Exploring the Economics of Global Climate Change

Gary Yohe is spending a lot of time these days studying the economic issues surrounding climate change. In an interview with Yale Environment 360, the Wesleyan University economist talked about why the world needs to start taking steps to adapt to climate change and why strong action must be taken despite uncertainty about the extent of the warming and its ultimate effects.

Gary W. Yohe, the Woodhouse/Sysco professor of economics at Wesleyan University, spoke recently with Yale Environment 360 about his primary field of research these days: the economics of climate change.

In an interview with e360’s editor Roger Cohn and senior editor Fen Montaigne, Yohe discussed his ideas on how to use economic tools to reduce greenhouse gas emissions and to adapt to environmental changes as the world warms. He believes that a tax on carbon is preferable to a cap-and-trade system and that the most important aspect of the tax is that it increase gradually and steadily, which will drive the development of renewable sources of energy. Yohe also argues that the uncertainties surrounding global warming — how much CO2 will be in the atmosphere? what is the expected range of temperature increases? — are no excuse for inaction.

As Yohe sees it, a prudent risk-management strategy dictates significant cuts in greenhouse gases and immediate planning to adapt to rising sea levels and other effects of climate change. Such strategies can be fine-tuned later, he says, as the extent of warming becomes clearer.

Yale Environment 360: We are here in the offices of Yale Environment 360 with Gary Yohe, the Wesleyan University economist whose research focuses on adaption and the potential damage of global climate change. We’re here to talk with him about those issues and some others. So welcome, Gary.

Gary Yohe: Thank you.

e360: You and others have spoken quite a bit about the importance of imposing a carbon tax as a way of reducing greenhouse gas emissions, and now we have a new administration coming in and a new Congress. What action should be taken in the first hundred days of the next administration and the new Congress toward putting a price on carbon?

Yohe: The fundamental thing is that a signal needs to be sent to the business community and to the world that from the U.S. perspective, carbon isn’t free anymore and that carbon should be more expensive next year than it is this year.

Gary Yohe
Gary Yohe

The appropriate incentives need to be set up: to support investment in alternative energy sources, to support potential investments in carbon capture and sequestration technologies if they can be made economically and technologically feasible, and to allow the world to recognize that the U.S. is beginning to assume a leadership role in the negotiations for international climate policy and in taking seriously the need to both mitigate emissions — reduce the pace — and to enhance adaptive capacity within the United States, as well as around the world.

e360: You’ve spoken in favor of a tax on carbon as being preferable to a cap-and-trade system. Can you explain why you think a carbon tax might be a better mechanism?

Yohe: There are a number of reasons, one of which is that cap-and-trade, while it does put a price on carbon, puts a variable price on carbon depending on the supply and demand of permits. The price bounces around and that adds a little bit of uncertainty, potentially a lot of uncertainty… A tax, on the other hand, sends a very strong price signal that’s unambiguous and not clouded with a lot of noise, so that people can actually understand what carbon will cost them and how the price of carbon will increase persistently and predictably over time.

e360: If you could impose a carbon tax right now in the United States, what would be a good price and how would you like to see it increase?

Yohe: I would like to see it start at some place that’s measurable and noticeable but not necessarily catastrophic to the economy. So, something in the neighborhood of $20 a ton of CO2 would be a reasonable place to start.

e360: If you’ve started at $20 per ton of CO2, what would that work out to per gallon of gas?

Yohe: Twenty cents… Not much. I mean we’ve seen gas go up and down a lot. The problem with that is that it’s a lousy climate policy, because the price goes up and then it goes down and people make decisions one way for one month or two and then Ford F-150’s become more attractive as the price goes back down. You don’t get this sort of consistent and persistent increase in the price of gasoline that [drivers] will take into account.

e360: Why is it vital that everybody knows that this tax is going to keep going nowhere but up?

