The Economics of Global Climate Change

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The Economics of Global Climate Change
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Climate Change

• My comments on the power of the market and the
  lack of past change with redistributive policies
  may have hit a nerve with some, but climate
  change
• It is a shame that someone with a higher
  education degree would fall for the scam of
  global warming
• If is a shame that someone with a higher
  education degree would dare question whether
  global warming is a looming economic issue

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Science of Climate Change

• A majority of those that work in the field
  believe that we are experiencing global warming,
  but there is a vocal minority
• Basic story
• Sunlight hits the earthsome of the sunlight is
  absorbed into the earth as heat and some is
  reflected back into space
• If the amount reflected back into space is
  reduced then the earth will get warmer

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More of the Story

• Some gasses absorb outward infrared radiation
• Carbon dioxide, methane, nitrous oxide, and
  chlorofluorocarbons CFCs) Greenhouse gasses
• Venus has so much greenhouse gasses that water
  can not exist as a liquidsteam
• Mars has so few greenhouse gases that water can
  not exist as a liquidice

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Thomas Schelling

• Nobel prize winner now as University of Maryland
• The science about greenhouse gasses is not really
  about greenhousesthey trap air that is warmed by
  the ground which is warmed by the sun
• A better illustration is the smudge pots used by
  citrus and wine grape growers

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Smudge Pots

• These little pots burn crude oil to help keep
  the crops warm nearby on cold nights
• It is not the heat from the pots that matters,
  but rather the pots produce a layer of carbon
  dioxide that captures some of the heat that
  radiates from the ground, including the pots.
• Not great for marketing, but better

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Intergovernmental Panel on Climate Change

• They are often in the news both because of their
  reports and because the organization won a Peace
  Prize in 2007
• Set up by the World Meteorological Organization
  and the United Nations Environmental Programme
• With these parents, the group is a bit conflicted
• Scientific intergovernmental body

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Middle Range Estimates

• IPCC estimates that world temperatures will rise
  by 2.8 C by 2100
• If this happens, many possible changes will
  follow
• More precipitation at higher latitudes, less in
  tropical areas
• Melting snow and sea ice
• Extreme weather like heat waves, droughts, and
  tropical cyclones
• Costs to agriculture, health, water supplies. And
  coastal protection

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Economic Losses

• They are smaller than many would expect
• Standard estimates could lead to a fall in world
  GDP of 3
• The reason that it is so small is that warming
  will help some areas and hurt others
• BenefitRussia, North America, and China
• SufferAfrica, Latin America, South Asia, and
  Western Europe
• Remember that many areas are not that dependent
  on rainfall for their economy

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Range

• Range is often 1.8 C to 4 C by 2100
• At the upper end we should have some difficult to
  describe extreme weather changes
• Could for example change the circulation patterns
  of the oceans
• Melt polar ice caps
• This could dramatically increase the economic
  costs

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Costs of Global Warming May Rise Over Time

• 1 of world GDP by 2050
• 3 of world GDP by 2100
• 13 of world GDP by 2200
• Huge amounts of uncertainty in these types of
  estimates
• They start off with models of economic growth and
  the energy industry and how those interact to
  produce carbon emissions
• Then you add on models about how carbon emission
  affect climate
• Then you add on models about how climate affect
  economic output
• This may be the best we can do but there must be
  so weak areasit is easy to find scientists on
  both side

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Could be Better or Worse

• A majority of the experts indicate that there is
  a potential problemthey may all be wrong but it
  is not economic sound to plan under that
  condition
• When there is a risk the first response of an
  economist is to buy insurance
• I buy car insurance, but I do not expect to have
  an accident
• It is time to start thinking about what global
  warming insurance would be like

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Insurance

• To make sound decisions about insurance, we need
  to decide how is the risk and how much insurance
  we should buy

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Problems of Valuing Costs and Benefits

