Economics

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One way to approach the decision of whether to limit CO2 emissions is based on economics. Which path costs less, to prevent climate change aggressively or rather to endure it? A few caveats are in order here before we proceed. Economic behavior is in general not as easy to forecast as climate can be forecast. Physical sciences are based on a solid foundation of natural laws such as Newton's laws of motion, conservation of energy, and so on. It is not always possible to derive the physics of climate solely from these natural laws. Higher-level processes like turbulence and clouds are called "emergent behavior," surprisingly difficult to build from the fundamental laws of physics. But at least the foundation exists. Economics and the other social sciences are fuzzier. Models of economic trends tend to be empirical, eyeball curve fits. It is not that physical scientists are smarter than social scientists, it is simply that physical sciences are more tractable.

Economic trends are strongly impacted by technological progress, which is impossible to forecast, and by social and political fancies. One could even argue that economics is pathologically unforecastable because it is self-aware. If I came up with a model that could successfully forecast stock prices, I could use it to make money, until everyone else discovered my methods. At that point, the stock prices would reflect everyone's knowledge of the model forecast, and the future trajectories of the stock prices would alter to evade my forecast. I wouldn't make money any more. Not even on my darkest days do I imagine that the physical world that I model for a living is going to change its behavior for the purpose of making my model wrong!

In general the costs of climate change are predicted to be nonlinear with temperature increase. A small increase in temperature, say 1°C or less, will probably not do too much damage, and may even be beneficial on the global average. As the temperature rises to 2°C or 3°C or higher, however, the economic impact starts to rise sharply. This is true for many aspects of climate change: farming, sea level rise, health impacts, and the possibility of abrupt climate change. William Nordhaus, an economist at Yale, has constructed an economic model to gauge the costs of climate change versus the costs of decreasing CO2 emissions.

Economic costs are presented as a percentage in global domestic product, GDP. Let's imagine an ongoing cost to the economy of 3% (Fig. 13.3). The cost is like a sales tax, applied to all the money that we make, every year. At the same time, the economy is growing at some rate. A typical growth rate might be 3% per year.

3% per year growth

3% of GDP cost every year

3% per year growth

3% of GDP cost every year

10 Year

Fig. 13.3 The effect of an ongoing expense equivalent to 3% of GDP every year, on an economy which is growing at a rate of 3%per year.

This sounds small, a few pennies out of a dollar, but yet somehow people's livelihood and sense of prosperity depend extremely sensitively on that few percentage growth rate. If the economy grows by 5% each year, everyone gets rich and shoeshine boys trade stock tips. The great depression decreased global productivity by about 25%. The reunification of Germany put a drain of about 5% on the GDP of West Germany, producing noticeable malaise among West Germans.

In Fig. 13.3 we put together the 3% cost and the 3% per year growth rate in GDP. We see that the effect of the cost is to set everything back a year. A person would only get $97 this year instead of $100 because of that 3% cost. But by next year, the economy will have grown to $103, and she'll get $100, just one year later.

A 3% cost affects the growth rate of the GDP by only 3%, changing, say, a growth rate of 3% per year to 2.91% per year. In the long run, this does not seem like a long-term catastrophe to a naïve noneconomist like your author. To an Earth scientist, any positive exponential growth like this is an explosion, whether it explodes quickly or slowly; it cannot persist forever.

Costs of climate change

The projected agricultural costs seem rather small, perhaps 1% of GDP, because agriculture itself is only 2.5% of GDP or so, globally. Of course, this is a special 2.5%, different from say shoes or music videos because one cannot eat shoes or music videos.

The costs of sea level rise are projected to be of the order of 0.1% of GDP. Storm surges currently cost about this much every year. It is not unreasonable to imagine doubling this cost by increasing sea level, just to get an idea of the scale of how big it could be.

Health impacts are projected to be worth 0.5% of GDP globally to avoid, with higher impacts in tropical developing countries in Africa and Asia, where it can reach 3%. Of course, this statistic requires coming up with a way to express the worth of a human life in dollars.

