Costs and Benefits of Greenhouse Gas Reduction

Summary

Uncertainties surrounding the impact of greenhouse gas emissions in global climate change and global economic growth require that policymakers carefully evaluate the costs and benefits of policies to limit emissions. If near-term steps to reduce emissions are not required to sustain long-term economic growth in developing or industrialized countries, policymakers should consider other uses of societies’ scarce resources to improve conditions in less-developed areas. Investments by the developed countries in the public health, education, and water resources of poorer economies of the world would yield substantially higher benefits than investments in emission reductions.

Climate Science Is Uncertain

Let me begin by examining the three uncertainties associated with the impact of greenhouse gases on global climate. These uncertainties, which have not been much reduced in the past decade and a half, exist on at least three levels. The first uncertainty, which drives the second, is the degree of global average warming to be expected. Arbitrarily adopting a doubling of greenhouse gas concentration as benchmark, a committee of the U.S. National Academy of Sciences estimated in 1979 that the change in average global surface atmospheric temperature to accompany that doubling could be anywhere from 1.5–4.5° Celsius. Note that the upper bound is three times the lower. In 1990 the Intergovernmental Panel on Climate Change (IPCC) revisited this estimate and concluded that “the models’ results do not justify altering the previously accepted range of 1.5–4.5° C.” This spread of uncertainty has not been reduced; if anything, estimates over the past five years have widened rather than narrowed the range.

The second uncertainty, which is more important than the average warming, is the effect this warming may have on regional climates. The temperature gradient from equator to pole is a main driving force in the circulation of atmosphere and oceans, and a change in that gradient will be more important than the change in average surface temperature. Climatologists can only attempt to translate changes in temperature at various latitudes, altitudes, and seasons into changes in weather and climate in different regions and localities.

The third great uncertainty, one that gets little attention, is what the world will be like in 75 years or so when changes in climate may become serious. Looking back to 1920 at what the environmental problems were then that might have been aggravated or ameliorated by climate change, high on the list would have been mud. This was the era of unpaved roads and narrow tires. Horses could carry wagons through mud, but cars got stuck and had to be pulled out by horses. Walking in mud was difficult and disagreeable, and biking was impossible. One might have thought, “If things get wetter or dryer the mud problem will get worse or better.” It might not have occurred to us in 1920 that by 1995 most of the nation’s roads would have been paved solid.

Imagining Society in 75 Years

If the climate changes expected for 75 years from now were to occur immediately, the most dramatic consequences might be in the incidence of parasitic diseases in tropical countries. Temperature and moisture affect malaria, river blindness, schistosomiasis, dengue fever, and infantile diarrhea, all vastly more dangerous than the radiation and chemical hazards that we worry about in the developed countries. But we must try to imagine the effect of climate changes when most of the currently “developing” countries will have had another 75 years of development, with the medical technologies and public health infrastructure of 75 years in the future, the dietary improvements and better access to health care that go with higher material standards of living, the potential eradication or severe limitation of vector-borne diseases, and all the other changes that need to be anticipated. In fact, superimposing the possibility of climate change on today’s technologies and today’s ways of earning a living may give an altogether wrong view of the impact climate change will actually have in the year 2050, 2060, 2070, and so on.

Climate Change’s Impact on Gross World Product

If we take the analysis of climate change scholars such as Stanford University professor Alan Manne seriously, it is hard to see why climate change issues are receiving so much attention. For example, Professor Manne’s research shows that the growth in gross world product (GWP) is almost unaffected if we continue under a business-as-usual scenario (meaning no near term reductions in carbon emissions, see Figure 1).1 His estimate of the difference in terms of gross world product that a greenhouse gas problem makes, even with a two percent discount rate, is about the thickness of the gross world product line drawn with a number two pencil (see Figure 2); with a discount rate of five percent it’s about a number four pencil (see Figure 3). In fact, Professor Manne suggests that taking the greenhouse gas problem seriously and doing something about it makes hardly any difference to the growth of gross world product (see Figure 3). His “Pareto optimal” and his “business as usual” estimates differ by small fractions of one percent. A small fraction of one percent of world gross product is a lot of money, and worth taking seriously, but not more seriously than 20 other global economic problems.

 

Figure 1: Global Growth Indexes, Business as Usual

Source: Alan S. Manne, “Costs and Benefits of Alternative CO2Emissions Reduction Strategies, paper presented at symposium sponsored by the American Council for Capital Formation Center for Policy Research, “An Economic Perspective on Climate Change Policies,” September 13, 1995, in Washington, D.C.

