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20 Oct 2009

The Economic Case for Slashing Carbon Emissions

Amid a growing call for reducing atmospheric concentrations of CO2 to 350 parts per million, a group of economists maintains that striving to meet that target is a smart investment — and the best insurance policy humanity could buy.
By frank ackerman

The climate change news from Washington is cautiously encouraging. No one in power is listening to the climate skeptics any more; the economic stimulus package included real money for clean energy; a bill capping U.S. carbon emissions emerged, battered but still standing, from the House of Representatives, and might even survive the Senate. This, along with stricter emission standards in Europe and a big push for clean energy and efficiency standards in China, provides grounds for hope for genuine progress on emissions reduction.

But while climate policy is finally moving forward, climate science is moving faster. One discovery after another suggests the world is warming faster, and climate damages are appearing sooner, than anyone had expected. Much of the policy discussion so far has been aimed at keeping the atmospheric concentration of CO2 below 450 parts per million (ppm) — which was until recently thought to be low enough to prevent dangerous levels of warming. But last year, James Hansen, NASA’s top climate scientist, argued that paleoclimatic evidence shows 450 ppm is the threshold for transition to an ice-free earth. This would imply a catastrophic rise in sea levels, eventually flooding all coastal cities and regions.

To avoid reaching such a crisis stage, Hansen and a growing number of others now call for stabilizing CO2 concentrations at 350 ppm. The world is now around 390 ppm and rising; since CO2 persists in the atmosphere for a long time, it is difficult to reduce concentrations quickly. In Hansen’s scenario, a phaseout of coal use, massive reforestation, and widespread use of carbon capture and storage could allow the world to achieve negative net carbon emissions by mid-century and reach 350 ppm by 2100.

Can we afford to reduce atmospheric concentrations of CO2 to 350 ppm by the end of this century? To address this question, Economists for Equity and Environment (www.E3Network.org) — a group dedicated to applying and developing economic principles to protect human health and the environment — conducted a study of “The Economics of 350.”

Why the wide range of cost estimates?

At first glance, there is a bewildering range of estimates of the costs of climate protection. Look more closely, however, and there are just a few projections of economic disaster, out in right field by themselves. Other estimates range from modest costs to small net economic gains.

The outliers are the handful of private consultant studies funded by partisan lobbying groups such as the U.S. Chamber of Commerce and the National Association of Manufacturers. Using proprietary models (or their own adaptations of standard models), and pessimistic economic assumptions, these studies forecast that even mild U.S. proposals, such as last year’s Lieberman-Warner bill, would cost many thousands of dollars per household and would cause widespread unemployment and economic dislocation. An analysis by journalist Eric Pooley documents the excessive, often uncritical attention given to these studies by the media.

These projections of economic ruin have not been reproduced by any major academic or non-profit research group. Many economic models find that the modest steps called for in recent U.S. proposals would have very small costs and virtually undetectable effects on total employment — as documented in a report by Nathaniel Keohane and Peter Goldmark for the Environmental Defense Fund.

But to reach 350 ppm, we will have to go far beyond the emission reductions considered in recent U.S. proposals. How much will it cost to reach this more ambitious target? Until recently, most economic research focused on higher targets such as 450 ppm or more. There are, however, four major climate economics modeling groups — all at European universities — that have analyzed the costs of reaching 350 ppm.

One group starts from the (realistic) assumption of high unemployment, and finds that long-run employment and economic growth would be
Needed emissions reductions will cost 1 to 3 percent of world economic output, some studies find.
increased by a program of public investment in green technology and emissions reduction that leads to 350 ppm. The other three groups adopt the common assumption that short-run unemployment can be ignored in long-run models. They generally find that the needed emissions reductions will cost an average of 1 to 3 percent of world economic output, for some years to come.

Other studies have reached more optimistic conclusions about costs. McKinsey & Company, an international consulting firm, has carried out detailed studies of the costs of hundreds of emission-reducing technologies. They find that some emissions can be eliminated for no cost or even an economic savings; more than half of worldwide business-as-usual emissions in 2030 could be eliminated at very small total cost. The net costs of reducing carbon emissions (i.e. investment costs, minus the value of energy saved) go down when the price of oil goes up, and vice versa. McKinsey’s entire package of reductions, eliminating more than half of world emissions, would have zero total cost if the price of oil were $90 per barrel.