• Let us start by thinking about some of the events
  that would have a very low probably of happening,
  but could have very high costs
• Richard Posner
• Catastrophe Risk and Response
• It was about how you should respond to low risk
  high cost events
• What is the chance that an asteroid will hit the
  earth in the next 100 years
• What about the chance of a severe bio-terror
  attack or a worldwide epidemic

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What is the Appropriate Response

• The obvious
• If the probability of the event goes up spend
  more
• If the cost of the event goes up spend more
• Note that we are not very good at these types of
  estimateswe may be moved by fear and do too much
  or we brush it aside and spend nothing
• Look at the boomers and long-term health care
  insurance

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What Should We Do

• The economist in me says that we should try to
  reduce the megarisk, but you would not try to
  eliminate all risk because there is a relative
  low chance of it happening
• Stick to relative low cost approaches in the
  present, but build up over time
• Think about what if we took the asteroid risk
  seriously
• You might start an agency to explore how to
  divert one
• Start early monitoring
• You do not start by blowing up all asteroids

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What They Say

• Most say that we are experiencing global warming
• There is a small probability of high cost in the
  future
• But it is more likely that we will experience
  moderate costs
• Balance the costs of action with the reductions
  in risk and the reductions in harm

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The Big Timing Issue

• The costs will be incurred in the near future and
  the benefits will be realized in the distant
  future
• Talking about global warming here and not
  pollution even though they are connected
• Sir Nicholas Stern
• Climate change would reduce world GDP by an
  average of 1 per year over the next century, but
  the total loss over time would be equal to 14 of
  world GDP

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How

• When you look at Sterns calculation more closely
  you will see that half of the loss is after 20800
• YES
• If we are going to reduce carbon emission right
  now should we be paying attention to benefits
  that are many hundreds of years into the future

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Yes

• You do want to count benefit in the future, but
  the further off in the future benefits should be
  weighted less
• I know that in some ways I am saying that a life
  in the future is worth less than a life today
• Some say that they just do not want to mess up
  the environment and then they show me a report on
  their Ipad

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I Do Not Want to Place the Same Weight for the
Future

• Is it the problem of this generation to pay for
  every possible action that might affect the
  entire future of the human race?
• Sure we have a responsibility to start and pay
  our share, but they have responsibilities too
• After all, people in the future will probability
  live long and have better technology as well as a
  better standard of living

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Discount Rate

• Discount Ratethe amount by which you count the
  future less than the present
• If you ignore the difference between the present
  and the future your discount rate is zero
• That is anything that happens in 20800 should be
  just as important as something that happens today
• If you assume the rate is 1, 2 or 3, that small
  number discount the very distant future to a very
  small amount

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Crazy Irony

• Many environmentalists have a very low discount
  rate and they value highly future generations
• But when it come to war to prevent a crazy from
  obtaining weapons that might kill many in the
  future, this same group tends to value the
  present over the potential future person
• This example is not presented to belittle a group
  but rather to show just how complex it is.
  (people are not as rational as Econ 202 implies)

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The Shape of Climate Change Policy

• Focus on market-oriented environmental tools
• Respect the time dimension of the problem
• Have an international dimension

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Economic Categories of Environmental Policies

• Command and control
• When you set a level there is no incentive for
  anyone to improve
• Market-oriented approach
• Pollution tax
• If you can figure a way to pollute less you will
  pay less tax
• Cap and trade
• Government could issue permits on how much
  pollution is allowable, but the permits can be
  traded. If you can reduce pollution you can sell
  your permits

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Politicians

• Rarely are very serious
• Imagine a 1 cent tax on gasoline and then
  announce that it will increase 2 cents every
  three year
• This allows for the time dimension
• Any politician who claims to be worried about
  global warming should not be afraid of a few
  cents tax on gasoline, but I doubt very many
  would be willing to pass this.

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International

• I left the most difficult for the last.
• China is now the largest polluter in the world
• The third-world countries can be very dirty
• But are you going to ask a very poor country to
  spend money to clean up when its citizens maybe
  are hungry
• The US and Europe need to start the process, but
  we can not force other to follow. The income
  effect says that as they get rich they will
  eventually follow.