The Economics of Global Climate Change - Tufts

The Economics ofGlobal Climate Change

by Jonathan M. Harris, Brian Roach and Anne-Marie Codur

Global Development And Environment Institute Tufts University

Medford, MA 02155 http://ase.tufts.edu/gdae

A GDAE Teaching Module on Social and Environmental

Issues in Economics

Copyright©2017GlobalDevelopmentandEnvironmentInstitute,TuftsUniversity.

Copyrightreleaseisherebygrantedforinstructorstocopythismoduleforinstruc-tionalpurposes.

Studentsmayalsodownloadthemoduledirectlyfromhttp://ase.tufts.edu/gdae.

Commentsandfeedbackfromcourseusearewelcomed:GlobalDevelopmentAndEnvironmentInstituteTuftsUniversitySomerville,MA02144http://ase.tufts.edu/gdae

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NOTE–termsdenotedinboldfacearedefinedintheKEYTERMSANDCONCEPTSsectionattheendofthemodule.

The Economics of Global Climate ChangeTable of Contents 1.CAUSESANDCONSEQUENCESOFCLIMATECHANGE.........................................1

TrendsinGlobalCarbonEmissions.....................................................................4

TrendsandProjectionsforGlobalClimate..........................................................7

2.ECONOMICANALYSISOFCLIMATECHANGE....................................................15

Cost-BenefitStudiesofGlobalClimateChange.................................................17

ClimateChangeandInequality..........................................................................26

3.POLICYRESPONSESTOCLIMATECHANGE........................................................29

AdaptationandMitigation................................................................................29

ClimateChangeMitigation:EconomicPolicyOptions......................................32

CarbonTaxes.....................................................................................................32

TradablePermits...............................................................................................37

CarbonTaxesorCapandTrade?.......................................................................41

OtherPolicyTools:Subsidies,Standards,R&D,andTechnologyTransfer........42

ClimateChange:TheTechnicalChallenge.........................................................43

4.CLIMATECHANGEPOLICYINPRACTICE............................................................46

TheParisAgreementof2015............................................................................47

Howadequateorinadequatearethecommitments?......................................49

Regional,NationalandLocalActions................................................................52

ForestsandSoils................................................................................................55

5.CONCLUSION...................................................................................................56

KeyTermsandConcepts......................................................................................58

References..........................................................................................................61

DiscussionQuestions...........................................................................................65

Exercises.............................................................................................................66

WebLinks............................................................................................................67

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The Economics of Global Climate Change1. CAUSES AND CONSEQUENCES OF CLIMATE CHANGE

Scientistshavebeenawaresincethenineteenthcenturyoftheplanetaryimpactsofcarbon dioxide (CO2) and other greenhouse gases in the atmosphere. In recentdecades, concern has grown over the issue of global climate change caused byincreasedaccumulationsofthesegases.1

Multiplestudiespublishedinpeer-reviewedscientificjournalsshowthat97percentormoreofactivelypublishingclimatescientistsagree:Climate-warmingtrendsoverthepastcenturyareextremelylikelytobeduetohumanactivities.2The2013and2014 reports of the Intergovernmental Panel on Climate Change clearly attributethe majority of recently observed global climate change to human-made green-housegasemissions.TheIPPCprojectsatemperatureincreaseby2100ofbetween1.5°C(2.7°F)and4.8°C(8.6°F),relativetopre-industriallevels(seeBox1).3

Recent statements by the U.S. Global Research Program and the American Geo-physical Union indicate thewidespread scientific acceptance of the reality of cli-matechange,andthehumanroleinitsrecentpattern:

Evidence for climatechangeabounds, from the topof theatmosphere to thedepthoftheoceans.Scientistsandengineersfromaroundtheworldhaveme-ticulouslycollectedthisevidence,usingsatellitesandnetworksofweatherbal-loons, observing andmeasuring changes in location and behaviors of speciesandfunctioningofecosystems.Takentogether,thisevidencetellsanunambig-uousstory:theplanetiswarming,andoverthehalfcentury,thiswarminghasbeendrivenprimarilybyhumanactivity.

–U.S.GlobalChangeResearchProgram,20144

Humanityisthemajorinfluenceontheglobalclimatechangeobservedoverthepast 50 years. Rapid societal responses can significantly lessen negative out-comes.

–AmericanGeophysicalUnion,20145

Thehorizonofprojectionsformajorconsequencesofclimatechangehasbecomecloserasscientificunderstandingofthephysicalprocesseshasincreasedinrecentyears.Whatappearedtenyearsagoasafuturethreatforgenerationstocome,in1Theproblemoftenreferredtoasglobalwarmingismoreaccuratelycalledglobalclimatechange.Abasicwarmingeffectwillproducecomplexeffectsonclimatepatterns—withwarminginsomeareas,coolinginothers,andincreasedclimaticvariabilityandextremeweatherevents.

2Cooketal.,2016.3IPCC,2014a,SummaryforPolicymakers,pp.4,15,21;IPCC2014d,SummaryforPolicymakers,p.8.4U.S.GlobalChangeResearchProgram,p.7.5AmericanGeophysicalUnion,2014.

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thelatetwenty-firstcenturyandbeyond,isincreasinglyunderstoodasanimmedi-ateandurgent issue,asmanycountriesarealreadyexperiencingsomeofthedis-ruptiveconsequencesofclimatechange(SeeBox1).

Putting climate change in the framework of economic analysis, we can considergreenhouse gas emissions, which cause planetarywarming and other changes inweatherpatterns,asbothacauseofenvironmentalexternalitiesandacaseoftheoveruseofacommonpropertyresource.

Theatmosphereisaglobalcommons intowhichindividualsandfirmscanreleasepollution. Global pollution creates a “public bad” affecting everyone—a negativeexternalitywithawideimpact.Manycountrieshaveenvironmentalprotectionlawslimiting the release of local and regional air pollutants. In economic terminology,suchlawstosomedegreeinternalizeexternalitiesassociatedwithlocalandregion-al pollutants. Butuntil relatively recently, few controls existed for carbondioxide(CO2), the major greenhouse gas, and concentrations of CO2 in the atmospherehaverisensteadily,recentlycrossingthebenchmarkof400partspermillion(ppm)atmosphericconcentration(seeFigure1).

Figure1.AtmosphericCarbonDioxideLevels

Source:NationalOceanicandAtmosphericAdministration,EarthSystemResearchlaborato-ry,GlobalMonitoringDivisionhttp://www.esrl.noaa.gov/gmd/ccgg/trends/data.htmlNote:SeasonalvariationsmeanthatCO2concentrationsriseandfalleachyearwithgrowthanddecayofvegetationandotherbiologicalsystems,butthelong-termtrend,measuredinpartspermillionorppm,isasteadyincreaseduetohumanemissionsofCO2.

Impactsofclimatechangehavealreadybeguntoaffectclimatepatterns (seeBox1). Theseeffects range in scope frommeltingpolar ice to raising sea levels, fromcollapseofmarineecosystemstoincreasinglyseverewaterstress in largepartsofthe world, from changing weather patterns accompanied by more frequent andmoreviolentclimacticepisodes(hurricanes,floods,droughts)towiderspreadingofpathogensanddiseases.TheWorldHealthOrganization(WHO)hasestimatedthatmorethan140,000peopleperyeararealreadydyingasadirectresultofclimatechange,primarilyinAfricaandSoutheastAsia.

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1962 1968 1974 1980 1986 1992 1998 2004 2010 2016

CO2Concentration(ppm)

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BOX1.WHATISTHEGREENHOUSEEFFECT?

Thesun’sraystravelthroughagreenhouse’sglasstowarmtheairinside,buttheglassactsasabarriertotheescapeofheat.Thus,plantsthatrequirewarmweathercanbegrownincoldclimates.Theglobalgreenhouseeffect,inwhichtheearth’satmosphereactsliketheglassinagreenhouse,wasfirstdescribedbyFrenchscientistJeanBaptisteFourierin1824.

Clouds, water vapor, and the natural greenhouse gases carbon dioxide (CO2), methane,nitrousoxide,andozoneallowinboundsolarradiationtopassthroughbutserveasabar-riertooutgoinginfraredheat.Thiscreatesthenaturalgreenhouseeffect,whichmakestheplanetsuitablefor life.Without it, theaveragesurfacetemperatureontheplanetwouldaveragearound–18°C(0°F),insteadofapproximately15°C(60°F).

“The possibility of an enhancedorman-madegreenhouse effect was introduced by theSwedish scientist Svante Arrhenius in 1896. Arrhenius hypothesized that the increasedburning of coal, which had paralleled the process of industrialization, would lead to anincreasedconcentrationofcarbondioxide intheatmosphereandwarmtheearth.” (Fan-khauser,1995).

SinceArrhenius’stime,emissionsofgreenhousegaseshavegrowndramatically.CO2con-centrationsintheatmospherehaveincreasedby40%overpre-industriallevels.Inadditionto increased burning of fossil fuels such as coal, oil and natural gas,manmade chemicalsubstancessuchaschlorofluorocarbons(CFCs)aswellasmethaneandnitrousoxideemis-sionsfromagricultureandindustrycontributetothegreenhouseeffect.

Scientistshavedevelopedcomplexmodelsthatestimatetheeffectofcurrentandfuturegreenhousegasemissionsontheglobalclimate.Whileconsiderableuncertaintyremainsinthese models, a broad scientific consensus has formed that the human-induced green-house effect poses a significant threat to the global ecosystem. The IntergovernmentalPanelonClimateChange(IPCC)hasconcludedinallitsreportsthattheglobalatmosphericconcentrationsofgreenhousegas(GHG)emissionshaveincreasedmarkedlyasaresultofhumanactivitiessince1750.

Accordingtothereport,“Human influenceontheclimatesystemisclear,andrecentan-thropogenic emissions of greenhouse gases are the highest in history…Warming of theclimate system is unequivocal, and since the 1950s many of the observed changes areunprecedentedoverdecadestomillennia.Theatmosphereandoceanhavewarmed,theamountsofsnowand icehavediminished,andsea levelhasrisen.”The IPCCprojectedaglobalaveragetemperatureincreaseby2100ofbetween1.5°Cand4.8°C,(between2.7°Fand8.6°F)abovepre-industriallevels.By2015,theworldhadalreadyreachedanaverageincreaseoftemperaturesof1°Ccomparedwithpre-industrial times,andglobal tempera-turesbrokeheatrecordsthreeyearsinarowin2014,2015and2016.

Sources:Fankhauser1995;IPCC,2014a,b,andc.DamianCarrington,“World’sclimateabouttoenter“un-chartedterritory”asitpasses1°Cofwarming”,TheGuardian,November9,2015.TheNewYorkTimes,January18,2017.

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If indeed the effects of climate change are likely to be severe, it is in everyone’sinterest to lower emissions for the common good. Climate change can thus beviewedasapublicgood issue, requiringcollaborativeactiontodevelopadequatepolicies.Inthecaseofclimatechange,suchactionneedstoinvolveallstakeholders,including governments andpublic institutions aswell as private corporations andindividualcitizens.

Afterdecadesoffailuresattheinternationalleveltoproduceanagreementinclud-ingallcountries,significantprogresswasachievedinParisinDecember2015,when195nations,under theauspicesof theUnitedNationsFrameworkConventiononClimate Change, signed the first global agreement aiming at keeping the overallincrease in global average temperature under 2 degrees Celsius (compared withpre-industrial times). In addition to the actions taken by national governments,hundreds of cities, regions, and corporations have pledged to make significantreductions in theirCO2 emissionsover thenext 5 to25 years, although thewith-drawaloftheUnitedStatesundertheTrumpAdministrationmaythrowthesuccessoftheagreementintodoubt.WewillreturntothespecificsoftheParisAgreementindetailsinthelastsectionofthismodule.

Because CO2 and other greenhouse gases continuously accumulate in the atmos-phere, stabilizing or “freezing” emissionswill not solve the problem.Greenhousegasespersistintheatmospherefordecadesorevencenturies,continuingtoaffecttheclimateoftheentireplanetlongaftertheyareemitted.Thisisacaseofastockpollutant.Onlymajorreductionsinemissionslevelsofastockpollutantwillpreventever-increasingatmosphericaccumulations.Developmentofnationaland interna-tionalpoliciestocombatglobalclimatechangeisahugechallenge,involvingmanyscientific,economic,andsocialissues.

Trends in Global Carbon Emissions GlobalemissionsofCO2fromthecombustionoffossilfuelshaveincreaseddramati-callysinceabout1950,asillustratedinFigure2.In2013,totalglobalcarbonemis-sionswere9.776billion tonsorGigatons (Gt)of carbon.Coalburning is currentlyresponsible for about 42 percent of global carbon emissions, while liquid fuels(primarily oil) are the source of another 33 percent, combustion of natural gasaccountsfor19percent,with6%fromcementproductionandgasflaring.6Figure2shows emissions over the period 1965-2015, expressed in millionmetric tons ofCO2.7

6Bodenetal,2016.7ToconvertfromtonsofcarbontotonsofCO2,multiplybyafactorof3.667,whichistheratio44/12,derivedfromCO2’smolecularweightof44,andcarbon’smolecularweightof12).

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Figure2.CarbonEmissionsfromFossilFuelConsumption,1860–2013

Source:CarbonDioxideInformationAnalysisCenter(CDIAC)http://cdiac.ornl.gov/ftp/ndp030/global.1751_2013.emsaccessedJune2016.Note:Emissionsinmillionmetrictonsofcarbon.ToconverttoMMtofCO2,multiplyby3.67

Figure3focusesonthedistributionofemissionsbetweentwogroupsofcountries,the OECD, including primarily industrialized countries, and the rest of theworld,comprising developing countries and including China. The share of OECD’s emis-sions has steadily declined since 2007, and the developing world’s share has in-creasedsignificantly,thoughtherehasalsobeenarecentslowdownofitsgrowth.

Figure3.CarbonDioxideEmissions,1965-2015,IndustrializedandDevelopingCountries(MillionMetricTonsofCO2)

Source:U.S.EnergyInformationAdministrationhttp://www.eia.gov/forecasts/aeo/data/browser/#/?id=10-IEO2016&sourcekey=0,ac-cessedJune2016.Note:OECD=OrganizationforEconomicCooperationandDevelopment(primarilyindustri-alizedcountries,whilenon-OECDaredevelopingcountries).TheverticalaxisinFigure3measuresmillionmetrictonsofCO2(agivenamountofemissionsmeasuredintonsofcar-bondioxideis~3.67timesthetotalweightincarbon).TheemissionsestimatesoftheU.S.EIAshownheredifferslightlyfromthoseoftheCDIACshowninFigure2.

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Emissions are closely connected with the economic cycles, and the 2008-2009recessionisclearlyvisibleinFigure3.AlsonoteworthyistheapparentlevelingoffofCO2emissionsintheyears2014,2015,and2016aroundthefigureof33billiontons(33gigatons)ofCO2.Thisispartlyexplainedbyaslowingdownofglobaleconomicgrowth (with a decrease in China’s economic growth rate). It also reflects newenergy investments in renewables (solar andwind),which have dominated addi-tionalenergyproductioncapacity in recentyears.This trend is starting tomakeasignificantimpactincurtailingCO2emissionsfromtheenergysector.

Indevelopedcountries,therehasbeenarapidswitchfromcoaltonaturalgasandrenewable energy, lowering overall CO2 emissions. In developing countries, coalproduction is stillexpanding,butan increasingshareofnewenergyproduction isalsocomingfromrenewables.8Itiscurrentlyuncleariftheleveling-offofemissionsisatemporaryphenomenon,orsignalsaturnaroundintotalemissionstrends.

Figure4shows thedistributionofCO2emissionsamong themainemitters:China(29%),theUnitedStates(15%),theEuropeanUnion(11%),India(6%),Russia(5%),Japan(4%),andtherestof theworld (30%).Mostof the futuregrowth incarbonemissionsisexpectedtocomefromrapidlyexpandingdevelopingcountriessuchasChina and India. China surpassed theUnited States in 2006as the largest carbonemitterintheworld.

Figure4.PercentageofGlobalCO2EmissionsbyCountry/Region

Source:JosG.J.Olivieretal.,EuropeanCommission’sJointResearchCentre,2014.“TrendsinglobalCO2emissions:2014Report”http://edgar.jrc.ec.europa.eu/news_docs/jrc-2014-trends-in-global-co2-emissions-2014-report-93171.pdf

In addition to total emissions by country, it is important to consider per capitaemissions.Percapitaemissionsaremuchhigherindevelopedcountries,asshowninFigure5.ThehighestratesareobservedinGulfcountries,suchasQatar(40tonsofCO2perperson), Kuwait (34 tonsperperson)or theUnitedArabEmirates (228InternationalEnergyAgency,16March2016https://www.iea.org/newsroomandevents/pressreleases/2016/march/decoupling-of-global-emissions-and-economic-growth-confirmed.html

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tons per person). TheUnited States has the highest rate amongmajor countries,with17metrictonsofCO2emissionsperperson.

Otherhigh-emitting countries areAustraliawith 16.7 tonsper capita andCanadawith14.6.Russiahasanaverageof10tonsperperson,whilemostotherdevelopedcountriesareintherangeof4to10metrictonspercapita9.Mostdevelopingcoun-trieshavelowratespercapita,typicallylessthan2tonsofCO2perperson,exceptChina,whosepercapitaemissionshavegrownto6.6tonsperperson.

Figure5.Per-CapitaCarbonDioxideEmissions,byCountry

Source:BritishPetroleum,EnergyChartingTool2015.