Studies from major environmental groups, including Greenpeace and the Union of Concerned Scientists (UCS), have reached even more optimistic conclusions than McKinsey. Both Greenpeace and UCS project substantial economic savings from emission reduction, with fuel savings much larger than the costs of investment. Both assume high oil prices — up to $140 per barrel for Greenpeace — along with rapid change in emissions-reduction technologies.

Deciding whether it’s worth the price

The range of cost estimates for reaching 350 ppm, combined with uncertainties about oil prices and future technologies, make it difficult to choose a single estimate of the total economic cost. Suppose that, for the sake of argument, 2.5 percent of world output must be spent on climate stabilization for years to come. Is that an unacceptably large number?

Imagine an economy growing at 2.5 percent every year (a little slower than the recent U.S. average). Suppose it skips one year’s growth — all too easy to imagine in 2009 — and then resumes growing. That makes GDP 2.5 percent smaller than it would have been, forever. So the “skip year” has the same effect as spending 2.5 percent of output on climate protection every year. Household incomes would take 29 years to double, instead of 28.

Alternatively, we know we can afford to devote 2.5 percent of income to protection against a remote but disastrous threat — because we already do,
We can afford to protect the climate, and leave a livable world to future generations.
year after year. In 68 countries, military spending exceeds 2.5 percent of GDP. In the United States and China, the top greenhouse gas emitters, military spending absorbs more than 4 percent of GDP. Both countries would be safer, not more vulnerable, if they diverted half of their defense spending to defense against climate crisis.

The most important conclusion of our research involves what we did not find. There are no reasonable studies saying that a 350 ppm stabilization target will destroy the economy. This is not surprising. The ominous recent research on potential climate damages does not examine the cost of doing something; instead, it looks at the cost of doing nothing about emissions.

If the worst happens, our grandchildren will inherit a degraded Earth that does not support anything like the life that we have enjoyed. On the other hand, if we prepare for the worst but it does not quite happen, we will have invested more than was absolutely necessary — in perfect hindsight — in clean energy, conservation, and carbon-free technologies. Which extreme presents the greater danger?

Climate risk and insurance

Think about climate risk as an insurance problem. You don’t buy fire insurance because you’re sure your house will burn down; rather, you are not, and cannot be, sure enough that it will not burn down. Likewise, projections by Hansen and others of dangerous climate risk from staying above 350ppm CO2 are not certainties; they are necessarily uncertain (although becoming more likely as temperatures rise).

The analogy to insurance is important but inexact; there is no climate insurance company to which the world can hand 2.5 percent of output, if that is what it costs. There is, however, a need for large-scale investment, both in proven emissions-reducing technologies and in research and development.

The role of government in climate policy is not only to set appropriate price signals through a carbon tax or cap-and-trade system; the public sector

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New Study Warns of
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The Earth has nine biophysical thresholds beyond which it cannot be pushed without disastrous consequences, the authors of a paper in the journal Nature report. Ominously, these scientists say, we have already moved past three of these tipping points, Carl Zimmer writes.
must also guide research on clean energy technologies. Despite free-market mythology to the contrary, this has worked well in the past. Wind power is profitable today as a result of decades of government investment in the United States and Europe. In another arena, the U.S. government essentially invented microelectronics in the 1950s and 1960s: At first, almost all transistors, integrated circuits, and the like were bought by agencies such as the Pentagon and NASA, because no one else could afford them. Just a few decades of massive government purchases of these items turned microelectronics into the premier private-sector success story of the late-20th century, transforming everyone’s life in countless unexpected ways.

The climate crisis challenges us to do it again, to invent the new technologies and industries that will transform life in the mid-21st century and beyond. We know it’s possible: We can afford to protect the climate, and leave a livable world to future generations.

ABOUT THE AUTHOR


Frank Ackerman is senior economist with the Stockholm Environment Institute at Tufts University. He is also a co-founder of Economists for Equity and Environment (E3), and the lead author of E3’s “Economics of 350” study.

