W.D. Nordhaus
The
Economist – July 7, 1990
Careful cost-benefit analysis, not panicky eco-action,
is the right answer to the risk of global warming, says William D. Nordhaus,
holder of a chair of economics at Yale University and formerly a member of
President Carter’s Council of Economic Advisers.
In the 1970s environmental Jeremiahs foretold economic stagnation caused by exhaustion of energy resources. Today, scientists instead give warning that excessive burning of fossil fuels threatens the health of the planet. They may be right – or they may not. So what should be done about it?
Recent studies have identified four major global
environmental risks: acid rain, ozone depletion, deforestation and – the
subject of this article – the greenhouse effect.
The essence of this last is that increasing accumulations of atmospheric
carbon dioxide (CO2) and other gases are preventing the planet
dissipating heat, and so threaten to change the climate.
To date, the policy cart has been careering far in front of
the scientific horse. Presidents
convene climate conclaves. Prime
ministers declaim on the need to reduce CO2 emissions.
Even a distinguished international panel of scientists, who should know
better, calls for a 60% cut in these emissions.
Yet, like most declarations of war, these calls to arms against global
warming have been made without an attempt to weigh the costs and benefits of
restraints.
Let us look instead at the economics of climate change, the
possibilities of a sensible compromise between the need for economic growth and
the desire for environmental protection.
Scientists have suspected for more than a century that
increasing CO2 concentrations would alter the climate.
As CO2 and other “greenhouse gases” accumulate in the
atmosphere, they act like a blanket to insulate the planet and warm its surface.
Scientific monitoring has firmly established the build-up
of the main greenhouse gases – CO2, methane, nitrous oxides and
chlorofluorocarbons (CFCs). Not all
greenhouse gases, however, are created equal.
CO2 – which comes mainly from the burning of fossil fuels,
of which coal produces the most carbon per unit of heat – has been and will be
mankind’s largest contribution to global warming.
Relying on climate models and historical temperature
records, scientists believe that the earth’s average surface temperature will
rise by from 1˚ to 4˚
Celsius over the next century. Polar
regions are likely to warm more than the tropics.
The warmer climate will increase rainfall, and some models foresee hotter
and drier climates in mid-continental regions, such as the American grain-belt.
Most discussion of climate change focuses on globally
averaged surface temperature. Yet
this variable has little direct economic importance.
Variables like rainfall, water levels and flows, and extremes of droughts
or freezes tend to dominate the human impacts of climate change.
Models, alas, are unreliable in forecasting these changes.
Much is conjectural in such forecasting, and few climate
modelers expect to improve their forecasts dramatically in the near future.
Measures to cope with the threat of greenhouse warming will have to live
with these uncertainties.
If climate change itself is terra infirma, the
social and economic impacts of such change are terra incognita.
In any attempt to assess them, the main factor to recognize is that the
climate has little economic impact upon advanced industrial societies.
Humans thrive in a wide variety of climatic zones.
Cities are increasingly becoming climate-proofed by technological changes
like air-conditioning and shopping malls.
On the whole, thanks to technological changes, people now
tend to move toward warmer regions in North America and Europe.
Climate warming will probably be a boon to Alaska, which is America’s
least productive state in GNP per square mile.
Studies of the impact of global warming on the United
States and other developed regions find that the most vulnerable areas are those
dependent on unmanaged ecosystems – on naturally occurring rainfall, run-off
and temperatures, and the extremes of these variables.
Agriculture, forestry and coastal activities fall into this category.
Most economic activity in industrialized countries,
however, depends very little on the climate.
Intensive-care units of hospitals, underground mining, science
laboratories, communications, heavy manufacturing and microelectronics are among
the sectors likely to be unaffected by climatic change.
In selecting whether to set up in, say, Hong Kong or in Warsaw, few
businesses will consider temperature a weighty factor.
Greenhouse warming would have little effect on America’s
national output. About 3% of
American GNP originates in climate-sensitive sectors such as farming and
forestry. Another 10% comes from
sectors only modestly sensitive – energy, water systems, property and
construction. Far the largest
share, 87%, comes from sectors, including most services, that are negligibly
affected by climate change.
What are the likely effects on individual industries?
Recent studies for advanced countries suggest that:
·
Agriculture is the most climate-sensitive of the main sectors.
But farmers have historically shown great ability to adapt to different
climatic zones and to changing environmental conditions.