Trends and Projections for Global Climate Theearthhaswarmedsignificantlysincereliableweatherrecordsbegantobekeptin the mid-nineteenth century (Figure 6). In the past hundred years, the globalaverage temperaturehas risenabout1°C, or about1.8°F. Fourteenof the fifteenwarmest years in themodernmeteorological recordhaveoccurred from2000 to2015.10 The record of 2014 as the hottest year ever recordedwas broken by theyear2015,whichinturnwasbrokenby2016,11whichwasabout1.1°Caboveprein-dustriallevels.12Evidenceindicatesthattherateofwarming,currentlyabout0.13°Cperdecade,isincreasing.TheUSDepartmentofEnergy’sPacificNorthwestNation-al Laboratory estimates that the rate at which temperatures are rising could be0.25°Cperdecadeby2020.13

9Therankingofallcountries’percapitaemissionsisaccessibleathttp://cotap.org/per-capita-carbon-co2-emissions-by-country/

10NOAA2012;DamianCarrington,“14ofthe15hottestyearsonrecordhaveoccurredsince2000,UNsays”,TheGuardian,February2,2015.

11NASA,January18,2017.https://www.nasa.gov/press-release/nasa-noaa-data-show-2016-warmest-year-on-record-globally

12NewYorkTimes,January18,2017.https://www.nytimes.com/2017/01/18/science/earth-highest-temperature-record.html?_r=0

13TheGuardian,March9,2015.“Globalwarming“settospeeduptoratesnotseenfor1,000

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Figure6.GlobalAnnualTemperatureAnomalies(°C),1850–2015

Source:CDIAC,GlobalMonthlyandAnnualTemperatureAnomalies(degreesC),1850-2015,relativetothe1961-1990mean,May2016.http://cdiac.ornl.gov/ftp/trends/temp/jonescru/global.txtNote:Thezerobaselinerepresentstheaverageglobaltemperaturefrom1961-1990.

Notallareasarewarmingequally.TheArcticandAntarcticahavebeenwarmingataboutdoubletheglobalrate.14MeltingiceintheArcticisbotharesultofglobalwarmingandacauseoffurtherwarming,sinceopenoceanabsorbsmoreofthesun’senergythanice,aphenomenonknownasreducedalbedo(seeFigure7).

Figure7:ShrinkingArcticIceintheArctic

Source:http://thinkprogress.org/climate/2014/02/18/3302341/arctic-sea-ice-melt-ocean-absorbs-heat/.FigureisbasedondatafromtheNationalSnowandIceDataCenter.Credit:climate.gov

years”.https://www.theguardian.com/environment/2015/mar/09/global-warming-set-to-speed-up-to-rates-not-seen-for-1000-years

14IPCC,2007a,WorkingGroupI:ThePhysicalScienceBasis.

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Warmer temperatures have produced noticeable effects on ecosystems. In mostregionsoftheworld,glaciersareretreating.Forexample,GlacierNationalPark inMontanahad150glacierswhentheparkwasestablishedin1910.Asof2010only25glaciersremained,andby2030itisestimatedthattheparkwillnolongerhaveanyofitsnamesakeglaciers.15

Climatechangeisalsoleadingtorisingsealevels.Sea-levelriseisattributedtothemelting of glaciers and ice sheets and to the fact that water expandswhen it isheated.In2012,theglobalaverageoceantemperaturewasabout0.5°Cabovethetwentieth-centuryaverage.Thecombinationofwarmeroceansandmeltingicehasled sea levels to rise about2millimetersper year, and in2012 the sea levelwasalready9inches(23cm)abovethelevelof1880(seeFigure8andBox2).16

Figure8.Sea-LevelRise,1880–2012

Source:IPCC,2014aNote:Thelineinthemiddleshowsanaverageestimatebasedonalargenumberofdatasources.Theshadedarearepresentsthehighlevelandlowlevelmarginsoferror(smallerforrecentdata).

15https://www.usgs.gov/centers/norock/science/retreat-glaciers-glacier-national-park?qt-science_center_objects=0

16NOAA,2012.

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The impactofrisingseasthreatensnumerouscoastalareas; forexample, theU.S.governmenthasidentified31Alaskantownsandcitiesatimminentrisk,andcitiesinFloridaarealreadywitnessingsignificantdamagefromamajorincreaseinflood-ing.17MiamiBeachhasalreadyinvestedmorethan$400milliontodealwithrecur-rentflooding,happeningnotonlyduringhurricaneepisodesbutalsoat“kingtides”which occur once or twice a year (when the orbits and alignment of the Earth,moon, and sun combine to produce thegreatest tidal effects of the year).18 Resi-dentsofseveralcoastalcitiesexperiencinghigherfrequenciesoffloodingarewor-riedaboutthelossofrealestatevalueoftheirhomes.Therearemajorimplicationsfor the insurance industry;accordingtothepresidentof theReinsuranceAssocia-tionofAmerica,“itisclearthatglobalwarmingcouldbankrupttheindustry.”19

RecentresearchontheWestAntarcticIcesheetshowsthatthisarea,largerthanMexico,ispotentiallyvulnerabletodisintegrationfromarelativelysmallamountof

17EricaGoode,“AWrenchingChoiceforAlaskaTownsinthePathofClimateChange,”NewYorkTimes,November29,2016;“IntensifiedbyClimateChange,‘KingTides’ChangewaysofLifeinFlorida,”NewYorkTimes,November17,2016

18NewYorkTimes,November17,2016.ibid.19EugeneLinden,“HowtheinsuranceindustryseesClimateChange”,LosAngelesTimes,June16,2014

BOX2.PACIFICISLANDSDISAPPEARASOCEANSRISE

TheislandnationofKiribati,acollectionof33coralatollsandreefislands,lyingnohigher than6 feetabovesea level, scatteredacrossa swathof thePacificOceanabout twice the sizeofAlaska, is facing the risk ofgoingunder in thenextfewdecades.

Twoof itsislands,TebuaTarawaandAbanuea,havealreadydisappearedasaresultofrisingsea level.Others,both inKiribati and intheneighboring islandcountryof Tuvalu,arenearlygone. So far the seashavecompletelyengulfedonly uninhabited, relatively small islands, but the crisis is growing all aroundtheshoresoftheworld’satolls.

The people of Tuvalu are finding it difficult to grow their crops because therisingseasarepoisoningthesoilwithsalt.Manyislandswillbecomeuninhabit-able longbefore theyphysicallydisappear, as salt from the seacontaminatestheundergroundfreshwatersuppliesonwhichtheydepend.ThesituationissobadthattheleadersofKiribatiareconsideringaplantomovetheentirepopu-lationof110,000toFiji.Theinhabitantsofsomevillageshavealreadymoved.

Sources:MikeIves,“ARemotePacificNation,ThreatenedbyRisingSeas.”NewYorkTimes,July2,2016.“KiribatiGlobalWarmingFears:EntireNationMayMovetoFiji,”AssociatedPress,March12,2012

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globalwarming,andcapableofraisingthesealevelby12feetormoreshouldithappen.Evenifthismostpessimisticscenariodidnotmaterialize,researchersfoundthatthetotalsearisecouldreach5to6feetby2100,andwouldcontinuetoincrease,withtheseasrisingbymorethanafootperdecadebythemiddleofthe22ndcentury.20

Inadditiontorisingoceantemperatures,increasedCO2intheatmosphereresultsinocean acidification. The U.S. National Oceanic and Atmospheric Administrationfinds:

Around half of all carbon dioxide produced by humans since the IndustrialRevolutionhasdissolved into theworld’soceans.Thisabsorption slowsdownglobalwarming,butitalsolowerstheoceanspH,makingitmoreacidic.Moreacidicwatercancorrodemineralsthatmanymarinecreaturesrelyontobuildtheirprotectiveshellsandskeletons.21

A2012reportinSciencemagazinefoundthattheoceansareturningacidicatwhatmaybe the fastestpace in300millionyears,withpotential severeconsequencesformarineecosystems.22Amongthefirstvictimsofoceanwarmingandacidificationarecoralreefs,becausecoralscanformonlywithinanarrowrangeoftemperaturesandacidityofseawater.Theyear2015sawarecorddie-offofcoralreefs,knownascoralbleaching,duetoacombinationofthemostpowerfulElNiño(Pacificwarm-ing) climate cycle in a century and water temperatures already elevated due toclimatechange.23Oysterhatcheries,whichhavebeenreferredtoas“canariesinacoalmine”sincetheymaypredicteffectsonawiderangeofoceanecosystemsasoceanacidification increases, are also affected, threatening thePacificNorthwestshellfishindustry.24Otherecosystemsarealsoseverelyimpactedbyclimatechange(Box3).

20DeContoandPollard,2016.21NOAA,2010.22Hönishetal.,2012;DeborahZabarenko,“Ocean’sAcidicShiftMayBeFastestin300MillionYears,”Reuters,March1,2012

23RogerBradbury,“AWorldWithoutCoralReefs,”NewYorkTimes,July14,2012;NOAA,“ScientistsfindrisingcarbondioxideandacidifiedwatersinPugetSound,”2010;MichelleInis,“Climate-relateddeathofcoralaroundtheworldalarmsscientists”NewYorkTimes,April9,2016

24CoralDavenport,“Asoystersdie,climatepolicygoesonthestump,”NewYorkTimesAugust3,2014.

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Futureprojectionsofclimatechangedependonthepathoffutureemissions.Evenifallemissionsofgreenhousegasesendedtoday,theworldwouldcontinuewarm-ingformanydecades,andeffectssuchassea-levelrisewouldcontinueforcentu-ries,becausetheenvironmentaleffectsofemissionsarenotrealizedimmediately.25

Basedon a rangemodelswith different assumptions about future emissions, theIPCCestimatedinits2014reportthatduringthetwenty-firstcenturyglobalaveragetemperatures will rise within a rangemost likely to be between 1.5°C (3°F) and4.8°C(8.6°F)abovepre-industriallevels,unlessdrasticpolicyactiontoreduceemis-sionsoccurs.26 The rangeof possible temperature increases is shown in Figures 9and10,withFigure10showingtheprobabledistributionoftemperatureincreasesacrosstheplanetforlow-endandhigh-endtemperatureincreasescenarios. 25Jevrejevaetal.,2012;http://www.skepticalscience.com/Sea-levels-will-continue-to-rise.html.26IPCC,2014b,pp.59-60.

BOX3.FORESTS,CLIMATECHANGE,ANDWILDFIRES

Wildfireswereonceprimarilyaseasonalthreat,takingplacemainlyinhot,drysummers. Now they are burning nearly year-round in the Western UnitedStates,Canada,andAustralia.InMay2016,thestateofAlbertawasdevastatedbywildfiresexpandingover350miles,leadingtotheevacuationofthe80,000inhabitantsofthecityofFortMcMurray,whichsufferedextensivedamage.

Globalwarmingissuspectedasaprimecauseoftheincreaseinwildfires.Thewarmingishittingnorthernregionsespeciallyhard:TemperaturesareclimbingfastertherethanfortheEarthasawhole,snowcoverismeltingprematurely,andforestsaredryingoutearlierthaninthepast.Drywintersmeanlessmois-tureontheland,andtheexcessheatmayevenbecausinganincreaseinlight-ning,whichoftensetsoffthemostdevastatingwildfires.

AccordingtoaresearchecologistfortheUnitedStatesForestService:“Insomeareas,we nowhave year-round fire seasons, and you can say it couldn’t getworsethanthat.Butweexpect fromthechangesthat itcangetworse.”TheUnitedStatesForestServicespentmorethanhalfof itsbudgetonfirefightingin2015,attheexpenseofprogramssuchascontrolledburningaimedatreduc-ingtheriskoffires.Scientistsseeariskthatifthedestructionofforestsfromfires andinsectskeeps rising, the carbon that has been locked away in theforestswill returntotheatmosphereascarbondioxide,acceleratingthepaceofglobalwarming—adangerousfeedbackloop.

Sources:MattRichtelandFernandaSantos,“Wildfires,onceconfinedtoaseason,burnearlierandlonger”NewYorkTimes,April12,2016;IanAusten,“WildfireemptiesFortMcMurrayinAlberta’soilsandsregion,”NewYorkTimes,May3,2016.

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Figure9.GlobalTemperatureTrends,1900–2100

Source:IPCC2014c,SummaryforPolicymakers,p.13.Note:Thegraphshowsmeanprojectionsforhigh-,medium-,andlow-emissionsscenarios.ThepossiblerangeoftemperatureincreasesinallIPCCmodelsiswider,rangingbetween0.3and4.8°C

Figure10.GlobalTemperatureTrendsProjectedto2100–twoscenarios

Source:IPCC,2013

Themagnitudeofactualwarmingandothereffectswilldependuponthe levelatwhichatmosphericconcentrationsofCO2andothergreenhousegasesareultimate-lystabilized.Pre-industrial levelsofconcentrationwerearound280partspermil-lion(ppm).A2008scientificpaperbyclimatescientistsJamesHansenandRajandraPachauri, the chairperson of the IPCC, declared that: “If humanitywishes to pre-serveaplanetsimilar tothatonwhichcivilizationdevelopedandtowhich lifeonEarth is adapted,paleoclimateevidenceandongoing climate change suggest thatCO2willneedtobe350ppm.”27

27Hansenetal,2008.

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In 2015, the atmospheric CO2 concentration passed themilestone of 400 ppm.28Whenwealsoincludethecontributionofothergreenhousegases,theoveralleffectis equivalent to a concentration of 430 ppm of CO2 or more referred to as CO2

equivalent (CO2e).This levelofCO2equivalenthasnotbeenexperiencedforover800,000years.29

Figure11relatesthestabilizationlevelofgreenhousegases,measuredinCO2e,tothe resulting rise inglobalaverage temperatures, incorporating thedegreeofun-certainty. The solid bar at each level of CO2e represents a range of temperatureoutcomes that is likely tooccurwitha90percentprobability. Thedashed lineateither end represents the full range of predicted results from themajor existingclimate models. The vertical line around the middle of each bar represents themidpointofthedifferentpredictions.

Figure11.RelationshipbetweenLevelofGreenhouseGasStabilizationandEventualTemperatureChange

Source:Stern,2007.Note:CO2e=CO2equivalent;ppm=partspermillion.

Thisprojectionsuggeststhatstabilizinggreenhousegasconcentrationsat450ppmCO2e would be 90 percent likely to eventually result in a temperature increasebetween1.0 and3.8°C,with amedianexpectationof 2°Canda small probabilitythat the rise could be significantly more than this.With current greenhouse gasconcentrationsintheatmosphereatover430ppmCO2e,stabilizationat450ppmislikely impossibletoachievewithoutsignificantwithdrawalofCO2fromtheatmos-phere–implyingnetemissionsbelowzeroatsomepointinthefuture.Evenstabili-zationat550ppmCO2e, implyingamedianglobal temperature increaseofabout3°C,wouldrequirestrongandimmediatepolicyaction.

28AdamVaughan,“Globalcarbondioxidelevelsbreak400ppmmilestone,”TheGuardian,May6,2015.

29AndreaThompson,“2015beginswithCO2above400ppmmark”,ClimateCentral,January12,2015,www.climatecentral.org/news/2015-begins-with-co2-above-400-ppm-mark-18534

15

2. ECONOMIC ANALYSIS OF CLIMATE CHANGE

ScientistshavemodeledtheresultsofaprojecteddoublingofaccumulatedCO2intheearth’satmosphere.Someofthemanynegativepredictedeffectsare:

• Lossoflandarea,includingbeachesandwetlands,becauseofsea-levelrise• Lossofspeciesandforestarea• Disruptionofwatersuppliestocitiesandagriculture• Increasedairconditioningcosts• Healthdamageanddeathsfromheatwavesandspreadoftropicaldiseases• Lossofagriculturaloutputduetodrought

Somebeneficialoutcomesmightinclude:• Increasedagriculturalproductionincoldclimates• Lowerheatingcosts• Fewerdeathsfromexposuretocold

The potentially beneficial outcomes would be experienced primarily in northernpartsoftheNorthernhemisphere,suchasIceland,SiberiaandCanada.Mostoftherestoftheworld,especiallytropicalandsemi-tropicalareas,arelikelytoexperiencestrongly negative effects fromadditionalwarming. According to IPCCprojections,with increasing emissions andhigher temperatures, negative effectswill intensifyandpositiveeffectsdiminish(seeTable1).

Otherless-predictablebutpossiblymoredamagingandpermanenteffectsinclude:• Disruption of weather patterns, with increased frequency of hurricanes,

droughts,andotherextremeweatherevents.• Apossible rapid collapse of theGreenland andWest Antarctic Ice Sheets,

whichwouldraisesealevelsby12metersormore,drowningmajorcoastalcities

• Suddenmajor climatechanges, suchasa shift in theAtlanticGulf Stream,whichcouldchangetheclimateofEuropetothatofAlaska.

• Positivefeedbackeffects30,suchasanincreasedreleaseofCO2fromwarm-ingarctictundra,whichwouldspeedupglobalwarming.

Asshown inFigure9, there isconsiderableuncertaintyabouttheexpectedglobalwarminginthecomingcentury.Weneedtokeepsuchuncertaintiesinmindaswetrytoevaluateeconomicimpactsofglobalclimatechange.

30Afeedbackeffectoccurswhenanoriginalchangeinasystemcausesfurtherchangesthateitherreinforcetheoriginalchange(positivefeedback)orcounteractit(negativefeedback).

