The Economic Perspective Economists are not concerned with whether it exists, but whether/what should be done about it. Even though climate change exists, this does not necessarily mean we should take action to reduce it’s impact (reduce GHGs). Only do something if the benefits > costs

The costs of reducing GHGs Mitigation - taking strong action to reduce emissions - must be viewed as an investment, a cost incurred now and in the coming few decades to avoid the risks of very severe consequences in the future. “An estimate of resource costs suggests that the annual cost of cutting total GHG to about three quarters of current levels by 2050, consistent with a 550ppm CO2e stabilisation level, averages approximately 1% of GDP.” Stern Review, 2007

What if we don’t do anything? Doesn’t mean GDP is 1% higher! Incur damages much higher than 1% of GDP, including: Rising sea levels More extreme weather Floods, droughts, and storms Damage to ecosystems Damage to food supply Harder to do business Hundreds of millions or billions of people suffer coastal flooding; property damages; hunger; water shortages, etc. All countries/people are affected. Poorest suffer earliest and most.

What if we don’t do anything? Already seeing some impacts: California drought: top agricultural state in terms of farm income. Prices of large number of fruits, vegetables, nuts and beef are increasing as farmers deal with drought conditions. Property damages from hurricanes are much higher. Florida homeowners insurance rates have doubled in last decade. Countries like Bangladesh and Maldives have already seen major damages from inland flooding. Everyone, regardless of whether they live in an area that is particularly susceptible to damages from climate change or not, will pay more for food, water, energy, basic products, tourism, etc.

What if we don’t do anything? “Using the results from formal economic models, (the Stern Review) estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever.” Costs about 1% ($870 billion) to save about 5% ($4.35 trillion).

What do most economists think? 500 top economists were asked “Do you believe that climate change presents a significant risk to the economy?” 84% agreed. Same economists were asked “Do you believe that the U.S. should take action to reduce Greenhouse Gas Emissions?” 94% agreed.

Other benefits of reducing GHGs By reducing fossil fuel consumption: Reduce dependency on foreign oil ($300 billion annual transfer of wealth from U.S. to other nations) Increase viability of renewable energy More labor intensive and uses more domestic content Studies suggest 3x as many jobs associated with renewable energy investments compared to fossil fuel investments Less pollution, which means better health, regardless of climate change.

What could it be done? Put a price on carbon (tax), and make it revenue neutral A $15/ton tax could generate enough revenue to eliminate all payroll taxes. $3600 per worker, or $1500 per citizen Tax pollution, something we want less of Subsidize work, something we want more of Advantages: least cost method of reduction, incentive to innovate, revenue can be used to reduce other taxes Disadvantages: can be costly to firms, don’t know how much pollution abatement will take place. Would it damage the economy? Finland implemented a $30/ton tax on CO2 in late 90s. Since 2000, Finland’s per capita GDP has increased at twice the rate as U.S. per capita GDP

What could be done? Cap and trade Distribute set number of permits, allow firms to buy and sell, and gradually reduce number of permits. Advantages: lowest total cost of abatement, less costly to firms compared to taxes, set quantity of emissions Disadvantages: initial distribution can be tricky, can present a barrier to entry, prices can be volatile.

Policy Issues Global Problem = Global Solution Temporal separation between emissions and damages (discount rate) Uncertainty of exact costs and benefits – based on probabilities Not just carbon, multiple GHGs Equity issues

Clean Air Act, Acid Rain Program In 1990, Acid Rain was a major environmental problem. 16 million tons of Sulfur Dioxide emissions. Goal was to cut emissions by approximately 50% within 20 years. Used cap and trade program What’s happened to emissions?

Sulfur Dioxide Emissions Emissions have been reduced by approximately 70%. What’s happened to the economy?

Relative to Economic Indicators

What else should be done? Like with any natural disaster: Government is needed to protect and manage public goods May not directly provide profit, but necessary for the economy to function Take steps to make adaptation easier. Provide financing to adapt buildings, construction of stormwater wetlands, improve drinking water, reduce shore erosion, improve water use efficiency and increase storage capacity, R&D in high temp seeds, desalination of water, identify vulnerabilities and inform decision making. All in addition to mitigation.

Have a happy day!