions of decisions around
the world so as to tilt them toward less carbon-emitting technologies and consumption.
However, for the most part, each of these involves a costly substitution. Nuclear power
is more expensive than coal power. A hybrid car costs more than a standard car. And,
from the point of view of our preferences, it is costly to stay home because we were
really looking forward to the trip to Mexico. Some of these substitutions may be very
inexpensive, and other more expensive, but the (dismal?) lesson of economics is that
attaining the goals of climate change policy – particularly the ambitious goals – will
require some economic costs.
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The usual way to measure the costs in this area is “$ per ton of CO2.” This
somewhat strange measure indicates how much extra it will cost to undertake our daily
tasks in a manner that reduces emissions. Suppose that for $1000 of expenditure, you
can reduce you CO2 emissions by 10 tons, then the cost is $100 per ton [= $1000/10].
Here is a real-world example: You have an old refrigerator and you are thinking
of buying a new efficient model. Your 1995 version uses 1000 kWh per year, while your
new one uses 500 kWh per year. The new model costs $1000 in up-front costs but saves
about $50 per year in electricity costs. Some calculations show that the new fridge emits
about 0.3 tons of CO2 per year less than the old one. Without discounting, over a 10-year
period, it costs about $169 per ton of CO2 [=($1500 - $1000)/(0.3 x 10)] to reduce
emissions through replacing an old refrigerator. The cost is a little higher if we discount
the costs, as is appropriate for investments. [20]
Energy experts have made many studies of the costs of reducing CO2 and other
emissions. They show a few important points. First, there are substantial inexpensive
opportunities. Some may even have “negative costs” in the sense that the energy cost
savings are greater than the up-front investments. Second, there is unlikely to be a
golden bullet technology that will solve the CO2 problem in one blow. Rather, there are
countless opportunities around the world, in virtually every sector of every country.
Third, the costs begin to rise steeply as we restrict emissions every more tightly. Studies
indicate that countries can achieve 10 or 20 percent reductions with relative modest
costs. But reducing emissions by 80 or 90 percent in a few years would be extremely
costly.
Which fuels are the ones that are the most important targets for efficient
reduction? Figure III-6 shows a surprising result. This figure examines the most efficient
way to achieve the target emissions reductions for the proposed climate legislation for
the U.S. In this proposal, CO2 emissions are reduced about 40 percent in 2030 relative to
a no-policy scenario. The result is that most of the emissions reductions take place in
coal. Coal consumption is reduced by 90 percent, whereas petroleum consumption is
reduced only 7 percent. The reason was foreshadowed in Figure III-2 above: The value
of coal CO2 is very low relative to the value of oil CO2. This important point should be
kept in mind when looking at different policy proposals.
I-16
Reduction by energy source in 2030
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Petroleum
Natural Gas
Coal
Figure III- 6. Percentage reduction by fuel in 2030
This figure shows calculations from models developed by the Energy Information
Administration of the Department of Energy to calculate how to reduce CO2 emissions
most efficiently. The calculation shows the reduction in each of the fossil fuels for the
year 2030. [21]
_______________________________
A final way of looking at the costs of emissions reductions is by estimating the
costs of meeting different climate change objectives. This is a slightly complicated
calculation because it requires putting the costs of emissions reductions together with a
climate model. This can be done with integrated assessment models (IAMs).
Figure III-7 shows an example using our Yale DICE/RICE model. The lines show
the minimum cost of meeting different temperature targets given current estimates of
the cost of emissions reductions. We have calculated these costs as a percentage of
world income. The lower line shows the utopian ideal of efficient policies with 100
percent participation of all countries. The upper line shows the more realistic case of 50
percent participation for the 21st century and then 100 percent participation after that. If
policies are implemented inefficiently (say by exempting farmers or using inefficient
approaches), then each curve would be higher. These results are from one model, but
most other models show similar results.
The calculations indicates that the maximum temperature with absolutely no
climate-change policies would be between 6.5 and 7 °C. This definitely gets way beyond
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the danger zone by anyone’s reckoning (or at least, anyone not inclined to dismiss the
entire enterprise). The first point is that we can limit temperature substantially at
relatively low cost if we do it efficiently and with universal participation. Suppose that
people agree that ½ percent of income is a reasonable price to pay; then in the most
efficient policy, we can limit the temperature rise to 2 – 2½ °C.
The upper line shows what would happen if countries are not united in their
participation. The cost curve bends up very quickly if we can only achieve 50 percent
participation for the next century. If we aim for much below 4 °C, then the costs begin
to rise sharply. The reason is that, with 50 percent of emissions uncontrolled, there will
be substantial warming even if the other half makes maximum efforts. This example
suggests that delayed participation of a substantial part of the world will make it
impossible – not just costly – to meet the Copenhagen objective of 2 °C.
Cost of meeting objective as (% of income)
3.5
Mitigation
cost: full part
3.0
2.5
Mitigation
cost: 50 % part
2.0
1.5
1.0
0.5
0.0
0
1
2
3
4
5
6
Temperature limit (°C)
Figure III- 7. Estimated costs of meeting different climate objectives.
The two curves show the fraction of income that would be devoted to slowing climate
change with the most efficient policy designs and with two different participation rates.
Note how low participation makes it impossible to achieve the Copenhagen target.
I-18
The Conundrum of Discounting
We have looked at both the costs of slowing climate change and the damages
from future climate change. In the next section, we will compare the two. But before
that, we need to confront one of the thorniest economic issue in all of climate change:
how to discount future costs and benefits. This is a moderately technical discussion, and
those who prefer to leave such questions to economists may decide to skip this section.
But be warned that the discounting is a very hot topic.
Here is the issue: When we make investments to reduce emissions, these are
present costs. The benefits in reduced damages come well into the future. Suppose that
we replace a coal plant with a solar plant. If we follow the chain of effects from
emissions, to CO2 concentrations, to temperature change, to damages, we find there is a
long delay from emissions to reduced damages.
How then should we compare investments today with reduced damages in the
distant future? Normally, when we make an investment, we insist that it have some
kind of return. For example, firms often require that their investments pay at least 10
percent per year after inflation. The government requires that its public works projects
have a return of at least 7 percent per year after inflation. If you, as a consumer, are
paying 20 percent per year on your credit card and there is no inflation, you would
probably have a high threshold for investments in your home.
We can illustrate the question posed by discounting with the following example.
Suppose someone of sterling character approaches you with the following proposition.
He is establishing a trust that will confer a $100 million benefit (corrected for inflation)
to your heirs in two hundred years in return for a current contribution of a certain sum
of money, x dollars, today. The $100 million return might be the benefit of reduced
climate damages. Alternatively, it might involve owning part of Manhattan Island.
What is the maximum amount that you would be willing to contribute?
A person relying on arithmetic intuition might reason as follows: “I know that
money invested will accrue interest and grow over time. If I take an interest rate of 5
percent times two hundred years, that would total 1,000 percent, or growth by a factor
of ten. So, by this calculation, to get $100 million in two hundred years, I would need
$10 million today. In other words, if I assume that money invested over the time period
will grow ten times in value, I would contribute to the trust no more than $10 million
today. Perhaps the interest rate would be higher. If the fund grows one hundred times
in value, I should contribute no more than $1 million.” Thus might our arithmetic
intuition proceed.
I-19
In fact, this approach is not even close to the right calculation. The intuitive
calculation forgets that interest is compounded—that is, interest is paid on the total
amount, not just the original amount. A financial consultant would advise you to
calculate the appropriate current contribution by taking the $100 million and
“discounting” it to the present using an appropriate interest rate or discount rate. That
discount rate should reflect the amount you could earn on your investments over the
period.
Moreover, in our example, the $100 million is inflation-corrected, so we are in
effect getting paid in future goods. For this reason, we want to use the discount rate on
goods in making the present-value calculation. (Again, recall that we are using a
comprehensive measure of goods in this analysis; also, goods whose prices are rising
relative to the average will have a lower discount rate.) A discount rate on goods is the
rate we would apply when converting the inflation-corrected values of goods
consumed in the future into today's values. The rate should reflect not only the
underlying return on social investments but also risk factors such as that the “sterling
character” might be the bankrupt Lehman Bros rather than Uncle Sam, or that we might
have no heirs, or that part of Manhattan Island might be under water.
Based on historical studies and projections, I generally use a 4 percent discount
rate in my calculations of the return on investment. Applying this discount rate to the
trust would lead you to propose a present payment of x = $39,204. Over two hundred
years, as the interest on that sum is paid and compounded, the value of the trust would
reach $100 million.
Many people are shocked that anyone would propose such a small sum. How
can we care so little about the future? Are we not shortchanging future generations?
The answer is not that we are indifferent to the future but that we have a vast array of
productive investments. The power of compound growth turns tiny investment acorns
into giant financial oaks over a century and more. It is always a useful reminder about
compound interest that at a 6 percent money-interest rate, the $26 paid for Manhattan in
1626 would yield $136 billion today, an amount approximately equal to the entire land
value of this most valuable island.
Some would argue that it is unethical to discount the future and that we should
apply a very low discount rate to calculate the present value of future goods or climate
damages. While the low-discounting approach is plausible in some circumstances, it
seems implausible in the context of the economic growth assumed in most climatechange studies. Recall that most climate model projections assume continued growth
over the coming decades. While there are plausible reasons to act quickly on climate
change, the need to redistribute income to a wealthy future does not seem to be the
most urgent.
I-20
The effect of low discounting can be illustrated by a “wrinkle experiment.”
Suppose that scientists discover that climate change will cause a wrinkle in the climate
system—perhaps it might be a small perturbation in the track of ocean currents—that
will cause damages equal to one-tenth of a percent of consumption starting in 2210 and
continuing at that rate forever after. How large a one-time investment would be
justified today to remove the wrinkle that only begins in about two centuries?
If we use a very low discount rate, the answer is that we should pay a substantial
fraction of one year's world consumption today to eliminate the wrinkle. In other
words, using the logic of low discounting, it is worth a huge one-time consumption hit
to fix a tiny problem that begins two centuries hence. This example shows why the
implications of using near-zero discounting—suggesting that the current generation is
ethically obliged to make large sacrifices now to prevent relatively small climate
damages for wealthy future generations—can be truly bizarre.
