Environmental and Natural Resource Economics 2nd ed. Jonathan M. Harris Updates for 2011 Chapter 18: Global Climate Change Copyright © 2011 Jonathan M. Harris

Carbon emissions from fossil fuels have risen steadily since the Industrial Revolution, with a much more rapid rate of increase after 1950. The rate of increase has accelerated further since 2000, with an especially notable growth in emissions from coal, largely due to increased emissions from China and other rapidly developing countries. Source: Carbon Dioxide Information Analysis Center (CDIAC), http://cdiac.ornl.gov/trends/trends.htm, accessed July 2011

Global temperatures have risen by about 1 degree Centigrade since the Industrial Revolution. The upward trend is especially marked since about 1970. According to the Intergovernmental Panel on Climate Change (IPCC), human-caused impacts on the atmosphere, primarily carbon emissions, have contributed substantially to the observed warming over the last 50 years. These data are for the Northern Hemisphere, but overall global data show much the same trend (see next graph). Note: Temperature variations are shown in degrees C relative to 1961-1990 mean Source: Carbon Dioxide Information Analysis Center (CDIAC), http://cdiac.ornl.gov/ftp/trends/temp/jonescru/nh.txt, accessed July 2011

Figure 18-2 Update: Global Temperature Trend Although annual temperature averages vary widely from year to year, the five-year average trend clearly shows an overall increase of 1 degree Centigrade since 1880, and a sustained increase of 0.6 degree Centigrade since 1970. The stable or declining period from 1940 to 1970 may have been caused by higher levels of other pollutants such as sulfur dioxide, which have the effect of blocking solar radiation. The most recent decade is the warmest decade on record, with eighte of the ten warmest years on record. Sources: Wikimedia Commons graphic, data from NASA Goddard Institute for Space Studies, NOAA National Climatic Data Center

Figure 18.3: Global Temperature Trends Projected to 2100 Projections of future temperature trends vary across a wide range, but all show temperatures continuing to rise. The lower range projections show an increase of about 2 degrees Centigrade (3.6 degrees Fahrenheit) above pre-industrial levels by 2100, but high range projections show an increase of as much as 8 degrees Fahrenheit. These are global averages, and temperature changes in the higher range would imply massive impacts especially in hotter, drier, and coastal areas. Source: U.S. Global Change Research Program, available at: http://www.globalchange.gov/

Figure 18-3 Update: Ocean Heat Content Ocean temperatures have increased along with atmospheric temperatures. This leads to expansion of ocean water volume and, together with melting icecaps, causes sea-level rise. At the higher ranges of projected temperature increases, sea-level rise could be as much as several meters, swamping major coastal cities and whole low-lying regions such as Bangladesh and much of Florida. Source: http://www.ncdc.noaa.gov/bams-state-of-the-climate/

Current projections by the Department of Energy show global carbon emissions increasing through 2035, mainly based on growing emissions from the developing world. The DOE projections show OECD (developed) economies’ emissions remaining about constant, while emissions from developing economies increase steadily. Note that these are “business as usual” projections that do not take into account the possibility of policies to reduce carbon emissions in developed nations, and to encourage low-carbon development paths for lower-income nations. Source: Energy Information Agency, International Energy Outlook 2010

Figure 18-4 Supplement: Carbon Stabilization Scenarios (450 and 550 ppm) Since damage from a stock pollutant such as atmospheric carbon is related to the level of accumulation, not emissions, control of the problem requires stabilization of atmospheric carbon levels. The Intergovernmental panel on Climate Change (IPCC) has called for stabilization at levels no greater than 450 – 550 parts per million (current levels are 380 ppm). To achieve these targets, global emissions would have to decline sharply starting around 2020, as shown above. Source: Adapted from IPCC, Climate Change 2001: The Scientific Basis, http://www.ipcc.ch/

Figure 18-4 Supplement: Greenhouse Gas Stabilization Levels and Eventual Temperature Change Stabilization of atmospheric carbon at 450-500 ppm CO2 would imply a temperature increase of around 2-3 degrees Centigrade (median estimate, with a wide margin of error as shown). “Business as Usual”, with no sustained effort to control carbon emissions, would imply an atmospheric concentration of 650-750 ppm by the end of the century, leading to an average temperature rise of about 4 degrees Centigrade (7 degrees Fahrenheit), with a margin of error extending up to 6 degrees Centigrade (10 degrees Fahrenheit) or more. Source: Stern, Nicholas, The Economics of Climate Change: The Stern Review, 2007.

