The Economics of Global Warming

Global Warming: The Problem Greenhouse gases (including carbon dioxide (CO2), methane, and chlorofluorocarbons (CFCs)) trap heat near the earth’s 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.

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 today’s greenhouse gas emissions. Greenhouse gases are long-lived, and they accumulate in the atmosphere.

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.

Global Warming: The Problem total CO2 emissions = population × GDP/population × energy/GDP × CO2/energy

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.

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!

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).

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.

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?

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.

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!

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.

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.

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?