The logic of market discounting is not that we should consume all our income, as
the United States does today. Nor is it that we should ignore impacts a few decades in
the future. Rather, it suggests that there are many high-yield investments that would
improve the quality of life for future generations at home and abroad. Such a portfolio
would include investing in health systems at home, cures for tropical diseases,
education around the world, and basic research on new energy and low-carbon
technologies. Investments in global warming must compete with other investments,
and the discount rate is the measuring rod for comparing competing investments.
Cost-benefit balancing
We ended our section on objectives with the conclusion that a sensible target for
climate-change policy would require balancing costs and benefits. This is the approach
often used by economists in analyzing different options and is called “cost-benefit
analysis” or “CBA.” The basic idea is quite intuitive. In a world of scarcity, we should
allocate our resources to the actions that produce the most desirable results.
We do cost-benefit analysis all the time in our daily lives. Take the example of
choosing a college. Jean has been accepted at three colleges and needs to choose. The
economic costs differ. But they also have different benefits. Some of the benefits are
market returns, such as the job placement and post-graduate salary. Others are nonmarket, such as the quality of student life, the climate, the proximity or distance from
home, and so forth. For some very rich students, the costs are not an issue and they
maximize benefits. For most people, they take into account both costs and benefits.
Some of these benefits might be hard to monetize, or put in dollar terms. But, at least
implicitly, we monetize all costs and benefits when we make economic choices such as
where to go to college.
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So, we now put impacts and costs together to find a target or policy that best
balances costs and benefits. One way to do this is to combine the costs and damages for
different targets. Figure III-7 puts the damages and costs of emissions reductions into
the same diagram. The upper line marked “Total” is the sum of the two costs. Note that
it is U-shaped because it is costly at the two extremes of doing nothing and doing too
much. For this example, we have also assumed that future benefits are not discounted.
While this is a controversial approach (and one the present author does not agree with),
it is useful to show the approach.
In the most optimistic case, the minimum cost comes between 1½ and 2 °C. In
that range, the total costs are in the range of 1.6 percent of total income, roughly equally
divided between damages and abatement costs. As we move outside this range, the
costs increase sharply.
12
Mitigation cost
Cost plus damage (% of income)
10
Damage
Total
8
6
4
2
0
0
1
2
3
4
5
Temperature limit (°C)
Figure III- 8. Total costs of different targets with full participation with no
discounting
_______________________
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6
Now introduce a different case, where we have limited participation and
discount future incomes. For the limited-participation case, we use the example shown
in Figure III-4 above of 50 percent participation for a century followed by 100 percent
participation after that. Additionally, we introduce discounting for future incomes, as
(in the present author’s view) is appropriate for investments. I take a simple example of
a 2 percent per year discount rate and a 50-year delay for climate damages. These
assumptions are a simple way of incorporating the lags and the effect of discounting.
Figure III-8 shows the second case. Here, the minimum cost temperature target is
higher. A careful reading shows that costs are minimized at around 3¾ °C. The target
must be moved way up. Most of the reason is due to the limited participation, which
raised the cost of meeting target objectives. If we look at that effect alone, it raises the
target to 3½ °C. Discounting raises the target a little but not much further, by about ¼
°C.
12
Mitigation cost
Cost plus damage (% of income)
10
Discounted damage
Total
8
6
4
2
0
0
1
2
3
4
5
Temperature limit (°C)
Figure III- 9. Total costs of different targets with limited participation with
discounting of future incomes
_____________________________
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6
These diagrams are simplified, but not terribly so. They capture the major forces
at work: the sharp upward-sloping damages with higher temperatures; the sharply
higher costs of abatement with lower targets; the major increase in costs with low
participation; and the lower damages with discounting. The full integrated assessment
models contain more detail and examine the dynamics of moving from today’s starting
point to different targets. But the basic point is retained in this stylized example.
CBA is often criticized. Some believe that it is particularly inappropriate for
weighing decisions on climate change. Some of the reasons for the difficulties of CBA in
this context are technical in nature. There are great uncertainties and sometimes we
cannot even determine the probabilities of different events; the costs and benefits may
accrue to different people or generations; and there are difficulties in comparing costs
today with benefits in the distant future. There are also philosophical questions. For
example, in making choices about health impacts, are we philosophically justified in
putting a price on human life? Perhaps the greatest difficulty is that climate change
impacts involve natural systems such as ecosystems and biodiversity, and we do not
have adequate tools for valuing these changes.
How do economists answer these criticisms. Most would agree that doing a
sound cost-benefit analysis for climate-change policy is definitely a daunting task. But it
is necessary if we are to make reasoned choices about policies. We might not be able to
make definitive estimates about the impacts of higher temperatures on different sectors.
But by a process of careful study and analysis we can get order-of-magnitude estimates
and use those in our analyses. We need to be careful to include all impacts – market,
non-market, environmental, and ecosystem impacts. Moreover, in those areas where the
estimates are very primitive, such as ecosystem valuation, we need economists and
natural scientists to cooperate to produce better estimates.
Consider the following thought experiment. Suppose that you have a friend who
is a very reliable economist who provides you estimates of attaining different climate
objectives. Suppose it looks like Figures III-7 and III-8. Perhaps the curves are a little
higher or lower or to the left or right. What target would you pick?
You would need to study the impact analysis and think about tipping points.
Perhaps you would change the damage functions. You would also need need to guess
at a realistic goal for country participation. If you really thought that only half of
countries would participate, then aiming for 2 °C is like hoping you can take Amtrak to
the moon. But if you thought you could get everyone on the train with no free riding,
and that the policy tools you employ are efficient ones, then you might well aim for the
Copenhagen target. But you couldn’t just ignore the costs and benefits without being
irrelevant to real-world decision making.
I-24
A Final Verdict on Objectives
How should we conclude this discussion of the objectives of climate policy? To
begin with, it is important that we have coherent and valuable objectives. Some
scientists are convinced that a temperature target is the right goal. While the argument
is not beyond debate, limiting climate change is definitely a worthy goal. By contrast,
emissions limits or concentration objectives are instrumental objectives, not ultimate
goals.
However attractive and simple climate targets may be, they are unlikely to be
sufficient in a world with competing goals, nations, and interest groups. Skeptics and
taxpayers want to be assured that these goals are not simply the result of overly
concerned environmentalists who are intent on saving their ecosystems at the expense
of the economies. Nations will want to make sure that they are not subsidizing other
undeserving countries or feeding corrupt dictators whose green policies are really an
excuse for skimming greenbacks.
If there is real money involved, people want to get their money’s worth. And all
these will require at the least some comparison of costs and benefits. The benefits need
not be completely monetized. But it will not be sufficient to say that “Ecosystems are
priceless” or “We can pay any cost to save the polar bears.” These are the reasons that
costs and benefits must be brought into the equation in weighing the options on global
warming.
Mechanisms I: The central role of carbon prices
In our review of possible approaches, we concluded that emissions reductions
are the only way to ensure that the freight train of global warming is slowed or stopped.
So now we need to know exactly how this is accomplished. Recall from above the three
ways that emissions are changed: changes in fuels, changes in energy intensity, and
changes in consumption bundles. What is the mechanism by which governments induce
firms and individuals to change their activities? The government can’t realistically say,
“Do this but don’t do that” about thousands of different things.
There are two parts to the answer about mechanisms. We start at the bottom, so
to speak, and ask how people can be induced to change their actions – change fuels, buy
fuel efficient applicances, take the train rather than drive, and similar activities. For this,
we will see that a strange beast called “carbon prices” are absolutely central. We then
move to the top, to governments, and ask how they best can determine the level of
carbon prices that can achieve the ultimate objective of slowing climate change. This
will be the subject in the next section.
I-25
The economics of emissions reductions is actually straightforward. Virtually
every activity directly or indirectly involves combustion of fossil fuels. Emissions
represent “externalities”-- i.e., social consequences not accounted for by the workings of
the market. They are market failures because people do not pay for the full social costs
of their actions.
The economic answer to this particular externality is very simple: a price on
carbon emissions. That is, we need to ensure that everyone, everywhere, and for the
indefinite future is confronted with a market price for the use of carbon fuels that
reflects the social costs of their activities. Economic participants – thousands of
governments, millions of firms, billions of people, all taking trillions of decisions each
year--need to face realistic prices for the use of carbon if their decisions about
consumption, investment, and innovation are to be appropriate.
What exactly do we mean by a carbon price? In this context, it means that
whenever someone – anyone – burns a fossil fuel, they pay an amount that is
proportional to the total amount of carbon-dioxide emissions that would be emitted. If I
burn a ton of coal, this emits about 0.74 tons of carbon. If the price of carbon is $50 per
ton of carbon, then I would pay a charge of $37. At this carbon price, a gallon of
gasoline would include a 3.3 cent carbon charge.
Carbon prices today are almost everywhere zero. When I use a gallon of gasoline
or 100 kilowatthours of electricity for lighting, I do not pay for the cost of the CO2 that
goes into the atmosphere. If we are all to make efficient decisions about transportation,
heating, and lighting, we need to face the true costs of these decisions. That is, everyone
needs to face an appropriate price of carbon in their decision. This means that at every
stage where someone uses a fossil fuel, a charge needs to be levied that is related to the
total amount of carbon-dioxide emissions that would be emitted.
To understand a carbon price, consider a household that consumes 12,000 kWh
of electricity per year at a price of about $0.10 per kWh. If this electricity is generated
from coal, that would lead to about 3 tons of carbon emissions. If the carbon price were
$50 per ton, this would increase the annual cost of coal-electricity purchases from $1200
to $1350. By contrast, the costs of nuclear or wind power would be unaffected by a
carbon tax because they use essentially no carbon fuels.
Now of course we buy all sorts of goods other than gasoline or electricity. What
about other goods and services are not fuels. Take the example of an airplane ticket for
the 2000-mile trip from Los Angeles to Detroit. A standard calculation is that air travel
emits about 54 kg of carbon per 1000 passenger-miles traveled. If the carbon price is $50,
then this would increase the cost of travel by about $6 = ($50 x .104). The $6 would get
passed on in the ticket price. This is not a huge amount, but it would be enough, on top
of all the other costs, to keep a few people home and thereby reduce the consumption of
I-26
jet fuel. It would also make the airlines think even harder about how to keep fuel use
down. This example shows how, in a market economy, the cost of the carbon used at
every stage of production would be included in the price I pay for the final good.