16

Table1.PossibleEffectsofClimateChange

Typeof

Impact

EventualTemperatureRiseRelativetoPre-IndustrialTemperatures

1°C 2°C 3°C 4°C 5°C

Freshwater

Supplies

SmallglaciersintheAndesdisappear,threateningwatersuppliesfor50millionpeople

Potentialwatersupplyde-creaseof20-30%insomeregions(South-ernAfricaandMediterranean)

SeriousdroughtsinSouthernEuropeevery10years1-4billionmorepeoplesufferwatershortag-es

Potentialwatersupplyde-creaseof30-50%inSouth-ernAfricaandMediterranean

LargeglaciersinHimalayaspossiblydisap-pear,affecting¼ofChina’spopulation

Foodand

Agriculture

Modestin-creaseinyieldsintemperatureregions

Declinesincropyieldsintropi-calregions(5-10%inAfrica)

150-550millionmorepeopleatriskofhunger;Yieldslikelytopeakathigherlatitudes

Yieldsdeclineby15-35%inAfrica;Someentireregionsoutofagricul-turalproduc-tion

Increaseinoceanaciditypossiblyreduc-esfishstocks

Human

Health

Atleast300,000dieeachyearfromclimate-relateddiseasesReductioninwintermortali-tyinhighlatitudes

40-60millionmoreexposedtomalariainAfrica

1-3millionmorepotential-lypeopledieannuallyfrommalnutrition

Upto80millionmorepeopleexposedtomalariainAfrica

Furtherdiseaseincreaseandsubstantialburdensonhealthcareservices

Coastal

Areas

Increaseddamagefromcoastalflooding

Upto10millionmorepeopleexposedtocoastalflooding



SealevelrisethreatensmajorcitiessuchasNewYork,Tokyo,andLondon

Ecosystems

Atleast10%oflandspeciesfacingextinc-tionIncreasedwildfirerisk

15-40%ofspeciespoten-tiallyfaceextinction

20-50%ofspeciespoten-tiallyfaceextinction;PossibleonsetofcollapseofAmazonforest

LossofhalfofArctictundra;Widespreadlossofcoralreefs

Significantextinctionsacrosstheglobe

Sources:IPCC,2007b;Stern,2007

17

Giventheseuncertainties,someeconomistshaveattemptedtoplacetheanalysisofglobalclimatechangeinthecontextofcost-benefitanalysis.Othershavecriticizedthis approach as an attempt to put a monetary valuation on issues with social,political, andecological implications that go far beyonddollar value.Wewill firstexamine economists’ efforts to capture the impacts of global climate changethrough cost-benefit analysis, and then return to the debate over how to imple-mentgreenhousegasreductionpolicies

Cost-Benefit Studies of Global Climate Change Withoutpolicyintervention,carbonemissionsinabusiness-as-usualscenariowouldbeexpectedtocontinuetoriseasshowninFigure12.Theseprojections,however,are based on current trendswithout considering the impacts of future emissionsreductions policies. Aggressive and immediate policy action is required first tostabilizeandthentoreducetotalCO2emissionsinthecomingdecades.Thisisthegoal of the 2015 Paris Agreement. To understand the issues involved in reducingemissions,weneedtolookattheeconomicimplicationsofsuchpolicyinitiatives.

Figure12.Energy-RelatedCarbonDioxideEmissions,Projectedto2040

Source:EIA,2016.Note:TheOrganizationforEconomicCooperationandDevelopment(OECD)includespri-marilyindustrializedcountries,andnon-OECDcomprisestherestoftheworld,includingdevelopingcountriesandincludingChina.

Wheneconomistsperformacost-benefitanalysis,theyweightheconsequencesoftheprojectedincreaseincarbonemissionsversusthecostsofcurrentpolicyactionstostabilizeorevenreduceCO2emissions.Strongpolicyaction topreventclimatechangewill bringbenefitsequal to thevalueofdamages thatareavoided.Thesebenefitsofpreventingdamagecanalsobereferredtoasavoidedcosts.Theesti-matedbenefitsmustthenbecomparedtothecostsoftakingaction.

18

Various economic studies have tried to estimate the benefits and costs of policyaction on climate change. Attempting tomeasure the costs of climate change inmonetized terms,orasapercentageofGDP,posesseveral inherentproblems. Ingeneral, these studies can only capture effects of climate change insofar as theyimpacteconomicproduction,orcreatenon-marketimpactsthatcanbeexpressedinmonetaryterms.Somesectorsoftheeconomyarepotentiallyvulnerabletotheeffectsofclimatechange,includingfarming,forestryandfishing,coastalrealestate,andtransportation.Butthesecomposeonlyabout10%ofGDP.Othermajorareas,such asmanufacturing, services, and finance are seen as only lightly affected byclimatechange.31

Thus, an estimate of GDP impactsmay tend to omit some of themost powerfulecologicaleffectsof climatechange.According toWilliamNordhaus,whohasau-thoredmanycost-benefitstudiesofclimatechangeoverthepasttwentyyears:

…themost damaging aspects of climate change – in unmanaged and unman-ageablehumanandnaturalsystems–liewelloutsidetheconventionalmarket-place.Iidentifiedfourspecificareasofspecialconcern:sea-levelrise,hurricaneintensification, ocean acidification, and loss of biodiversity. For each of thesethescaleofthechangesisatpresentbeyondthecapabilityofhumaneffortstostop. To this list wemust add concerns about earth system singularities andtipping points, such as those involved in unstable ice sheets and reversingocean currents. These impacts are not only hard tomeasure and quantify ineconomicterms;theyarealsohardtomanagefromaneconomicandengineer-ingperspective.Buttosaythattheyarehardtoquantifyandcontroldoesnotmean that they shouldbe ignored.Quite the contrary, these systems are theones that should be studiedmost carefully because they are likely to be themostdangerousoverthelongerrun.32

Cost-benefit analysis can alsobe controversial since it puts a dollar figureon thevalueofhumanhealthandlife.Moststudiesfollowacommoncost-benefitpracticeof assigning a value of about $8 ̶ 11 million to a life, based on studies of theamountsthatpeoplearewillingtopaytoavoidlife-threateningrisk,orarewillingtoaccept(e.g.,inextrasalaryfordangerousjobs)toundertakesuchrisks.Butlowerhumanlifevaluestendtobeassignedindevelopingnations,sincethemethodologyfordeterminingthevalueofa“statisticallife”dependsonmonetarymeasuressuchas incomes and contingent valuation. Sincemany of themost serious impacts ofclimatechangewillbeexperienced indevelopingnations,thiseconomicvaluationbiasclearlyraisesbothanalyticalandmoralissues.

31Nordhaus,2013,p.137.32Nordhaus,2013,p.145.

19

Theissueofuncertaintyiscentraltocost-benefitanalysisofclimatechange.Dam-age estimates tend to omit the possibility of themuchmore catastrophic conse-quencesthatcouldresult ifweatherdisruption ismuchworsethananticipated.Asinglehurricane, forexample, cancause tensofbillions indamage, inaddition tolossoflife.HurricaneKatrinainAugust2005,forexample,causedover$100billionindamage,inadditiontolossofover1,800lives.HurricaneSandy,in2012,causedabout$50billion indamages,disruptingpower tonearly5millioncustomersandleavinglastingeffectsonanextensiveareaofshorelineinNewYorkandNewJer-sey.

If climatechangecauses severehurricanes tobecomemuchmore frequent, cost-benefitanalyseswouldhavetoestimatethecostsofdestructionatamuchhigherlevel than they have done previously. Another of the unknown values—humanmorbidity, or losses from disease—could well be enormous if tropical diseasesextendtheirrangesignificantlyduetowarmerweatherconditions.

“Integrated assessment”models have been used by scientists and economists totranslate scenarios of population and economic growth, and resulting emissionsinto changes in atmospheric composition and global mean temperature. Thesemodels then apply “damage functions” that approximate the global relationshipsbetween temperature changes and the economic costs from impacts such aschanges in sea level, cyclone frequency, agricultural productivity and ecosystemfunction. Finally, the models attempt to translate future damages into presentmonetaryvalue.33

Higher rangesof temperaturechange lead todramatically increaseddamageesti-mates at the global level, as shown in Figure 13.Differentmodels yield differentestimatesforfuturedamagesandinturndifferentimpactsontheeconomy,rang-ingfrom2%to10%ormoreofglobalGDPperyear,dependingontheglobalmeantemperature rise. The values in Figure 13 show results from three widely usedmodelswithdamageestimatesbasedonthe IPPCestimatesof likelytemperaturechangeby2100.

33Revesz,Arrowetal.,2014.

20

Figure13.IncreasingDamagesfromRisingGlobalTemperatures

Source:R.Revesz,K.Arrowetal.,2014.http://www.nature.com/news/global-warming-improve-economic-models-of-climate-change-1.14991Note:Thethreedifferentmodels(ENVISAGE,DICE,andCRED)showninthisfiguregivedamageestimatesthataresimilaratlowtomoderatelevelsoftemperaturechange,butdi-vergeathigherlevels,reflectingdifferentassumptionsusedinmodeling.

Thesemonetizedestimatesofdamagemaybesubjecttocontroversyandmaynotcoverallaspectsofdamage,butsupposethatwedecidetoacceptthem—atleastas a rough estimate. We must then weigh the estimated benefits of policies topreventclimatechangeagainstthecostsofsuchpolicies.Toestimatethesecosts,economistsusemodelsthatshowhowinputssuchaslabor,capital,andresourcesproduceeconomicoutput.

To lower carbon emissions,wemust cut back the use of fossil fuels, substitutingotherenergysourcesthatmaybemoreexpensiveandinvestinginnewinfrastruc-ture for renewables, energy efficiency, and other carbon abatement strategies.Economistscalculateameasureofmarginalabatementcosts–thecostofreduc-tionofoneextraunitofcarbon– forvariousmeasuressuchasenergyefficiency,shiftingtosolarandwindpower,oravoideddeforestation.

Some of thesemeasures are low-cost, or even negative cost (meaning that theybringaneteconomicbenefitinadditiontotheircarbon-reducingcontribution).Butespecially for very substantial carbon reduction, most economic models predictsomenegativeimpactonGDP.Onesummaryofabroadarrayofstudies,knownasameta-analysis,foundthatestimatesoftheimpactonGDPvarybasedonassump-tions about thepossibilities for substitutionof newenergy sources, technologicallearning,andeconomicflexibility.34

34Stern,2007,Chapter10,“MacroeconomicModelsofCosts”.

21

OneestimateofthecostsofmeetingtheParisagreementtargetofnomorethan2°C temperature increase is that it would require about 1.5% of world income(abouttheequivalentofoneyear’sgrowthinreal income).Butthis isunderbest-caseassumptionsof international cooperation.Under less favorableassumptions,costsareestimatedtorisetoabove4%ofglobalGDP.35Similarly,themeta-analysisreferredtoabovefindsthatcostscouldvaryfrom3.4%ofglobalGDPunderworst-case assumptions to an increase in global GDP of 3.9% using best-case assump-tions.36

IfcostsandbenefitsofanaggressivecarbonabatementpolicyarebothintherangeofseveralpercentofGDP,howcanwedecidewhattodo?Muchdependsonourevaluationof futurecostsandbenefits.Thecostsof takingactionmustbebornetodayorinthenearfuture.Thebenefitsoftakingaction(theavoidedcostsofdam-ages)are further in the future.Our task, then, is todecide todayhow tobalancethesefuturecostsandbenefits.

Economists evaluate future costs andbenefits by theuseof adiscount rate. Theproblems and implicit value judgments associated with discounting add to theuncertainties thatwe have already noted in valuing costs and benefits. This sug-gests thatweshouldconsidersomealternativeapproaches—including techniquesthatcanincorporatetheecologicalaswellastheeconomiccostsandbenefits.

Economicstudiesdealingwithcost-benefitanalysisofclimatechangehavecometoverydifferentconclusionsaboutpolicy.Accordingtoearlystudies(2000to2008)byWilliamNordhausandcolleagues,the“optimal”economicpoliciestoslowclimatechangeinvolvemodestratesofemissionsreductionsinthenearterm,followedbyincreasing reductions in themedium and long term, sometimes referred to as agradual“rampingup”ofclimatepolicy.37

Mostearlyeconomicstudiesofclimatechangereachedconclusionssimilartothoseof the Nordhaus studies, although a few recommendedmore drastic action. Thedebateonclimatechangeeconomicschangedsignificantlyin2007,whenNicholasStern, a former chief economist for theWorld Bank, released a 700-page report,sponsoredbytheBritishgovernment,titled“TheSternReviewontheEconomicsofClimateChange.”38Whilemostpreviouseconomicanalysesofclimatechangesug-gestedrelativelymodestpolicyresponses,theSternReviewstronglyrecommendedimmediateandsubstantialpolicyaction:

35Nordhaus,2013,Chapter15,“TheCostsofSlowingGlobalClimateChange”.36Stern,2007,p.271.37Nordhaus2007,2008;NordhausandBoyer,2000.38Stern,2007.

22

Thescientificevidenceisnowoverwhelming:climatechangeisaseriousglobalthreat,and itdemandsanurgentglobal response.ThisReviewhasassessedawiderangeofevidenceontheimpactsofclimatechangeandontheeconomiccosts,andhasusedanumberofdifferenttechniquestoassesscostsandrisks.From all these perspectives, the evidence gathered by the Review leads to asimpleconclusion:thebenefitsofstrongandearlyactionfaroutweightheeco-nomiccostsofnotacting.

Using the results from formal economicmodels, the Review estimates that ifwedon’tact,theoverallcostsandrisksofclimatechangewillbeequivalenttolosingatleast5percentofglobalGDPeachyear,nowandforever.Ifawiderrangeofrisksandimpactsistakenintoaccount,theestimatesofdamagecouldriseto20percentofGDPormore. In contrast, the costs of action—reducing greenhouse gas emis-sions to avoid theworst impacts of climate change—can be limited to around 1percentofglobalGDPeachyear.39Thisbenefit/cost ratioofat least5:1 impliesastrongeconomiccaseforimmediateandmajorpolicyaction,asopposedtoaslow-er“rampingup”.

Whatexplainsthedifferencebetweenthesetwoapproachestoeconomicanalysisof climate change? Onemajor issue is the choice of the discount rate to use invaluingfuturecostsandbenefits.Thepresentvalue(PV)ofa long-termstreamofbenefitsorcostsdependsonthediscountrate.Ahighdiscountratewill leadtoalowpresent valuation for benefits that aremainly in the longer term, andahighpresentvaluationforshort-termcosts.Incontrast,alowdiscountratewillleadtoahigherpresentvaluationforlonger-termbenefits.Theestimatednetpresentvalueof an aggressive abatement policy will thus be much higher if we choose a lowdiscountrate(Box4).

WhileboththeSternandNordhausstudiesusedstandardeconomicmethodology,Stern’sapproachgivesmuchgreaterweighttolong-termecologicalandeconomiceffects.TheSternReviewusesalowdiscountrateof1.4percenttobalancepresentandfuturecosts.Thus,eventhoughcostsofaggressiveactionappearhigherthanbenefits for several decades, thehighpotential long-termdamages sway thebal-anceinfavorofaggressiveactiontoday.Thesearesignificantbothfortheirmone-taryandnonmonetaryimpacts.Inthelongterm,damagetotheenvironmentfromglobal climate changewill have significant negative effects on the economy, too.Buttheuseofastandarddiscountratehastheeffectofreducingthepresentvalueofsignificantlong-termfuturedamagestorelativeinsignificance(seeBox4).

39Stern,2007,ShortExecutiveSummary,vi.

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BOX4.DISCOUNTING

Economistscalculatethepresentvalueofacostorbenefitof$Xthatoccursinyearsinthefutureusingtheequation:

PresentValue($X)=$X/(1+r)n

where r is the discount rate. So, for example, if we want to determine thepresentvalueofabenefitof$50,000received25years fromnowwithadis-countrateof5%,itwouldbe:

$50,000/(1+0.05)25=$14,765

Thechoiceofadiscountratebecomesmoreimportantthefurtheroutintimeonegoes.Figure14showsthepresentvalueof$100ofcostsorbenefitsexpe-rienced at different times in for different time periods into the future usingseveral discount rates that have been used in climate change cost-benefitanalyses.Weseethatwhenadiscountrateof5%or7%isused,costsorbene-fitsthatoccur100yearsintothefuturearenegligibleintermsofpresentvalue–worthonly$0.76and$0.12respectively.Evenwithadiscountrateof3%,thevalueof$100isonly$5.20after100years.Butwhenthediscountrateis1%,impacts 100 years into the future are still significant – worth about $37 inpresentvalue;evenwhendiscountingoveraperiodof200years,thepresentvalueisstillnearly$20.

Figure14:PresentValueofaFuture$100CostorBenefit:

TheEffectsofDifferentDiscountRates

24

Anotherdifferencebetweenthetwostudiesconcernstheirtreatmentofuncertain-ty. Stern’s approach gives a heavier weighting to uncertain but potentially cata-strophic impacts. This reflects the application of a precautionary principle: If aparticular outcome could be catastrophic, even though it seems unlikely, strongmeasuresshouldbetakentoavoidit.Thisprinciple,whichhasbecomemorewidelyused inenvironmentalriskmanagement, isespecially importantforglobalclimatechangebecauseofthemanyunknownbutpotentiallydisastrousoutcomespossiblyassociatedwithcontinuedgreenhousegasaccumulation(seeBox5).

