TOWARD A STRONGER ECONOMY

June 21st, 2007 <-- by Paul Higgins -->

In any discussion about climate change, you will almost certainly hear the claim that reducing our greenhouse gas emissions will harm the economy. Even proponents of climate policy seem to take this as a given when they argue that environmental protection justifies the economic costs that could result.

The view seems to make intuitive sense: greenhouse gas emissions result from energy use, efforts to reduce emissions will make energy more expensive, higher energy prices will hinder economic activity and thereby harm the overall economy. For all its intuitive certainty, however, the view that increasing energy prices must necessarily harm the economy is patently false. Basic economic principles instead suggest that including a price on pollution would lead to an overall economic improvement. In this post, I’ll explain why.

Greenhouse gas emissions impose costs on the economy by causing climate damages. Some of the consequences of climate change (expected or already underway) include impacts on human health, property damage from floods, changes in the availability of fresh water, increased coastal inundation, and more intense storms (among a range of other impacts). These current and future climate impacts are part of the economic costs of our greenhouse gas emissions.

Critically, these economic costs do not get paid directly by those who pollute so they don’t factor in to their decisions about how much to emit. Rather, everyone in society pays (or subsidizes) these costs by suffering the impacts of climate change. This is a bad situation economically.

To understand why, imagine an economy consisting of only two people: you and me. If I can take an action that returns to me greater economic benefits than the costs I must pay, then it makes sense for me to do it. That remains true no matter what costs you may also incur from my action, since I don’t pay your costs. Now suppose that your costs and my costs together equal more than the total benefits of the action. The economy as a whole is actually worse off by my taking the action. If I had to pay all the costs (and received all the benefits), then I would take only those actions that resulted in more net benefit than cost for the economy as a whole.

This is the problem with pollution. Polluters will choose to emit greenhouse gases, even when doing so causes a net economic loss to society, because they don’t pay the costs associated with climate change. Therefore, policies that require emitters to pay for the economy wide costs of their pollution would actually tend to benefit the economy as a whole.

Unfortunately, we don’t know exactly (and likely can’t know) the economically optimal price to put on climate pollution. The fact that people, and the natural systems that we depend on, are heavily adapted to our current climate suggests that the costs of climate change will be considerable. Nevertheless, we could still get lucky (i.e., experience less dramatic climate changes and face more minor societal impacts), unlucky (i.e., face dramatic climate changes and catastrophic impacts), or end up with climate impacts somewhere in between those extremes. Setting the best pollution price (from an economic perspective) depends on knowing just how lucky or unlucky we’ll be. We won’t know that with certainty until after the fact (see this post about dealing with uncertainty).

Even with this uncertainty, economic improvements remain possible. For most countries, including the United States, polluters currently don’t pay any costs for their contribution to climate change, meaning they can treat the atmosphere like a free sewer for greenhouse gases. Adding a pollution fee could get us closer to the right pollution price, even if we can’t expect to get that price exactly right.

Not all policies are equally effective economically, however, so it’s certainly possible to make wasteful and ineffective choices. This doesn’t lend much support to fears about the economic consequences of reducing emissions though, because the major policy debates tend to focus on market-based mechanisms (either a cap and trade system or a pollution fee). These are approaches that would put a price on pollution and allow for the largest reduction in emissions at the lowest cost. As long as we put a price on pollution that brings the costs polluters pay closer to the total costs of their activities, then overall economic gains, not losses, can be expected. (In a future post I’ll write about choosing a pollution fee under uncertainty and whether it is better to err on the side of a fee that is too low or too high).

Of course, other factors could outweigh the economic considerations. For example, society may view fairness, ethics, or moral preferences as being more important than the economic implications. At a minimum, policies that seek to reduce or eliminate pollution subsidies will have winners and losers even as the economy as a whole improves. Do those who will lose deserve special consideration, even at the expense of the wider economy? They probably do in many cases but that important question isn’t how discussions about climate policy usually get framed. Instead we hear dubious assertions about impending economic damage. (Note also that with overall economic gains exceeding the losses, it is possible to compensate fully those who lose and still have some of the gains left over).

Policy makers clearly face difficult choices in dealing with climate change. The best hope for making those choices wisely, in my view, is to begin by retiring the old canard that reducing greenhouse gas emissions requires economic sacrifice. Instead, the current subsidies to pollute cause economic harm. If we can counterbalance those subsidies with some form of pollution fee, then the economy as a whole can be expected to improve.