Raising the price on the use of carbon has the primary purpose of providing
strong incentives to reduce carbon emissions. It does this through three mechanisms.
First, it will provide signals to consumers about what goods and services have high
carbon content and should therefore be used more sparingly. Consumers will find that
air travel becomes relatively more expensive than visiting local sights, and this will
reduce air travel and therefore the emissions from air travel.
Second, it will provide signals to producers about which inputs use more carbon
and which use less or none, thereby inducing firms to move to low-carbon technologies.
One of the most important signals will come in electric power generation. Electricity
from coal will rise sharply, as noted above, while that from nuclear power or renewable
like wind will rise not at all. Of all the adjustments, reducing coal use in electricity is
probably the most important for the United States.
Third, appropriate carbon prices will give market incentives for inventors and
innovators to develop and introduce low-carbon products and processes that can
replace the current generation of technologies. Suppose you are the executive in charge
of research and development (R&D) at a large company like GE, which had a R&D
budget in 2008 of $4.3 billion. You make equipment for generating electricity from
different sources – coal, nuclear energy, and wind. Most generating facilities will last for
the 50 years. If carbon prices are going to be zero or very low, then coal plants will
continue to be an important source, and you will put much or you R&D budget there.
On the other hand, if you expect carbon prices to rise sharply, few coal stations will be
built, and zero-carbon technologies like wind and nuclear power are the areas on which
to place your bets. In other areas where consumer or producer demand is sensitive to
carbon prices – air travel, consumer appliances, and automobiles being good examples –
there are big companies with big R&D budgets that will be sensitive to the signals given
by carbon prices.
A subtle but important role of putting an appropriate price on carbon is that it
simplifies greatly the multitude of decisions that are made by consumers, organizations,
and governments. In effect, the price of carbon becomes the societal decision about the
priority of reducing CO2 emissions. Once carbon emissions carry a price tag, this
provides a signal that emissions are harmful and should be reduced. The signal is
similar to the one given by a high price tag on land at 57th Street and Fifth Avenue,
which indicates that this is not the appropriate place for a golf course.
This discussion shows that decisions about emissions reductions are extremely
complicated, diverse, and pervasive. One of the beautiful aspects of using carbon prices
I-27
rather than other mechanisms is that this reduces the amount of information that is
required to undertake the different tasks. Suppose you take environmental ethics very
seriously. You desire to minimize your carbon footprint – the amount of carbon
emissions your activities produce. (Well, of course, you don’t really want to minimize it
as that would mean living in a cave, but you want to make decisions that are not overly
wasteful.)
How might you go about adapting your daily life to include carbon decisions?
Suppose you are living in Denver and want to visit your father in Albuquerque. Should
you drive or fly? You consult one of the online carbon calculators and find that flying
produces 10.9 kg of carbon while driving your Ford Taurus produces 11.5 kg. So flying
is better from a pure carbon point of view. But, then you remember that you have to get
to and from the airport, so you need to do the calculation of car carbon for airport
connections. And you also wonder whether the calculator takes into account the
amount of baggage in the plane. Does it account for the fact that the flight is only half
full so you are really only adding a little weight to the plane, which surely doesn’t take
very much carbon.
You further wonder whether these calculators have just figured the carbon in the
gasoline and jet fuel but have excluded the carbon in the tires, aluminum, steel,
cushions, and everything else that went into the car and plane travel. Maybe you should
just stay home and save the travel carbon, but then you would need to determine how
much carbon is in your spending on going skiing instead, and you definitely would
have an unhappy father to deal with. You are likely very quickly to decide that adding
carbon calculations to all the other constraints in your life is a fool’s errand.
This is where the advantages of a carbon price as an aid to decision making
become so clear. If a price were charged on all carbon emissions, they would be in the
price of the gasoline for the car trip, the ticket and taxi fares for the air travel, as well as
in the costs of the ski trip. Once the carbon price is universally applied, the market price
of all activities using carbon would rise by the carbon price times the carbon content of
fuels they used. We would still not know how much of the price is due to the carbon
content, but we would not need to care. We could make our decisions confident that we
are paying for the social cost of the carbon we use.
Mechanisms II: How governments can steer the climate system
Climate change is a tale of two cultures. The natural sciences have done an
admirable job of describing the geophysical aspects of climate change. The science
behind global warming is well established. While the exact trajectory of climate change
is imprecisely known, we know enough to resolve that serious steps are needed to slow
or reverse the trajectory of global warming.
I-28
But designing an effective political and economic strategy to control climate
change will require the second culture – the social sciences – to analyze how to harness
our economic and political systems to achieve our climate goals effectively and at low
cost. This second task involves a very different set of issues from the natural-science
questions. It requires not only examining the impacts of climate change on the economy
and the costs of slowing climate change, as we have seen. It also involves designing
policy instruments for implementing the desired emissions reductions. In other words,
we ask how the goals of climate policy can be effectively and efficiently implemented
on the national and sub-national scale. This is the problem of “institutional design” for a
low carbon world.
The economics of global warming contains two important truths. The first, which
is an inconvenient economic truth, is the need to raise the price of carbon emissions
sufficiently high to discourage carbon-intensive consumption and production and to
encourage low-carbon technologies; we discussed this point above. The second truth is
that we need national and international institutions to coordinate and steer decisions
about energy and economic systems. We turn to this point now.
What mechanisms can we use?
We have written about the necessity to set a “carbon price” but have not said
where it comes from. Is it from the free market, from some kind of regulatory
mechanism, from a tax policy, or what?
To begin with, we need to recognize is that we do not want to use the “freemarket” price of carbon. The free-market price is zero, but that is an incorrect price
because it excludes the external costs of emissions on other people, other countries, and
in the future. So even if you are a conservative, pro-growth, small-government
advocate, you would recognize that some kind of governmental intervention is
necessary to raise the carbon price to the appropriate level.
How can the price be raised? There are two possible mechanisms for doing this.
One is to limit or “cap” the quantity of allowable carbon emissions. This is the classical
regulatory approach to pollution, and is the route that is followed in the European
Union and that has been proposed in legislation for the United States. This approach is
augmented by a mechanism that allows owners of the allowances to buy, sell, and trade
them, hence the mechanism known as “cap and trade.” Because the caps are below the
unregulated level, the right to emit carbon is valuable. It will therefore have a positive
market price. So the cap-and-trade approach will indirectly lead to a non-zero price of
carbon.
An alternative approach, known as “carbon taxation,” is to have governments
tax carbon emissions. This approach is similar to the approach taken on cigarettes,
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where companies are free to sell whatever amount they like, but consumption is
discouraged by the high price than results from cigarette taxes. This approach has been
used by some countries but has not been central to international proposals to control
CO2 emissions. We will return below to a comparison of these two approaches, but our
point here is to note that in each case the government has taken steps to raise the market
price of carbon so that people have strong incentives to reduce CO2 emissions.
The need for broad participation
The analytical basis for an efficient global-warming policy is extremely simple.
Because global warming is a global public good, everyone, everywhere must face the
same price. Put differently, the future damages from carbon dioxide emissions are the
same whether the carbon comes from rich Americans, middle-income Brazilians, or
poor Africans. There are sectors in all countries where carbon emissions can be reduced
at relatively low costs. We therefore need to find mechanisms that will allow us to
harvest as many of the low-cost emissions reductions as possible.
The difficulty arises because, for global public goods like global warming, there
are widely disparate incentives to participate in measures to mitigate the damages. The
differences reflect different perceptions of damages, income levels, political structures,
environmental attitudes, and country sizes. For example, Russia may believe that it will
benefit from limited warming, while low-lying countries may believe they will be
devastated. Within the United States, some regions are coal or oil producers and resist
measures to tax carbon fuels, while others are environmentally oriented and have
already enacted local legislation to limit carbon emissions.
Current international agreements differentiate among countries in their
responsibilities to undertake measures to limit emissions. Under the Kyoto Protocol,
rich countries must limit their emissions, while developing countries have a variety of
non-binding commitments as well as the ability to participate in the “clean
development mechanism.” Moreover, while some countries have implemented strong
internal mechanisms to control emissions, these often cover only a limited part of
national emissions. For example, the European Trading Scheme covers only about half
of EU emissions.
Evidence from economic studies indicates that the costs of non-participation are
high. Consider a plan that includes countries with 70 percent of the world’s emissions.
Calculations from economic models suggest that the costs of attaining a specific
emissions target would be about 80 percent higher than in a regime with 100 percent
participation. [22] We also saw this in our cost curves in Figure III-? above.
The reason for the extremely high cost of non-participation is simple:
Engineering studies indicate, for example, that virtually all countries have substantial
energy inefficiencies that can be improved at modest costs. In other words, we can
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harvest a considerable fraction of the carbon abatement at low cost. These include such
things as insulating structures, improved lighting, using more efficient air conditioning
and water heating, and replacing obsolete machinery. If we exclude half the world, we
lose the possibility of harvesting these low-cost sources of abatement. [23]
Different architectures: cap and trade and carbon taxes
Global warming is a peculiar kind of economic activity known as a global public
good. Such activities are ones whose impacts are indivisible and whose influences are
felt around the world rather than affecting one nation, town, or family. These are not
new phenomena. However, they are becoming increasingly prevalent because of rapid
technological change and the the decline in transportation and communication costs.
What makes global public goods different from other economic activities is that there
exist only weak economic and political mechanisms for solving these issues efficiently
and effectively.
Dealing with global public goods has been an increasingly important feature of
international relations. We have only to think about recent crises such as those
involving the AIDS epidemic, the threat of nuclear proliferation, international financial
crises, and the decline of the blue-fin tuna to realize how prevalent global public goods
are.
A little further reflection will indicate that nations have had only modest success
in agreements to deal with global public goods. There are but a few examples of
regimes that manage international public goods effectively, such as those managing
international trade disputes (today primarily through the World Trade Organization)
and the protocols to limit chlorofluorocarbons. There are major governance issues
involved in dealing with global public goods. To deal effectively with these problems
requires concerted action of virtually all major countries, as we saw above. But there is
no legal mechanism by which disinterested majorities or even super majorities of
countries can coerce other countries to provide for global public goods.