 

Figure 2: Global Costs Under Alternative Policies (mitigation + damages) Discounted to 1990 at 2 Percent

Source: Alan S. Manne, “Costs and Benefits of Alternative CO2 Emissions Reduction Strategies, paper presented at symposium sponsored by the American Council for Capital Formation Center for Policy Research, “An Economic Perspective on Climate Change Policies,” September 13, 1995, in Washington, D.C.

 

Figure 3: Global Costs Under Alternative Policies (mitigation + damages) Discounted to 1990 at 5 Percent

Source: Alan S. Manne, “Costs and Benefits of Alternative CO2 Emissions Reduction Strategies, paper presented at symposium sponsored by the American Council for Capital Formation Center for Policy Research, “An Economic Perspective on Climate Change Policies,” September 13, 1995, in Washington, D.C.

 

Beneficiaries of Greenhouse Gas Abatement

Thought of this way, greenhouse gas abatement becomes a foreign aid program. The benefits will almost exclusively accrue to the developing countries and the costs, at least for the first 50 years, will be borne by the rich countries. The developing countries do have to participate in any efficient greenhouse gas abatement program, but the costs of decarbonizing their economies will have to be borne by the wealthy countries.

As a prediction, I do not believe the Chinese, Indians, Indonesians, or Bangladeshi are going to divert significant resources from their own economic development to reduce greenhouse gas emissions. Their best defense against any possible adverse effects of climate change is their own development, reducing their reliance on agriculture and other sources of livelihood that are vulnerable to weather and climate. Furthermore, they have immediate environmental problems-air, water, congestion, disease-that demand priority attention.

I said “foreign aid program,” because the beneficiaries are mainly going to be in the countries we now call “developing,” which I expect will be much more developed when the climate impacts occur. Why? First: that’s where the people are, four fifths of them now, nine tenths in the second half of the coming century. Second, these are the countries whose economies may still be vulnerable, in a way the developed economies are not. Third, though these populations, with the possible exceptions of some countries in Africa, should be immensely better off materially in another half century, they will still be poorer than the rich countries are now. The “utility” of their increments in consumption will therefore be greater than the decrements we undergo for greenhouse gas abatement.

Of course, as the rich get richer, their demand for environmental amenities, including recreation and tourism, may greatly increase-an income elasticity of demand much greater than 1. Nevertheless, I perceive the benefits to the developing world as dominating.

The Politics of Greenhouse Gas Abatement

That makes greenhouse gas abatement a political problem. The amount of money isn’t much-a few trillion dollars over the next 30 or 40 years out of an OECD gross product rising approximately from 15 to 30 or 40 trillion dollars annually. But any greenhouse gas abatement program that is not outrageously inefficient will have to attack carbon emissions in China, which currently emits half as much carbon as the United States but may emit several times the U.S. emissions by 2050 unless resources are devoted to Chinese decarbonization. The OECD countries can curtail their own emissions by regulations, which may be comparatively inefficient but, the costs often being invisible, may be politically acceptable; curtailing Chinese emissions at developed-country expense will require visible transfer of budgetary funds. It will appear as the “foreign aid” it actually is, although planting trees in China at our own expense would be no more for the benefit of Chinese than of Indians and Nigerians. Building non-carbon or carbon-efficient electric power in China will look like “aid to China,” not climate abatement for the world.

Direct Assistance May Be Best

A nagging question remains that usually does not get attended to at meetings on greenhouse climate issues. The questions is whether those beneficiaries that I have identified as the populations of the countries we now call developing are likely to be much better off then their parents and grandparents were, namely the residents of those countries today. We have to consider the alternative potential uses of any resources we might like to devote to ameliorating climate change including investing directly in the development of those countries.

There are two issues here. The first is whether, in terms of benefits three or four generations hence, we get more for our money by investing directly in public health, education, water resources, infrastructure, industry, and family planning, for example, than we obtain from reduced climate change. The second is whether the benefits accrue earlier, to people who more desperately need the benefits, when we apply the resources directly to development.

We must stop treating the international greenhouse gas problem in isolation from the developing world’s economic needs.

Note:
1. Source: Alan S. Manne, “Costs and Benefits of Alternative CO2 Emissions Reduction Strategies, paper presented at symposium sponsored by the American Council for Capital Formation Center for Policy Research, “An Economic Perspective on Climate Change Policies,” September 13, 1995, in Washington, D.C. Published February 1996 in An Economic Perspective on Climate Change Policies.

This report is based on a commentary prepared for a September 13, 1995 policy conference sponsored by the American Council for Capital Formation Center for Policy Research, and appears in the Center’s recently published monograph, An Economic Perspective on Climate Change Policies.