10 Responses to “TOWARD A STRONGER ECONOMY”

  1. Anonymous Says:

    I see that there are discussions on the internet about reducing emissions. Still, those discussion are so steril that they lead to other topics. And this is because using less cars, or turning off computers are not solutions to reduce effects of global warming. I guess the causes of global warming should be searched for elsewhere, like the oceans and the sun.

  2. Roggie Says:

    (Typos corrected)
    Paul Higgins argument for greatly reducing the use of fossil fuels is extremely speculative. His premises are that: (1) Global warming will take place if we don’t reduce greenhouse gases, (2) That it will be extremely harmful and (3) preventing it will cost less than the consequences of not preventing it.

    Quite a few serious scientists doubt that global warming will take place along the lines of the IPCC reports. The IPCC places great trust in the computer models but these models have many problems and further the observational data that is needed to check and improve the models is not yet here. That is why his first premise is speculative.

    His second premise that it will be harmful can be easily questioned. Most of the warming takes place in the Arctic, in the winter and at night. This could be considered beneficial warming. The effect in the USA might be compared to moving 100 or 200 miles south. A few dozen centimeters of sea level rise is not serious. A serious rise could only take place if a great part of the Greenland ice cap melts or collapses. Antarctica is very cold and not in danger of melting. At the present rate of losing ice it would take 300 years for Greenland ice to add 10 cm to sea level. It is foolish vanity and bad economics to worry about 300 years in the future. The harmful nature of global warming is speculative for these reasons.

    On the other hand, cutting fossil fuel use by say, 80%, would require turning the entire economy upside down. Clearly automobiles would have to go for the great majority of the population. Air travel would have to be limited. A huge number of nuclear plants would need to be built. The developing countries would sink back into poverty without access to cheap energy. Of course this is a political fantasy and will never happen. Our lawmakers are scared of even a 50 cent gas tax when a $10 gas tax would be needed to substantially reduce consumption.

    Al Gore understands the political realities. That’s why his strongest proposal is that his readers should each replace one light bulb with a compact fluorescent bulb. This would reduce CO2 by an amount that the Chinese would make up very quickly.

  3. Dan G Says:

    I feel sort of silly responding, in a way, when I can’t do better than to keep referring to the RealClimate website. Either Roggie hasn’t read the material at that website, or he must be prepared to counter some of it. For instance his refernce to “quite a few serious scientist” doesn’t include any climatologist. Last I heard, only six peer reviewed papers on climatology out of one thousand did not support the main contentions that warming was occuring and that it was due to human activity, and 0.6% can’t possibly constitute “quite a few”.

    A hotter world will cost more in fuel since it generally costs more to cool than to heat. Most of our burgeoning fuel expenditures, on a per-capita basis, happened with the advent of air-conditioning, although I haven’t researched this. There is probably considerably more argument to be had on how higher temperatures will affect our own lives, or agriculture, but I imagine water, or its lacking, to be the real difficulty. We in western North America are already scrambling. Warmer sea waters are not more productive than colder, much of the nutrients are supplied by (drying) rivers, diversity will not be enhanced by warming waters, and let’s not forget the growing acidification which threatens almost all mollusks and coral; and coral does form the basis of reefs, the most productive areas of life in the oceans. Project just a little ways ahead, and we seem to be headed for oceans poulated mainly by diatoms (silica based) and jellyfish.

    At this point, it would be interesting to do a few of those Isaak Asimov style measurements (he published many non-fiction, science based books) where he might campare the amount of higher life existing on the planet compared to the amount of humans (in number or in wieght), say at the turn of the twentieth century, compared to the same measurements today, to drive home some very salient and inescapable and portentious facts. I don’t believe this coming situation to be a reflection of smile-be-happy.

    Unfortunately, while there appear to have been inaccuracies in the IPCC projections, most of the errors seem to have been in underplaying the issue; i. e., the changes are occurring faster than most had imagined.

    Nuclear plants are as yet a very dubious part of any solution. Hazards have yet to be adequately handled and the production of concrete is a not insignificant producer of carbon dioxide; and nuclear plants pour a lot of cement. Perhaps te biggest problem which is just now surfacing, a lot of water, often more than is available, is required for cooling.

    I guess we visit different websites. It’s been a while since I’ve encountered such unwavering support for fossil fuels. I am puzzled — the whole issue is based on science. It is not a question of whether one believes, as in if one believes in God, or this story over that one. These things are measurable, and in that sense, hardly contestable.

