Degrees of difference

Apr 29th 2004 From The Economist print edition

In the third of a series of articles on the Copenhagen Consensus project*, we look at climate change

GLOBAL warming looms, in many people's minds, as one of the biggest threats facing the planet. Over the past 20 years researchers have gathered evidence that the burning of fossil fuels is causing temperatures to rise. However, the exact pace of global warming, as well as the size of mankind's contribution to the warming trend, remain uncertain. Aside from these issues is the question of precisely how greenhouse-gas emissions should be abated, assuming that they need to be reduced at all. In a new paper for the Copenhagen Consensus project, William Cline of the Centre for Global Development and the Institute for International Economics examines these topics.

Rising temperatures are capable of causing great economic harm?though a lot depends not just on how big future rises prove to be but also on how quickly they happen. One estimate is that a doubling of atmospheric concentrations of carbon dioxide would cost between 1% and 2.5% of global GDP, depending on what kinds of damage you include.

One study from America's Environmental Protection Agency listed the possible costs. Around a quarter of the total economic damage would fall on farmers, who could no longer use some lands. Around a sixth of the total cost would come in the form of increased cooling costs for homes and offices (net of the reduced costs of heating). Rising sea levels, damage to drinking-water supplies and heatwaves would each account for 10%. Deforestation and rising ozone pollution together would add another 10%. And the economic estimates exclude the ?amenity value??the price people would be willing to pay to avoid rising temperatures for reasons of convenience.

Yet totting up such figures is far from straightforward. That is because applying cost-benefit analysis to climate change is harder than for most public-policy questions: many of the benefits will not be realised for decades or centuries, while the costs of abatement will be felt today.

Using a discount rate of, say, 3-6%, which would be typical for most short-term projects, would cause you nearly to ignore any costs and benefits occurring in 100 years' time. Mr Cline uses a discount rate of just 1.5%, which has the effect of making the future benefits of slowing global warming much more attractive than they would be under traditional analysis. So he can certainly not be accused of minimising the pain of global warming for future generations, nor of hyping the economic costs of abatement in the near future. On the other hand, the rationale for the use of a much lower rate is unclear. To say that without using such a rate, abatement would be minimal is not a very persuasive reason. That way of thinking fails to demonstrate that strong abatement is necessary; in effect, it merely assumes it to be necessary. Be that as it may, using such discounting and a widely cited model developed by William Nordhaus of Yale University, Mr Cline then considers three possible remedies.

Kyoto revisited

One is the Kyoto treaty. The goal of that agreement was to freeze rich countries' carbon emissions at 5% below their 1990 levels, while letting poor countries emit as much carbon as they please. According to Mr Cline, slowing global warming in this way would yield benefits totalling $166 trillion (in 1990 prices, as are all of the following figures). The costs of abatement amount to $94 trillion, giving a global benefit-to-cost ratio of 1.77. But the costs and benefits are unequally shared in the Kyoto approach. Industrial countries must cut back heavily on carbon emissions and realise comparatively few benefits: for them, the benefit-to-cost ratio is far less than one. That helps explain, argues Mr Cline, why many rich countries refuse to sign the Kyoto treaty.

Mr Cline next considers a global carbon tax. This ought to be more efficient than the Kyoto caps, since it would encourage the lowest-cost reductions in carbon emissions to happen first. The discounted costs of applying such taxes would amount to $128 trillion up to 2300. The benefits are reckoned to be $271 trillion. That produces a benefit-to-cost ratio of 2.1. Carbon taxes do indeed give better value for money than Kyoto.

The last policy recognises that predictions of climate change encompass a wide range of scenarios. Mr Cline looks at the costs and benefits of abating global warming in 95% of possible outcomes, rather than focusing only on the median prediction for climate change. This strategy is even more aggressive than the other two, as it addresses worst-case scenarios. Reducing emissions by enough to mitigate damage in 95% of scenarios would be extraordinarily expensive?a cost of 3.5% of world economic output for the rest of the 21st century, rising to 5% later: $458 trillion in net-present-value terms. But the gains, if measured against the worst-case scenarios, are big too: some $1,749 trillion. The benefit-to-cost ratio would be 3.8.

All of these figures are huge and, given the time horizon, very speculative. Mr Cline emphasises that much depends on how you discount costs and benefits for future generations. Even on his analysis, with many assumptions very favourable to aggressive abatement strategies, the economic benefits of reducing global warming are not felt in any of the three policy regimes until around 2100?and the costs are felt immediately. Policies to deal with global warming do not produce the short-term gains of many other development policies.