AstudybyMartinWeitzmanarguesthataseriousconsiderationofthepossibilitiesofcatastrophicclimatechangecanoutweightheimpactsofdiscounting,suggestingsubstantialinvestmentinmitigationtodaytoavoidthepossibilityoffuturedisaster– on the same principle as insuring against the uncertain possibility of a futurehousefire.40

Athirdareaofdifferenceconcernstheassessmentoftheeconomiccostsofactiontomitigateclimatechange.Measures taken topreventglobal climatechangewillhaveeconomiceffectsonGDP,consumption,andemployment,whichexplainsthereluctance of governments to take drasticmeasures to reduce significantly emis-sionsofCO2.Buttheseeffectswillnotallbenegative.

The SternReview conducted a comprehensive reviewof economicmodels of thecostsofcarbonreduction.Thesecostestimatesdependonthemodelingassump-tionsthatareused.Asnotedabove,thepredictedcostsofstabilizingatmosphericaccumulationsofCO2at450ppmcouldrangefroma3.4percentdecreasetoa3.9percent increase inglobalGDP.Theoutcomesdependona rangeofassumptionsincluding:

• Theefficiencyorinefficiencyofeconomicresponsestoenergypricesignals• Theavailabilityofnoncarbon“backstop”energytechnologies• Whethercountriescantradeleast-costoptionsforcarbonreductionusinga

tradablepermitsscheme.• Whetherrevenuesfromtaxesoncarbon-basedfuelsareusedtolowerother

taxes• Whether external benefits of carbon reduction, including reduction in

ground-levelairpollution,aretakenintoaccount.41

40Weitzman,2009.41Ibid.

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BOX5.CLIMATETIPPINGPOINTSANDSURPRISES

Muchoftheuncertaintyinprojectionsofclimatechangerelatestotheissueoffeedbackloops.Afeedbackloopoccurswhenaninitialchange,suchaswarmertemperatures, produces changes in physical processes, which then amplify orlessen the initialeffect (a response that increases theoriginaleffect is calledapositivefeedback loop;aresponsethatreduces it isanegativefeedback loop).An example of a positive feedback loop is when warming leads to increasedmelting of arctic tundra, releasing carbon dioxide andmethane, which add toatmosphericgreenhousegasaccumulationsandspeedupthewarmingprocess.

As a result of various feedback loops associated with climate change, recentevidencesuggeststhatwarmingisoccurringfasterthanmostscientistspredictedjustfiveortenyearsago.Thisisleadingtoincreasingconcernoverthepotentialfor“runaway”feedbackloops,whichcouldresultindramaticchangesinashortperiod. Some scientists suggest that we may be near certain climate tippingpoints,which,onceexceeded,posethepotentialforcatastrophiceffects.

PerhapsthemostdisturbingpossibilityistherapidcollapseoftheGreenlandandWestAntarcticIceSheets.A2016studyarguedthatlargechunksofthepolaricecouldmeltoverthenext50years,causingaseariseof20to30feet.ThepapersuggeststhatfreshwaterpouringintotheoceansfrommeltinglandicewillsetoffafeedbackloopthatwillcauserapiddisintegrationoficesheetsinGreenlandandAntarctica.“Thatwouldmean lossofallcoastalcities,mostoftheworld’slargecitiesandalltheirhistory,”accordingtoleadauthorDr.JamesHansen.

While rapidmelting scenarios remain controversial, other dangerous feedbackloops have been identified. In recent studies, scientists found that methaneemissionsfromtheArctichaverisenbyalmostone-third in just fiveyears.Thediscoveryfollowsastringofreports fromtheregion in recentyearsthatprevi-ouslyfrozenboggysoilsaremeltingandreleasingmethaneingreaterquantities.Sucharcticsoilscurrentlylockawaybillionsoftonsofmethane,afarmorepo-tent greenhouse gas than carbon dioxide, leading some scientists to describemelting permafrost as a ticking time bomb that could overwhelm efforts totackle climate change. They fear the warming caused by increased methaneemissionswillitselfreleaseyetmoremethaneandlocktheregionintoadestruc-tivecyclethatforcestemperaturestorisemorerapidlythanpredicted.

Sources:DavidAdam,“ArcticPermafrostLeakingMethaneatRecordLevels,FiguresShow,”TheGuardian,2010,www.guardian.co.uk/environment/2010/jan/14/arctic-permafrost-methane/;JustinGillis,“Scientistswarnofperilousclimateshiftwithindecades,notcenturies”,NewYorkTimesMarch22,2016;DeContoandPollard,2016.

26

Dependingonwhichassumptionsaremade,policiesforemissionsreductioncouldrange from a minimalist approach of slightly reducing emissions to drastic CO2emissionsreductionof80percentormore.Inrecentyears,however,thepositionsofNordhausandSternhaveconverged.Nordhaus,inhislatestpublications,usesanupdatedversionofhismodel(DICE-2013)projectingatemperatureincreaseof3°Cormoreby2100.Headvocatesacarbontaxof$21pertonofCO2emitted,risingrapidlyovertime.42AmodificationofhismodelbySimonDietzandNicholasStern,taking into account increased damages and the possibility of climate “tippingpoints” (seeBox5), suggests carbon taxes thatare two to seven timeshigher, tolimit atmospheric CO2 accumulations to 425-500 ppm and global temperaturechange to1.5 to2.0°C.43Thuswhiledifferences remain, the trend isgenerally to-wardsrecommendationsformoredrasticpolicymeasures:

WhileNordhaus and Sternmaydifferonwhether a carbon tax shouldbe im-posedeitherasaramporasteephill,andontheappropriatediscountrateforconvertinganticipatedfuturedamagestopresentterms,thisdebateisprogres-sivelylessrelevantastheybothagreethatthesteepnessofthisrampwouldin-crease,withmodelsophisticationandwiththefurtherdelayofacarbontax.44

Climate Change and Inequality The effects of climate change will fall most heavily upon the poor of the world.RegionssuchasAfricacouldfaceseverelycompromisedfoodproductionandwatershortages,whilecoastalareasinSouth,East,andSoutheastAsiawillbeatgreatriskofflooding.TropicalLatinAmericawillseedamagetoforestsandagriculturalareasduetodrierclimate,whileinSouthAmericachangesinprecipitationpatternsandthedisappearanceofglacierswillsignificantlyaffectwateravailability.45Whiletherichercountriesmayhavetheeconomicresourcestoadapttomanyoftheeffectsof climate change, poorer countries will be unable to implement preventivemeasures,especiallythosethatrelyonthenewesttechnologies.

Recentstudieshaveusedgeographicallydistributedimpactsmodelstoestimatetheimpactsofclimatechangeacrosstheglobaldomain.AsTable2indicates,thenum-berofcoastalfloodvictimsandpopulationatriskofhungerby2080willberelative-ly larger inAfrica, SouthAmerica, andAsia,wheremostdeveloping countriesarelocated.AstudypublishedinNaturepredictedthat:

Ifsocietiescontinuetofunctionastheyhaveintherecentpast,climatechangeis expected to reshape the global economy by substantially reducing globaleconomicoutputandpossiblyamplifyingexistingglobaleconomicinequalities,

42Nordhaus,2013.43DietzandStern,2014.44Komanoff,2014.45IPCC,2007b;Stern,2007,Ch.4.

27

relativetoaworldwithoutclimatechange.Adaptationssuchasunprecedentedinnovationordefensiveinvestmentsmightreducetheseeffects,butsocialcon-flictordisruptedtradecouldexacerbatethem.46

Overall,thestudyprojectsthat“thelikelihoodoflargegloballossesissubstantial”,withtheheaviestproportionallossesbeingbornebythepoorestcountries.

Table2.Regional-ScaleImpactsofClimateChangeby2080(millionsofpeople)

RegionPopulationlivinginwater-shedswithanincreaseinwater-resourcesstress

Increaseinaverageannualnumberof

coastalfloodvictims

Additionalpopulationatriskofhunger*

Europe 382–493 0.3 0

Asia 892–1197 14.7 266(–21)

NorthAmerica 110–145 0.1 0

SouthAmerica 430–469 0.4 85(–4)

Africa 691–909 12.8 200(–2)

*FiguresinparenthesesassumemaximumCO2enrichmenteffectSource:AdaptedfromIPCC,2007b.Note:Theseestimatesarebasedonabusiness-as-usualscenario(IPCCA2scenario).TheCO2enrichmenteffectisincreasedplantproductivity,whichatmaximumestimatescouldactuallydecreasethenumberatriskofhunger.

Thewayinwhicheconomistsincorporateinequalityintotheiranalysescanhaveasignificant impact on their policy recommendations. If all costs are evaluated inmoneyterms,alossof,forexample,10percentofGDPinapoorcountryislikelytobemuchless,measuredindollars,thanalossof3percentofGDPinarichcountry.Thus,thedamagesfromclimatechangeinpoorcountries,whichmaybelargeasapercentage of GDP, would receive relatively little weight because the losses arerelativelysmallindollarterms.TheSternReviewassertsthatthedisproportionateeffectsof climate changeon theworld’spoorestpeople should increase theesti-matedcostsofclimatechange.Sternestimatesthat,withouttheeffectsofinequity,the costs of a business-as-usual scenario could be as much as 11–14 percent ofglobalGDPannually.Weighingtheimpactsontheworld’spoormoreheavilygivesacostestimateof20percentofglobalGDP.47

Assumptionsabouttheproperwaytoevaluatesocialandenvironmentalcostsandbenefits canmakeabigdifference topolicy recommendations.Aswehave seen,cost-benefit analyses mostly recommend action to mitigate climate change, butdiffer in the strengthof their recommendationsbasedonassumptions about risk46Burke,HsiangandMiguel,2015.47Stern,2007,Ch.6.

28

and discounting. An ecologically oriented economistwould argue that the funda-mental issue is thestabilityof thephysicalandecological systems thatserveasaplanetaryclimate-controlmechanism.Thismeansthatclimatestabilization,ratherthaneconomicoptimizationofcostsandbenefits,shouldbethegoal.

Stabilizinggreenhousegasemissionsisinsufficient;atthecurrentrateofemissionscarbon dioxide and other greenhouse gases will continue to accumulate in theatmosphere.Stabilizingaccumulationsofgreenhousegaseswillrequireasignificantcutbelowpresentemissionlevels.Figure15showstheIPCCestimatesofrequiredreductions inCO2emissionstoachievestabilizationat levelsof430–480pmand530–580ppmofCO2intheatmosphere.Notethatforthelowerstabilizationlevel,totalemissionsneedtofallessentiallytozerointhesecondpartofthetwenty-firstcentury. This could likely only be achievedwith substantially increased global ab-sorption of CO2, possibly through expanding forests and modifying agriculturaltechniquesinadditiontodrasticemissionsreductions.

Clearly, reductions of thismagnitudewould implymajor changes in theway thattheglobaleconomyusesenergy.Energyefficiencyandtheuseofrenewableenergycould have a significant effect in reducing emissions.Other policies could reduceemissions of other greenhouse gases and promote CO2 absorption in forests andsoils.Whatcombinationofpoliciescanprovideasufficientresponse,andhowhavethecountriesoftheworldreactedtotheissuethusfar?Wewillnowturntotheseissuesinmoredetail.

Figure15CarbonStabilizationScenarios:RequiredEmissionsReductions

Source:IPCC,2014d,p.11.Note:UpperlinerepresentsIPCCRCP4.5scenario(moderatestabilizationintherangeof530–580ppmCO2accumulation)andlowerlinerepresentIPCCRCP2.6scenario(strongerstabilizationat430–480ppmCO2accumulation).

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3. POLICY RESPONSES TO CLIMATE CHANGE

Adaptation and Mitigation Policy responses to climate change can be broadly classified into two categories:adaptivemeasures todealwith the consequencesof climate changeandmitiga-

tion,orpreventivemeasures,intendedtolowerthemagnitudeortimingofclimatechange.

Adaptivemeasuresinclude:

• Construction of dikes and seawalls to protect against rising seas and ex-tremeweathereventssuchasfloodsandhurricanes.

• Shifting cultivation patterns in agriculture to adapt to changing weatherconditions.

• Creating institutionsthatcanmobilizetheneededhuman,material,andfi-nancialresourcestorespondtoclimate-relateddisasters.

Mitigationmeasuresinclude:

• Reducingemissionsofgreenhousegasesbymeetingenergydemandsfromsourceswith lower greenhousegasemissions (e.g., switching fromcoal towindenergyforelectricity).

• Reducinggreenhousegasemissionsbyincreasingenergyefficiency.• Enhancingnaturalcarbonsinks.Carbonsinksareareaswherecarbonmay

bestored;naturalsinksincludesoilsandforests.Humaninterventioncanei-therreduceorexpandthesesinksthroughforestmanagementandagricul-turalpractices.Forestsrecyclecarbondioxide(CO2)intooxygen;preservingforestedareasandexpandingreforestationcanhaveasignificanteffectonnetCO2emissions.Soilsarealsovastcarbonrepositories,withthreetimesmore carbon stored in soils than in the atmosphere. Restoring degradedsoilscouldcapturelargequantitiesofCO2.

Economicanalysiscanprovidepolicyguidancefornearlyanyparticularpreventiveoradaptivemeasure.Cost-benefitanalysis,asseenabove,canpresentabasisforevaluatingwhetherapolicyshouldbe implemented.However,asdiscussedprevi-ously,economistsdisagreeabouttheappropriateassumptionsandmethodologiesfor cost-benefit analyses of climate change. A less controversial conclusion fromeconomictheoryisthatweshouldapplycost-effectivenessanalysisinconsideringwhichpolicies toadopt.Theuseofcost-effectivenessanalysisavoidsmanyof thecomplications associated with cost-benefit analysis. While cost-benefit analysisattemptstoofferabasisfordecidinguponpolicygoals,cost-effectivenessanalysisacceptsagoalasgivenbysocietyanduseseconomictechniquestodeterminethemostefficientwaytoreachthatgoal.

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Ingeneral,economistsusuallyfavorapproachesthatworkthroughmarketmecha-nisms to achieve their goals. Market-oriented approaches are considered costeffective;ratherthanattemptingtocontrolmarketactorsdirectly,theyshiftincen-tivessothatindividualsandfirmswillchangetheirbehaviortotakeexternalcostsandbenefitsintoaccount.Examplesofmarket-basedpolicytoolsincludepollutiontaxesand transferable,or tradable,permits. Bothof thesearepotentiallyusefultools for greenhouse gas reduction. Other relevant economic policies includemeasures to create incentives for the adoption of renewable energy sources andenergy-efficienttechnology.

Mostof thissection focusesonmitigationpolicies,but it isbecoming increasinglyevidentthatmitigationpoliciesneedtobesupplementedwithadaptationpolicies.Climate change is alreadyoccurring, andeven if significantmitigationpoliciesareimplementedintheimmediatefuture,warmingandsea-levelrisewillcontinuewellinto the future, even for centuries.48 Theurgencyandability to instituteadaptivemeasuresvariesacrosstheworld.Itistheworld’spoorwhofacethegreatestneedtoadaptbutalsomostlackthenecessaryresources.

[Climatechange’s]adverse impactswillbemoststriking in thedevelopingna-tionsbecauseoftheirgeographicalandclimaticconditions,theirhighdepend-ence on natural resources, and their limited capacity to adapt to a changingclimate.Withinthesecountries,thepoorest,whohavetheleastresourcesandtheleastcapacitytoadapt,arethemostvulnerable.49

The Intergovernmental Panel on Climate Change (IPCC) has identified adaptationneeds bymajor sectors, as shown in Table 3. Someof themost critical areas foradaptationincludewater,agriculture,andhumanhealth.

Climate change is expected to increase precipitation in some areas, mainly thehigherlatitudesincludingAlaska,Canada,andRussia,butdecreaseitinotherareas,includingCentralAmerica,NorthAfrica,andsouthernEurope.Areductioninwaterrunofffromsnowmeltandglacierscouldthreatenthewatersuppliesofmorethanabillionpeople inareas suchas Indiaandpartsof SouthAmerica.Providing safedrinkingwater intheseregionsmayrequirebuildingnewdamsforwaterstorage,increasingtheefficiencyofwateruse,andotheradaptationstrategies.

Changing precipitation and temperature patterns have significant implications foragriculture.Withmoderatewarming,cropyieldsareexpectedtoincreaseinsomecolderregions,includingpartsofNorthAmerica,butoveralltheimpactsonagricul-tureareexpectedtobenegative,andincreasinglysowithgreaterwarming.Inthe

48IPCC,2007,p.46;IPCC,2014bSummaryforPolicymakers,p.16;Kahn,2016.49AfricanDevelopmentBanketal.,2003,p.1.

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US, climate changehas lengthenedandworsened theepisodesof drought in theWesternStates,notablyCalifornia,which,asaresult,hasalreadyforcedfarmerstoadapttolesswater-intensivecrops,replacingorangegrovesandavocadotreeswithother tree crops such as pomegranates or cactus-like dragonfruit.50 AgriculturalimpactsareexpectedtobemostsevereinAfricaandAsia.Moreresearchisneces-sary to develop crops that can grow under anticipated drier weather conditions.Agriculturemayneedtobeabandonedinsomeareasbutexpandedinothers.51

The impactsofclimatechangeonhumanhealtharealreadyoccurring.TheWorldHealthOrganization(WHO)estimatesthatmorethan140,000peopleperyeararealreadydyingasadirectresultofclimatechange,primarilyinAfricaandSoutheastAsia. It alsoestimates thatafter2030, climatechangewill result in250,000addi-tionaldeathsperyear,causedbymalnutrition,malaria,diarrhea,andheatstress.TheWHO estimates direct damage costs to health at US$2–4 billion per year by2030.WHOpolicy recommendations include strengtheningpublichealth systems,withincreasededucation,diseasesurveillance,vaccination,andpreparedness.52

Table3.ClimateChangeAdaptationNeeds,bySector

Sector Adaptationstrategies

Water ExpandwaterstorageanddesalinationImprovewatershedandreservoirmanagement.Increasewateruseandirrigationefficiencyandwaterre-useUrbanandruralfloodmanagement

Agriculture AdjustplantingdatesandcroplocationsDevelopcropvarietiesadaptedtodrought,highertemperaturesImprovedlandmanagementtodealwithfloods/droughtsStrengthenindigenous/traditionalknowledgeandpractice

Infrastructure RelocatevulnerablecommunitiesBuildandstrengthenseawallsandotherbarriersCreateandrestorewetlandsforfloodcontrolDunereinforcement

Humanhealth HealthplansforextremeheatIncreasetracking,early-warningsystemsforheat-relateddiseasesAddressthreatstosafedrinkingwatersuppliesExtendbasicpublichealthservices

50http://www.npr.org/sections/thesalt/2015/07/28/426886645/squeezed-by-drought-california-farmers-switch-to-less-thirsty-crops.