    Poverty? We will see real, extended, life-threatening poverty as is now occurring in Darfur. Those starving refugees couldn’t even return to their own lands if they were allowed to — their lands have all dried-up and that situation is expected to expand. The people who will suffer most from the disruptions in systems and supplies from global warming are the poorest — most of us in northern North America will simply buy our way out of difficulty, in the foreseeable future.

    As I write this, I find myself getting more and more frustrated at the same old non-sensical, unsubstantiated claims of denial. Roggie belittles the entire science community as he cassualy throws his nonsensical and degrading remarks around. It is perhaps debatable, what politicians deserve, but scientists certainly don’t derve this sort of treatment. Maybe when Roggie is better prepared to offer arguments to support his contentions, I can take him seriously.

  4. Roggie Says:

    Reply to Dan G

    I think Dan G is referring to the paper by Naomi Oreskes that claims all climatologists are on board with the extreme global warming disaster predictions. This paper has been debunked by numerous reviewers. An objective survey of climate scientist by Dennis Bray and Hans von Storch has shown the climate scientists have a wide variety of opinions. For example More climate scientists “strongly disagree” than “strongly agree” that climate change is mostly the result of anthropogenic causes.

    Most of Dan G’s other statements don’t make much sense. I’m at a loss to know what “degrading” remarks I made.

  5. Patrick Henry Says:

    When Carter was president we had to deal with a real problem – some days we couldn’t buy gasoline or had to wait in line for hours to get it. I suspect a few days of that again would make most people forget their obsession with AGW.

    It would be great to find alternatives to buying oil from Iran or Venezuela, but we need to keep in mind that if our oil was cut off, most of us would starve to death in about three weeks. Pretending that fossil fuels aren’t critical to our economy is just not dealing with reality.

  6. Dan G Says:

    Actually, I wasn’t referring to any paper or survey in particular, Roggie. I don’t think that I can argue about the science of GW. However, anyone who spends any time looking through the RealClimate website is likely to come away with one viewpoint. I have looked through quite a few websites by now, and I can’t find anything that speaks with nearly the authority that RC does. If you really do doubt the presentations you’ve heard, why don’t you take it up in one of the commentary threads there? I’ll certainly watch for you.

    I have looked up Dennis Fray and Hans von Storch. I can’t find reference to the survey by these two scientists of which you mention. Perhaps you could steer me in a good direction, or maybe you could remember a few specifics or phrases that would start my search? From initial sounds of it, the conclusion you mention doesn’t quite jive with what is published on their websites. Neither scientist seems to refute the concept or actuality of AGW, although they seem ready to discuss degrees.

    And, as mentioned before, whereas the IPCC may be wrong in the extent of their predictions, the possibility was always that they may err on minimizing the actuality, which is what seems to have been happening; i. e., things seem to be progressing faster than they expected.

    As for “degrading” remarks . . . I am going to be tainted with reliance on RealClimate. They have already dealt with these two scientists’ claims. To ignore that and just keep bringing-up the same old claims seems degrading.

    And do please point out where what I say is nonsensical.

    Patrick Henry, no one is saying to cut oil off. You know, if we don’t get off saying statements like “Pretending that fossil fuels aren’t critical . . . not dealing with reality.” and then dismissing the whole subject, doesn’t lead anywhere but to , well . . . a complete dismissal. I am sure that students of logic will have a perfect phrase to describe the tactic you are using.

    I am here to discuss policy to deal with GW I don’t see this as a place to argue the science. There are other websites for this, and they don’t wish to discuss policy . . . they is that as out of their purview. That is what this website is for (I thought). If you feel there is no need for specific policy, then perhaps you should say so, although I”m not too sure what effect that will have on the operation of this blog . . . I guess that may depend on how often you’ll feel the need to remind us of your objection. But just throwing out nonsequiturs, with a vague inference that we’re just wasting our time doesn’t seem very productive . . . unless you want this discussion to fail.

    And, most of this is not a question of all or nothing — fossil fuels or no fossil fuels. That’s what we’re here for . . .to evolve a policy that is clever enough to deal with changing parameters. Common — let’s use our heads, not just throw up our hands in doubt or futility.

  7. David B. Benson Says:

    Ok, here is a suggested policy. The reasons for it are suggested by my comments on two prior posts.

