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BY SOREN LARSON

In print | Published October 8, 2009

This December, world leaders will meet in Copenhagen to negotiate a new treaty to deal with climate change.

The 350 campaign that Swarthmore’s Earthlust supports is one of the campaigns to raise awareness of climate change and push for an international treaty. Three hundred fifty parts per million, or ppm, is the number that scientists say is the “safe upper limit for CO2 in our atmosphere.”

British economist Nicolas Stern, whom 350 calls “the most important climate economist in the world” lays it out for us. He warns, “If we don’t act, the overall costs and risks of climate change will be equivalent to losing … 20 percent of GDP or more” and that could cause pain “on a scale similar to [that] associated with the great wars and the economic depression of the first half of the 20th century.” I’ve never been a guy to hold hands and sing, but it might be Kumbaya time.

Given that my hands get clammy at the thought of digging deep into my soul as I stand on AstroTurf listening to Disney songs, I decided to look to economics literature for an answer instead of singing.
Let’s carefully consider 350’s goals and how to achieve them. 350’s concerns about the consequences of rising temperatures include increased deadliness of vector-borne diseases like malaria, ocean acidification and rising sea levels. 350 says we can save the world by reducing atmospheric carbon density to 350 ppm.

350’s solution is simple. It’s also wrong.

Climate change affects people as well as the environment, but some populations may actually be better off in warmer temperatures. Obviously, we should not subsidize warming. But we should carefully consider the costs and benefits of global warming and our approaches to fight it, because adverse effects often hide behind good intentions. To sensibly address climate change, we should try to internalize the social cost of carbon via some Pigouvian tax while minimizing the tax’s effect on global trade in order to protect vulnerable populations.

A Pigouvian tax is a tax levied on market activity that creates negative externalities. In this case, developed nations impose uncompensated costs onto poorer, undeveloped nations. So without this tax, energy is oversupplied and there is market failure. To impose an appropriate Pigouvian tax, we must determine the social cost of carbon, or SCC, so firms and individuals pay the actual costs associated with their market activities. (Note: I am not suggesting a cap-and-trade regime because our limited experience with such a system shows it suffers from even more extreme volatility than the stock market and oil futures.)

Unfortunately, figuring out SCC is really hard. The uncertainty about climate change has led scientists to offer a wide range of taxes to be levied on activities that release carbon into the atmosphere (i.e. everything).

Although traditional cost-benefit analysis, or CBA, is discussed in the rest of the article, it’s important to acknowledge the uncertainty that exists with CBA. A forthcoming paper by Harvard economist Martin Weitzman emphasizes the inadequacy of CBA. Weitzman argues that CBA arbitrarily ignores the likelihood of high-impact, extreme catastrophes based on the logic that they are almost statistically impossible. Weitzman suggests we incorporate such events into analysis because, according to his model, risk-averse agents would be willing to pay a “very high price to eliminate or reduce deep uncertainty.”

Social injustice is at the center of the global policy response to climate change. Most of the world, particularly those who don’t much like America, argues for an international climate change abatement treaty because the effects of climate change, caused mostly by affluent Western countries, impacts mostly poor countries.

(This is precisely why the United States should not sign a climate change treaty. By signing the treaty, the US would put domestic energy policy in the hands of foreign nations that don’t have our best interests at heart. We should pass climate legislation through traditional means that allows for input by the American public.)

But proponents of a climate change policy rightly point out the plight of poor people in this context. According to World Bank Senior Insurance Specialist Eugene Gurenko, weather-related disasters associated with climate variability can affect as much as a quarter of GDP in developing nations, which rely more on vulnerable natural resource-based enterprises.

Surprisingly, developing nations, particularly those in Africa, actually stand to lose from climate change abatement policy. Yes, lose. This is because we can only currently reduce emissions by reducing growth, which is bad for developing nations. Let me explain:

According to Nathan Lewis of the California Institute of Technology, we do not have technology cheap enough to maintain current energy consumption and reduce emissions. And currently, the only way to reduce emissions is to reduce energy consumption, which means cutting economic growth.

If OECD countries were to make reductions consistent with demands of the Kyoto Protocol, Babiker et al. (1997) show that the costs to “non-OECD countries would be high, because exports to the OECD would fall substantially, not only for oil but for other commodities.” This is consistent with most of Congress’ sentiments, especially that of Senate Democrats who say they will not vote for a bill that doesn’t impose what they like to call “border measures” (also known as: “tariffs”).

Tol and Dowlatabadi developed a model that relates OECD emissions reduction to economic development and show how development can reduce deaths from vector-borne disease. They argue that once per capita income in developing countries reaches a certain threshold, countries are no longer vulnerable to vector-borne diseases. They conclude, “… if the costs of emission reduction are high, implementation of climate policy can increase malaria mortality.” For example, “at higher efforts to reduce carbon dioxide, say 3 percent annual emission reduction, mortality actually increases by 4 percent.” Furthermore, Tol argues in a 2005 Journal of Environment and Development Economics paper that in Africa “a dollar invested in emissions reduction is worth less than a dollar invested in development.” (Note that the relationship between per-capita income and malaria incidence is somewhat weak, although it has been replicated using different datasets.)

If our goal in mitigating climate change is primarily to help poor people, then we should reconsider our priorities. While we don’t have carbon-neutral means of producing lots of energy, poorer nations, especially those in Africa, are better off when we embrace economic growth and limit our ambitions for big reductions in carbon emissions. (Of course, island nations threatened by rising sea levels require a different policy response.)

This doesn’t mean we do nothing, however.

First, we must revise our ambitions for reducing carbon density in the atmosphere. Dr. Lewis argues, “to stabilize the concentrations of CO2 at 350 ppm by 2050 would necessitate reducing carbon emissions on our planet to zero by that date.”

If even the International Energy Agency questions whether a 450 policy scenario is “technically achievable,” why do we push for an even lower number (350) that is less feasible?

Second, we should set our Pigouvian tax equal to SCC. According to climate economist Richard Tol’s analysis, the SCC is at most $50 per ton CO2 and is likely to be much lower. We should couple this tax with the exploiting of inexpensive technology to combat climate change, such as the cloud whitening techniques proposed by University of Texas engineer and economist J. Eric Bickel and American Enterprise Institute researcher Lee Lane.

Third, if reducing ocean acidification is important, we must campaign for it directly. Pearce and Moran (1994) report that people’s willingness to pay to preserve nature remains below one percent of income. Economists and scientists must put a higher price on biodiversity to make it a more important part of any CBA.

Finally, we must spend more money on researching the probability of climate catastrophes, as Weitzman suggests, and develop technologies for carbon-neutral energy production.
Should research substantiate an unacceptable probability of high-impact events, current CBA will become mostly invalid. Reducing uncertainty, then, should be a top priority.

Decreasing energy consumption to zero to reach 350 ppm is not an option. In fighting global warming, we must make humanity better off in the future as well as the present.

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