51Cline,2007;U.S.GlobalChangeResearchProgram,2009,AgricultureChapter;KahsayandHan-sen,2016..

52WorldHealthOrganization,2009;WHO,ClimateChangeandHealth,June2016,http://www.who.int/mediacentre/factsheets/fs266/en/

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Transport RelocationoradapttransportinfrastructureNewdesignstandardstocopewithclimatechange

Energy StrengthendistributioninfrastructureAddressincreaseddemandforcoolingIncreaseefficiency,increaseuseofrenewables

Ecosystems ReduceotherecosystemstressesandhumanusepressuresImprovescientificunderstanding,enhancedmonitoringReducedeforestation,increasereforestationIncreasemangrove,coralreef,andseagrassprotection

Source:IPCC,2007;IPCC,2014c.

Variousestimatesexistforthecostofappropriateadaptationmeasures.TheUnitedNationsEnvironmentProgram(UNEP)estimatesthatthecostofadaptationfordevelopingnationscouldrisetobetween$140and$300billionperyearby2030,andbetween$280and$500billionperyearby2050.Thesesumssignificantlyexceedthe$100billionperyearpledgedbydevelopednationsinthe2015ParisAgreement.UNEPwarnsthattherewillbeasignificantfinancegap,“likelytogrowsubstantiallyoverthecomingdecades,unlesssignificantprogressismadetosecurenew,additionalandinnovativefinancingforadaptation”.Adaptationcostsarealreadytwotothreetimeshigherthancurrentinternationalpublicfundingforadaptation.53

Climate Change Mitigation: Economic Policy Options Thereleaseofgreenhousegasesintheatmosphereisaclearexampleofanegativeexternalitythatimposessignificantcostsonaglobalscale.Inthelanguageofeco-nomictheory,thecurrentmarketforcarbon-basedfuelssuchascoal,oil,andnatu-ralgastakesintoaccountonlyprivatecostsandbenefits,whichleadstoamarketequilibriumthatdoesnotcorrespondtothesocialoptimum.Fromasocialperspec-tive,themarketpriceforfossilfuelsistoolowandthequantityconsumedtoohigh.

Carbon Taxes Astandardeconomicremedyforinternalizingexternalcostsisaper-unittaxonthepollutant. In this case,what is called for is a carbon tax, levied on carbon-basedfossilfuelsinproportiontotheamountofcarbonassociatedwiththeirproductionanduse.Suchataxwillraisethepriceofcarbon-basedenergysourcesandsogiveconsumers incentives to conserve energy overall (which would reduce their taxburden), as well as shifting their demand to alternative sources of energy thatproducelowercarbonemissions(andarethustaxedatlowerrates).53UNEP,2016.

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In economic terms, the level of such a tax should be based on the social cost ofcarbon– an estimateof the financial impact on societyof carbonemissions. TheU.S.EnvironmentalProtectionAgencyestimatesthesocialcostofcarbon,basedonvaryingassumptions,asbeingbetween$11and$212,withamedianrangearound$50.54Asnotedearlier,amajorreasonfordifferingestimatesisassumptionsregard-ingdiscountratesandrisk/uncertainty.

Table4shows the impact thatdifferent levelsofacarbontaxwouldhaveon thepricesofcoal,oil,andnaturalgas.ThetaxhereisgivenindollarspertonofCO2.Acommonpointofconfusionisthatacarbontaxcanbeexpressedaseitherataxperunitofcarbonorataxperunitofcarbondioxide.Tocomparethetwo,oneneedstotake intoaccounttheratiobetweenCO2’smolecularweight (44),andCarbon’smolecularweight(12)-onetonofCarbonisequivalentto44/12tonsofCO2.Ifwewanttoconvertataxof$100pertonofcarbonintoataxpertonofCO2,wewouldneedtomultiplythat$100taxby12/44=0.2727:thismeansataxof$100pertonofCarbonisequivalenttoataxof$27.27pertonofCO2.

Table4.AlternativeCarbonTaxesonFossilFuels

ImpactofCarbonPriceonRetailPriceofGasoline

kgCO2pergallon 8.89

tonnesCO2pergallon 0.00889

$/gal.,$50/tonnetax $0.44

$/gal.,$100/tonnetax $0.88

Retailprice(2016)pergallon $2.20

%increase,$50/tonnetax 20.2%


ImpactofCarbonPriceonRetailPriceofCoal

kgCO2pershortton 2100

tonnesCO2pershortton 2.1

$/shortton,$50/tonnetax $105

$/shortton,$100/tonnetax $210

Retailprice(2016)pershortton $40



54U.S.EPA,TheSocialCostofCarbon,https://www3.epa.gov/climatechange/EPAactivities/economics/scc.html

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ImpactofCarbonPriceonRetailPriceofNaturalGas

kgCO2per1000cu.ft. 53.12

tonnesCO2per1000cu.ft. 0.05312

$/1000cu.ft.,$50/tonnetax $2.66

$/1000cu.ft.,$100/tonnetax $5.31

Retailprice(2016)per1000cu.ft. $12


%increase,$100/tonnetax 44.2%Source:CarbonemissionscalculatedfromcarboncoefficientsandthermalconversionfactorsavailablefromtheU.S.DepartmentofEnergy.AllpricedatafromtheU.S.EnergyInformationAdministration.

Basedonenergycontent,measuredinBritishThermalUnits(Btus),coalisthemostcarbon-intensivefossilfuel,whilenaturalgasproducesthelowestcarbonemissionsperBtu(Figure16).Calculatingtheimpactofacarbontaxrelativetothestandardcommercialunitsforeachfuelsource,weseethatacarbontaxof$50/tonofCO2,for example, raises the price of a gallon of gasoline by about 44 cents, or 20%,basedon2016prices(Figure17).Ataxof$100/tonofCO2equatestoanincreaseingasolinepricesofabout88centspergallon.The impactofacarbontaxwouldbeevengreaterforcoalprices—ataxof$50/tonofCO2wouldincreasecoalpricesby262%.Anda$100/tontaxwouldraisecoalpricesbyafactoroffive.Fornaturalgas,thepercentimpactisaboutthesameasforgasoline.Fornaturalgas,althoughitscarboncontentislowerthanthatofgasoline,itslowprice(asof2016)meansthatthepercentageimpactonpriceisaboutthesameasforgasoline.

Figure16.CarbonContentofFuels

Source:CalculatedfromU.S.DepartmentofEnergydata.

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Figure17.Impactofacarbontaxongasolineprice

Source:CalculatedfromU.S.DepartmentofEnergydata.

Willthesetaxamountsaffectpeople’sdrivingorhomeheatinghabitsverymuch,orimpactindustry’suseoffuels?Thisdependsontheelasticityofdemandforthesefuels.Elasticityofdemandisdefinedas:

Percent change in quantity demandedElasticity of demandpercent change in price

=

Economistshavemeasuredtheelasticityofdemandfordifferentfossilfuels,partic-ularlygasoline.(Elasticityofdemandisgenerallynegative,sinceapositivepercentchange inpricecausesanegativepercentchange inquantitydemanded.)Studiesindicatethatintheshortterm(aboutoneyearorless)elasticityestimatesrangedfrom−0.03to−0.25.Thismeansthata10percentincreaseinthepriceofgasolinewouldbeexpectedtodecreasegasolinedemandintheshorttermbyabout−0.3to−2.5percent.55

In the long term (about five years or so) people aremore responsive to gasolineprice increases, as they have time to purchase different vehicles and adjust theirdrivinghabits.Theaveragelong-termelasticityofdemandformotorfuels,basedonfifty-one estimates, is −0.64.56 According to Table 4, a tax of $50 per ton of CO2wouldincreasethepriceofgasolinebyabout20percent,adding44centspergal-lon to the price of gasoline basedon 2016prices. A long-termelasticity of –0.64suggests that after people have time to fully adjust to this price change, the de-mandforgasolineshoulddeclinebyabout13percent.

Figure18showsacross-countryrelationshipbetweengasolinepricesandpercapitaconsumption. (Since the cost of producing a gallonof gasoline varies little acrosscountries,variationsinthepriceofagallonindifferentcountriesisalmostsolelyafunctionofdifferences in taxes.)Note that this relationship is similar to thatof a55Goodwinetal.,2004;Hughesetal.,2008.56Goodwinetal.,2004.

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demand curve: Higher prices are associated with lower consumption, and lowerprices with higher consumption. The relationship shown here, however, is notexactly the sameas ademand curve; sinceweare lookingatdata fromdifferentcountries, theassumptionof“other thingsequal,”which isneededtoconstructademandcurve,doesnothold.

Differences in demandmay, for example, be in part a function of differences inincomelevelsratherthanprices.Also,peopleintheUnitedStatesmaydrivemorepartlybecausetraveldistances(especiallyinthewesternUnitedStates)aregreaterthan in many European countries, and public transportation options fewer. Buttheredoesseemtobeaclearprice/consumptionrelationship.Thedatashownheresuggest that itwouldtakea fairlybigpricehike—intherangeof$0.50–$1.00pergallonormore—toaffectfuelusesubstantially.

Figure18.GasolinePriceVersusConsumptioninIndustrialCountries,2012

Sources:U.S.EnergyInformationAdministrationdatabase,InternationalEnergyStatistics;GIZ,InternationalFuelPrices2012/2013;WorldBank,WorldDevelopmentIndicators(Popu-lation).Note:Shadedarearepresentsprice/consumptionrangetypicalofWestEuropeancountries.

Wouldalargegasolinetaxincrease,orabroad-basedcarbontax,everbepoliticallyfeasible? Especially in the United States, high taxes on gasoline and other fuelswouldfacemuchopposition.AsFigure18shows,theUnitedStateshasbyfarthehighestgasolineconsumptionperpersonandthelowestpricesoutsidetheMiddleEast.Butletusnotetwothingsabouttheproposalforsubstantialcarbontaxes:

• First, revenue recycling could redirect the revenue from carbon andotherenvironmental taxesto lowerothertaxes.Muchof thepoliticaloppositiontohighenergytaxescomesfromtheperceptionthattheywouldbeanextratax—on topof the income,property,and social security taxes thatpeoplealreadypay. Ifacarbontaxwerematched, forexample,withasubstantialcutinincomeorsocialsecuritytaxes,itmightbemorepoliticallyacceptable.

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• The idea of increasing taxes on economic “bads,” such as pollution,whilereducingtaxesonthingswewanttoencourage,suchaslaborandcapitalin-vestment, is fully consistentwith principles of economic efficiency. Ratherthananettax increase, thiswouldberevenue-neutral taxshift—thetotalamount that citizens pay to the government in taxes is essentially un-changed.Someofthetaxrevenuescouldalsobeusedtoprovidereliefforlow-incomepeopletooffsettheburdenofhigherenergycosts.

• Second, if such a revenue-neutral tax shift did take place, individuals orbusinesses whose operations were more energy efficient would actuallysavemoneyoverall.Thehighercostofenergywouldalsocreateapowerfulincentive for energy-saving technological innovations and stimulate newmarkets. Economic adaptationwould be easier if the higher carbon taxes(andlowerincomeandcapitaltaxes)werephasedinovertime.

Tradable Permits Analternative toa carbon tax is a systemof tradable carbonpermits, also calledcap-and- trade.Acarbon tradingschemecanbe implementedat thestateorna-tional level, or could include multiple countries. A national permit system couldworkasfollows:

• Eachemittingfirmwouldbeallocatedaspecificpermissiblelevelofcarbonemissions.Thetotalnumberofcarbonpermits issuedwouldequalthede-sirednationalgoal.Forexample,ifcarbonemissionsforaparticularcountryarecurrently40milliontonsandthepolicygoalistoreducethisby10per-cent (4milliontons), thenpermitswouldbe issuedtoemitonly36milliontons. Over time, the goal could be increased, with the result that fewerpermitswouldbeissuedinfutureperiods.

• Permits are allocated to individual carbon-emitting sources. Including allcarbonsources(e.g.,allmotorvehicles)inatradingschemeisgenerallynotpractical. It ismost effective to implementpermits as far upstream in theproductionprocessaspossibletosimplifyprogramadministrationandcoverthemostemissions.(“upstream”heredenotesanearlystageintheproduc-tion process). Permits could be allocated to the largest carbon emitters,such as power companies and manufacturing plants, or even further up-stream to the suppliers through which carbon fuels enter the productionprocess—oilproducersandimporters,coalmines,andnaturalgasdrillers.

• Thesepermitscouldinitiallybeallocatedforfreeonthebasisofpastemis-sionsorauctioned to thehighestbidders.Theeffectivenessof the tradingsystem should be the same regardless of how the permits are allocated.However, there is a significant difference in the distribution of costs andbenefits:Givingpermitsout for freeessentiallyamounts toawindfallgainfor polluters, while auctioning permits imposes real costs upon firms andgeneratespublicrevenues.

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• Firmsareabletotradepermitsfreelyamongthemselves.Firmswhoseemis-sions exceed the number of permits they hold must purchase additionalpermitsorelsefacepenalties.Meanwhilefirmsthatareabletoreducetheiremissionsbelowtheirallowanceatlowcostwillseektoselltheirpermitsforaprofit.Apermitpricewillbedetermined throughmarketsupplyandde-mand. Itmayalsobepossible forenvironmentalgroupsorotherorganiza-tionstopurchasepermitsandretirethem—thusreducingoverallemissions.

• Inaninternationalsystem,countriesandfirmscouldalsoreceivecreditforfinancing carbon reduction efforts in other countries. For example, aGer-manfirmcouldgetcreditforinstallingefficientrenewableelectricgenerat-ingequipmentinChina,replacinghighlypollutingcoalplants.

Atradablepermitsystemencouragestheleast-costcarbonreductionoptionstobeimplemented, as rational firms will implement those emission-reduction actionsthatarecheaperthanthemarketpermitprice.Tradablepermitsystemshavebeensuccessful in reducingsulfurandnitrogenoxideemissionsat lowcost.Dependingon the allocation of permits in an international scheme, itmight alsomean thatdeveloping countries could transform permits into a new export commodity bychoosinganon-carbonpathfortheirenergydevelopment.Theywouldthenbeableto sell permits to industrialized countries thatwere having troublemeeting theirreduction requirements. Farmers and foresters could also get carbon credits forusingmethodsthatstorecarboninsoilsorpreserveforests.

While the government sets the number of permits available, the permit price isdeterminedbymarketforces. Inthiscase,thesupplycurve is fixed,orvertical,atthenumberofpermitsallocated,asshowninFigure19.ThesupplyofpermitsissetatQ0.Thedemandcurveforpermitsrepresentsfirms’willingnesstopayforthem.Theirmaximumwillingnesstopayforpermitsisequaltothepotentialprofitstheycanearnbyemittingcarbon.

Figure19.DeterminationofCarbonPermitPrice

Note:WTP=Willingnesstopay.

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Assumethatthepermitswillbeauctionedoffonebyonetothehighestbidders(aprocessknownasasequentialauction).Figure19showsthatthewillingnesstopayforthefirstpermitwouldbequitehigh,asaparticularfirmstandstomakearela-tivelylargeprofitbybeingallowedtoemitoneunitofcarbon.Forthesecondper-mit,firmsthatfailedtoobtainthefirstpermitwouldbeexpectedtosimplyrepeattheirbids.Thefirmthatsuccessfullybid for the firstpermitcouldalsobid for thesecondpermit,butwouldbeexpectedtobidaloweramountassumingtheirmar-ginalprofitsaredeclining(i.e.,theirsupplycurveslopesupward,asisnormal).

Regardlessofwhetherthesamefirmwinsthebidforthesecondpermit,oranewfirm, the selling price for the second permitwould be lower. This processwouldcontinue,withallsuccessivepermitssellingforlowerprices,untilthelastpermitisauctionedoff.Thesellingpriceofthispermit,representedbyP*inthegraph,isthemarket-clearingpermitprice.Wecanalso interpretP*asthemarginalbenefit,orprofit,associatedwiththerighttoemittheQ0

thunitofcarbon.

While permits could theoretically sell for different prices in a sequential auction,tradablepermitmarketsarenormallysetupsothatallpermitssellforthemarket-clearingprice.Allpartiesinterestedinpurchasingpermitsmaketheirbids,indicat-inghowmanypermitstheyarewillingtopurchaseatwhatprice.Whoeverbidsthehighestgetsthenumberofpermitsthatwererequested.Thenthesecond-highestbiddersgetthenumberofpermitstheyappliedfor,andsoonuntilallpermitsareallocated.Thesellingpriceofallpermitsisthewinningbidfortheverylastpermitavailable.ThiswouldbeP*inFigure19.Allbidderswhobidbelowthispricedonotreceiveanypermits.