Studies suggest that greenhouse warming will reduce yields in many crops,
but the associated fertilization effect of higher CO2 will probably
offset any climatic harm over the next century.
·
Other parts of the economy will feel mixed impacts.
Greenhouse warming will increase the demand for space cooling, for
instance, but decrease the demand for space heating.
Construction, in temperate climates, will be favorably affected, because
the weather will be warm for more of the year.
In recreation, snow skiing will be hurt, but water skiing will benefit.
For the bulk of the economy, however – manufacturing, mining,
utilities, finance, trade and most services – climate change over the next few
decades is likely to have less effect than the economic reunification of Germany
this summer.
·
Many valuable goods and services escape the net of national-income
accounting. Among the areas of
importance are human health, biological diversity, amenity values of everyday
life and leisure, and environmental quality.
No one has done the sums here, so it is impossible to say whether the
cost of climate change will be large or small.
But every time I read of a new deadly tropical virus, I wonder whether
humanity could do with a little less biodiversity.
·
Recent studies indicate acceleration in sea-level rise of about one foot
(with a large margin of uncertainty) over the next century.
Land will be lost to the sea and some areas will need protection.
Studies indicate that protecting coasts from sea-level rise will not be
expensive. One study indicates that
to protect all the river deltas of the world against a three-foot sea level rise
would cost .04% of world output over the next century.
Less is known about the impacts of climate change on the
third world. Developing countries
are more vulnerable to greenhouse warming than are advanced ones.
In the world’s low-income countries, with a total population of about 3
billion, one-third of GNP originates in agriculture.
Given the vulnerability of farming to climate change, the risks are
worrisome. On the other hand, the
fertilization due to higher levels of CO2 could well offset the
damage.
In sum, the impacts of climate change on developed countries are likely to be small, probably amounting to less than 1% of national income over the next half-century. In contrast, small and poor countries with large agricultural sectors are particularly vulnerable.
Or maybe not. All
these prognostications are judgments based on immense uncertainties.
They could be dead wrong. This
uncertainty must affect mankind’s choice of responses to the threat of global
warming. The options are many.
The main ones are: action to prevent greenhouse warming; climatic
engineering to offset it; or adapting lifestyles and economies to it.
·
Prevention has received the greatest public attention.
How much should economic growth be slowed down to prevent uncertain
climate change in the distant future? A
rational answer to this question depends upon the costs of reducing atmospheric
concentrations of greenhouse gases. Three
cases have been analyzed: reducing CFC emissions, reforestation, and various
steps to reduce CO2 emissions.
Reducing or phasing out production of CFCs would be
particularly beneficial: on top of their other harmful effects, these are
extremely powerful greenhouse gases.
Some have proposed using trees as a method of removing
carbon from the atmosphere. Slowing
or stopping tropical deforestation is highly cost-effective in slowing
greenhouse warming; having school children plant billions of trees would
probably do more for civic virtues than for the climate.
Any large programme to cut emissions of greenhouse gases
will require a significant reduction in the burning of fossil fuels, especially
coal. CO2 emissions can
be reduced through a wide variety of measures, from energy conservation to new
technologies.
Energy studies indicate that 10% or perhaps 20% reductions
in CO2 emissions can in the long run be attained at modest costs.
However, further reductions would be extremely costly.
There are simply no substitutes for many of today’s uses of fossil
fuels. Try to drive to the next
town, or jet to Japan, after fossil fuels have been phased out.
The graph above shows an estimate of the cost of reducing
emissions of greenhouse gases. A
small amount can be eliminated at low cost.
But then the effort rapidly hits diminishing returns.
I estimate that the 60% reduction in greenhouse-gas emissions recently
called for by a panel of government scientists, if efficiently engineered and
phased in slowly, would cost over $300 billion annually in today’s world.
The graph below sketches, for rich countries, the trade-off
between economic growth and slowing emissions.
The upper curve shows the trade-off if emission-cutting policies are
efficient – international carbon taxes, say – and introduced gradually.
The middle path assumes similar policies but a rapid phase-in that gets
rid of existing energy capital over a period of only 20 years.
The bottom curve shows the combined effect of inefficient policies –
say, sector-by-sector regulation – and a rapid phase-in.
In sum, a substantial cut in emissions can be achieved at modest cost, if
it is done efficiently and gradually; if it is done inefficiently and quickly,
the cost would be heavy. The curves
are a warning of the price of any rush into fierce cuts, let alone a badly
managed one.
