I thought this paper was interesting, and it was (as part of a Twitter exchange) sent to me by request (thanks to Both Richard Tol and Bjørn Lomborg). I found figure 8 (shown below as part of the preview on Science Direct) to be interesting because it shows a positive impact of warming up to 2.0C and a negative impact afterwards, suggesting that some warming is beneficial, but a lot of warming is not. All things in moderation I suppose. – Anthony.
Abstract
A survey of the economic impact of climate change and the marginal damage costs shows that carbon dioxide emissions are a negative externality. The estimated Pigou tax and its growth rate are too low to justify the climate policy targets set by political leaders. A lower discount rate or greater concern for the global distribution of income would justify more stringent climate policy, but would imply an overhaul of other public policy. Catastrophic risk justifies more stringent climate policy, but only to a limited extent.
Introduction
Climate change is one of today’s defining problems. It is often described as the largest problem, or the largest environmental problem of the 21st century (Stern et al. 2006) – without much evidence. Climate change has been said to fundamentally challenge economics as a discipline (van den Bergh 2004). More sober people would recognize greenhouse gas emissions as an externality. It is an externality that is global, pervasive, long-term, and uncertain – but even though the scale and complexity of this externality is unprecedented, economic theory is well equipped for such problems – and advice based on rigorous economic analysis is anyway preferred to wishy-washy thinking. This paper surveys the literature on first-best climate policy.
The first benefit-cost analysis of greenhouse gas emission reduction was published in 1991 by William D. Nordhaus of Yale University (Nordhaus 1991). It was a static, aggregate analysis, but was soon followed by dynamic studies (Nordhaus 1992;Nordhaus 1993) and regionally disaggregated ones (Nordhaus and Yang 1996). Nordhaus’ research was influential and his findings controversial. Nordhaus concluded
- (i) that modest emission reduction is desirable now;
- (ii) that the ambition of climate policy should accelerate over time;
- but (iii) that the atmospheric concentration of greenhouse gases should not be stabilized.
Conclusion (ii) is qualitatively uncontroversial, but the rate of acceleration is disputed. Conclusions (i) and (iii) are controversial, within the economics profession but particularly outside.
…
Fig. 8. Estimates of the global economic impact of climate change (blue dots) and two fitted functions: I=4.33(1.49)T−1.92(0.56)T2 (red line) and I=0.348(0.166)T2−0.0109(0.0025)T6 (green line); the thin lines demarcate the 95% confidence interval based on the bootstrapped standard deviation.
Discussion and conclusions
I review optimal targets for international climate policy in the short and long run. Carbon dioxide emissions are probably a negative externality, and should therefore be taxed. Using a discount rate similar to the one typically used for public investments, the expected value of the carbon tax is $25/tC. That carbon tax corresponds to the initial carbon tax of a cost-effective emission reduction trajectory towards stabilization at 625 ppm CO2e – considerably higher than the implicit political aim to stabilize at 450 ppm CO2e. Furthermore, the efficient carbon tax would increase at some 2.3% per year whereas the cost-effective carbon tax would increase at some 5.5%. Efficient concentrations at the end of the 21st century would thus exceed 625 ppm CO2e.
Indeed, it is unlikely that a benefit-cost analysis would justify stabilization of the atmospheric concentration of greenhouse gases – as stipulated by international law – as that would require zero carbon dioxide emissions. Fossil fuel use may of course cease for reasons other than climate change. A lower discount rate and an aversion to inequity would justify more stringent climate policy, but would imply inconsistencies between climate policy and other areas of public policy.
Catastrophic risk is a more powerful argument for more stringent climate policy, but to a limited extent as emission reduction has downside risks too. The above analysis considers efficient climate policy in isolation. This is a useful yardstick for analysis, but not particularly realistic. Climate policy interacts with many other policies, but two
areas stand out. Climate policy is intimately intertwined with technological progress in the
energy sector and with the availability of energy resources. Recent break-throughs in the
exploitation of shale gas reduce greenhouse gas emissions in the short term (as gas replaces coal) but increase emission reduction costs in the long term (as solar now competes with cheap gas and cheap coal). Even so, optimal climate policy is unaffected provided that technology policy is first-best (Bosetti et al. 2011;Fischer 2008;Fischer and Newell 2008;Popp and Newell 2012) and that resources policy is first-best (Hoel 2012;van der Ploeg and Withagen 2012). Those are strong assumptions, yet it would not be wise to solve other problems through climate policy.