Anotherimportantpointisthateachfirmcanchoosetoreduceitscarbonemissionsin a cost-effectivemanner. Firms have various options for reducing their carbonemissions.Figure20showsanexampleinwhichafirmhasthreecarbonreductionstrategies:replacingoldermanufacturingplants,investinginenergyefficiency,andfunding forestexpansion to increasecarbonstorage inbiomass. Ineachcase, thegraphshowsthemarginalcostsofreducingcarbonemissionsthroughthatstrategy.Thesemarginalcostsgenerallyriseasmoreunitsofcarbonarereduced,buttheymaybehigherandincreasemorerapidlyforsomeoptionsthanothers.

Inthisexample,replacementofmanufacturingplantsusingexistingcarbon-emittingtechnologiesispossiblebutwilltendtohavehighmarginalcosts—asshowninthefirstgraphinFigure20.Reducingemissionsthroughgreaterenergyefficiencyhaslowermarginalcosts,asseeninthemiddlegraph.Finally,carbonstoragethroughforestareaexpansionhasthelowestmarginalcosts.ThepermitpriceP*(asdeterminedinFigure19)willgoverntherelativelevelsofimplementa-tionofeachofthesestrategies.Firmswillfinditprofitabletoreduceemissionsusingaparticularstrategysolongasthecostsofthatoptionarelowerthanthecostofpurchasingapermit.

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Figure20.CarbonReductionOptionswithaPermitSystem

Note:Marginalcostsshownherearehypothetical.

Theanalysisindicatesthatforestexpansionwouldbeusedforthelargestshareofthe reduction (QFE), but plant replacement and energy efficiencywould also con-tributeshares (QPRandQEE)at themarketequilibrium.Firms(andcountries if theprogramisinternational)thatparticipateinsuchatradingschemecanthusdecideforthemselveshowmuchofeachcontrolstrategytoimplementandwillnaturallyfavortheleast-costmethods.Thiswillprobably involveacombinationofdifferentapproaches. In an international program, suppose that one country undertakesextensivereforestation.Itisthenlikelytohaveexcesspermits,whichitcanselltoacountrywithfewlow-costreductionoptions.Theneteffectwillbetheworldwideimplementationoftheleast-costreductiontechniques.

This system combines the advantages of economic efficiency with a guaranteedresult: reduction in overall emissions to the desired level. Themajor problem, ofcourse, is achieving agreement on the initial number of permits, and decidingwhetherthepermitswillbeallocatedfreelyorauctionedoff.

Theremay also bemeasurement problems and issues such as whether to countonlycommercialcarbonemissionsortoincludeemissionschangesthatresultfromlandusechangessuchasthoseassociatedwithagricultureandforestry. Includingagriculture and forestry has the advantage of broadening the scheme to includemanymore,reductionstrategies,possiblyatsignificantlylowercost,butitmaybemoredifficulttogetanaccuratemeasureofcarbonstorageandreleasefromlandusechange.

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Carbon Taxes or Cap and Trade? There is a lively debate regarding which economic approach should be used toreduce carbon emissions. Carbon taxes and a cap-and-trade approach have im-portantsimilaritiesbutalsoimportantdifferences.

Both pollution taxes and cap-and-trade can, in theory, achieve a given level ofpollutionreductionattheleastoverallcost.Bothapproacheswillalsoresultinthesamelevelofpriceincreasestofinalconsumers,andbothcreateastrongincentivefor technological innovation.Bothapproachescan raise thesameamountofgov-ernmentrevenue,assumingallpermitsareauctionedoff,andcanbeimplementedupstreaminproductionprocessestocoverthesameproportionoftotalemissions.

Yetthetwopolicieshaveseveralimportantdifferences.Someoftheadvantagesofacarbontaxinclude:

• In general, a carbon tax is considered simpler to understand and moretransparent thanacap-and-tradeapproach.Cap-and-tradesystemscanbecomplexandrequirenewbureaucraticinstitutionstooperate.

• Withtechnologicalchangethat lowers thecostofcarbonreduction,acar-bon tax will automatically further reduce carbon emissions. In a cap-and-trade program, technological changewill instead reduce the price of per-mits,probablyresultinginsomefirmsactuallyemittingmorecarbon.

• Acarbontaxcouldprobablybeimplementedmorequickly.Giventheneedto address climate change as soon as possible, it may be inadvisable tospendyearsworkingoutthedetailsandimplementationofacap-and-tradeprogram.

• Perhaps themost important advantage of a carbon tax is that it providesgreaterpricepredictability.Ifbusinessesandhouseholdsknowwhatfuturetaxes will be on fossil fuels and other greenhouse gas–emitting products,theycan investaccordingly.Forexample,whetherabusiness invests inanenergyefficientheatingandcoolingsystemdependson itsexpectationsoffuturefuelprices. Inacap-and-tradesystem,permitpricescouldvarycon-siderably, leadingtopricevolatilitythatmakesplanningdifficult.Acarbontax,bycontrast,providesadegreeofpricestability,especiallyifcarbontaxlevelsarepublishedyearsintothefuture.

Theadvantagesofacap-and-tradesysteminclude:

• Eventhoughacap-and-tradesystemultimatelyresults inthesamelevelofpriceincreasestoconsumersandbusinesses,itavoidsthenegativeconnota-tionsofa“tax.”Soacap-and-tradesystemoftengenerateslesspoliticalop-positionthanacarbontax.

• Some businesses favor cap-and-trade because they believe that they can

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successfullylobbygovernmentsforfreepermits,ratherthanhavingtopur-chasethematauction.Distributingpermitsforfreeintheearlystagesofacap-and-tradeprogramcanmakeitmorepoliticallyacceptabletobusiness-es.

• The greatest advantage of a cap-and-trade approach is that emissions areknownwithcertaintybecausethegovernmentsetsthenumberofavailablepermits. Since the policy goal is ultimately to reduce carbon emissions, acap-and-trade approach does this directlywhile a carbon tax does it indi-rectly through price increases. Using a cap-and-trade approach, we canachieveaspecificemissionspathsimplybysettingthenumberofpermits.Inacarbon tax system,achievinga specificemissions targetmay requirenu-merousadjustmentstothetaxrates,whichmaybepoliticallyverydifficult.

The choice of instrument—carbon tax or cap-and-trade—mainly depends onwhether policy makers are more concerned with price uncertainty or emissionsuncertainty.Ifyoutaketheperspectivethatpricecertaintyisimportantbecauseitallowsforbetterlong-termplanning,thenacarbontaxispreferable.Ifyoubelievethat the relevantpolicygoal is to reducecarbonemissionsbya specifiedamountwithcertainty,thenacap-and-tradeapproachispreferable,althoughitmayleadtosomepricevolatility.

Anotherpracticaldifferenceappearstobethatcarbontaxrevenuesaremoreoftenrefunded to taxpayers or used in general government spending, while cap-and-tradeauctionrevenuesaremoreoftenusedtosupportsuch“green” investmentsasrenewableenergy,energyefficiency,andforestconservation.57

Other Policy Tools: Subsidies, Standards, R&D, and Technology Transfer Politicalhurdlesmaypreventtheadoptionofsweepingcarbontaxesortransferablepermitsystems.Fortunately,avarietyofotherpolicymeasureshavethepotentialto lowercarbonemissions.Evenwith implementationofawidespreadcarbontaxor cap-and-trade system, supplemental policies may still be necessary to reducecarbon emissions sufficiently to keep warming within acceptable levels. Thesepoliciesaregenerallynotconsideredtobesufficientbythemselves,buttheymaybe important components of a comprehensive approach. To some extent thesepoliciesarealreadybeingimplementedinvariouscountries.Thesepoliciesinclude:

• Shifting subsidies from carbon-based to non–carbon-based fuels. Manycountries currently provide direct or indirect subsidies to fossil fuels. Theeliminationofthesesubsidieswouldalterthecompetitivebalance infavorofalternativefuelsources.Ifthesesubsidyexpenditureswereredirectedto

57CarlandFedor,2016.

43

renewablesources,itcouldpromoteaboomininvestmentinrenewables.• The use of efficiency standards for machinery and appliances, and fuel-

economy standards or requirements for low-carbon fuels. By imposingstandardsthatrequiregreaterenergyefficiencyor lowercarbonuse,tech-nologiesandpracticescanbealteredinfavorofalow-carbonpath.

• Researchanddevelopment(R&D)expenditurespromotingthecommerciali-zationofalternativetechnologies.BothgovernmentR&Dprogramsandfa-vorable tax treatment of corporate R&D for alternative energy can speedcommercialization. The existence of non-carbon “backstop” technologiessignificantly reduces theeconomic costofmeasures suchas carbon taxes,andifthebackstopweretobecomefullycompetitivewithfossilfuels,car-bontaxeswouldbeunnecessary.

• Technology transfer todevelopingcountries.Thebulkofprojectedgrowthincarbonemissionswillcomeinthedevelopingworld.Manyenergydevel-opmentprojectsarenow fundedbyagencies suchas theWorldBankandregionaldevelopmentbanks.Totheextentthatthesefundscanbedirectedtowardnon-carbonenergysystemsandalternativeenergydevelopment, itwillbeeconomicallyfeasiblefordevelopingcountriestoturnawayfromfos-sil-fuelintensivepaths,achievingsignificantlocalenvironmentalbenefitsatthesametime.

Climate Change: The Technical Challenge Meetingtheclimatechangechallengerequiresbothbehavioralchangeandtechno-logical change. Economicpolicy instruments such as carbon taxes, cap and trade,andsubsidiesuse incentives tomotivatechanges inbehavior.Forexample,acar-bontaxthatraisesthepriceofgasolinewillcreateincentivestodrivelessorbuyamorefuel-efficientvehicle.Butwecanalsolookatclimatechangefromatechnicalperspective rather than a behavioral perspective. Economic policies can createpowerful incentives for technological changes. Because of higher gas prices as aresult of a carbon tax, the increased demand for high-efficiency vehicles wouldmotivateautomobilecompaniestodirectmoreoftheirinvestmentstohybridandelectricvehicles.

A well-known analysis, by McKinsey & Company, examined different technicaloptions thatwouldhavean impactongreenhousegasmitigation,orabatements,onaglobalscale.TheresultsofMcKinsey’sanalysisarepresentedinFigure21.Thevarious options are arranged in order of cost, from lowest cost to highest. Theeconomic logic is that itmakessenseto implementactions that reducecarbonatthelowestper-unitcostsfirstandthenproceedtomorecostlyactions.58

58McKinsey&Company,2007and2009.

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Figure21.GlobalGreenhouseGasAbatementCostCurvefor2030

Source:AdaptedfromMcKinsey&Company,2009,and2013.Note:Costsareestimatedineuros,buttheanalysiscoversworldwidereductionpossibili-ties.

This figure takes a little explanation. The y-axis indicates the cost range for eachabatement option, measured in euros per ton of CO2 reduction per year (or anamount equivalent to one ton of CO2 for reductions in other gases such asme-thane).ThethicknessofthebarrepresentstheamountofCO2emissionsthatcanbeavoidedbyeachaction.Thecostofpoliciessuchasbuildinginsulation,increasedefficiency,andwasterecyclingisinthenegativerange.Thismeansthatthesepoli-cieswouldactuallysavemoney,regardlessoftheireffectonCO2emissions.Soevenifwedidnotcareaboutclimatechangeandtheenvironment,itwouldmakesenseto insulate buildings, increase appliance and recycle wastes, solely on long-termfinancialgrounds.

Thex-axistellsusthecumulativereductioninCO2equivalentemissions,relativetoa“BusinessAsUsual”scenario,ifweweretoimplementalltheactionstotheleft.Soifweweretoimplementallnegative-costoptionsincludingimprovingefficiencyofair-conditioning,lightingsystems,andwaterheating,totalCO2equivalentreduc-tionwouldbeabout12billiontons(Gt)peryear,allwhilesavingmoney!

Moving farther to the right, actionsare identified thatdoentail positive costs. Inotherwords,foralltheseotheractionsitdoescostusmoneytoreduceCO2emis-sions.Figure21showsallactionsthatreduceCO2emissionsforacostoflessthan

45

€60perton,includingexpandingwindandsolarenergy,expandingnuclearenergy,improvedforestmanagementandreforestation,andimplementingcarboncaptureandstorage(CCS).

Ifalltheseactionswereimplemented,totalCO2-equivalentreductionwouldbe38billion tons/year. Total global CO2 equivalent emissions, including all greenhousegasesandemissionsfromlandusechange,arecurrentlyabout50billiontonsperyear,projectedtorisetoabout70Gtby2030.Thus,insteadofemitting70Gt/yearin2030,wewouldbeemittingonly32Gt—adecreaseof18Gtbelowcurrentlev-els.Furtherreductioncouldbeachievedatslightlyhighercost,especiallybymoreextensive expansion of wind and solar energy. (This analysis does not take intoaccountlikelycostreductionsforrenewableenergy).

Thetotalcostof implementingalloptions inFigure21,consideringthatsomeop-tionsactuallysavemoney, isestimatedtobe lessthan1percentofglobalGDPin2030.Thereportnotesthatdelayingactionbyjusttenyearsmakeskeepingwarm-ingunder2°Cextremelydifficult.

Policy recommendations to achieve the reductions represented in Figure 21 in-clude:

• Establishstricttechnicalstandardsforefficiencyofbuildingsandvehicles.• Establish stable long-term incentives for power producers and industrial

companiestoinvestinanddeployefficienttechnologies.• Providegovernmentsupportforemergingefficiencyandrenewableenergy

technologies,througheconomicincentivesandotherpolicies.• Ensureefficientmanagementof forests andagriculture, particularly inde-

velopingcountries.59

59Ibid.

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4. CLIMATE CHANGE POLICY IN PRACTICE

Climatechangeisaninternationalenvironmentalissue.Ineconomictheoryterms,climate change is a public good issue, requiring global collaboration to achieveeffective results. Since the United Nations Framework Convention on ClimateChange(UNFCCC)wasfirstestablishedin1992,therehavebeenextensiveinterna-tionaldiscussions,knownas“ConferencesoftheParties”orCOPs,aimedatreach-ingaglobalagreementonemissionsreduction(SeeTable5).

Table5.ImportantEventsinInternationalClimateChangeNegotiations

Year,Location Outcome

1992,RiodeJaneiro UNFrameworkConventiononClimateChange(UNFCCC).Coun-triesagreetoreduceemissionswith“commonbutdifferentiatedresponsibilities.”

1995,Berlin ThefirstannualConferenceofthePartiestotheframework,knownasaCOP.U.S.agreestoexemptdevelopingcountriesfrombindingobligations.

1997,Kyoto AtthethirdConferenceoftheParties(COP-3)theKyotoProtocolisapproved,mandatingdevelopedcountriestocutgreenhousegasemissionsrelativetobaselineemissionsby2008-2012period.

2001,Bonn (COP-6)reachesagreementontermsforcomplianceandfinancing.BushadministrationrejectstheKyotoProtocol;U.S.isonlyanobserveratthetalks.

2009,Copenhagen COP-15failstoproduceabindingpost-Kyotoagreement,butdeclarestheimportanceoflimitingwarmingtounder2°C.Devel-opedcountriespledge$100billioninclimateaidtodevelopingcountries.

2011,Durban (COP-17)participatingcountriesagreedtoadoptauniversallegalagreementonclimatechangeassoonaspossible,andnolaterthan2015,totakeeffectby2020.

2015,Paris COP-21195nationssigntheParisAgreement,providingforworldwidevoluntaryactions(NDC’s)byindividualcountries.

ThefirstcomprehensiveinternationalagreementonclimatechangewastheKyotoProtocol, adopted at the third COP in 1997, which has now expired. Under theKyoto treaty, industrial countries agreed to emission reduction targets by 2008–2012 compared to their baseline emissions, set to 1990 levels. For example, theUnitedStates agreed toa7percent reduction, France toan8percent reduction,and Japan to a 6 percent reduction. The average targetwas a cut of around 5%

47

relative to 1990 levels. Developing countries such as China and India were notboundtoemissionstargetsunderthetreaty,anomissionthattheUnitedStatesandsomeothercountriesprotested.UnderPresidentGeorgeW.Bush,theU.S.refusedto ratify the Kyoto Protocol. But despite theU.S.withdrawal, the Kyoto Protocolenteredintoforceinearly2005.

The resultsof theKyotoProtocolweremixed.Somenations, suchasCanadaandthe U.S., increased rather than reduced emissions; Canada withdrew from theProtocol,andtheU.S.neverenteredit.SomeEuropeancountriesmetorexceededtheirtargets,whileothersfellshort.RussiaandmostEastEuropeancountriescon-siderablyexceededtheirtargets,notasaresultofdeliberatepolicybutratherasabyproductofcommunism’seconomiccollapseintheearly1990s.TheoverallKyototargetwastechnicallyachieved,butonlyasaresultofthissignificantdropinRus-sianandEasternEuropeanemissions.

