ECONOMICS OF GLOBAL WARMING
The economics of global warming relates to the
size and distribution of the economic costs and benefits of global
warming and of a variety of actions aimed at the mitigation of global
warming. Estimates come from a variety of sources, including integrated
assessment models, which seek to combine socio-economic and biophysical
assessments of climate change.
McKibbin and Wilcoxen (2002) cite the United Nations
IPCC as concluding with 33 to 67 percent confidence that the aggregate
market sector effect of a small increase in global temperatures
could be “plus or minus a few percent of world GDP”. Developed countries
are more likely to experience positive effects and developing countries
are more likely to experience negative effects.
cost of reducing global warming
The costs of reducing global warming depend on
a number of factors. One fundamental factor is the target level
of atmospheric carbon dioxide: the lower the level, the sooner action
must be taken. The sooner action must be taken, the shorter the
period over which costs must be spread, and the higher the absolute
costs, as cheaper technologies which could be used are not yet available.
A common target level (assumed by the United Kingdom) is 550ppm
(current levels are around 380ppm, and rising at 2-3ppm per year).
Another crucial factor in estimating the costs
of climate change is the discount rate to apply. Normally a relatively
high rate (eg. 8%) is applied, reflecting the cost of capital. However,
where intergenerational issues involve potential irreversibilities
such as climate change, a low discount rate (eg. 4%, a typical rate
for social issues) may be applied. The difference is dramatic: at
4%, avoiding $1m worth of climate change damage in 100 years’ time
is valued at nearly $20,000 today (net present value), whereas at
8% it is valued at less than $500.
Another area for debate is the relationship between
technological development and regulatory incentives: if regulation
can induce substantial technological change, the costs of mitigation
may be much lower.
cost estimates of global warming
IPCC TAR (Synthesis Report) suggested values of
$78bn to $1141bn annual mitigation costs, amounting to 0.2% to 3.5%
of current world GDP (which is around $35 trillion), or 0.3% to
4.5% of GDP if borne by the richest nations alone. As economic growth
is expected to continue, the percentage would fall. In terms of
cost per tonne of carbon emission avoided, the range (for a target
of 550ppm) is $18 to $80. (House of Lords 2005)
These cost estimates refer to reductions achieved
through tradable emissions permits when those permits are given
away to polluters. If the reductions are achieved through emission
taxes or auctioned permits, and the revenue is used to reduce distortionary
taxes, the TAR III synthesis report concludes that “[depending]
on the existing tax structure, type of tax cuts, labor market conditions
and method of recycling... it is possible that the economic benefits
may exceed the costs of mitigation.” This is in contrast to McKibbin
and Wilcoxen’s (2002) report that Nordhaus and Boyer calculated
that the present value cost of the Kyoto Protocol would be $800
billion to $1,500 billion if implemented as efficiently as possible.
They also cite a study by Tol that estimated the net present value
cost to be more than $2.5 trillion.
Azar and Schneider (2002) observe that global
output in 1990 was around $20 trillion. If it grew steadily at 2.1
percent per annum it would be just short of $200 trillion by 2100.
They thereby make the point that the calculated present value costs
of mitigation would look smaller if scaled against 2100 output than
if scaled against 1990 output. However, neither comparator is relevant
to the question of whether the likely benefits from mitigation exceed
the costs.
benefits of reducing global warming
McKibbin and Wilcoxen also report that Nordhaus
and Boyer calculated that the present value of benefits from mitigation
under the Kyoto Protocol would be $120 billion, far below the likely
costs. McKibbin and Wilcoxen report that “[o]ther studies reach
similar conclusions”. They cite Tol as concluding that “the emissions
targets agreed in the Kyoto Protocol are irreconcilable with economic
rationality.”
However, the Stern Report produced much larger
benefit estimates, of between 5 per cent and 20 per cent of GDP.
The difference reflected a number of factors, the most important
of which were the choice of discount rate, the use of welfare weighting
for effects on people in poor countries, a greater weight on damage
to the natural environment and the use of more up-to-date scientific
estimates of likely damage.
In addition to avoiding the costs of the business-as-usual
scenario, mitigation actions can bring other benefits, depending
on factors such as the technology used. These include, for example,
the reduced economic impact from oil supply disruptions and/or price
rises, if mitigation reduces oil dependence. This may be of particular
benefit to non-oil-exporting developing countries, which suffer
greater economic impact from oil price rises.
Click here to go to the
home page www.climatechange.110mb.com
This information is licensed under the GNU
Free Documentation. It is derivative of articles on Climate
Change, Global Warming and related environmental issues at http://en.wikipedia.org |
