The Economics of Global Warming

1
The Economics of Global Warming
2
Global Warming The Problem

• Greenhouse gases (including carbon dioxide (CO2),
  methane, and chlorofluorocarbons (CFCs)) trap
  heat near the earths surface, thus contributing
  to global warming.
• Evidence CO2 concentration has increased by
  about 27 since the Industrial Revolution and is
  now increasing by about 0.5 per year.
  Concentrations of methane and NO2 also are
  rising.
• Scientists predict that if current trends
  continue, average temperatures might rise by 2 to
  6 degrees Fahrenheit over the next century.

3
Global Warming The Problem

• Global warming probably involves a lag of at
  least a few decades, so it is hard to predict the
  effects of todays greenhouse gas emissions.
• Greenhouse gases are long-lived, and they
  accumulate in the atmosphere.

4
Global Warming The Problem

• Of greenhouse gas emissions due to human
  activity, about 85 are caused by burning of
  fossil fuels, and about 12 are due to
  deforestation and other changes in land use.
• The U.S. is responsible for about 20 of CO2
  emissions and about 10 to 15 of emissions of
  other gases.

5
Global Warming The Problem

• total CO2 emissions population GDP/population
  energy/GDP CO2/energy

6
The Economic Impact of Global Warming

• Many tend to assume that we cannot allow any
  warming. Does this make sense?
• We have to weigh the costs (and benefits?) of
  warming against the costs of preventing it.
• The economic impact of global warming would
  depend on accompanying changes in precipitation,
  ocean currents, the sea level, the spread of
  diseases, and other factors that are hard to
  predict.

7
The Economic Impact of Global Warming

• Estimates by economists suggest that a doubling
  of the CO2 concentration would cause damages
  equal to about 1 to 2 of total output.
• Changes in international trade patterns and other
  market responses might mitigate some of the
  damages.
• Remember Assignment 9!

8
Developing Countries vs. Developed Countries

• The effects of global warming would differ
  between countries some (such as Russia, Canada,
  and perhaps the U.S.) might gain, while others
  (particularly developing countries) would be
  hurt.
• Economies in developed countries have little
  exposure to climate, so they would be less
  affected by global warming than economies in
  developing countries (where agriculture is still
  very important).

9
Developing Countries vs. Developed Countries

• Developed countries have more resources to deal
  with the problem, but most of the growth in
  greenhouse gas emissions is expected to come in
  developing countries.
• Many economists believe that the most
  cost-effective approach would be to improve the
  energy-efficiency of developing nations, since
  they have not yet invested much in modern
  production techniques.

10
Possible Policies

• Global warming can be prevented or slowed if CO2
  emissions are reduced.
• What can a country do?
• caps on emissions
• transferable emissions permits
• tax incentives for emission reductions
• funding for research to reduce emissions
• tax breaks for fuel-efficient cars
• greater reliance on solar and wind power
• reforestation
• nuclear power?

11
Possible Policies

• A carbon tax would provide disincentives for
  the use of fossil fuels.
• Governments could also impose taxes on activities
  that generate other greenhouse gases.

12
Possible Policies

• International emissions trading a country could
  pay another country to reduce its CO2 emissions.
  This could significantly reduce global abatement
  costs.
• Studies suggest that if a policy designed to
  limit greenhouse gas emissions to their 1990
  level is phased in gradually over the next forty
  years or so, economic growth rates would be
  affected only slightly.
• However, even this slight impact would add up to
  trillions of dollars in sacrifices!

13
The Kyoto Protocol (1997)

• Under the Kyoto Treaty, industrial nations agreed
  to limit their greenhouse gas emissions to 5.2
  below 1990 levels.
• This would be 30 below levels projected for
  2010.
• The Kyoto Treaty officially took effect when
  Russia ratified it in November 2004.

14
The Kyoto Protocol

• No requirements were imposed on newly
  industrialized countries such as China.
• In the U.S., the Bush administration and many in
  Congress are opposed to the treaty.
• The U.S. would have been required to cut
  emissions to 7 below 1990 levels by the years
  2008 through 2012.

15
The Kyoto Protocol

• In the 1990s the U.S. persuaded other nations to
  agree to allow various forms of emissions trading
  in the agreement.
• A developed country can earn credits by cutting
  its emissions more than required, and then it can
  sell the credits to another country.
• A developed country can meet part of its
  obligations by entering into a joint program with
  a developing country to reduce its emissions.
• The Clean Development Mechanism companies in
  developed countries can earn emission-reduction
  credits if they invest in projects (such as
  modern, fuel-efficient power plants) in
  developing countries.
• Cost-effectiveness? Hot spots?