Yohe: Because people make long-term investment decisions or short-term investment decisions on the basis of what they think their project or their automobile will cost over time. For automobiles, people need to understand that over the lifetime of the car that they will own, the price of gasoline will go up marginally from year to year, and they need to take that into account. People that make investments in building and infrastructure and business decisions need to take that into account… And for investments in things like carbon sequestration, there’s absolutely no economic incentive whatsoever to do that unless carbon has a price attached to it. If you sequester carbon and throw it into some place where it will not enter the atmosphere, if you can be compensated for that, then that becomes a reason to do it.

e360: Looking forward to next year in Copenhagen, what do you think needs to happen?

Yohe: What needs to happen is for a global agreement to be reached that includes the United States from the get-go as an active participant, with agreement on the next round of emissions targets so that they will be taken a lot more seriously than Kyoto was and be a lot more effective. There also has to be an agreement on exactly how to fund and administer adaptation funds and climate risk insurance for developing countries for people who are at risk of climate impacts and vulnerabilities around the world — not just in developing countries but in developed countries as well. There is room for the United States to accept the responsibility of preparing for adaptation, learning how to do it, learning how to finance it, creating templates that can be applied around the world. Europe has been doing that. The Netherlands has been doing that. We’ve been lagging behind for lack of leadership, not only on reducing emissions but also on trying to respond to the risks. But a lot of states and localities have begun to think very, very seriously about how to adapt, how to protect infrastructure, how to protect vulnerable people. New York City has an extensive program underway to try to figure out how to do that. London has one. Seattle has one.

e360: What kinds of things are they talking about?

Yohe: London is talking about protecting the city and its surroundings from high precipitation events and storm surges up the Thames. They have a barrier now. They’re talking a lot about planning to do a new barrier when it becomes necessary… New York City is a little bit further behind, but they’re thinking about exactly the same sorts of things with respect to storm runoff and storm surges. They’re mostly at the moment worried about infrastructure and they’ve engaged through the leadership of the mayor’s office with all the agencies of city government, as well as a lot of the major businesses who have invested in the infrastructure in downtown Manhattan.

e360: You’ve said that adaptation is not a dirty word. What did you mean by that?

Yohe: For a very long time, it seems to a lot of us that the environmental community has looked at adaptation as something to be avoided, to be ignored, to be eliminated from the conversations.

e360: Because it was an admission of defeat when it came to tackling global warming?

Yohe: Because it was an admission of defeat to some degree, but also because they thought it takes your eye off the ball of trying to reduce the source of the problem. The Fourth Assessment Report of the IPCC [Intergovernmental Panel on Climate Change] has made it very clear that we need to do both adaptation and mitigation, that if we were to shut off greenhouse gas emissions tomorrow, we’ve already committed ourselves to another six-tenths or seven-tenths of a degree of warming over the course of the next century and associated with that warming will be impacts to which we will have to respond. We’re committed to a certain amount of sea-level rise that there’s nothing we can do about, and we need to prepare for that.

“It seems to a lot of us that the environmental community has looked at adaptation as something to be avoided.”

e360: Could you summarize the major challenges that the developed world and the developing world are going to face?

Yohe: In both worlds, people living along the coast and in mega-deltas are going to be most vulnerable from changes in patterns of coastal storms, from sea-level rise, from changes in patterns of tsunamis, storm surge risk… In the developing world, the changes will be felt by millions and millions and millions of people who simply live in flood plains and are at risk everytime there is a storm. Health issues are going to be very important for the developing world… But the developed world faces the same sorts of problems. We learned from the heat wave in Europe a couple of years ago, from a statistical study I just read, that anthropogenic sources were the dominant source of the heat wave that caused all the loss of life.

e360: Do you feel that if the Obama administration gets behind a serious structure of targeted greenhouse gas reductions that it’s conceivable in Copenhagen to have a global agreement with binding reductions in greenhouse gases?

Yohe: Global is a strong adjective but a more pervasive agreement than Kyoto I think is certainly the case. It’s incumbent upon the Obama administration not simply to get behind this, but actually to take a leadership role. And one of the ways of doing that is to further the negotiations. Another way is implementing some climate policy at home.