The largest impact in Nordhaus' tabulation was a willingness to pay to avoid catastrophic climate change, which he defines as equivalent to the Great Depression, a 25% reduction in GDP, that lasts forever. He gauged the probability of an event like this by surveying experts in climate science, to derive the collective opinion of the group that there is a 1% probability of catastrophe if the globe warms by 2.5°C. If climate warms to 6°C, the probability, pulled out of the air by the panel of experts, rises to about 7%. When the probabilities and downside costs are combined in a way that recognizes that people are willing to pay a little extra in order to reduce risk, Nordhaus derives that it would be worth about paying about 0.5% of GDP globally as insurance to prevent rise in temperature by 2.5°C, or about 5% of GDP to prevent a temperature rise of 6°C, on the basis of catastrophic climate change alone. Overall, Nordhaus estimates that it would be worth paying 1.5-2% of GDP to avoid a 2.5°C rise.

Costs of Kyoto

The costs of climate change on the one hand can be compared with projections of the cost of compliance with Kyoto on the other. Of course these numbers are speculative as well. The costs of limiting CO2 emission will depend on technology development, very difficult to forecast. Ultimately only time will tell. These are guesses, but it is interesting to look at the numbers anyway.

The forecast is that compliance for Kyoto by all nations including the US would cost about 1% of GDP each year, according to a book published in 2000, and 7% in a paper in Science published in 2002. The Science article is the more recent of the two, and the cost went up apparently because the predicted BAU baseline had gotten higher. (A change in our expectations appears as a cost.) Interestingly, the cost to the United States is much higher than the cost to other countries because the carbon emissions are rising much more slowly in other developed countries than it is in the States.

US participation would be a boon to the rest of the industrialized world because we have such a ravenous appetite for fossil fuels that we would be forced to purchase CO2 emission credits from other countries, so that the price of those credits would be much higher. Nordhaus' model forecasts that, without US participation, CO2 emission credits would trade for about $40 per ton of CO2 in the year 2025. United States' participation would drive the price up to $150 per ton of CO2.

The bottom line is that compliance with Kyoto could cost a few percentage of GDP every year, and climate change could cost a few percentage of GDP every year. Don't forget that Kyoto will not prevent global warming, it is only the first step, and further restrictions will cost more. One could therefore uncharitably characterize Kyoto as "inefficient and expensive."

It may still however be better than the alternative. The costs of climate change will persist as long as CO2 persists, say 300 years for the bulk of it. If you compute the total costs added up over the long term, Kyoto seems like a bargain because we pay for a few decades and benefit for hundreds of years. Ah, but don't forget that discount rate. We don't care about costs or benefits in the future; we want the money now.

Economics is an awkward tool for the climate change decision because many aspects of the natural world are simply not economically fungible. The economic value of the coral reefs could be tabulated in terms of the tourist dollars they generate, same as Euro-Disney, but somehow something is missing in this tabulation. If coral reefs cease to exist because it gets too hot, we cannot purchase more coral reefs for any amount of money.

The bulk economic framework also hides an issue of fairness, in that people who benefit from BAU are not the same people who pay for BAU, say by living in an increasingly drought-prone world far in the future. I imagine that giving up the institution of slavery in the American South entailed a cost, too, for somebody. Ultimately the abolition of slavery was not an economic decision, but an ethical one.

Although the Kyoto Protocol will not by itself prevent climate change, it would provide the benefit of guiding investment toward decreasing CO2 emission. Coal power plants, for example, can be built using newer technology called "integrated gasification combined cycle" (IGCC), enabling future CO2 capture for sequestration into geological repositories. If CO2 is released into the atmosphere, IGCC plants cost about 20% more than traditional plants. If CO2 sequestration starts to be common practice, however, IGCC plants would be cheaper overall than traditional plants. In the regulated US energy market, regulations often require power companies to use the cheapest technologies. In general this regulation makes sense, if we want to limit the power of monopoly power companies to spend money wantonly, passing the costs on to their captive customers. But in this case, the cost of climate change is external to the accounting, and so the regulation may not be choosing the cheapest option. Once a power plant is built, it has a life span of 50 years or so. The ultimate costs of decreasing CO2 emissions would be lowered by starting now, rather than continuing to invest in high-emission technology.

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Solar Panel Basics

Solar Panel Basics

Global warming is a huge problem which will significantly affect every country in the world. Many people all over the world are trying to do whatever they can to help combat the effects of global warming. One of the ways that people can fight global warming is to reduce their dependence on non-renewable energy sources like oil and petroleum based products.

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