Figure 18.5: Per Capita CO2 Emission Rates from Fossil Fuel Consumption and Flaring (2006) Current per capita carbon emissions show a huge disparity across nations. U.S. per capita emissions are about twice those of Europe and Japan, while developing nations have much lower emissions per person. Some developing nations, such as Mexico and China, are approaching the per capita levels of developed nations such as France. Considering the large populations of developing nations such as India, the potential for increased total emissions from these nations is very great. Source: Energy Information Administration, International Energy Annual 2006, updated 2009

Figure 18.6: Long-Term Costs and Benefits of Abating Global Climate Change Attempts to evaluate the costs and benefits of policies to respond to climate change typically show costs being higher in the short-term, while benefits of action are larger in the long-term. This poses a dilemma of how to balance costs and benefits. The choice of a discount rate is a key factor here, since a higher discount rate will make longer-term costs seem relatively insignificant. In the Stern Review on the Economics of Climate Change (2007), the choice of a low discount rate led to a high weighting for long-term benefits, and a recommendation for strong action to avert climate change.

Figure 18.7: The Economic Effects of a Carbon Tax Many economists favor a carbon tax to internalize the environmental costs of carbon emissions. A carbon tax raises the cost of carbon-based fuel sources, encouraging a reduction in their use, and encourages the production of alternative energy sources. An economic advantage of a carbon tax is that it also encourages energy efficiency in both production and consumption. Politically, the difficulty of passing a tax on carbon might be mitigated by rebating the revenues to taxpayers, either directly or by lowering other taxes on labor and capital.

The effect of price on consumption is clearly shown in a cross-country comparison of gasoline prices and per capita gasoline consumption. The U.S., with relatively low gasoline prices, has per capita consumption about four times as high as most European countries. Other factors (such as longer driving distances in the U.S.) could play a role, but the impact of price is clearly very great. Price affects both short-term decisions about how much to drive, and longer-term decisions like how fuel-efficient a car to buy, as well as national policy decisions like investment in public transit and rail systems. Source: German Agency for Technical Cooperation, U.S. Census Bureau, and Energy Information Agency, 2007

Figure 18.9: US CO2 Emissions 1990-2006, with Projections to 2030 U.S. carbon emissions showed a steadily increasing trend until 2008. The recession of 2007-9 led to a marked decrease in carbon emissions, with a projected slow rise accompanying recovery from recession. The U.S. Department of Energy projects that the combination of the effects of recession, higher oil prices, and government policies aimed at increasing automobile efficiency will stabilize carbon emissions below 2007 levels through about 2020. This does not put the U.S. on a track of reduced emissions, but it does indicate the responsiveness of emission levels to economic and policy changes. Source: Energy Information Agency, Annual Energy Outlook 2009

Figure 18.10a: Determination of Carbon Permit Price A tradable-permit system for carbon allows the market to set a carbon price based on the overall emissions reduction set through the permit allocation system. If Q* permits are issued, the market price of a permit will be P*, based on the marginal net benefit of carbon-based fuels to purchasers. The effect is similar to a carbon tax, but the government may or may not receive revenues depending on whether permits are allocated for free (“grandfathering”) or are auctioned off.

Figure 18.10b: Carbon Reductions with a Permit System Once a carbon permit price is established, market participants will seek out the least-cost methods for carbon reduction. Current carbon emitters can save on permits by reducing their emissions, or they may purchase permits from other firms who reduce emissions. If the system includes “offsets”, participants who can achieve carbon storage (for example, through certain agricultural techniques or forestry) can sell permits to other emitters.

Figure 18-10 Supplement: European Union Carbon Trading System The largest operational carbon permit system is the European Union Emissions Trading Scheme (ETS), including 30 countries. Carbon prices under this scheme were in the range of $25-$30 per ton of CO2 through December 2007, then plunged to zero due to an excessive allocation of permits. In the second phase of ETS, a tighter allocation of permits returned prices to the $25-$30 range. The price declined to about $18 due to lower demand following the 2008-9 recession and had recovered to around $22 in 2011. The number of allowances will be reduced over time to reduce total emissions. 2020 emissions are projected to be 21% lower than 2005. Source: Worldwatch Institute, State of the World 2008, Chapter 7: Improving Carbon Markets