Action on global warming therefore requires international agreements. Nations
have forged a variety of frameworks for dealing with global public goods and other
transnational issues, employing a wide variety of instruments or techniques. [24] A
partial list of techniques is:
 Noncooperative, market-based, or laissez-faire approaches (as is currently the
case for production of most goods and services as well as for some potential
global issues such as asteroid defense)
 Aspirational or hortatory agreements that urge countries to undertake actions
(e.g., the Framework Convention on Climate Change) or nonbinding voluntary
agreements (e.g., the institutional regime created in the 1980s to clean up
pollution in the North Sea)
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 Specific and binding treaties among sovereign nations (currently in effect for
ozone depleting chemicals and international trade)
 Agreements embedded in broader international institutions or agreements (as
when developing countries accepted accept strong patent protection under
multilateral trade laws); and
 Limited delegations of regulatory or fiscal authority to supranational bodies
(seen in some European activities such as the European Central Bank).
This array of international institutions reminds us that although global warming
is a new problem, the problems of international political economy raised by global
warming are quite ancient. When dealing with economic public goods like global
warming, it is necessary to reach through sovereign national governments to the
multitude of firms and consumers who make the vast number of decisions that affect
the ultimate outcomes.
The two major approaches
Economists who have studied global warming have concluded that there are two
major mechanisms that can be employed—quantitative limits through government
regulation, and price-based approaches through taxes.
The first approach, quantitative limits, is the one that has been chosed for global
warming. In its pure form, this is called a “cap-and-trade regime.” Under this approach,
countries have caps on the time path of their emissions. Countries can administer these
limits in their own fashion, but countries are allowed to buy and sell allowances to
other participating countries. This model has been used in the Kyoto Protocol and is
envisioned in the latest round of agreements at Copenhagen in 2009. This approach has
been used since 2007 by the European Union in its Emissions Trading Scheme (ETS),
and has been used extensively under national trading regimes such as the U.S. acid rain
allowance-trading program.
The second approach is to use harmonized prices or taxes as a method of
coordinating policies among countries; this is commonly called a “carbon tax” regime.
This approach has no international experience in the environmental area, although it
has considerable national experience for environmental markets in such areas as the
U.S. tax on ozone-depleting chemicals. On the other hand, the use of harmonized pricetype measures has extensive international experience in fiscal and trade policies, such as
with the harmonization of taxes in the EU and harmonized tariffs in international trade.
Harmonized carbon taxes
Because it has not received extensive attention, I will describe briefly the carbon
tax approach. Under this approach, countries agree to penalize carbon emissions at an
internationally harmonized “carbon price” or “carbon tax.” The carbon price might be
determined by estimates of the price necessary to limit GHG concentrations or
I-32
temperature changes below some level thought to be a dangerous interference. From a
conceptual point of view, the price on carbon should be equal in all countries and
sectors.
An important feature of the system is that the revenues would be collected and
retained domestically. It would naturally fit into the domestic fiscal system and should
be seen as an alternative mechanism for collecting the revenues needed by all countries.
They are not levied or collected by international institutions. They are primarily
designed to raise the price of carbon, with countries retaining the right to use the
revenues according to domestic priorities.
Comparison of Carbon Taxes and Cap-and-Trade
In idealized conditions, a cap-and-trade regime and a carbon tax regime have
exactly the same properties. This can be seen with the following example. Suppose that
uncontrolled emissions in a given year are 10 billion tons. Suppose that countries decide
to limit emissions to 8 billion tons. Governments issue or auction allowances to emit up
to 8 billion tons. Allowances are then traded so that the 2 billion tons of reduction are
undertaken in the most economical manner. Because it is costly to reduce emissions, the
price of an allowance would rise to the cost of reducing the last ton. Assume that the
cost is $100 per ton, so the price of allowances would rise to $100 per ton.
Now assume instead that countries had agreed to levy a $100 per ton carbon tax.
At that tax rate, countries would find it economical to reduce emissions by 2 billion
tons. From the worm’s eye view of individual firms, in both cases the price of adding a
ton of CO2 to the atmosphere is $100 per ton, so firms will behave identically in both
situations. The net result is therefore exactly the same for the cap-and-trade regime as
for the carbon tax. The only difference is that in the one case governments employ a
“quantity” regulation while in the other governments use a “price” mechanism.
Once we move from an idealized to a realistic situation, significant differences
emerge. While the current regime has focused on the cap-and-trade approach, I believe
that there are major advantages to a carbon tax approach. Here are some of the reasons.
[25]
To begin with, tax systems are mature and universally applied instruments of
policy. Countries have used taxes for centuries, and their properties are well
understood. Every country uses taxes. Countries have an administrative tax system, tax
collectors, tax lawyers and tax courts. Countries need revenues, and indeed many
countries face large fiscal deficits today. By contrast, there is very limited experience
with international cap-and-trade systems. Just as it would be irresponsible for military
planners to use an untested weapon to defend against grave threats, it would be
similarly perilous for the international community to rely on an untested system like
international cap-and-trade to prevent dangerous climate change.
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A related point is that quantitative limits have proven to produce severe
volatility in the market price of carbon under an emissions-targeting approach. The
volatility arises because of the price-inelasticity of both supply and demand of permits.
The high level of volatility is economically costly and provides inconsistent signals to
private-sector decision makers. Clearly, a carbon tax would provide consistent signals
and would not vary so widely from year to year, or even day to day.
In addition, a tax approach can capture the revenues more easily than
quantitative approaches can, and a price-type approach will therefore cause fewer
additional tax distortions. The tax approach also provides less opportunity for
corruption and financial finagling than do quantitative limits, because the tax approach
creates no artificial scarcities to encourage rent-seeking behavior. (I elaborate on this
point below in the discussion of poor countries.)
Carbon taxes have the apparent disadvantage that they do not steer the world
economy toward a particular climatic target, such as a CO2-concentration limit or a
global temperature limit. This suggests that a carbon tax cannot ensure that the globe
remains on the safe side of “dangerous anthropogenic interferences” with the climate
system. This advantage of quantitative limits is in my mind largely illusory. We do not
currently know what emissions would actually lead to the “dangerous interferences” –
or if there are “dangerous interferences”—or even what global climate change will be
implied by a system such as the Kyoto model. We might make a large mistake – either
on the high or the low side – and impose much too rigid and expensive, or much too
lax, quantitative limits. In other words, whatever initial target we set is almost sure to
prove incorrect for either taxes or quantities. Moreover, the current system, or even the
modifications that have been proposed, does not come close to being efficient or
attaining the strict environmental goals because of the high levels of non-participation.
This leads to a final point about the two systems. A carbon-tax model provides a
friendly way for countries to join a climate treaty. Currently, countries joining the Kyoto
limitations would need to enter into highly politicized and uncertain negotiations on
the extent of their emissions reductions. Suppose you were a medium-sized open
economy closely tied to the United States or Russia, and you were considering whether
to join the Kyoto Protocol under the current model. You might be concerned about the
long-term impacts of climate change and might even be eager to join the effort to ensure
its success. But you would also be realistically wary of the heavy pressures that big
countries can apply. Your emissions commitments are poorly defined under the Kyoto
model. You and other newly-joining countries would be under pressure to make sharp
reductions so that larger countries could make smaller ones.
This is a set of negotiations, under the current Kyoto model, that you would be
reluctant to join if you could avoid it. So it is not a puzzle that countries have not been
flocking to join the Kyoto Protocol since its original negotiations in 1997. Under the
carbon-tax model, by contrast, countries would need only to guarantee that their
I-34
domestic carbon price would be at least at the level of the international norm. If I were a
small country – worried about climate change, eager to join the effort, but wary of the
heavy pressures that big countries can apply – I would find the carbon-tax approach
most attractive. It would not be a painless choice to agree to a minimum carbon price,
but it would at least be a transparent and relatively straightforward one, and one in
which countries contemplating joining would know what they were signing up for.
Hybrids
Many considerations enter the balance in weighing the relative advantages of
carbon taxes and quantitative cap-and-trade approaches. However, we must be realistic
about the shortcomings of the tax-based approach. It is unfamiliar ground in
international environmental agreements. Tax is one letter short of a four-letter word.
Many people distrust price approaches for environmental policy. Many
environmentalists and scientists distrust carbon taxes as an approach to global warming
because they do not impose explicit limitations on the growth of emissions or on the
concentrations of greenhouse gases. What, they ask, would guarantee that the carbon
tax would be set at a level that would prevent “dangerous interferences?” Do carbon
emissions, some worry, really respond to prices? Might the international community
fiddle with tax rates, definitions, measurement issues, and participation arguments
while the planet burns? These questions have been addressed in this and other studies,
but many remain unconvinced.
Given the strong support for cap-and-trade systems among analysts and
policymakers, is there a compromise where the strengths of the carbon-tax regime can
be crossed with cap-and-trade to get a hardy hybrid? Perhaps the most promising
approach would be to supplement a quantitative system with a carbon tax that
underpins it. Call this a “cap-and-tax” system. For example, countries could buttress
their participation in a cap-and-trade system by imposing a carbon tax along with the
quantitative restriction. Countries could also put a “safety valve” along with the tax,
wherein nations could sell carbon-emissions permits at a multiple of the tax, perhaps at
a 50-percent premium of the base level, to reduce volatility and ensure that the
economic costs of the program are capped.
The cap-and-tax system would share some of the strengths and weaknesses of
each of the two polar cases. It would not have firm quantitative limits like a pure capand-trade system. But the soft quantitative limits would guide firms and countries and
would give some confidence that the climatic targets were being achieved. The hybrid
would have some but not all of the advantages of a carbon-tax system. It would have
more-favorable public-finance characteristics, it would reduce price volatility, it would
mitigate the incentives for corruption, and it would help deal with uncertainties. The
narrower the band between the tax and the safety-valve price, the more it has the
advantages of a carbon tax; the wider the band, the more it has the advantages of a capand-trade system.
I-35
Other approaches
There are many other ideas about how to tackle global warming. Some
approaches are complementary to the basic approaches outlined above. For example,
strong support for public and private research and development would lower the costs
of alternative (low-carbon) technologies. This would lead to higher emissions
reductions and lower the costs of attaining the targets.
Some proposals are in the dubious category. One example is the “clean
development mechanism” instituted under the Kyoto Protocol. This allows poor
countries to sell emissions reductions to rich countries. For example, China built a
hydroelectric power station, which (it claims) would replace a coal-fired station. It
obtained 31,261 tons of CO2 credits, which it sold to the Netherlands. The problem is
that we have no way of knowing whether China would have built this hydroelectric
power even without the sale of credits. Without strict caps on Chinese emissions, the
counterfactual is essentially unknowable.