I assumed that adaptation is efficient. If so, it does not affect optimal mitigation policy (de Bruin et al. 2009). I also assumed that climate policy is implemented efficiently. In Section 3.1, I note that second- or higher-best policy implementation may be substantially more expensive. If emission abatement is more expensive, then climate policy should be less stringent.
I reasoned from the perspective of a global planner. Greenhouse gas emission reduction is, of course, a public good. A non-cooperative equilibrium has higher emissions (Babiker
2001;Barrett 1994;Carraro and Siniscalco 1992;Carraro and Siniscalco 1993;Carraro and
Siniscalco 1998;Nordhaus and Yang 1996;Yang 2003).
Although considerable progress has been in our understanding of optimal climate policy, much research remains to be done. Quantitatively, the estimates of the costs and benefits of climate policy can be improved. Incremental improvements on the current state of the art are always feasible. Both sets of estimates have primarily relied on simulation modeling, but data have steadily improved so that impacts of climate variations should be measurable (Mendelsohn et al.1994). Some countries now have two decades of experience with climate policy; the impacts and the model assumptions should be tested econometrically (Leahy and Tol 2012). Such research would add confidence to current estimates, or new insights. Qualitatively, besides carefully exploring the myriad second-best features of climate policy, research to date has been limited to a fairly narrow class of welfare functions. The assumption of exogenous population growth is
particularly troubling in the context of climate change. A convincing alternative to the intuitively incorrect conclusion that continued warming is optimum, is still elusive.
http://www.sciencedirect.com/science/article/pii/S0165188913000092
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This article is outrageous! It is a pick pocket scheme as plain as the nose on your face! Who subscribes to such skullduggery in our government? Name them! And then vote them out! I work long hours (yes as a public school teacher, so do your best to dirty it) and do not take kindly to those long hours ending up in the pockets of government. Don’t take kindly to it at all!
I think I’ve finally realized what troubles me about papers and projections on economic impacts, particularly as used to support policy decisions. When it isn’t even settled in the U.S. whether or not tax policies or federal spending are going to have positive or negative impacts on the economy, when we can’t even decisively answer relatively simple questions, what on earth makes us confident we can answer complicated ones?
I’m glad a study suggests that some warming might be OK, but I can’t say I’m going to give it any more credence than the papers suggesting doom.
I have an idea. Krugmanomics tells us that printing green pieces of paper makes us wealthy. Why not just print a few more of the green pieces of paper and use them to solve that climate thing? As Ben Bernanke will print until the unemployment is gone, he will print from here to kingdom come. So asking him to print just a tiny bit more shouldn’t be that big a thing.
And if it makes the economy collapse on the way, all the better. No economy, no negative externality. Wasn’t this the goal anyway.
I find it somewhat suspicious that this study derives the break point at 2C. This just “happens” to agree with the climate communities insistence that temperatures must be held at 2C or else. Considering the original 2C, had no real fundamental basis, it seems very convenient. I am not saying it is wrong, just that the coincidence of such an exact match is stimulating my skeptic bones. GK
From the graph provided, I read it as no NET negative until something over + 3 (red line) or about 2.5 (other)
Absent the increasingly absurd Catastrophic scenario, the news is ALL GOOD.
@Karst
You are free to reproduce the result. The data are in the paper.
[Thank you for the courtesy of your reply. Mod]
Remember that we are talking about averages. Since most of the change is expected to take place at the poles, where economic activity is today zero, any change can only be positive in terms of economic activity.
There is no credible evidence that the earth 10 thousand years ago, during the Holocene optimum, which was 4C warmer than today, was in any way inhospitable. Since human civilization arose at that time it seems much more likely that 4C of warming will simply return us to a time when conditions were closer to those that gave rise to civilization. Since these temperatures were maintained for well over 1000 years there is no evidence they will be harmful.
A wetter, warmer earth with increased CO2 will have more plant biomass than at present. This biomass will be available for human economic activity, which will boost GDP globally. What countries are likely to experience a negative effect anything like figure 8, which predicts an exponential falloff in economic activity above 2 C? Again, since this will mostly take place in regions that are today quite cold, how will making them a bit warmer hurt anything?
Instead, these projections rest on the assumption that warming will bring drought, but the assumption of drought is inconsistent with the assumption of positive H2O feedback, which will increase the amount of H2O in the atmosphere, which must increase global precipitation due to the short lifetime of H2O in the atmosphere. Also, we know from the paleo records, that a warmer planet is a wetter planet. It is during ice ages that the climate is dry and agriculture suffers.
