The Economics of Climate Change

Transcription

1 The Economics of Climate Change William D. Nordhaus Yale University Growth and Development Commission Workshop on Global Trends and Challenges September 28-29, 2007 Note: slides are available. Background studies available on my web page including 2008 book from Yale University Press. 1

2 Questions to consider 1. Is global warming theory a vast left-wing conspiracy? 2. Integrated assessment economic (IA) models of global warming 3. Alternative regimes: taxes, permits, and the Kyoto Protocol 4. Three policy dilemmas for the Commission 2

3 CO 2 concentrations at Mauna Loa

4 Instrumental record, global mean temperature index( C) GISS Hadley

5 IPCC TAR4 Model Results: History and Projections DICE-2007 model 5

6 Bayesian temperature estimate of 2x CO 2 (TSC) Likelihood IPCC Range Likelihood from models Joint likelihood Likelihood from history Temperature sensitivity coefficient 6

7 Integrated Assessment (IA) Models What are IA model? These are models that include the full range of cause and effect in climate change ( end to end modeling). Major goals: Project trends Assess costs and benefits Assess uncertainties and research priorities 7

8 Fossil fuel use generates CO2 emissions The emissions -climateimpactspolicy nexus Carbon cycle: redistributes around atmosphere, oceans, etc. Impacts on ecosystems, agriculture, diseases, skiing, golfing, Climate system: change in radiation warming, precip, ocean currents, etc.. Measures to control emissions (limits, taxes, subsidies, ) 8

9 The Problem of Impacts Estimating the impact of climate change on society is the most treacherous of all areas. Problems: Regional climate estimates are highly unreliable We have no reliable valuations of non-market activity and ecosystems Studies of developing countries are very sparse Science premature for low-p high-consequence events. Uncertain trajectory of growth and development (say to 2100) E.g., Size of agricultural sector? The shape of coastal developments? Population distribution and size? Migration? Location and porosity of national boundaries? 9

10 Damage functions in different estimates 11% 10% RICE-1999 Climate damage/global output 9% 8% 7% 6% 5% 4% 3% 2% DICE-2007 IPCC estimate 1% 0% Mean temperature increase (oc)

11 1. No controls ("baseline"). No emissions controls. 2. Economic optimal policy. Emissions and carbon prices set to maximize discounted utility. 3. Climatic constraints with CO 2 concentration constraints. Concentrations limited to 550 ppm 4. Kyoto Protocol. Kyoto Protocol with the U.S. Some Illustrative Policies Examined in DICE-2007 Model 11

12 Emissions trajectories for different strategies Carbon emissions (tons GtC per decade) Optimal Baseline < 2x CO2 Kyoto w US

13 Carbon prices for different strategies Carbon price (2005 US$ per ton C) Optimal Baseline < 2x CO2 Kyoto w US

14 Global temperature for different strategies 6 5 Optimal Baseline Temperature change (C) < 2x CO2 Kyoto w US 0 14

15 Dilemmas of uncertainty Uncertainty and the potential for catastrophic risks are a major concern in global warming science and policy today. Major risks include: Atlantic deepwater circulation Melting of Greenland and Antarctic ice sheets Abrupt climate change Runaway greenhouse effect Unknown unknowns 15

16 Uncertainty for future temperature: DICE 2007 baseline 6 Mean Mean + 1 sigma Global temperature increase (oc) Mean - 1 sigma Most likely

17 The macro risk question: theory Should we be paying a large risk premium on hightemperature change scenarios? Obviously, yes!!! In capital-consumption asset pricing (Samuelson-Merton) framework, want to pay a risk premium the high-climate outcome is positively correlated with high MU consumption. For quick estimate, look at 100 random runs using the empirical distributions assumed above. 17

18 The macro risk question: empirical Per capita consumption, 2105 (1000s of 2005 $) Temperature change, For 100 random runs, correlation of consumption and temperature is positive. (correlation of MU and temperature is negative.) This implies that there is a negative risk premium on high-climate outcome. 18

19 The Kyoto Protocol Major provisions: - A cap and trade emissions reduction program - Protocol negotiated in Limiting emissions to fraction of 1990 rates. - Limited to high-income countries - Only agreed for period - Allows trading of emissions permits among countries - Bush Administration withdrew in Protocol went into effect in Feb 2005 after Russian ratification. 19

20 Price v. quantity systems for global warming 1. The Kyoto Protocol lacks any connection to ultimate policy objectives. 2. Quantity limits are particularly troublesome in a world of differential economic growth and uncertain technological change. 3. Weitzman 1976 uncertainty for stock externality favors taxes. 4. Quantity-type regulations will show extremely volatile trading prices for carbon emissions. 5. Tax (or auctioned quotas, which are a long shot) have beneficial public-finance characteristics. 6. Quantity-type systems with international trading are much more susceptible to corruption than price-type regimes. 7. It may be easier to transfer resources to poor countries with a permit system.

21 Attrition of Kyoto Protocol Fraction of Global Emissions Covered by KP 100% 80% With US Without US Enthusiasts 60% 40% 20% 0%

22 Climatic Impacts Under Current KP Will Be Minimal 6 5 Baseline Kyoto w US Temperature change (C) Source: W. Nordhaus, DICE

23 An Alternative: Harmonized Carbon Taxes What are harmonized carbon taxes? Environmental equivalent of cigarette taxes Raise fossil fuel prices proportional to carbon content All countries would target a comparable tax Level of tax set to meet environmental target Example of a tax of $50 per ton C (or $15/ton CO 2 ): Raise gasoline price by 10 cents/gallon If efficiently introduced, reduce real income by ½ % Virtually all US proposals are cap and trade like Kyoto Protocol (McCain-Lieberman, California, Yale, ) But there is (glacial) progress in understanding the advantages of carbon taxes. 23

24 Growth and development issue 1: The perils of policy It is virtually certain that there will be a spread of climate change policies around the world - These may be tax, or emissions limits, or a hybrid; perhaps harmonized, perhaps not; perhaps well-designed, probably not; perhaps technological standards, perhaps not. - Unless they become involved early, developing countries may find themselves (again) as passive actors in the policies (think IP rights) Major worry: that the costs of poorly designed policy in the short run will be more costly than the global-warming disease. 24

25 Growth and Development Issue 2: A looming trade issue As countries introduce climate-change policies in a nonharmonized manner, this will raise trade issues: - Carbon prices and embodied goods and services will rise in high-carbon-price regions - E.g., if US acts, between the US and Mexico Countries and international organizations will have to deal with the question of border-tax adjustments - This will be particularly important for more stringent regimes and energy-intensive industries (electricity, steel, petrochemicals and chemicals, ) Caveat exporters: carbon CVD on non-participants. 25

26 Growth and development issue 3: Long-run energy technology A critical long-run issue is that there is no energy technology globally available that is - superabundant - environmentally clean, - and economical 26

27 a great geophysical experiment 27