A final set of proposals is to subsidize “green energy” or “green jobs.” This is
misguided. The spirit of these proposals is that certain activities are low-carbon and
should be encouraged. An example of such a policy is the U.S. subsidy on ethanol, a
gasoline substitute currently made from corn. Even overlooking technical issues of
whether ethanol is in fact low-carbon, the question is why should we subsidize ethanol
rather than the entire list of low-carbon activities. Why ethanol and not hiking or
canoeing? However, if we attempt to subsidize low-CO2 activities, there are just too
many around, and it will prove astronomically expensive. Here is another way to see
this point: Subsidies are an attempt to use to discourage carbon use by making other
activities more attractive. But the dollars involved in other activities is much larger than
the dollars involved in carbon use. So it is much more sensible to tax carbon than to
subsidize everything else.
A Policy Proposal for Today
The agreed framework for all international climate-change deliberations is the
United Nations Framework Convention on Climate Change, ratified in 1994. That
document stated, “The ultimate objective … is to achieve … stabilization of greenhouse
gas concentrations in the atmosphere at a level that would prevent dangerous
anthropogenic interference with the climate system.” The Framework Convention was
implemented in the Kyoto Protocol in 1997, in which both high-income countries and
countries in transition from socialism agreed to binding emissions limits for the 20082012 period. However, the reality of global warming policy has lagged far behind
scientific prescriptions. This is seen in the attrition in covered emissions. The original
Kyoto Protocol covered two-thirds of 1990 industrial CO2 emissions. However, with the
I-36
failure of the United States to ratify the agreement and the decline in the relative
emissions of rich countries, currently the Kyoto Protocol covers only about 25 percent of
global emissions.
The 2009 Copenhagen meeting was designed to negotiate a successor agreement
for the post-Kyoto period. Because of deep divisions about costs and about the
distribution of emissions reductions, the meeting concluded without a binding
agreement. However, it did lead to an agreement known as the “Copenhagen Accord.”
The accord adopts a target of limiting the increase in global mean temperature,
“recognizing the scientific view that the increase …should be below 2 degrees Celsius.”
Those looking for a silver lining behind the cloudy outcome have pointed to the fact
that developing countries joined the accord. A close look reveals, however, that
developing countries committed themselves to very little. They agreed to
“communicate” their “nationally appropriate mitigation actions seeking international
support efforts,” but no binding targets for developing countries were set. Virtually all
countries did indeed communicate their goals, but most countries have resisted
undertaking binding commitments.
Where can we go from here? It is possible that a sudden turn of events – perhaps
some environmental catastrophe even worse than the oil spill in the Gulf of Mexico in
2010 – will cause a change of heart of major nations. At present, however, global action
lags far behind the steps that would be necessary to limit climate change to a 3 °C range
that is indicated by economic cost-benefit analysis, and is far short of what is necessary
to attain the ambitious 2 °C target announced at Copenhagen.
The proposal here is quite simple: That countries adopt a target carbon price and
take steps to ensure that their domestic carbon prices are at least at that level. The
rationale for this approach has been explored above, and this fills in the numbers.
A target carbon price
The first step is to agree upon a target carbon price trajectory. There is a
substantial literature on this subject that countries could draw upon. Figure III-9 shows
an illustrative range of numbers for the period 2010 – 2030 that draw upon the results of
the RICE-2010 model. The lower curve is the carbon price that is drawn from an
economic cost-benefit analysis. The upper curve is one that adds a constraint that the
temperature increase must be less than 2 °C with full country participation. [26]
To put numbers on these, the cost-benefit optimum is calculated to be $26 per ton
carbon in 2010, while the 2 degree limit price is estimated to be $56 per ton. The square
at the bottom shows the actual global average price in 2010, which is around $5 per ton.
The gap between the actual and either of the two policy numbers indicates how far
policies are from achieving even the most modest goals.
I-37
I would emphasize that the carbon prices shown in Figure III-9 are derived from
only a single model. Other estimates can differ significantly depending upon
assumptions about economic growth and the way that future incomes are discounted.
The basic shape is similar across most approaches. But the major finding of economics
in this area is the necessity of ensuring that firms and consumers face prices that reflect
the damages that greenhouse gas emissions like CO2 are imposing on future
generations.
200
Cost-benefit optimum
Carbon price ($ per ton carbon)
180
2 degree limit
160
Actual
140
120
100
80
60
40
20
0
2010
2015
2020
2025
2030
Figure III- 10. An illustrative target for carbon prices in an international agreement
________________________
Policies for Rich Countries
International agreements often differentiate responsibilities of poor and rich
countries. Under the Kyoto Protocol, for example, rich countries had binding emissions
limitations which middle-income and poor countries were only required to report their
emissions. Going forward, we would expect that rich countries would take the most
expensive and extensive steps to curb GHG emissions, and they would provide
assistance to poorer countries.
I-38
It will be useful to show the current distribution of CO2 emissions grouped by
country income. Table III-1 shows 167 countries for which the World Bank provides
data, divided into five groups on the basis of per capita income. [27] Today’s high
income countries (countries with per capita income of more than $20,000) represent
slightly less than half of all CO2 emissions. To attain a target of 90 percent of emissions
would require including low-middle income countries with per capita incomes of more
than $5000. These countries include China, South Africa, Ukraine, Thailand,
Kazakhstan, Egypt, Algeria, Colombia, Turkmenistan, Peru, and Azerbaijan. The range
of governing structures and integration in world governance differs greatly among
these countries, but it does not seem unthinkable that these countries would join an
effort that would not overly burdensome and truly global.
Country
group
High income
Middle income
Low-middle income
Low income
Lowest income
Lower limit of
per capita income
[2005 US $]
20,000
10,000
5,000
2,000
280
Cumulative share
Number
of global CO2
of countries
emissions (%)
46.28
35
60.83
30
89.93
30
99.14
35
100.00
37
Table III- 1. Distribution of emissions by country income level
_______________________________
High-income countries already have commitments under the Kyoto Protocol
(although not all countries are meeting these commitments, and the U.S. has yet to join).
It would be important to extend an agreement for future years. At a minimum,
countries should agree to penalize carbon and other greenhouse gas emissions by a
minimum carbon price. This would require a negotiation about the minimum price, but
that is a relatively simple negotiation compared to negotiating a set of country
emissions caps. Countries would be free to choose a mechanism for attaining the
minimum price standard, although a carbon tax would be the simplest approach.
In addition, countries may want to integrate the minimum price with a quantity
regime of the type envisioned by the Kyoto Protocol and embedded in U.S. legislation.
Such a quantitative agreement would reinforce the carbon-price standard. In effect,
there would be two benchmarks that countries would need to meet. Each would
reinforce the other, and having two standards would help prevent cheating on the
overall goal of emissions reductions.
As Table ? shows, an effective agreement will require including most middleincome and low-income countries, particularly China and India. For these countries,
I-39
joining in the carbon-price component would seem a reasonable objective in the near
term, while joining in the quantitative limits may need to be postponed for many years.
Approaches for Poor Countries
What about the poorest countries? On the one hand, we have emphasized the
importance of universal participation; on the other hand, it is unrealistic to expect
countries struggling to provide clean drinking water and primary schooling to make
sacrifices for people in richer countries many decades in the future. It would seem
unreasonable and unnecessary to attempt to induce the lowest income countries to join.
Aside from Nigeria, the current emissions of the lowest income countries are negligible.
The best mechanisms to include middle and low-income countries would be a
combination of technological assistance in adapting low-carbon technologies as well as
a campaign to persuade these countries to adopt carbon taxes. The advantage of carbon
taxes relative to a binding emissions reduction is particularly applicable to countries
with weak governance structures. It seems unlikely that these countries could adopt a
cap-and-trade system without terrible problems of corruption and evasion. [28] By
contrast, a carbon tax would be an instrument that could meet the revenue needs of
governments while reducing other burdensome taxes and would pose no especially
difficult governance problems.
Obstacles
The science and economics of global warming are clear. Unless strong measures
are taken, the globe will continue to warm, and the result will be increasingly severe
damages to the natural world and to vulnerable parts of human systems. The simplest
solution is also the most powerful and effective – to raise the price of carbon and other
greenhouse gas emissions sharply and progressively until the curve of warming has
bent down to prevent the most dangerous consequences.
As Figure III-9 shows, the community of nations has taken only the tiniest of
baby steps to slow warming. The United States as of 2010 has refused to participate, and
only the EU has instituted a strong set of institutions to control CO2 emissions. The
reality is that the politics of global warming pose powerful impediments on the path.
There are many obstacles on the road to sensible global-warming policies. The
following seem the most important.
Prisoners of nationalism
The first set of obstacles arises because decisions about global warming are
lodged in national governments. This poses problems because the costs of emission
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reductions are national while the benefits from slowing climate change are widely
dispersed around the globe. This structure of local costs and distant benefits gives
strong incentives for free riding. Individual countries have little incentive to take action
and will benefit greatly if everybody else abates. This is the celebrated “prisoners’
dilemma,” or noncooperative, equilibrium, which in this context can be better described
as the “nationalist dilemma.” If each country seeks a strategy that will maximize its
national welfare taking other countries’ policies as given, then the resulting abatement
will be much smaller than if countries took the global benefits into account.
Figure III-10 illustrates the results of economic studies of nationalistic behavior in
climate change for a carbon price in 2010. The non-cooperative outcome produces
estimates of policies in which the globally averaged carbon price is about one-tenth of
the cost-benefit optimum and an even smaller fraction of the carbon price for the 2 °C
limit. It is interesting to note that the non-cooperative equilibrium is actually reasonably
close to the actual number. Not only do countries have strong incentives to free ride by
not participating, but they also have incentives to cheat on strong climate-change
agreements. If they hide emissions or overstate reductions, their own economic welfare
will improve even though others’ welfare will deteriorate. [29]
Carbon price ($ per ton carbon)
60
50
40
30
20
10
0
2 °C limit
Cost-benefit
optimum
Actual
Nationalistic
Figure III- 11. Carbon price for different strategies
A global policy of limiting temperature or a cost-benefit maximum lead to high carbon
prices today. The actual and noncooperative (“nationalistic”) policies would lead to
much lower effective carbon prices.