Therefore, this paper is really about increasing taxes.
Carbon dioxide emissions are probably a negative externality, and should therefore be taxed.
Breathing tax. Probably…
I read the damned thing. The author has style , but he polished a…
Carbon dioxide emissions are probably a negative externality, and should therefore be taxed.
=========
Poverty is also a negative externality. We should therefore tax poor people that highest and therefore eliminate poverty.
Since there is an extremely high correlation between CO2 production and economic activity, as well a a direct 1-1 cause and effect – more economic activity generates more Co2 – what the author is really saying is that economic activity is a negative externality. and should therefore be taxed.
That is the crux of the argument. That economic activity is bad and we should use taxes to get rid of it. We should instead drive it to countries like China and India, where the CO2 produced with magically remain along with the jobs.
If you think the deficit is bad today, cut economic activity through CO2 taxes and see the floor drop out of tax revenues. As has been seen in the EU countries that have tried it.
Old Fossil–
Your request for a winners-losers analysis was done by Tol in his recent on-line draft economics textbook in a Wattsupwiththat blog a week or two ago. A slight problem is that only about every 4th or 5th country was actually named in the figure, but Richard says he is working on making the underlying data available. From somewhere I recall that Canada had the single greatest benefit, although I am sure that Russia would be near the top.
Richard Tol (@RichardTol) says:
February 4, 2013 at 5:59 am
@techgm
1. Pigou (1920) showed that negative externalities should be taxed.
==========
Since 1920 there has been considerable change in the strategies that people and corporations employ in response to tax changes. There is a considerable body of evidence that policies that worked 90 years ago don’t work today.
People and corporations today largely act on what they expect they government to do, thus the government’s actions are largely already future discounted and rarely have the effect expected by government planners and theorists 90 years ago. Instead, tax policies increase the inefficiencies in the economy, as people use less efficient means of production to avoid taxes.
The once popular economic theory that governments can spend their way out of poverty has been shown by modern realities to be false in a global economy. Thus, we saw little to any economic benefit in the “Stimulus Spending” in the US, contrary to what was expected using outdated economic theory.
In any case, in conventional terms, economic activity and CO2 go hand in hand in today’s industrialized economy. A tax on CO2 thus has the unintended consequence of being a tax on economic activity. Reducing economic activity through CO2 taxes will have the effect of increasing unemployment and reducing income taxes and sales taxes, which given the marginal tax rates is likely to reduce overall tax revenues.
Thus, while it may sound like a good idea to increase revenues through a tax on CO, all it will likely do is force companies to use oil in place of coal, leading to windfall profits for the oil companies. On a global scale this will lead to a reduction in coal prices worldwide, leading to increased coal consumption in countries that do not have CO2 taxes. This could lead to a net global increase in CO2 production, due to the inefficiencies in cola burning technologies in countries without CO2 taxes.
From EconLib: “Pigou’s analysis was accepted until 1960, when ronald coase showed that taxes and subsidies are not necessary if the people affected by the externality and the people creating it can easily get together and bargain. Adding to the skepticism about Pigou’s conclusions is the new view, introduced by public choice economists, that governments fail just as markets do. Nevertheless, most economists still advocate Pigovian taxes as a much more efficient way of dealing with pollution than government-imposed standards.”
Richard Tol is citing some discredited ideas.
‘1. Pigou (1920) showed that negative externalities should be taxed.’
But, later, Pigou himself finessed his position and said (in 1954):
‘When people decide to spend their money in certain ways it sometimes happens that their spending yields uncovenanted benefits or inflicts uncovenanted damage on other people whose gains or losses do not enter into the calculations of the spenders. There are many examples of this…
‘… These gaps, positive and negative, between private and public costs were not much in people’s minds until fairly recently. Now everybody understands about them. It must be confessed, however, that *we seldom know enough to decide* in what fields and to what extent the State, on account of them could usefully interfere with individual freedom of choice. Moreover, even though economists were able to provide a perfect blueprint for beneficial State action, politicians are not philosopher kings and a blueprint might quickly yield place on their desks to the propaganda of competing pressure groups. “Fancy” finance, like a fancy franchise, whatever its theoretical attractions, has, at all events in a democracy, dim practical prospects.’
From A. C. Pigou, “Some Aspects of the Welfare State,” Diogenes 7:1-11 (Summer 1954), p. 10
“Fancy” finance indeed.