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COMMENTS


Though I do not have PhD in Economics, some analysis here is somewhat of misleading. For example: you assumed 2.5% of GDP invested on battling Global Warming is like a permanent loss for American people. However, it is not true. This 2.5% of GDP is not pure consumption, large part of it will be investment, so it actually will generate much job opportunity. The chain effect on the macro-economy probably will generate the wealth more than 2.5% of GDP as the initial investment to the society. Therefore, Doubling the economy will not be 29 years but less than 28 years.

Anyway, thanks your contribution on raising the public awareness of this issue. The paradigm will be shifted if more people willing to act as you.
Posted by Feng Wang on 21 Oct 2009


"Our grandchildren will inherit a degraded Earth...”

Please… I have never read a reputable climate study claiming the world will be “degraded.” What I have read is that the world will be a little warmer, wetter, and different than it currently is… but you could have said that 10,000 years ago as well.

This is more of a cheerleading article than an intellectual discussion on costs and benefits. Kind of what I read from Wall Street economists.

What I would find really interesting is an article addressing climate change from an under represented economic perspective. All of the climate change "solutions" proposed have some sort of transfer of wealth mechanism in them. What is the cost to the economy when 1) the money transferred is not used appropriately in the ways proscribed but instead is pilfered by the powerful and 2) Climate scientists are correct about their predictions on the negative effects of climate change. This would mean the economy would take a triple strike… need of massive investment to maintain status quo, massive unproductive wealth extraction, burdensome regulations that inhibit responses to a changing environment (think California of today)

Think the pilfering and non-productive use of money can’t happen? It happens in almost every UN program that has ever been tried… it happens in most Federal and State government programs… Why do you think this time is different?
Posted by Billy D on 21 Oct 2009


Billy D,

Please...? The article right ahead of this one reports on increasing costs due to increased diseases (b/c of warmer temp's)

http://e360.yale.edu/content/feature.msp?id=2199

... furthermore the costs of sea level rise. "We estimate that shoreline retreat from a one-meter rise in sea level would cost the United States $270 to $475 billion dollars. " By the way, one meter is a low estimate. There now you have some real costs to think about.

How can you say our earth won't be degraded... have you seen the movie on mountaintop removal that is also on Yale E360? (http://e360.yale.edu/content/feature.msp?id=2198)...

I'd say that that is the definition of degradation.

-Another concerned environmentalist


Posted by Alex Place on 23 Oct 2009


"How can you say our earth won't be degraded... have you seen the movie on mountaintop removal that is also on Yale E360?"

Good false argument.

Global warming did not cause the mountain top to be removed. The mountain top was removed to extract coal, which yes, when burned releases CO2.

Are we debating the environmental impact of different mining methods, or the cost benefit analysis of reducing CO2.
Posted by Greywolf on 26 Oct 2009


"Think about climate risk as an insurance problem. You don't buy fire insurance because you're sure your house will burn down; rather, you are not, and cannot be, sure enough that it will not burn down. Likewise, projections by Hansen and others of dangerous climate risk from staying above 350ppm CO2 are not certainties; they are necessarily uncertain (although becoming more likely as temperatures rise)."

Welcomed clarity.

"Global warming did not cause the mountain top to be removed. The mountain top was removed to extract coal, which yes, when burned releases CO2.

Are we debating the environmental impact of different mining methods, or the cost benefit analysis of reducing CO2."

Agreed. The issues are not the same. Still, it's worth remembering that there's a perfect storm of degradation throughout the global system: Top soil, forests, oceans, wildlife, etc. While I appreciate the main article, I wish for a way to routinely bring these different issues together. I'm sure that dealing with them in a systems fashion will be cheaper than tackling them one at a time.

Posted by TRB on 26 Oct 2009


A note to Alex Place [concerned environmentalist]-the increasing costs due to increasing diseases from warmer weather have been somewhat exagerated-try googling Paul Reiter, from the CDC journal "Emerging Diseases". Also, please note that even Hansen has downgraded His estimate of sea level rise to 30cm by 2100, which is getting closer to the 14cm per 100 year rise that we have all come to know and expect.. ... 14cm per 100 years, is, of course, the approx sea level rise over the last 5000 year.