There are countries around the world that are simply waiting for the U.S. to lead in these issues. I’m told that in the People’s Republic of China, there are plans on the shelves to try to begin to reduce their emissions of greenhouse gases. They are simply waiting for the United States to sign on and actually commit itself to doing that, instead of playing this giant global game of chicken. It’s time to say, “Okay, we’ll take the lead.” And taking the lead involves allowing for the transfer of technologies to developing countries so that they can leapfrog some of the high carbon, high fossil fuel, high greenhouse gas emission technologies that we’ve gone through.

“There are countries around the world that are simply waiting for the U.S. to lead in these issues.”

e360: You’ve written recently about uncertainty over the future impacts of climate change and how that plays a role in discouraging action in reducing greenhouse gases. How do you spur world action on this issue when there are still questions out there about future levels of CO2 in the atmosphere and the range of future temperature increases?

Yohe: Uncertainly is ubiquitous. There are some fundamental conclusions that we now know: that the planet is warming; that humans are the cause of it. We’ve seen the climate signal and changes in global mean temperature… But there’s some uncertainty that simply will not be resolved in a timely fashion. Yet once you adopt a risk-management perspective, then uncertainty becomes a reason to do something rather than a reason not to do something. And people who argue against doing anything then have to guarantee that humans aren’t changing the climate. They can’t do that, so they can’t argue against enacting some climate policy. At the same time, though, uncertainty is something we need to recognize will be persistent. We have to learn how to make decisions under uncertainty.

e360: You’ve written about how, because of these uncertainties, it’s important that action be taken sequentially. Can you explain that?

Yohe: It’s absolutely the case that we cannot write climate policy next year, or the year after, for the next century. We will do some learning — some of it will be that we identify some things we thought we knew and we don’t know anymore. We will identify some things that we didn’t even know about that create some uncertainty…

So the point is that climate policy has to adopt a risk-management approach. It involves both adaptation and mitigation. We have to think seriously about how we do mid-course corrections. What is near-term policy? How do you make adjustments? Well, you keep track of how you’re doing relative to the short-term target that you set up. But you also have to worry about whether or not the target was right, and that’s where increased knowledge about the climate system and the economic system come into play. And so every 10 years or so, you have to sit down and say, “Okay what have we learned? Are we doing well compared to the target we set? Is the target right? Is it too high? Is it too low? Should we ramp these things up or ramp these things down?” And those are the essential things that we need to do.

e360: You talk about how policies have to aim toward not crossing irreversible thresholds. Would you say that we in fact have crossed and are very rapidly heading towards one of those thresholds, which is the loss of summer sea ice in the Arctic? How important is keeping the goal of not crossing these thresholds in mind as you try and sell these various policies?

Yohe: The answer to the second question is easier. We have to keep that in mind a lot. And every time you figure out some sort of hedging strategy, you think about the potential thresholds of catastrophic impacts and say, “Well, maybe we better back off from that just a little bit further and push a little bit harder in reducing emissions.”

e360: With the boom in economic activity in China, India, Brazil, et cetera, greenhouse gas emissions just keep going up despite all the dire warnings. As an economist, when you look at this, do you say to yourself: “Well there’s a problem here, and here’s the solution.”

“This international game of chicken and lack of leadership out of Washington has cost us eight years.”

Yohe: If I had the solution, I think I would be shouting a lot louder than I am… I think that emissions over the last 10 years are on the high range of what we were projecting 10 years ago because we missed China. People did not anticipate 10 percent growth a year and the rapid exploitation of the coal resources that they have. Those are the sorts of social economic surprises that we have to plan for as well. They’re climate surprises but they’re social-economic ones. It amplifies the importance of the problem. It amplifies the importance of getting China to participate [in any solution]. But I think that there are people in China who are recognizing their contribution to the problem and the risks that they’re facing. They have serious local pollution problems that they can see co-benefits for addressing.

And again, this international game of chicken and lack of leadership out of Washington has cost us eight years. In Bali, at the conference of the parties, Papua New Guinea stood up and looked at the U.S. and said, “Lead, follow, or get out of the way!” Get out of the way is no longer on the table. But it’s not enough just to follow — we have to lead. And I think if we do lead there will be other countries that will follow.