·
The option of climatic engineering has been completely neglected.
Possibilities include shooting particulate matter into the stratosphere
to cool the earth, altering land-use patterns to change the globe’s
reflectivity, and cultivating carbon-eating organisms in the oceans.
Though such measures would raise profound legal, ethical and
environmental issues, they would also probably be far more cost-effective than
shutting down the world’s power plants.
·
A third option is to adapt to the warmer climate.
This would take place gradually on a decentralized basis through the
automatic response of people and institutions, or through markets, as the
climate warms and the oceans rise. In
addition, governments can prevent harmful climatic impacts by land-use
regulations or investments in research on living in a warmer climate.
Adaptation will, in any event, be a necessary strategy for
coping with climate change. But
most of it can wait for a few decades until the changes actually begin.
How should uncertainty be folded into the analysis?
Two particular aspects of uncertainty might change the timing or
stringency of policies: the risk of catastrophe, and learning.
Climate systems are complex, non-linear systems, rife with
mathematical chaos. Climatologists
suspect the future may hold qualitative changes that are not predicted by their
models. Catastrophic changes in
climate cannot be ruled out. Potential
calamities include surges of icecaps, leading to a rise in sea level of 20 feet
or more in a few centuries; drastic shifts in North Atlantic ocean currents that
would freeze Europe; invasions of bugs into new terrain; and large-scale
desertification of the current grain-belts of the world.
Geological history is filled with odd events.
Depending on fossil fuels is like relying on nuclear
weapons. Mankind will probably
muddle along and cope with its diverse problems, but there is a chance that
greenhouse warming will trigger some cataclysmic climatic event.
A vague premonition of some potential future disaster is, however,
insufficient grounds to plunge the world into depression, particularly when it
faces present challenges and perils aplenty.
But if scientists can identify the probability of catastrophic risks,
people and governments can then rationally decide how much “climate
insurance” to buy.
The threat of unforeseen calamity argues for more aggressive action against greenhouse gases than a straightforward economic analysis would suggest. On the other hand, the likelihood that further scientific analysis will resolve climatic uncertainties suggests postponing action until knowledge is more secure. The best investment today may be learning about climate change rather than preventing it.
So what should be done today to respond to the threat of global warming over the next century? I suggest the following portfolio of measures:
·
International co-operation. It
is essential to remember that climatic change is a global issue.
Efficient policies will involve steps by all countries.
In order to induce international co-operation, affluent nations will need
to expand the concept of foreign aid to include subsidizing environmental
improvement by poor nations. Unilateral
action may be better than nothing, but concerted action is better still.
·
Better information. Scientists
must improve their understanding of greenhouse warming.
More monitoring of the global environment and analysis of past climatic
records is needed. So is a better
understanding of the economic and social impacts of past and possible future
climate change. Understanding of
climate change has improved enormously over the past two decades.
Further research will sharpen pencils for the tough decisions to be made
in the future.
·
New technologies. Governments
should support research and development of new technologies that will slow
climate change, particularly in the energy sector.
Energy technologies that replace fossil fuel use deserve government
support. A bolder step would be for
brave political leaders to launch an international Manhattan Project to develop
safe nuclear power. Research on
climate engineering may well be the best investment.
·
“No regret” policies. There
are countless measures that would be beneficial on other grounds and would also
tend to slow global warming. These
steps include efforts to strengthen international agreements that severely
restrict CFCs, moves to slow uneconomic deforestation, and steps to slow the
uneconomic use of fossil fuels.
·
Carbon taxes. A final policy
would be to impose environmental taxes or “fees” on the emission of
greenhouse gases, particularly carbon taxes on CO2 emissions from the
burning of fossil fuels. Recent
economic analyses suggest that a tax in the order of $5-10 per ton of CO2
equivalent would be a reasonable insurance premium to pay, given the risks to
mankind. A carbon tax would be
preferable to regulatory intervention, because taxes can harness markets to
minimize the costs of slowing climate change and would strengthen the incentive
to develop new technologies.
Like other religions, the environmental movement needs a
catechism of homilies. If I could
write one to be read at eco-gatherings, it might go as follows:
The threat of climate change is uncertain. It may fade away or succumb to a cheap engineering solution. Or it might conceivably prove ruinous. But we face many perils. And humans have shown the capacity to inflict great harm on themselves through ill-designed schemes, as this century’s socialist experiment clearly shows. Therefore move cautiously, gather information and use markets wherever possible.