Mind you, no trend lasts forever, and after about 20,000 years of warming and gradual sea level rise, one should not expect this trend to continue much longer. Please relax, and continue to enjoy the current interglacial.
Posted by ianh on 26 Oct 2009


How anyone can believe that a few parts PER MILLION of a trace gas that is absolutely vital to all life on the planet can change its climate is simply ridiculous. Think about it! The planet has changed over 4.5 billion years, and we think that a tiny increase in a trace gas is responsible - get real. Follow the money, follow the power - its political! Big business is just along for the ride (and why wouldn't they be?).

Has anyone noticed the change in sea level over the past 50 plus years?
For all those in cities, sitting in offices and labs - get out into the real world - its special and man is arrogant in the extreme if he believes he can SAVE it - from what? It been through a lot worse and survived!

Posted by Chris on 27 Oct 2009


Hi all,

Feng Wang: You are absolutely right. This green movement is a stimulus of new, truly sustainable jobs. We will need to move away from fossil fuels at some point, why not switch to clean energy now before we burn away our planet (i.e. deforestation, and yes mountaintop coal removal) American people don’t care about the climate right now; the values need to change quickly. This transformation may occur with the court case occurring in I believe California as to whether climate change is real (very interesting!)

Greywolf & Billy D: The real costs of not cutting emissions include mountaintop coal removal, which is surely degradation. That cannot be disputed. Furthermore, health costs due to poor air quality needs to be considered. Mountaintop coal removal is raping nature. Have we lost the ability to connect with nature, when we see polar bears drowning? Or our connection with humanity, when we see rising tides forcing immigration. Are we better than those people in Bangladesh, in Alaska? The Ovarian Lottery is very sobering when you think about it? You could be born anywhere.

TRB: We trust doctors to proscribe us strong medicines when we our sick. Why don’t we trust the climate scientists? No one wants to say that the planet is in trouble, but the fact is our impact on the earth is changing the historical climate patterns. This clean energy movement is more than just emissions, it’s about being responsible on our planet and realizing that we need to minimize our impact.

There’s a huge pile of garbage out in the ocean for gosh sakes! Look at deforestation, we simply need to change the way we treat the planet.

I went to talk to Olympia Snowe, after protesting at a coal fire plant in Washington DC. The one question I asked her aid (we had missed her time slot) about energy incentives. I found out… While oil companies are making record profits, they still receive forty billion dollars in tax incentives. Meanwhile, the energy efficiency fund is a measly five billion dollars. Energy efficiency being the most cost-effective way to cut our carbon footprint, and save money!

Big business is really “on for the ride” that’s why ExxonMobil spent so much money trying to disprove the science, through ads and shotty research. Now the big oil companies (those stand to lose the most from the acceptance of climate change) are agreeing with the science. What more evidence do you need. This is not big business. Big business is Detroit motor company having ties to oil companies and making inefficient cars. The business of today is in China where they are making huge investments in clean
energy, and in Japan where Toyota originated
I think.

Chris no creature has ever impacted the earth the way we have. Do you think we have the right to do such a thing? (Pause before, closing your mind to this question, and being the arrogant human being.)

We have altered the greenhouse effect. The IPCC is sure of it.

The climate scientists are our earth’s doctors… please let us take them seriously.

-Alex

Posted by Alex Place on 28 Oct 2009


How anyone can believe that a few parts PER MILLION of a trace gas that is absolutely vital to all life on the planet can change its climate is simply ridiculous.

One presumes one lives their life according to this argument and eschews medicine. Yes, a few parts per million of trace elements absolutely vital to life...etc.


Posted by Dan Staley on 02 Nov 2009


As one of thousands of 350.org International Day of Climate Action organizers, thank you for your hopeful research and analysis.

I agree with Joe Romm that our present "economy" is a distorted Ponzi scheme, where mined material resources (coal, petroleum fluids and uranium) are defined perversely as energy resources. I believe that the global conversion to clean energy and sustainability is not at cost, but at profit. I would further say that a civilization that does not understand the difference between matter and energy resources will trend toward ecologic and economic bankruptcy, i.e. collapse.

Considering the gibberish from most neoclassical economists (Wall St, the Fed, Treasury, etc.), the phrase: Eco? No. Mist! comes to mind.

Posted by James Newberry on 15 Nov 2009



 

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