I-41
__________________________
The strong nationalist dilemma structure of global warming is not fatal. There
are other examples where countries have joined in cooperative agreements to overcome
the tendency to underinvest in global public goods. The agreement to phase out ozonedepleting chemicals is an example where the free-riding tendencies were overcome. We
should be realistic rather than fatalistic. The major point here is to identify the structure
of the incentives so that mechanisms can be designed to overcome the nationalist
dilemma.
Prisoners of the present
The nationalist dilemma is amplified by a second factor, the long-term nature of
the payoffs from emissions reductions. Climate-change policies require costly
abatement in the near term to reduce damages in the distant future. The generational
trade-off is illustrated in Figure III-11. This figure shows estimates of costs and benefits
by region of a set of emissions reductions such as that proposed but not agreed upon at
Copenhagen in 2009. [30]
The first set of bars, below the axis shows for each region, are the net benefits
from 2010 to 2050. For example, the net benefits for the United States are minus $505
billion, while the global total is minus $1.6 trillion. (Net benefits include both damages
averted minus abatement costs, discounted back to 2010 at market interest rates. This
graph is therefore the regional equivalent of Figure III-?.)
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Net benefits by period (discounted in billions of US$)
3,000
2,500
Net benefits through
2050
Net benefits after 2050
2,000
1,500
1,000
500
0
-500
-1,000
Figure III- 12. The temporal tradeoff in climate change policies
______________________
The second set of bars, which are uniformly positive, shows the net benefits after
2050, again discounted to 2010. The net benefits to the United States are $635 billion,
which more than offsets the early costs. For all countries, the net benefits in the post2050 period are positive $12.5 trillion as compared with the pre-2050 net costs of minus
$1.6 trillion.
Two important points emerge from this discussion. First, for the world as a
whole, a grand bargain such as that underlying the Copenhagen Accord would in the
long run be highly beneficial from an economic point of view. All countries will
eventually benefit. However, this is an investment with a very long-term payoff.
Countries must wait for at least half a century to reap the fruits of the investment.
From a political point of view, this raises a thorny problem in political economy.
Asking present generations – who are, in most projections, less well off than future
generations – to shoulder large abatement costs would be asking for a level of political
maturity that is rarely observed. The delayed payoffs reinforce the incentives of the
nationalist dilemma, so the temptation is high to postpone taking the costly steps to
reduce emissions.
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Unrepresentative democracy
A third set of obstacles involves the unavoidable reality that some parties will be
economically hurt by global warming policies. We showed in the last two sections that
most countries (and therefore most people) will experience net costs from global
warming policies over the coming decades.
We can illustrate this with a specific example. Suppose that the United States
adopts the proposal of the Obama administration. We saw in Figure III-5 that this
would have a very large impact on coal use. According to estimates by the EIA, coal use
in 2020 would decline by about 50 percent. There were 80,000 coal miners in the 2008, so
let’s suppose that this would be the number for 2020 as well. As a first approximation,
the rise in coal prices would reduce employment by around 40,000 workers once the full
impact was felt. The loss of 40,000 jobs in an economy with 130 million does not seem
like a big impediment. But for an industry with a powerful union, many illustrious folk
songs, strong Congressional representation, and deep public sympathies, reducing coal
production and employment is a major roadblock to any global warming policy that
imposes high carbon prices. [31]
This example can be multiplied many fold. We would see companies in coal
mining and in coal-fired electricity generation with declines in profits. We would see
similar but quantitatively smaller impacts in industries dependent on other fossil fuels.
Many people are surprised to learn that the impact on gasoline prices is relatively small.
For the example of a $40 carbon tax, gasoline prices rise only 12 cents per gallon (about
4 percent). The small rise is due to the heavy loadings of other costs (taxes, refining, etc.)
in the current gasoline price. But people will be concerned about even this small rise in
gasoline prices.
In democratic countries, we expect that elected representatives will face pressure
to oppose measures that disadvantage their current constituents. For this reason, we
have seen that representatives from coal states and countries are particularly resistant to
global warming policies. This would include the United States, China, and Australia
among countries; and West Virginia, Kentucky, and Wyoming among U.S. states. In
countries like Britain, Sweden, and Germany, with minimal production and
employment in coal, governments can support aggressive global warming policies with
less fear of domestic opposition. Similarly, countries with large oil exports such as the
OPEC countries will find their incomes declining and generally oppose strong curbs on
emissions.
Over the long run, strong global warming policies will probably benefit the
majority of people in countries like the United States. But a small minority, largely from
overrepresented industries and states, representing today’s interests, are able to block
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the larger longer run interests of the many. Those who speak for the majority – born
and unborn – need to make their voices heard.
Merchants of doubt
While the roadblocks of representative democracy are a necessary part of an
open society, a more pernicious obstacle arises from what Naomi Oreskes and Erik
Conway call the “merchants of doubt.” [32] Their argument is that scientific or pseudoscientific advocates undermine the normal processes of science as a way of confusing
people and preventing political action. This process differs from the democratic process,
which is a system in which competing interests and values jostle for votes. In the doubtcreating process, groups undermine, distort, hide, or create facts and theories in an
attempt to refute mainstream science and confuse the public.
The best-documented case of doubt-creation was the long campaign of the
cigarette companies to combat the medical evidence that cigarette smoking causes
cancer. Scientific evidence on the link between smoking and cancer was developed in
Germany in the 1930s, and the evidence piled up in the 1950s. Beginning in 1953, the
largest tobacco companies launched a public-relations campaign to convince the public
and the government that there was no sound scientific basis for the claims that cigarette
smoking was dangerous. The most alarming part of the campaign was to support
researchers who would support the industry’s claims. The approach was elegantly
expressed by one tobacco company executive as follows: “Doubt is our product since it
is the best means of competing with the body of fact that exists in the mind of the
general public. It is also the means of establishing a controversy.” [33]
We can see evidence of similar production of doubt in the debates about global
warming, although the complete story cannot be understood because of the opacity of
the process of the doubt-producing machine. One documented example came when an
enterprising journalist collated grants by Exxon-Mobil, which funneled $8 million to
organizations, many of which challenged the science or economics of global warming.
[34]
The basic attack on climate science has been to reject the finding that humans are
causing global warming. [35] This is at the same time the wrong question and a
distracting one. It is the wrong question because we want to know how much humans
are currently affecting the climate. We saw that the best evidence suggests that the
globe has warmed about 0.7 °C since 1900. The real question is, How much of this is due
to human factors, and how much to background variability? It is a distraction because
what we really want to know is how much our world will warm over the next 20, 50,
100, and 200 years. It might be that there has been negligible warming to date but much
to come, and the future warming rather than the past non-warming would be the cause
for concern.
I-45
One of the techniques in the modern wars on science is the use of conservative or
libertarian organizations. One study found that many of the authors of skeptical
pamphlets were affiliated with conservative organizations. [36] Another technique is to
cite public opinion polls, which generally find poorly grounded and unstable views
about climate change. The idea that the findings of scientific studies are to be evaluated
by public-opinion polls is itself wrong at best and disingenuous at worst. No serious
biologists would base their evaluation of the evidence of human evolution on the
finding that 44 percent of respondents believe that “God created human beings pretty
much in their present form at one time within the last 10,000 years or so.” [37] Biologists
take this as evidence that they need to work harder explaining the fundamentals of
evolutionary biology and history.
Similarly, a recent poll asked, “Assuming global warming is happening, do you
think it is caused mostly by human activities, by natural changes in the environment,
none of the above because global warming isn’t happening, or other?” On this question,
47 percent responded that human activities were responsible (which actually declined
in recent years). [38] The proper response of environmental scientists is to understand
the reasons for the other 53 percent and to find better ways to communicate existing
science.
One of the worrisome features of the distortion of science is that the stakes are
even larger for global warming than for smoking. Tobacco sales in the U.S. in 2007 were
approximately $30 billion. By contrast, expenditures on all energy goods and services
were close to $1000 billion in that year. [39] A carbon tax large enough to bend the
temperature curve from its current trajectory to a 2 or 3 °C maximum would have huge
economic effects on many workers, business, and countries. Global warming is a trillion
dollar problem versus a trillion dollar solution, so the battle for hearts, minds, and votes
will be fierce. Scientists, citizens, and our leaders will need to be extremely vigilant to
prevent pollution of the scientific process by the merchants of doubt.
The anti-tax argument
A common argument of critics of global warming policy is that such policies are
just another sad example of an anti-growth “tax and spend” economic philosophy. This
argument fundamentally misunderstands the economic rationale of raising carbon
prices. Those who burn fossil fuels are enjoying an economic subsidy – in effect, they
are grazing on the global commons and not paying for what they eat. Raising the
carbon price – whether by cap and trade or by a carbon tax – would improve rather
than reduce economic efficiency because it would correct for the implicit subsidy on the
use of carbon fuels.
I-46
Wooden-headedness and Planck’s insight
The debates about global warming are full of complexity, competing interests,
and temptations to ride free and procrastinate. Public opinion is divided. Think tanks
are putting out warring pamphlets. But such is modern life in pluralistic market
democracies. Even so, how can we explain that such a large fraction of American policy
makers refuse to consider even the most modest steps to limit or tax carbon dioxide
emissions? Why would a leading Senator ask, “With all of the hysteria, all of the fear, all
of the phony science, could it be that man-made global warming is the greatest hoax
ever perpetrated on the American people? It sure sounds like it.” [40]
At some point, the usual explanations fail and we may conclude that the people
have become wooden-headed. Wooden-headedness consists in assessing a situation in
terms of preconceived fixed notions while ignoring or rejecting any contrary signs. This
process, which historians have recorded from the wooden horse of Troy to the 2003
invasion of Iraq, is characterized as follows by Barbara Tuchman: [41]
A phenomenon noticeable throughout history regardless of place or period is the
pursuit of governments of policies contrary to their own interests. Mankind, it
seems, makes a poorer performance of government than of almost any human
activity. In this sphere, wisdom, which may be defined as the exercise of
judgment acting on experience, common sense and available information, is less
operative and more frustrated than it should be. Why do holders of high office so
often act contrary to the way reason points and enlightened self-interest
suggests?