Inaddition,weneedtoconsidertheeffectsoftrade.IntheKyotoframework,emis-sions released during production of goods were assigned to the country whereproduction takes place, rather than where goods are consumed. Therefore the“outsourcing” of carbon emissions through imports from developing countries,especiallyChina,wasnotincludedinofficialaccounting.Consideringthefullcoun-trycarbonfootprinttakingtradeintoaccount,theprogressmadeunderKyotowasverylimited,withEurope’ssavingsreducedtojust1%from1990to2008,andthedevelopedworldasawholeseeingitsemissionsriseby7%inthesameperiod(25%for the US, when trade is included). Moreover, Kyoto placed no restrictions onemissions from developing countries, and overall global emissions continued togrowduringtheKyotoperiod.60

ButiftheKyotoprotocolwasafailureinitsinabilitytoslowdownglobalemissions,it nevertheless provided an important first step in global climate diplomacy, andfromthefailuresofKyotoanditsaftermath,countrieslearnedlessonsthatprovedusefulinthelaterphasesofthoseglobalnegotiations.

The Paris Agreement of 2015 AftereffortstosecureabindingglobalagreementonemissionsreductionsfailedatthefifteenthCOPinCopenhagenin2009,itbecameincreasinglyobvioustonegoti-atorsthatanotherapproachwouldbeneeded.TheCopenhagenconferencepartiesagreedonly that thegoal for future roundsofnegotiationswouldbe tokeep theglobaltemperaturewarmingbelowthethresholdof2°Cabovepre-industriallevels.Themostcontentiouspointofdisagreementwasthequestionofwhetherdevelop-ingcountriesshouldbeboundbymandatorycuts inemissions.Whilesomecoun-

60Clark,2012.

48

tries, particularly the United States, argued that all participants should agree toreductions,developingcountriescontendedthatmandatorycutswould limittheireconomicdevelopmentandreinforceexistingglobalinequities.

After the failureofCopenhagen, the ideaofabindingagreementwasrejectedasunfeasible. In its place, negotiators came up with the idea that countries wouldinstead propose their own voluntary goals– the hope being that countrieswouldeventually feel “peer-pressure” to set the most ambitious possible goals withintheir reach. This new negotiating strategy laid the foundations for the globalagreementreachedatthetwenty-firstConferenceoftheParties(COP21)inParis.Inthe months that preceded the COP21, 186 countries submitted their proposednationally determined contributions (NDCs) – indicating their willingness to con-tributetothereductionofglobalCO2emissions.

The Paris Agreement, negotiated by 195 national delegations, formally expressestheglobalaimofholding temperatures tonomore than2°Cabovepreindustriallevels,with amore ambitious target of 1.5° C. Since the current total of countrypledges(NDCs)isnotsufficienttosecuretheglobalgoalofkeepingwarmingunder2°C, theagreement includes5yearcycles forcountries toreviewtheirgoalsandratchet up their targets, in order to reachmore ambitious goals. The negotiatingprocesshasbeendesignedtoputpressureoneverycountrytocomplywithitsownpledgesandtoincreasethemovertime.

Astrongtransparencyandaccountabilityregimeisbuiltintotheagreement,basedon regular inventories, regular reportingof theprogress countriesaremaking to-wardstheir targets,andregular reviewbyexpert teams.TheParisagreementen-tered into force, with over 80 countries representing over 60 percent of globalemissionsratifyingtheagreementbytheendof2016,justayearafteritwasnego-tiated,a recordspeed for internationalagreements.Despitesubsequent rejectionof the agreement by theUnited States TrumpAdministration, the agreement re-mainsinforce–thoughcompliancewiththetargetsisvoluntary.Arelatedbindingagreement establishing specific timetables to eliminate the production of hydro-fluorocarbons (HFCs), powerful greenhouse gases used in air-conditioners andrefrigerators,wasagreedoninOctober2015.61

TheParisagreementalsoprovidesforcontinuingfinancialandtechnicalsupporttodevelopingcountriestohelpthemadapttothedisruptiveconsequencesofclimatechange, aswell as support for a transition away from fossil fuels toward cleanerrenewable energy sources. The agreement included a loss-and-damage clause

61CoralDavenport,“ParisClimateDealReachesMilestoneas20MoreNationsSignOn,”NewYorkTimes,September21,2016;CoralDavenport,“Nations,FightingPowerfulRefrigerantthatWarmsPlanet,ReachLandmarkDeal,”NewYorkTimes,October15,2016.

49

recognizingthe importanceofaddressingtheadverseeffectsofclimatechange indevelopingcountries.Whiletheagreementdoesnotacceptliabilityorprovideforcompensation,itdoesofferseveralconditionswheresupportmaybegiven.Start-ingin2020,industrializednationshavepledged$100billionayearinfinancialandtechnicalaidtodevelopingcountriestofightclimatechange.62

Manyvoicesinthedevelopingworldhavewarnedthat$100billionwillfallfarshortofwhat is really needed, and that a conservative figurewould be closer to $600billion,whichisabout1.5%oftheGDPof industrializednations.Someoftheesti-mates, by organizations from the World Bank to the International Institute forAppliedSystemsAnalysis,inVienna,suggestthatthesumsneededwouldbeashighas1.7oreven2.2trilliondollarsperyear.63

How adequate or inadequate are the commitments? An independent organization, Climate Action Tracker, provides assessments andratingsofsubmittedNDCs.64Accordingtoitsgradingsystem,theUSAisrated“me-dium” for its commitment, China is rated as “medium with inadequate carbonintensity target”, and theEuropeanUnion is also ratedas “medium”. This “medi-um”rangeratingoftheUSAappliedtotheObamaAdministration’scommitmenttoreducing its greenhouse gas emissions by 26-28 per cent below its 2005 level in2025andtomakebesteffortstoreduce itsemissionsby28%. It is likelythatthisratingisnowobsolete,astheTrumpAdministrationhasexpresseditsunwillingnessto comply with the former administration’s climate commitment, and has with-drawnfromtheParisAgreementaltogether.

TheClimateActionTrackerratesas“inadequate”thecommitmentsbyalonglistofcountries,includingRussia,Japan,Australia,NewZealand,Canada,Argentina,SouthAfrica,Chile,andTurkey.65Figure22showsthedifferencesbetweenabusiness-as-usualemissionstrajectory,thetrajectorythatwouldresultfromthecurrentaggre-gationofNDCscommitments,andthepaththatwouldbenecessarytoreach2°C(3.6°F)orless.

62“AdoptionoftheParisAgareement”http://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf63www.scientificamerican.com/article/poorer-nations-demand-more-aid-to-deal-with-climate-change/;http://roadtoparis.info/2014/11/06/climate-finance-too-little-too-late/

64Foramoredetailedanalysis,seeGDAE’sClimatePolicybrief#2,“AfterParis:thenewlandscapeforClimatePolicy.”http://www.ase.tufts.edu/gdae/Pubs/climate/ClimatePolicyBrief2.pdf

65http://climateactiontracker.org/methodology/85/Comparability-of-effort.html;http://www.wri.org/blog/2015/07/japan-releases-underwhelming-climate-action-commitment

50

Figure22.BusinessasUsual,ParisPledges,and2°CPath

Source:http://www.nytimes.com/interactive/2015/11/23/world/carbon-pledges.html?_r=1Note:2°C=3.6°F;3.5°C=6.3°F;24.5°C=8.1°F.

Mostcurrentpledgesdonotextendbeyond2030,whichiswhyemissionsstarttoriseagainafter2030inFigure22.Considerablestrengtheningofthepledgeswouldclearlybeneededbefore thatdate tokeepoverall emissionsona2°C track– letalone 1.5°C.66 According to analysis by the Climate Action Tracker, if policies ofcomparablestrengthtothoseinthecurrentNDCsweremaintainedafter2030,theywouldleadtoamedianwarmingofabout2.7°C(4.8°F)by2100–betterthanthe3.5°C(6.3°F)showninFigure22forthecurrentcommitments,butstillfarexceed-ingtheParistargets.67(Forascientificperspectiveontheimportanceofreachinga2°Coreven1.5°Ctarget,seeBox6).

Toseewhat is required toachievea2°Cor1.5°C target, theconceptofaglobalcarbonbudget isuseful.Aglobalcarbonbudgetattemptstoquantifythecumula-tiveemissionsofcarbonthatcanbeaddedto theatmospherewithoutexceedingspecifiedtemperatureincreases.Toreacha2°Ctarget,itisnecessarytokeepwith-in a cumulative global carbonbudgetofnomore than270additional gigatonsofcarbon–about30yearsofemissionsatcurrent levels.To reach the1.5°C target,thebudgetwouldhavetobeamere110gigatons–about12yearsofemissionsatcurrentrates.68ThecurrentPariscommitmentsareinadequatetomeetthesegoals,withoutasignificantstrengtheningofcommitmentsinfutureroundsofnegotiation.

66Millaretal.,2016.67http://climateactiontracker.org/assets/publications/briefing_papers/CAT_Temp_Update_COP21.pdf

68TheGlobalCarbonProject,“GlobalCarbonBudget,”http://www.globalcarbonproject.org/;Schellnhuberetal,2016.

51

BOX6.THESCIENTIFICBASISFORTHEPARISCLIMATETARGETS

TheParisAgreement codifiedagoal of nomore than 2°Cof temperature in-crease,withamoreambitiousgoalofnomorethan1.5°C.Whatisthereasonforthesetargets?A2016studyarguesthatthetemperaturetargetsselectedinParisarethescientificallycorrectonesbycomparingthesetargetstotheprob-ability thatvarious catastrophicand irreversible losseswilloccur, suchas theloss of alpine glaciers or the loss of the Amazon rainforest. The authors as-sessed the available research to determine the temperature range at whicheachimpactisexpectedtooccur.ThisisshowninFigure23.

The bar for each impact reflects scientific uncertainty about howmuch tem-peraturesmust increasetomakethat impact inevitable.Thedarkertheshad-ing,thehighertheprobabilitytheimpactwilloccur.So, forexample,ifglobalaverage temperatures increase only 1°C there is a small probability alpineglacierswillbe lost.But if temperatures increasemore than2.5°C it isnearlycertainthatalpineglacierswillbelostbasedonthecurrentresearch.

TheverticalbarrepresentstherangeoftheParisclimatetargets,from1.5°Cto2.0°C.Comparingthesetargetstothevariousimpacts,weseethatlimitingthetemperatureincreaseto1.5°Coffersachancethattheworld’scoralreefswillnotbe lost.Butat2°C it isvirtuallycertainthatcoral reefswillnotsurvive. Ifthe2°Ctargetcanbemet,theoutlookisbetterforavoidingthelossofalpineglaciers, theGreenland ice sheet, and theWestAntarctic ice sheet, althoughconsiderableuncertaintyremains.At4−6°CtheAmazonandborealforests,theEastAntarctic icesheet,andpermafrostareallendangered,asisthethermo-halinecirculation intheoceans, includingtheGulfStream,whichkeepsmuchof Europe relatively temperate despite high latitudes. The article concludesthatachievingtheParistargets,whileambitious,isthereforeessential:

Beyond 2°C the course would be set for a complete deglaciation of theNorthernHemisphere, threatening the survivalofmanycoastal citiesandislandnations.Globalfoodsupplywouldbejeopardizedbynovelextreme-event regimes, andmajor ecosystems such as coral reefs forced into ex-tinction.Yet,stayingwithintheParistargetrange,theoverallEarthsystemdynamics would remain largely intact. Progressing [further] on the otherhand,withglobalwarmingreaching3–5°C,would seriously [riskmost im-pacts]. For warming levels beyond this range, the world as we know itwouldbeboundtodisappear.

–Schellnhuberetal,2016.

Sources:Schellnhuberetal,2016.Note:TheverticalbarrepresentstherangeoftheParisclimatetargets,from1.5°Cto2.0°C

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Figure23.TheParisClimateTargetsandCatastrophicGlobalImpacts

Source:Schellnhuberetal,2016.Note:TheverticalbarrepresentstherangeoftheParisclimatetargets,from1.5°Cto2.0°C

Regional, National and Local Actions Whileinternationaleffortstoestablishaframeworkforemissionsreductionhave continued, policies have been implemented at regional, national, andlocallevels.Theseinclude:

• Tohelp itmeet itsobligationsunder theKyotoProtocol, theEuropeanUnionsetupacarbontradingsystemthatwentintoeffectin2005(seeBox7).

• Carbontradingsystemshavealsobeenestablishedinseveralregionsinthe United States. The Regional Greenhouse Gas Initiative (RGGI) is acap-and-tradeprogramforemissions frompowerplants innineNorth-easternstates.Permitsaremostlyauctionedoff(somearesoldatafixedprice),withtheproceedsusedtofundinvestmentsincleanenergyandenergyefficiency.Permitauctionpriceshaverangedfromabout$2to$5per tonofCO2.69 In2013,California initiateda legallybindingcap-and-trade scheme. “The program imposes a greenhouse gas emission limitthatwilldecreasebytwopercenteachyearthrough2015,andbythreepercentannuallyfrom2015through2020.”70

69www.rggi.org.70http://www.c2es.org/us-states-regions/key-legislation/california-cap-trade

53

• Carbon taxeshavebeen instituted in several countries, including ana-

tionwidetaxoncoal in India (about$1/ton,enacted in2010),a taxonnewvehiclesbasedon their carbonemissions inSouthAfrica (alsoen-actedin2010),acarbontaxonfuelsinCostaRica(enactedin1997),andlocal carbon taxes in the Canadian provinces of Quebec, Alberta, andBritishColumbia(seeBox8).

BOX7.THEEUROPEANUNIONCARBONTRADINGSYSTEM

In2005,theEuropeanUnion(EU)launcheditsEmissionsTradingScheme(EU-ETS),whichcoversmorethan11,000facilitiesthatcollectivelyemitnearlyhalfthe EU’s carbon emissions. In 2012, the system was expanded to cover theaviationsector, includingincomingflightsfromoutsidetheEU.UndertheEU-ETS,eachcountrydevelopsanationalallocationplantodeterminetheoverallnumberofpermitsavailable.Permitsarebothauctioned offandallocated tosomefirms for freebasedonhistoricalemissions.Anyunneededpermitscanbesoldontheopenmarket.

Theinitialphase(2005–2007)oftheEU-ETSproduceddisappointingresultsaspermitswereover-allocated, leadingtoadrop inthepermitprice frommorethan €30 per ton to less than €1 by the end of 2007. In the second phase(2008–2012),fewerpermitswereinitiallyallocated,leadingtorelativelystableprices of around €15–€20/ton for a few years. But by mid-2012 prices hadfallento€5–€10/tonasthemarketagainexperiencedaglutofpermits.Despitethe volatility in prices, according to the EU the EU-ETS led to a reduction inemissionsfromlargeemittersof8percentbetween2005and2010.Also, thecostsoftheEU-ETShavebeenlessthanexpected,around0.5percentofEuro-peangrossdomesticproduct(GDP).

TheEUhasmoved into the thirdphaseof theETS, covering2013–2020.Thisphasewill requiremore of the permits tobeauctioned, includemoregreen-housegases,andsetanoverallEUcapratherthanallowingindividualcountriestodeterminetheirowncap.Bytheendofthethirdphase,theprogram’sgoalis to reduce overall EU emissions 21 percent relative to 1990 levels, with afurthergoalofa43%reductionby2030.

Sources:EU-ETS,http://ec.europa.eu/clima/policies/ets/index_en.htm;Grubbetal,2009

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• Networks of cities have also organized to address climate change. The

C40networkofmegacities,representing25%ofglobalGDPhasfocusedon measuring and reducing urban emissions. Another network, theCompactofMayors,aglobalcoalitionofover500cities,waslaunchedin2014withsimilargoals.71By2050,between65%and75%oftheworldpopulation isprojected tobe living incities,withmore than40millionpeoplemovingtocitieseachyear.Urbanpopulationwillgrowfromap-proximately3.5billionpeoplenowto6.5billionby2050.Estimatessug-

71http://www.c40.org/;https://www.compactofmayors.org/

BOX8.BRITISHCOLUMBIA’SCARBONTAX:ASUCCESSSTORY

In 2008, the Canadian province of British Columbia, on the Pacific Coast, im-plementedacarbontaxof$10pertonofCO2(Canadiandollars).Thetaxroseincrementally by $5 each subsequent year, until it reached $30 in 2012. Thistranslatesintoanadditional26centspergallonofgasolineatthepump,withcomparablepriceincreasesinothercarbon-basedenergysources.

Thecarbontax is revenueneutral,meaningthattheprovincehascut incomeand corporate taxes to offset the revenue it gets from taxing carbon. BritishColumbianowhasthelowestpersonalincometaxrateinCanada,andoneofthelowestcorporateratesamongdevelopedcountries.

In the first six years of its implementation, consumption of fuels droppedbybetween5%and15%inB.C.,while itrosebyabout3%intherestofCanada.During that time,GDPper capita continued togrow inBritishColumbia,ataslightlyhigherpacethanforthe restofCanada.By loweringtaxeson incomeand on corporations, this policy encouraged employment and investment,whilediscouragingcarbonpollution.

BritishColumbia’sexperiencehasbeenheraldedby theOECDand theWorldBankasasuccessfulexampletofollow.Arecentstudyfoundthatthetaxhadnegligibleeffectsontheeconomy,andhadovercomeinitialoppositiontogaingeneral public support. As of 2016, the Canadian government planned to ex-tendthetaxtothewholeofCanada.

Sources:TheWorldBank,Developmentinachangingclimate.BritishColumbia’scarbontaxshift:anenvironmentalandeconomicsuccess.Sept.10,2014;TheEconomist,BritishColum-bia’scarbontax:theevidencemounts.July31,2014,MinistryofFinance,BritishColumbia,CarbonTax:overviewoftherevenue-neutralcarbontax;MurrayandRivers,2015;Metcalf,2015;http://www.nationalobserver.com/2016/10/03/news/breaking-feds-announce-pan-canadian-carbon-price-plan-2018.

