Anne-Marie Codur has a PhD in Economics from the Institut d’Etudes Politiques de Paris (France). Her fields of research include Population, Environment, and Sustainable Development in the developing world and particularly in North Africa and the Middle East.

Jonathan M. Harris holds a B.A. from Harvard University and a Ph.D. from Boston University. He is the author of Environmental and Natural Resource Economics: A Contemporary Approach (Houghton Mifflin, 2002).

• An Introduction to Ecological Economics
• Climate Change and Foreign Policy: An exploration of options for greater integration

Introduction

Concern has grown in recent years over the issue of global climate change. In terms of economic analysis, greenhouse gas emissions, which cause planetary climate changes, represent both an environmental externality and the overuse of a common property resource.

The atmosphere is a global commons into which individuals and firms can release pollution. Global pollution creates a “public bad” borne by all — a negative externality with a wide impact. In many countries, environmental protection laws limit the release of local and regional air pollutants. In economic terminology, the negative externalities associated with local and regional pollutants have to some degree been internalized. Few controls exist for carbon dioxide (CO₂), the major greenhouse gas, which has no short-term damaging effects at ground level. Atmospheric accumulations of carbon dioxide and other greenhouse gases, however, will have significant effects on world weather, although there is uncertainty about the probable scale and timing of these effects.

If indeed the effects of climate change are likely to be severe, it is in everyone’s interest to lower their emissions for the common good. But where no agreement or rules on emissions exist, no individual firm, city, or nation will choose to bear the economic brunt of being the first to reduce its emissions. In this situation, only a strong international agreement binding nations to act for the common good can prevent serious environmental consequences.

Economic Analysis of Climate Change

Scientists have modeled the effects of a projected doubling of accumulated carbon dioxide in the Earth’s atmosphere. Some of the predicted effects are:

• Loss of land area, including beaches and wetlands, to sea-level rise
• Loss of species and forest area
• Disruption of water supplies to cities and agriculture
• Increased costs of air conditioning
• Health damage and deaths from heat waves and spread of tropical diseases
• Loss of agricultural output due to drought

Some beneficial outcomes might include:

• Increased agricultural production in cold climates
• Lower heating costs

In addition to these effects, there are some other, less predictable but possibly more damaging effects including:

• Disruption of weather patterns, with increased frequency of hurricanes and other extreme weather events.
• Sudden major climate changes, such as a shift in the Atlantic Gulf Stream, which could change the climate of Europe to that of Alaska.
• Positive feedback effects, such as an increased release of carbon dioxide from warming arctic tundra, which would speed up global warming.

How can we evaluate such major possible economic impacts? We need to obtain information on the extent of the impacts, which in turn depends on projections of carbon emissions and climate change. As shown in Figure 1, there is considerable uncertainty about the expected global warming in the next century. We need to keep such uncertainties in mind as we evaluate economic analyses of global climate change. Even with the best data currently available, the actual effects cannot be precisely determined.

Given these uncertainties, economists have attempted to place the analysis of global climate change in the context of cost-benefit analysis. Others have criticized this approach as an attempt to put a monetary valuation on issues with social, political, and ecological implications that go far beyond dollar value. Here we examine economists’ efforts to capture the impacts of global climate change through cost-benefit analysis, then return to the debate over how to implement greenhouse gas reduction polices.

Cost-Benefit Studies of Global Climate Change

Without policy intervention, carbon emissions will likely continue to rise as projected in Figure 2. Aggressive and immediate policy action would be required to stabilize, and perhaps reduce, total CO₂ emissions in the coming decades. In performing a cost-benefit analysis, we must weigh the consequences of this projected increase in carbon emissions – consequences that will primarily occur in the future – versus the costs of current policy actions to stabilize or even reduce CO₂ emissions. Strong policy action to prevent climate change will bring benefits equal to the value of future damages that are avoided. Then we must compare these to benefits to the costs of taking action. Various economic studies have attempted to estimate these benefits and costs. The results of one such study for the U.S. economy are shown in Table 1.

The study is based on an estimated doubling of CO₂ over pre-industrial levels. When the monetized costs are added up, the total annual U.S. damages are estimated at approximately $60 billion (1990 dollars). This is about 1% of U.S. gross national product (GNP). Although different economic studies come up with different estimates, most of them are in the range of 1-2% GNP. Cost estimates for larger temperature change over the longer-term rise to around 5% of GNP (the far-right column of Table 1).

Note, however, that there are also some “Xs” and “Ys” in the totals – unknown quantities that cannot easily be measured. The damages from species extinctions, for example, are difficult to estimate in dollar terms: the estimates used here show a cost of at least $4 billion in the short term and $16 billion in the long term, with additional unknown costs in both the short and long term.

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