How can we explain wooden-headedness? It is a psychological process whereby
our preferences are in the driver’s seat of our understanding. This an example of a
psychological bias that has been studied by behavioral psychologists. One such
syndrome is the “confirmation bias.” [42] This is the process in which people seek or
interpret information in a manner that supports their beliefs. An interesting example is
how Americans viewed the war in Iraq. When opponents and supporters of the war
were presented the same news content, they more often judged the news as biased if it
contained content unfavorable to their view of the war. [43]
People are not interpreting events differently; they are actually experiencing events
differently. Wooden-headedness is just the extreme where people refuse to accept
information that they are sick until they end up in the operating room. The extremes of
wooden-headedness are impervious to reason, evidence, and debate.
What is the solution? The end will come when the wooden-headed have left the
stage to be replaced by those who grew up with a different set of beliefs. The process of
generational replacement is not only for policy makers, bloggers, and representatives. It
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also holds at the very pinnacle of science, as is expressed in this passage from Max
Planck’s Scientific Autobiography:
A new scientific truth does not triumph by convincing its opponents and making
them see the light, but rather because its opponents eventually die, and a new
generation grows up that is familiar with it.
We can only hope that the generational turnover is sufficiently rapid that it can outpace
the perils of warming.
Final word to my grandchildren
I close this book with an afterword to my grandchildren. As I write these words,
you are either too young to read them or perhaps just a dream. When you have come of
age to understand the complexities of our economic, political, and environmental
systems, I hope you will look at this book. Ask yourselves how well or badly we, your
parents and grandparents, have fulfilled our role as trustees for your generation. The
generational trust that I write about does not pay dollar interest and dividends. Rather,
it builds the institutions, knowledge, laws, and technologies – local, national, and global
– that allow us to work, play, read, and enjoy our natural and spiritual heritages.
At the time this is written – in the summer of 2010 – our country and our world
face daunting challenges in many areas. The U.S. is fighting low-level wars around the
world. A financial meltdown has produced high unemployment for three years, and
there is no end in sight. Legislative gridlock and political partisanship block a sensible
response to the business downturn. The recession has also increased public debt to
levels not seen in American history outside of World War II. Computer technologies
threaten to turn computers from servants into masters or at the very least mischiefmakers.
But this small book tackles another subject. It has reviewed the findings on the
science and economics of global warming. I first began studying the subject seriously in
1974 and have worked on this question ever since then. With the many pages of journal
articles, thousands of lines of computer code, and hundreds of presentations behind me,
it seemed time to step back and ask how this subject might be understood by the
interested non-specialist. By you, my grandchildren, when you are a few years older.
So what is the summary? What would be the finding of an impartial jury at this
stage? I conclude that the jury would find that there is clear and convincing evidence
that the globe is warming.; that unless strong steps are taken the earth will experience a
warming that has not been seen for at least one-half million years; that the
consequences of the changes will be costly for human societies and grave for many
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unmanaged earth systems; and that the balance of risks indicates that immediate action
should be taken to slow and eventually cease the emissions of carbon dioxide and other
greenhouse gases. We need to find mechanisms to include quickly all major countries in
an international agreement so that virtually all of global emissions are covered and so
that CO2 emissions are gradually reduced or phased out.
These basic findings must be qualified and constantly updated because of the
large uncertainties involved at all stages of the link from economic growth through
emissions and climate to impacts and policies. But the basic findings have stood the test
of time, rebuttal, and multiple reviews by hundreds of natural and social scientists.
There are no grounds for objective parties simply to ignore the basic results or call them
a hoax.
Taking steps to slow global warming will not solve all the problems that we face
in this decade. But human societies are rich enough to deal with our many problems as
long as we take them seriously and employ the most effective and efficient tools
available. In this case, the most effective tool is a universal and internationally
harmonized carbon tax. This is a tax on the carbon content of fossil fuel use. A carbon
tax not only can slow global warming, but it has many other advantages such as raising
revenues to reduce the deficit, reducing the pollution of deadly particulates from coal,
and replacing many inefficient regulatory mechanisms that are clumsy attempts to
avoid straightforward price increases on carbon emissions.
You, my grandchildren, may well read this book in the 2030s. My hope is that by
the time you read this book, we – your parents and grandparents who are steering the
economy and polity today – have taken the first steps to save the precious natural world
that you already love and that will increasingly become part of your lives over the years
to come.
I-49
Background references and discussion
See IPCC Science 2007, p. 32 for the estimates for 2005. The long-term projections are
from GISS at http://data.giss.nasa.gov/modelforce/ghgases/.
1
Data are from CDIAC http://cdiac.ornl.gov/trends/emis/meth_reg.html. [Source:
CO2_Emissions_2007_2008.xls]
2
Emissions rates and prices are from EIA. Note these are wholesale prices. [Source:
CO2_Emissions_2007_2008.xls]
3
These calculations were made using the RICE model. Additionally, IPCC Science 2007,
p. 826 shows estimates of this scenario for five models of intermediate complexity.
4
Freeman Dyson, “The Question of Global Warming,” New York Review of Books, Vol. 55,
No. 10,June 12, 2008.
5
The synthetic tree has been in the “information” stage for several years. The current
proposal is really an industrial chemical process which would have to be a mammoth
farm to make a dent on CO2 concentrations. It has yet to be proven on a large scale. A
recent discussion by the author can be found at
http://democrats.science.house.gov/Media/file/Commdocs/hearings/2010/Energy/
4feb/Lackner_Testimony.pdf, posted February 5, 2010.
6
7
Source: bc trees.xlsx
The following is useful for conveying the spirit of Kurzweil’s approach (from Ray
Kurzweil, The singularity is near: when humans transcend biology, Viking, New York, 2005).
Those who are skeptical should remember that computers with much less power than a
cell phone would fill an entire room in 1960.
8
Nanosolar has a design based on titanium oxide nanoparticles that can be mass-produced on
very thin flexible films. CEO Martin Roscheisen estimates that his technology has the potential to
bring down solar-power costs to around fifty cents per watt by 2006, lower than that of natural
gas. Competitors Nanosys and Konarka have similar projections. Whether or not these business
plans pan out, once we have MNT (molecular nanotechnology)-based manufacturing, we will be
able to produce solar panels (and almost everything else) extremely inexpensively, essentially at
I-50
the cost of raw materials, of which inexpensive carbon is the primary one. At an estimated
thickness of several microns, solar panels could ultimately be as inexpensive as a penny per
square meter. We could place efficient solar panels on the majority of human-made surfaces,
such as buildings and vehicles, and even incorporate
them into clothing for powering mobile
devices. A 0.0003 conversion rate for solar energy should be quite feasible, therefore, and
relatively inexpensive.
Terrestrial surfaces could be augmented by huge solar panels in space. A Space Solar
Power satellite already designed by NASA could convert sunlight in space to electricity and
beam it to Earth by microwave. Each such satellite could provide billions of watts of electricity,
enough for tens of thousands of homes. With circa-2029 MNT manufacturing, we could produce
solar panels of vast size directly in orbit around the Earth, requiring only the shipment of the raw
materials to space stations, possible via the planned Space Elevator, a thin ribbon, extending from
a shipborne anchor to a counterweight well beyond geosynchronous orbit, made out of a material
called carbon nanotube composite.
In his best-selling book, Capitalism and Freedom, Friedman argued for, among other
things, a volunteer army, freely floating exchange rates, abolition of licensing of doctors,
and education vouchers. His argument relied primarily on the adverse effect of these
measures on personal and economic freedom rather than on the moral hazard impact.
9
See the Kyoto Protocol’s statement of purpose that the parties, “In pursuit of the
ultimate objective of the Convention as stated in its Article 2…”
[http://unfccc.int/resource/docs/convkp/kpeng.html] Recall that Article 2 of the
Framework Convention states in full: “The ultimate objective of this Convention and
any related legal instruments that the Conference of the Parties may adopt is to achieve,
in accordance with the relevant provisions of the Convention, stabilization of
greenhouse gas concentrations in the atmosphere at a level that would prevent
dangerous anthropogenic interference with the climate system. Such a level should be
achieved within a time frame sufficient to allow ecosystems to adapt naturally to
climate change, to ensure that food production is not threatened and to enable economic
development to proceed in a sustainable manner.”
[http://unfccc.int/resource/docs/convkp/conveng.pdf]
10
A series of important studies was published in John Weyant and Jennifer Hill, eds.,
The Costs of the Kyoto Protocol: A Multimodel Evaluation, Energy Economics, 1999.
11
12
See http://unfccc.int/files/meetings/cop_15/application/pdf/cop15_cph_auv.pdf .
A history of the 2 °C target is contained in Carlo Jaeger and Julia Jaeger, “Three Views
of Two Degrees,” Version 3 of December 10, 2009, available at www.european-climateforum.net/index.php?id=articelsandpapers.
13
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William Nordhaus, “Economic Growth and Climate: The Carbon Dioxide Problem,”
American Economic Review, February 1977, vol. 67, 341-346. The paper emphasized that
the target was “deeply unsatisfactory” because it did not involve any balancing of costs
and benefits. However, there were at this time no estimates of the damages from global
warming, so this target was a substitute for a more satisfactory cost-benefit comparison.
14
Estimation of temperature before the modern period uses temperature “proxies.” The
most widely used proxy for the deep past are ice cores from Greenland, Antarctica, and
other ice sheets. The estimate of temperature maxima of around 3 °C has been
conventional for many years, but it relies on a number of extrapolations and
calibrations and is therefore only approximate.
15
The diagram is the authors based on data from the Vostok ice core at
http://cdiac.ornl.gov/ftp/trends/temp/vostok/vostok.1999.temp.dat. The data have
been produced by several teams of scientists working for many years. A primary source
is J. R. Petit et al., “Climate and atmospheric history of the past 420,000 years from the
Vostok ice core, Antarctica,” Nature, 1999, 399: 429-436.
16
German Advisory Council on Global Change, Scenario for the derivation of
global CO2 reduction targets and implementation strategies, Statement on the occasion of the
First Conference of the Parties to the Framework Convention
on Climate Change in Berlin, March 1995, available at
http://www.wbgu.de/wbgu_sn1995_engl.pdf.
17
Information Reference Document Prepared and adopted by EU Climate Change
Expert Group ‘EG Science, Version 9.1, 9th July 2008, available at
http://ec.europa.eu/environment/climat/pdf/brochure_2c.pdf.