(*My emphasis)
Translation: We don’t think continued warming is a good thing but we can’t prove it.
Government polices that increase efficiencies, such as building roads where none existed, these lead to increased economic activity and increased tax revenues. Government policies that decrease efficiencies as people and corporations substitute less efficient means of production to avoid the tax, these reduce overall economic activity and reduce tax revenues, leading to deficits and long term problems for the host economy that the government relies on for its survival. Over time any country that follows such policies will ultimately fail, which has been demonstrated time and time again throughout history.
I reasoned from the perspective of a global planner. Greenhouse gas emission reduction is, of course, a public good.
###
The reduction of civilization is a public good???
Just remember that when you make energy more expensive – to stabilise a climate that was never stable and bring it back to a position that never existed – billions of people will burn more twigs and dung. I know that a global planner doesn’t concern himself with quantifying burnt twigs and dung, but I thought I’d point it out for those who believe that “first-best climate policy” is a ritual practiced by fairies in the bottom of the garden – while life and the globe just go spinning on. (Me et nemo. 2013).
It is more than worrying to think that there are educated people who think that climate and economy, so fantastically complex and variable, can be mechanistically controlled from a child’s pretend console. By making the knobs, levers and buttons a bit complicated, people like Mr. Tol believe they have dealt with actual complexity.
But perhaps this is satire, and there is no Richard Tol? Is this a huge leg-pull by Anthony?
Luther Wu says:
February 4, 2013 at 7:33 am
I read the damned thing. The author has style , but he polished a…
###
cannonball?
Zentrol blanink komrad!
There’s something odd about the equations in figure 8. Firstly why are the coefficients all written as the product of 2 numbers? is there some other operator that didn’t get printed?
Secondly when I take the first equation (with the coefficients multiplied out) and look at where the maximum should be, I find it to be at 3.000. the figure has the max at 1.0-ish. I’m missing something I’m sure.
I found figure 8 (shown below as part of the preview on Science Direct) to be interesting becuase it shows a positive impact of warming up to 2.0C and a negative impact afterwards, suggesting that some warming is beneficial, but a lot of warming is not. All things in moderation I suppose. – Anthony.
=====================
A very interesting paper, that requires a lot of thought.
I could be way wrong, but based on one quick readthrough, I think Figure 8 is an input to the calculations, not a conclusion. I personally find the assumption that a little warming is good to be reasonable. The lot of warming is bad part is, I think, more dubious, but not irrational. The transition point from net good to net bad — if it exists at all — is probably very dubious. Might be 2.5C. But it might be 1.0C or 10.0C.
A hubris filled statement, if ever I’ve seen one. How do you know that freeing centuries and millenia worth of sequestered carbon won’t be a boon to the biosphere? What if the result of that is coral reefs begin growing more quickly and trees to grow more rapidly and grains and grasses to burst into life, heaping an abundance onto a hungry world? How do you know that “we” would never consider it a positive trade to get that potential productivity in exchange for a shaky prediction of a few degrees of temperature rise that’s unlikely in any case, because of water vapor’s domination of the GHG equation?
I appreciate that you at least want to look at physical realities to try and make sense of the costs of CAGW-based policy recommendations. I suggest you start with commercial wind turbines as green alternatives to coal and gas fired electrical generation, so as to more rapidly disabuse the emoting supporters of those technologies of their utopian fantasies. The birds and bats and climate skeptics will love you for it.
People need to quickly begin to see and understand that taxing energy and prohibiting efficient forms of energy means destroying economic activity and the erosion in living standards, and cause new environmental damage to other areas they’re not currently considering, as in the aforementioned birds and bats, as well as energy starved populations with fewer economic prospects who will undoubtedly begin to denude their forests for firewood if the fossil fuel industry is artificially crippled.
Negative impacts after 2.0C. This gets me thinking about Canada, Siberia, Scandinavia, afterall the greatest impact of global warming should be felt in the higher latitudes, no?
Mmmmmmm. Why is this assumed? OK then, reducing fertilizer on US farms is, of course, a public good. Who here believes me? I need to see evidence that a doubling of co2 will lead to a net negative impact on the planet.
When I look at the planet Earth I can’t help but notice most of the greeness is in the tropics and slowly declines as you head north and south towards the poles. I can’t help but notice the Sahel greening as well as the biosphere generally. What caused these negative impacts.
Here is a small part of the world from the past which was subjected to higher temperature and higher C02 than today’s values.