    Establish two goals:
    (1) A fossil carbon tax of $US 50 per tonne of fossil carbon. (This might be done in increments of $US 10 per tonne per annum.)
    (2) Sequester, world-wide, 15 billion tonnes of carbon per annum. (This covers the 7 billion tonnes per annum of fossil carbon (togethr with deforestration) introduced into the atmosphere as carbond dioxide, allows for sequestration losses of one billion tonnes per annum, and still makes up for excess carbon dioxide introduced into the atmosphere and oceans in prior years.)

  8. Dan G Says:

    David Benson . . . I peeked at all the other posts in this website and couldn’t find your comments. Did I miss something? Can you help me out? I’m pretty sure I’ve seen your name on a RealClimate thread, though . . . any chance you’re remembering that?

  9. Nick Gotts Says:

    Dan G.,

    I think Roggie may be referring to D. Bray [not Fray] and H. von Storch (2007) “The Perspectives of Climate Scientists
    on Global Climate Change”, a working paper of GKSS Forschungcentrum, available at

    http://dvsun3.gkss.de/BERICHTE/GKSS_Berichte_2007/GKSS_2007_11.pdf

    It describes two anonymous surveys carried out in 1996 and 2003. It’s far from clear how many of those responding were actually climate scientists (see below). The specific claim Roggie makes, that “More climate scientists “strongly disagree” than “strongly agree” that climate change is mostly the result of anthropogenic causes.” is supported by the surveys if we accept that the respondents were in fact all climate scientists, but is not the whole story. In 1996 10% “strongly disagreed”, 5% “strongly agreed”; in 2003 10% “strongly disagreed”, 9% “strongly agreed”. Responses were given on a 7-point scale, where 1 indicated the strongest agreement, 7 the strongest disagreement (it is the figures for responses 1 and 7 I compare above). If we add the figures for responses 1, 2 and 3 (those on the “agreed” side and for 5, 6 and 7 (those on the “disagreed” side), we find a 40:44 split in 1996 but a 53:29 split in 2003 – so taking things at face value, there’s been a big shift of opinion toward anthropogenic causes between those dates.

    However, as to the sampling, the working paper itself says of the 1996 survey “The anonymous, self-administered questionnaire was distributed by post with no
    follow up letters of reminder. Sampling was less than ideal.” Of the 2003 survey it says “This was conducted by electronic means and responses were forthcoming from some 30 countries. The existence of the survey was posted in the Bulletin of the American Meteorological Society, the Climlist server, and was sent to institutional lists in Germany and Denmark. As an effort to prevent general access to the survey, the survey was password protected. The password was contained in the informative message distributed according to the above. Consequently response rate cannot be calculated.”, and later: “Critics of the survey suggested that sceptics could submit multiple copies of the survey (see: Lambert, Tim, 2005), thereby biasing the results. (However, no criticism was raised suggesting that the other polemic might also act in a similar manner, that is, a biasing of the results by multiple submissions by climate change alarmists.) It is claimed that the 2003 survey was posted on a sceptics mailing list and concern was raised that the sample for the 2003 survey might not be representative and as such the results invalid.”

    On another issue, I share your frustration that denialists feel obliged to horn in here, when there are plenty of other places where they can air their views, including some where those who accept the overwhelming balance of evidence and argument in favour of anthropogenic climate change will see their objections.

    Finally, on Paul Higgins’ “Toward a Stronger Economy”, I have some doubts about the argument put forward. First, Paul does not mention the “discount rate” – how you weight costs and benefits now against costs and benefits in the future. So far as I’m aware there is no generally agreed rate, or way of calculating a rate, among economists, yet this could determine whether an economic assessment would support immediate mitigation or not. Second, one of the arguments of the “yes-maybe-it’s-happening-but-we-shouldn’t-do-anything” school is that technological advance will reduce the future costs of mitigation and/or adaptation relative to current costs of mitigation, and this is not addressed. Third, I think the strongest arguments for prompt action are not mentioned – perhaps because they don’t fit easily into a neoclassical economic framework. One is the argument from equity: those mostly responsible for the problem are, roughly speaking, the rich; those likely to suffer most are, roughly speaking, the poor. Even if gross global product were to be increased throughout the foreseeable future by delaying action rather than acting now, the cost might well be tens or hundreds of millions of unnecessary premature deaths among the poor. The other argument is that there is a real possibility, impossible to quantify, that failure to mitigate fast will lead to truly catastrophic results – the collapse of industrial civilisation or even human extinction, either directly via ecological collapse, or by leading desperate political elites to blunder into nuclear or biological warfare.

  10. Dan G Says:

    Nick Gotts — many thanks for your submission. I stand better informed.

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