18
The diagram is from IPCC, Impacts, Technical Summary, p. 67. The vertical white lines
start at 0 °C above 1990, and run in 1 °C increments. The 2 °C target relative to
preindustrial temperatures is halfway between the second and third line (about where
the “b” in “Annual bleaching of the Great Barrier Reef” lies in the Australia/New
Zealand panel).
19
The details of the calculation are shown below for the undiscounted case and for
discounting at 5 percent per year (source: cost of emissions reductions.xlsx):
20
I-52
Variable
Carbon
Old
Model
New
1000.000
1.300
0.00059
0.591
5.909
Difference
500.000
1.300
0.00059
0.295
2.955
Units
2.955
Kwh per year
Lb CO2 per kwh
Tons CO2 per kwh
Total CO2 per year
Total CO2 over 10 years
500
Capital ($)
Electricity cost $ per kwh
Total cost for 10 years
Costs
0
0.1
1000
Costs per ton of CO2 reduced
Undiscounted
Discounted at 5% per year
1000
0.1
1500
169.2
248.2
$ per ton CO2
$ per ton CO2
The estimate compares the reference run with the no-international offsets run. The
results are available at http://www.eia.doe.gov/oiaf/servicerpt/hr2454/index.html.
Source: efficient fuels eia.xls.
21
The calculations here are pretty complicated, but here is the approach for those
interested in the details. W began with the DICE-2009 model, which is very close to the
RICE-2010 model. The DICE model is used because it is easy to calculate the costs of
constraints. We then made a set of run limiting temperature change in steps shown in
Figure III-?. To make the limited participation runs, we used the approach explained in
William Nordhaus, A Question of Balance, New Haven, Yale University Press, 2007,
Chapter 6. The calculations here are from the RICE-2010 model and are consistent with
the simpler calculations. For those interested in the mathematics, the cost with
incomplete participation is equal to the cost with complete participation times the
participation rate to the power of -1.8. Hence, in the example in the text, the cost ratio is
approximately 0.5-1.8times the cost of meeting the same objective with 100 percent
participation. Source: cost of objectives.xlsx, sheet “cost_net_nodisc.” The GAMS
programs are DICE09_050909_50%part.gms and DICE09_050909.gms.
22
Some have argued that these are “negative cost” reductions in emissions. See
particularly the studies of the McKinsey Institute, such as McKinsey and Co, Reducing
U.S. Greenhouse Gas Emissions: How Much at What Cost, 2007. Whether these are negative
cost or low cost is inessential to the basic point that there is much low-cost abatement
available in many sectors and countries.
23
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A leading writer on the economics of treaties is Scott Barrett. See particularly his
Environment & Statecraft: The Strategy of Environmental Treaty-Making, Oxford: Oxford
University Press, 2003.
24
A more detailed comparison of carbon taxes and cap-and-trade systems is contained
in my book, A Question of Balance, New Haven, Yale University Press, 2007, Chapter 7.
The contrary point of view can be found in a study by Robert Stavins, A U.S. Cap-andTrade System to Address Global Climate Change, prepared for the Hamilton Project, The
Brookings Institution, October 2007, available at
http://www.hks.harvard.edu/fs/rstavins/Papers/Stavins_HP_Discussion_Paper_200
7-13.pdf.
25
26
The estimates are from Nordhaus, 2010. Source: c tax proposal 063010.xlsx.
The data are available from http://databank.worldbank.org/ddp/home.do. Source
file is Distribution of co2 and pcy.xls.
27
Since the problems of corruption are a digression, I have banished those to this
footnote. Quantity-type systems like cap-and-trade are much more susceptible to
corruption than price-type regimes. An emissions-trading system creates valuable
assets in the form of tradable emissions permits and allocates these to countries.
Limiting emissions creates a scarcity where none previously existed. It is a rent-creating
program. The dangers of quantity as compared to price approaches have been
demonstrated frequently when quotas are compared with tariffs in international trade
interventions.
Rents lead to rent-seeking behavior. Additionally, resource rents may increase
unproductive activity, civil and international wars, and slow economic growth—this
being the theory of the ‘‘resource curse.’’ The scarce permits can be used by the
country’s leaders for nonenvironmental purposes rather than to reduce emissions.
Dictators and corrupt administrators could sell part of their permits, and pocket the
proceeds.
Calculations suggest that tens of billions of dollars of permits may be available
for foreign sale under an international cap-and-trade regime. Given the history of
privatizing valuable public assets at artificially low prices, it would not be surprising if
the carbon market became tangled in corrupt practices, undermining the legitimacy of
the process. Consider the case of Nigeria, which had carbon emissions of around 100
million tons in recent years. If Nigeria were allocated tradable allowances equal to
recent emissions and could sell them for $20 per ton of carbon, this would raise around
$2 billion of hard currency annually—in a country whose nonoil exports in 2000 were
only $600 million.
A cap-and-trade system relies upon accurate measurement of emissions or fossil
fuel use by sources in participating countries. If firm A (or country A) sells emissions
28
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(or carbon-content) permits to firm B (or country B), where both A and B are operating
under caps, then it is essential to monitor the emissions (or fuel use) of A and B to make
sure that their emissions (fuel use) are within their specified limits. Indeed, if
monitoring is ineffective in country A but effective in country B, a trading program
could actually end up raising the level of global emissions because A’s emissions would
be unchanged while B’s would rise. Incentives to evade emissions limitations in an
international system are even stronger than the incentives for tax evasion. Tax cheating
is a zero-sum game for the company and the government, while emissions evasion is a
positive sum game for the two parties.
A carbon tax gives less room for corruption because it does not create artificial
scarcities, monopolies, or rents. There are no permits transferred to countries or leaders
of countries, so they cannot be sold abroad for wine or guns. There is no new rentseeking opportunity. Any revenues would need to be raised by taxation on domestic
consumption of fuels, and a carbon tax would add absolutely nothing to the rentproducing instruments that countries have today.
The estimates of the non-cooperative price are from Nordhaus (2010). Source: c tax
proposal 063010.xlsx
29
The estimates of the net benefits are from Nordhaus (2010). This presentation was
suggested by Nat Keohane. Source: c tax proposal 063010.xlsx
30
Source: Data on employment are from the Bureau of Labor Statistics. Results on coal
use are from EIA. Source: efficient fuels eia.xls
31
See Naomi Oreskes and Erik Conway, Merchants of Doubt, New York: Bloomsbury
Press, 2010.
32
Brown & Williamson Tobacco Corporation, “Smoking and Health Proposal” 1969,
available at Legacy Tobacco Documents Library, http://legacy.library.ucsf.edu/. There
is an extensive literature on the tobacco industry’s strategy for distorting the scientific
record and promoting views that were favorable to smoking. See Stanton Glantz et al.,
The Cigarette Papers, University of California Press, Berkeley, 1996 and Robert Proctor,
Cancer Wars: How Politics Shapes What We Know and Don’t Know about Cancer, Basic
Books, New York, 2007.
33
Chris Mooney, “Some Like it Hot,” Mother Jones, May/June, 2005, available at
http://motherjones.com/environment/2005/05/some-it-hot. The list is available at
http://motherjones.com/politics/2005/05/put-tiger-your-think-tank. A more
comprehensive link of organizations supported by Exxon Mobil is at the
“ORGANIZATIONS IN EXXON SECRETS DATABASE” at
http://www.exxonsecrets.org/html/listorganizations.php.
34
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One example of a group Mother Jones identifies is the National Center for Policy
Analysis, a think tank associated with supply-side economics. This organization has a
pamphlet, H. Sterling Burnett, “Myths of Global Warming,” available at
http://www.ncpa.org/pub/ba230. One of the myths is “Humans Are Causing Global
Warming.” The pamphlet explains as follows: “Scientists do not agree that humans
discernibly influence global climate because the evidence supporting that theory is
weak. The scientific experts most directly concerned with climate conditions reject the
theory by a wide margin.A Gallup poll found that only 17 percent of the members of
the Meteorological Society and the American Geophysical Society think that the
warming of the 20th century has been a result of greenhouse gas emissions - principally
CO2 from burning fossil fuels….Only 13 percent of the scientists responding to a survey
conducted by the environmental organization Greenpeace believe catastrophic climate
change will result from continuing current patterns of energy use. More than 100 noted
scientists, including the former president of the National Academy of Sciences, signed a
letter declaring that costly actions to reduce greenhouse gases are not justified by the
best available evidence.” No citations are provided for the assertions.
35
A. M. McCright and R.E. Dunlap, “Defeating Kyoto: The Conservative Movement’s
Impact on US Climate Change Policy,” Social Problems, 2003, pp. 348–73.)
36
See the Gallup poll from 2008 at http://www.gallup.com/poll/21814/evolutioncreationism-intelligent-design.aspx.
37
A. A. Leiserowitza, E. W. Maibach, C. Roser-Renouf, N. Smitha, E. Dawson,
“Climategate, Public Opinion, and the Loss of Trust,” Working Paper, 2010.
38
Energy expenditures are at http://www.eia.doe.gov/aer/txt/ptb0105.html. Tobacco
sales exclude taxes and distribution.
39
This being Senator James Inhofe from Oklahoma. His original statement came as a
question, “With all of the hysteria, all of the fear, all of the phony science, could it be
that man-made global warming is the greatest hoax ever perpetrated on the American
people? It sure sounds like it.” He made a different positive assertion at a different
point, “I have offered compelling evidence that catastrophic global warming is a hoax.”
(http://inhofe.senate.gov/pressreleases/climate.htm, speech of July 28, 2003). He then
misquoted himself, “I called the threat of catastrophic global warming the ‘greatest
hoax ever perpetrated on the American people.’ ” (See his Senate speech in 2005 at
http://inhofe.senate.gov/pressreleases/climateupdate.htm.)
40
41
Barbara Tuchman, The March of Folly.
I-56
Raymond S. Nickerson, “Confirmation Bias: A Ubiquitous Phenomenon in Many
Guises,” Review of General Psychology, 1998, Vol. 2, No. 2, pp. 175-220.
42
J.H. Choi, J.H. Watt, and M. Lynch, “Perceptions of news credibility about the war in
Iraq: Why war opponents perceived the Internet as the most credible medium,” Journal
of Computer-Mediated Communication, vol. 12, article 11, 2006, available at
http://jcmc.indiana.edu/vol12/issue1/choi.html.
43
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