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gest that cities are responsible for75percentof globalCO2emissions,withtransportandbuildingsbeingamongthelargestcontributors.72

• FollowingthewithdrawaloftheUnitedStatesfromtheParisagreement,a coalition of U.S. states formed the United States Climate Alliance,pledging tostrengthen theirefforts tocurbgreenhousegases tooffsetthelackoffederalaction,andseektomeetorexceedtheParisgoals.

Forests and Soils While themajor focus of climate policy has been on the reduction of emissionsfromcarbon-basedfuels,theroleofforestsandsoilsisalsocrucial.Currentlyabout11%ofgreenhousegasemissionscomefromforestandlandusechange,especiallytropical forest loss.73 Internationalnegotiationshavealso ledtotheadoptionofaprogramknownasREDD(ReductionofEmissionsfromDeforestationandDegra-

dation).TheCopenhagenAccord(2009)acknowledgedtheneedtoactonreducingemissionsfromdeforestationandforestdegradationandestablishedamechanismknown as REDD-plus. TheAccord emphasizes funding for developing countries toenable action onmitigation, including substantial finance for REDD-plus, adapta-tion,technologydevelopmentandtransferandcapacitybuilding.

Inadditiontoreducingemissions,forestsandsoilshavehugepotentialforabsorb-ingandstoringcarbon.TheEarth’s soils store2500billion tonsof carbon–morecarbon than the atmosphere (840 billion tons) and plants (560 billion tons) com-bined.Butitisestimatedthatsoilshavebeendepletedof50to70percentoftheirnaturalcarboninthelastcentury.Globally,thosedepletedsoilscouldreabsorb80to 100 billion metric tons of carbon per year, through regenerative agricultureincluding: polyculture, cover cropping, agroforestry, nutrient recycling, crop rota-tion,properpasturemanagement,andorganicsoilamendmentslikecompostandbiochar.74Itislikelythatthisvastunexploitedpotentialforcarbonstoragewillbeamajorfocusoffutureclimatepolicy75–acrucialfactor intheefforttomovefromtheintermediate“pledges”pathinFigure22tothe“goals”pathnecessarytoholdglobaltemperaturechangetonomorethan2°C.

72http://www.theguardian.com/cities/2015/nov/17/cities-climate-change-problems-solution;http://www.unep.org/urban_environment/issues/climate_change.asp

73IPCC,2014b,SummaryforPolicymakers,p.5;HarrisandFeriz,2011;SanchezandStern,2016.74Lal,2010;ChrisMooney,“TheSolutiontoClimateChangethathasnothingtodowithcarsorcoal,”WashingtonPost,February11,2016;BethGardiner,“Aboonforsoils,andfortheenviron-ment,”NewYorkTimes,May17,2016;CenterforFoodSafety,“Soil&Carbon:SoilsolutionstoClimateproblems,”2015.

75Foramoredetailedanalysisofthesoilsolutionstoclimatechange,seeGDAEClimatePolicybrief#4:“Hopebelowourfeet:SoilasaClimateSolution.”http://www.ase.tufts.edu/gdae/Pubs/climate/ClimatePolicyBrief4.pdf

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CONCLUSION

Climatechangeisanissuethatembodiesissuesofexternalities,commonpropertyresources,publicgoods,renewableandnonrenewableresources,andthediscount-ingofcostsandbenefitsovertime.Ithaseconomic,scientific,political,andtechno-logicaldimensions.Economicanalysisalonecannotadequatelyrespondtoaprob-lemofthisscope,buteconomictheoryandpolicyhavemuchtoofferinthesearchforsolutions.

Aneffectiveresponsetotheclimatechangeproblemrequiresmuchmoresweepingactiononaglobalscalethananythingsofarachieved.Economicpolicyinstrumentsthathave thepower toalterpatternsofenergyuse, industrialdevelopment, andincomedistributionareessential toanyplan formitigatingoradaptingtoclimatechange. Evidence of climate change impacts is already clear, and the issue willbecome more pressing as greenhouse gas accumulation continues and costs ofdamagesandofclimateadaptationrise(seeBox9).

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BOX9.FORU.S.COASTALCITIES,CLIMATEADAPTATIONISURGENT

InAugust2016,torrentialdownpoursalongtheGulfCoastledtodeadlyfloodsinSouthernLouisiana.With$9billioninestimateddamages,thisnaturalcatas-trophe qualified as the worst in the United States since Hurricane Sandy inOctober 2012. The National Oceanic and Atmospheric Administration foundthatglobalwarmingincreasesthechancesofsuchintenserainsby40%duetoincreasedmoistureinawarmeratmosphere.

Already, coastal cities around the United States are investing massively toprepareforfuturefloods.FortLauderdale,Florida,isspendingmillionsofdol-lars fixing battered roads and drains damaged by increasing tidal flooding.MiamiBeach increased local feesto financea$400millionplanthat includesraisingstreets,installingpumpsandelevatingseawalls.Thecostofadaptingtorising seas for the medium-size town of Norfolk, VA has been estimated atabout$1.2billion,orabout$5000foreveryresident.ThesecostsforindividualcitiesimplythattheorderofmagnitudeofcostsforthewholeEastCoastandGulf Coastwill be several trillions. 1.9million shoreline homesworth a com-bined$882billionmightbelosttorisingsealevelsby2100.

Accordingtosomeeconomicanalysts,thepossibilityofacollapseinthecoastalrealestatemarketcouldrivaltheimpactsofthedot-comandrealestatecrash-esof2000and2008.ThePentagontoofacesmajoradaptationissues,asmanynavalbasesarefacingseriousthreatsandtheir land isatriskofdisappearingwithinthiscentury.

Sources:JonahEngelBromwich,“FloodingintheSouthlooksalotlikeclimatechange”NewYorkTimes,August16,2016;HenryFountain,“ScientistsseepushfromclimatechangeinLouisianaflooding”NewYorkTimesSeptember7,2016;JustinWillis,“Floodingofcoast,causedbyglobalwarming,hasalreadybegun”NewYorkTimes,September3,2016;IanUrbina,“Perilsofclimatechangecouldswampcoastalrealestate,”NewYorkTimes,November24,2016.

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KEY TERMS AND CONCEPTS

adaptivemeasures/adaptive strategiesactionsdesigned to reduce themagnitudeorriskofdamagesfromglobalclimatechange.

avoided costs costs that can be avoided through environmental preservation or im-provement

“backstop”energytechnologiestechnologiessuchassolarandwindthatcanreplacecurrentenergysources,especiallyfossilfuels.

business as usuala scenario inwhichno significant policy, technology, or behavioralchangesareexpected.

capandtradeatradablepermitsystemforpollutionemissions.

carbon footprint total carbon emissions, direct and indirect, resulting from the con-sumptionofanation,institution,orindividual.

carbonintensityameasureofcarbonemissionsperunitofGDP.

carbonsinksportionsoftheecosystemwiththeabilitytoabsorbcertainquantitiesofcarbondioxide,includingforestsandoceans.

carbontaxaper-unittaxongoodsandservicesbasedonthequantityofcarbondiox-ideemittedduringtheproductionorconsumptionprocess.

climatejusticeequitablesharingbothoftheburdensofclimatechangeandthecostsofpolicyresponses.

climate stabilization the policy of reducing fossil-fuel use to a level that would notincreasethepotentialforglobalclimatechange.

CO2equivalent(CO2e)ameasureoftotalgreenhousegasemissionsorconcentrations,convertingallnon-CO2gasestotheirCO2equivalentinwarmingimpact.

cost-benefitanalysis(CBA)atoolforpolicyanalysisthatattemptstomonetizeallthecostsandbenefitsofaproposedactiontodeterminethenetbenefit.

cost-effectiveness analysis a policy tool that determines the least-cost approach forachievingagivengoal.

commonproperty resourcea resource that is available toeveryone (nonexcludable),butuseoftheresourcemaydiminishthequantityorqualityavailabletoothers(rival).

cumulative or stock pollutant a pollutant that does not dissipate or degrade signifi-cantlyover timeandcanaccumulate in theenvironment, suchascarbondioxideand

59

chlorofluorocarbons.

distributionallyneutraltaxshiftachangeinthepatternoftaxesthatleavesthedistri-butionofincomeunchanged.

efficiencystandardsregulationsthatmandateefficiencycriteriaforgoods,suchasfueleconomystandardsforautomobiles.

elasticityofdemandthesensitivityofquantitydemandedtoprices;anelasticdemandmeansthataproportional increase inpricesresults ina largerproportionalchange inquantitydemanded;an inelasticdemandmeansthataproportional increase inpricesresultsinasmallchange.

environmental justice the fair treatmentofpeople regardlessof race, color,nationalorigin,orincome,withrespecttothedevelopment,implementation,andenforcementofenvironmentallaws,regulations,andpolicies.

discountratetheannualrateatwhichfuturebenefitsorcostsarediscountedrelativetocurrentbenefitsorcosts.

feedbackeffecttheprocessofchangesinasystemleadingtootherchangesthateithercounteractorreinforcetheoriginalchange.

futurecostsandbenefitsbenefitsandcoststhatareexpectedtooccur inthefuture,usuallycomparedtopresentcoststhroughdiscounting.

global carbonbudget theconcept that total cumulativeemissionsof carbonmustbelimitedtoafixedamountinordertoavoidcatastrophicconsequencesofglobalclimatechange.

globalclimatechange:thechangesinglobalclimate,includingtemperature,precipita-tion,stormfrequencyandintensity,andchangesincarbonandwatercycles,thatresultfromincreasedconcentrationsofgreenhousegasesintheatmosphere.

global commonsglobal commonproperty resources suchas theatmosphereandtheoceans.

global warming the increase in average global temperature as a result of emissionsfromhumanactivities.

greenhouseeffecttheeffectofcertaingasesintheearth’satmospheretrappingsolarradiation,resultinginanincreaseinglobaltemperaturesandotherclimaticimpacts.

greenhouse gases gases such as carbon dioxide and methane whose atmosphericconcentrationsinfluenceglobalclimatebytrappingsolarradiation.

60

least-costoptionsactionsthatcanbetakenforthelowestoverallcost.

marginal abatement costs costs of reduction for one extra unit of pollution, such ascarbonemissions.

nationallydeterminedcontribution(NDC):avoluntaryplannedreductioninCO2emis-sions, relative tobaselineemissions, submittedbyparticipatingcountriesat theParisConferenceoftheParties(COP-21)in2015.

oceanacidification increasing acidity of oceanwaters as a result of dissolved carbonfromCO2emittedintotheatmosphere.

pollutiontax(es)aper-unittaxbasedonthelevelofpollution.

precautionaryprincipletheviewthatpoliciesshouldaccountforuncertaintybytakingstepstoavoidlow-probabilitybutcatastrophicevents.

preventivemeasures/preventive strategiesactions designed to reduce the extent ofclimatechangebyreducingprojectedemissionsofgreenhousegases.

pricevolatilityrapidandfrequentchangesinprice,leadingtomarketinstability.

progressive taxes taxes that comprise a higher share of incomewith higher incomelevels.

publicgoodsgoodsthatareavailabletoall(nonexclusive)andwhoseusebyoneper-sondoesnotreducetheiravailabilitytoothers(nonrival).

reductionofemissionsfromdeforestationanddegradation(REDD)aUnitedNationsprogram adopted as part of the Kyoto process of climate negotiations, intended toreduceemissionsfromdeforestationandlanddegradation.

regressivetaxataxinwhichtherateoftaxation,asapercentageofincome,decreaseswithincreasingincomelevels.

revenue-neutraltaxshiftpoliciesthataredesignedtobalancetaxincreasesoncertainproducts or activitieswith a reduction in other taxes, such as a reduction in incometaxesthatoffsetsacarbon-basedtax.

social cost of carbon an estimate of the financial cost of carbon emissions per unit,includingbothpresentandfuturecosts.

technology transfer the process of sharing technological information or equipment,particularlyamongcountries.

transferable (tradable) permits tradable permits that allow a firm to emit a certainquantityofapollutant.

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DISCUSSION QUESTIONS

1. What is the main evidence of global climate change? How serious is theproblem, andwhat are its primary causes?What issues does it raise con-cerningglobalequityandresponsibilityfordealingwiththeproblem?

2. Doyouthinkthattheuseofcost-benefitanalysistoaddresstheproblemofclimatechangeisuseful?Howcanweadequatelyvaluethingslikethemelt-ingofArcticicecapsandinundationofislandnations?Whatistheappropri-ate role of economic analysis in dealing with questions that affect globalecosystemsandfuturegenerations?

3. Whatgoalswouldbeappropriateinrespondingtoclimatechange?Sinceitisimpossibletostopclimatechangeentirely,howshouldwebalanceouref-fortsbetweenadaptationandprevention/mitigation?

4. Whicheconomicclimatechangepolicydoyouprefer:acarbontaxoracap-and-tradesystem?Why?Whatarethemainbarrierstoeffectivepolicyim-plementation?

5. Climatechangepoliciescanfocusonchangingbehaviorsorchangingtech-nology.Whichapproachdoyou thinkcouldbemoreeffective?Whatpoli-ciescanbeusedtoencouragechangesineach?

6. Theprocessforformulatingandimplementinginternationalagreementsonclimatechangepolicyhasbeenplaguedwithdisagreementsanddeadlocks.Whatarethemainreasonsforthedifficultyinagreeingonspecificpolicyac-tions?Fromaneconomicpointofview,whatkindsof incentivesmightbeusefultoinducecountriestoenterandcarryoutagreements?Whatkindsof“win-win”policiescouldbedevisedtoovercomenegotiatingbarriers?

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EXERCISES

1. Supposethatunderthetermsofaninternationalagreement,U.S.CO2emissionsare to be reduced by 200million tons and those of Brazil by 50million tons.Here are the policy options that the United States and Brazil have to reducetheiremissions:

UnitedStates:

PolicyOptionsTotalemissionsreduction

(milliontonscarbon)Cost

($billion)

A:Efficientmachinery 60 12

B:Reforestation 40 20

C:Replacecoal-fueledpowerplants 120 30

Brazil:

PolicyOptionsTotalemissionsreduction

(milliontonscarbon)Cost

($billion)

A:Efficientmachinery 50 20

B:ProtectionofAmazonforest 30 3

C:Replacecoal-fueledpowerplants 40 8

a. Whichpoliciesaremostefficientforeachcountryinmeetingtheirreductiontargets?Howmuchwillbe reducedusingeachoption,atwhatcost, if thetwocountriesmustoperate independently?Assumethatanyof thepolicyoptionscanbepartiallyimplementedataconstantmarginalcost.Forexam-ple, theUnited States could choose to reduce carbon emissionswith effi-cientmachineryby10milliontonsatacostof$2billion.(Hint:startbycal-culatingtheaveragecostofcarbonreductionindollarspertonforeachofthesixpolicies).

b. SupposeamarketoftransferablepermitsallowstheUnitedStatesandBraziltotradepermitstoemitCO2.Whohasaninterest inbuyingpermits?Whohasaninterestinsellingpermits?WhatagreementcanbereachedbetweentheUnitedStatesandBrazilsothattheycanmeettheoverallemissionsre-duction target of 250 million tons at the least cost? Can you estimate arange for thepriceofapermit toemitonetonofcarbon? (Hint:useyouraveragecostcalculationsfromthefirstpartofthequestion.)

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2. Suppose that the annual consumption of an average American household is1,000gallonsofgasolineand200Mcf(thousandcubicfeet)ofnaturalgas.UsingthefiguresgiveninTable4ontheeffectsofacarbontax,calculatehowmuchanaverageAmericanhouseholdwouldpayperyearwithanaddedtaxof$50pertonofcarbondioxideiftherewasnoinitialchangeindemand.Thenassum-ing a short-termdemand elasticity of −0.1, and a long-term elasticity of −0.5,calculate thereductions inhouseholddemandforoilandgas in theshortandlongterm.Ifthereare100millionhouseholdsintheUnitedStates,whatwouldbetherevenuetotheU.S.Treasuryofsuchacarbontax,intheshortandlongterm?Howmightthegovernmentusesuchrevenues?Whatwouldtheimpactbeon theaverage family?Discuss thedifferencebetween the short-termandlong-termimpacts.

WEB LINKS

1. http://www.ipcc.ch/ Theweb site for the Intergovernmental Panel on Cli-mateChange,aUnitedNations-sponsoredagency“toassess thescientific,technical,andsocioeconomicinformationrelevantfortheunderstandingoftheriskofhuman-inducedclimatechange.”

2. http://epa.gov/climatechange/index.html The global warming web site oftheU.S.EnvironmentalProtectionAgency.

3. http://www.wri.org/our-work/topics/climate/ World Resource Institute’swebsiteonclimateandatmosphere.Thesite includesseveralarticlesandcasestudies,includingresearchonCleanDevelopmentMechanisms.

4. http://unfccc.int/2860.php/Homepage for theUnitedNationsFrameworkConvention on Climate Change. The site provides data on the climatechange issueand informationabouttheongoingprocessofnegotiating in-ternationalagreementsrelatedtoclimatechange.

5. http://rff.org/focus_areas/Pages/Energy_and_Climate.aspxandwww.rff.org/research/topics/climate-change/PublicationsbyResourcesfortheFutureonissuesofenergyandclimatechange.

6. www.hm-treasury.gov.uk/sternreview_index.htm/ Web site for the SternReview,providinganextensiveanalysisoftheeconomicsofclimatechangeincludingimpacts,stabilization,mitigation,andadaptation.

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The Economics of Global Climate Change - Tufts