The Economics of Climate Change: Is Doing Nothing Too Costly

 


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In November 2004, the North Atlantic Drift, the warm current that provides Europe with its temperate climate, stopped flowing northward. Ten days later, the current resumed.

Scientists were stunned. Lloyd Keigwin of the Woods Hole Oceanographic Institution called the event “the most abrupt change in the whole record” of climate. “We’d never seen anything like that before and we don’t understand it, ” Harry Bryden of the National Oceanography Centre explained.

Climate models have suggested that a consequence of climate change could be a slowing or stopping of this current. Had the world reached the precipice of abrupt climate change only to step back and gain a temporary reprieve of uncertain duration? Scientists don’t know.

Even as the research goes on, the climate change debate is shifting toward one over the economics of doing nothing/very little vs. acting robustly to mitigate the expected climate change. Such a debate hinges on the idea that humans are contributing to the ongoing climate change and, therefore, can take steps to alleviate the change attributable to human activities. Most scientific evidence affirms a human contribution, even as the exact delineation between human and natural causes remains uncertain.

Now, a just-released report prepared by Sir Nicholas Stern, a senior British Government economist and former chief economist of the World Bank, breaks new ground in focusing on the economics involved in the climate change debate. It specifically addresses the question of the costs of climate change vs. those associated with seeking to control it. In doing so, assuming its findings are reasonably accurate, it turns on its head the conventional thinking that aggressive efforts to mitigate climate change are too costly or would be economically ruinous. Rather, it asserts, allowing climate change to proceed largely unimpeded would be the far more costly and ruinous approach.

The report’s basic conclusion is that “the benefits of strong, early action considerably outweigh the costs. ” It also warns, “The evidence shows that ignoring climate change will eventually damage economic growth… And it will be difficult or impossible to reverse these changes… The earlier effective action is taken, the less costly it will be. ”

Its research estimates that the costs of not acting would impose a cost equivalent to at least 5% of GDP every year and, possibly, as high as 20% of GDP, if such factors as human health impacts are considered. On the other hand, an aggressive approach aimed at reducing greenhouse gas emissions and stabilizing the atmospheric CO2 level at no higher than 550 ppm (parts per million) could amount to approximately 1% of global GDP per year. Over time, the amount of GDP foregone on account of taking relatively little action would be enormous and the adverse impact on the standard of living would be sizable.

Is the report’s goal of stabilization of the atmospheric CO2 concentration realistic? Such an outcome would require allowing global emissions to peak in the next 10-20 years and then fall at a rate of 1%-3% per year afterward. By 2050, global emissions would need to be 25% below current levels. In the context of a larger world economy, the report estimates that the emissions per unit of GDP would likely need to fall to a level of 25% of today’s figures. According to the study, such stabilization “is feasible and consistent with continued growth. ” In contrast, “unabated climate change” would “eventually pose significant threats” to sustained economic growth. Put simply, it is inaction, not aggressive action that would hinder economic growth.

The historic experience also suggests that such a course is realistic. In the past, the United States has been able to tackle endeavors that were arguably comparable to that involved with moving away from a carbon-intensive economy. In June 1942, President Roosevelt launched the Manhattan Project with the aim of developing an atomic bomb before Nazi Germany could. In September 1962, President Kennedy made it America’s mission to land men on the Moon. In June 1982, President Reagan launched his plan to “leave Marxism-Leninism on the ash heap of history. ” All of these projects succeeded spectacularly. All were achieved in less than a decade. The United States and Western Europe have the financial resources, technological tools, and intellectual capital to stabilize the atmospheric CO2 concentration at or below 550 ppm.

Does it “pay” to wait? The report strongly rejects delaying a robust climate mitigation effort. “Weak action in the next 10-20 years would put stabilization even at 550 ppm CO2e [CO2 level] beyond reach—and this level is already associated with significant risks, ” the report warns. “Anything higher would substantially increase the risks of very harmful impacts while reducing the expected costs of mitigation by comparatively little, ” it continues. In short, inaction would greatly elevate the risks of harm while saving very little money.

Beyond the study’s economic arguments, an aggressive posture against climate change would provide potentially significant geopolitical benefits for the United States. Oil dependency currently entails major geopolitical costs and risks for the United States. One can readily envision the adverse impact were Iran or Islamist terrorists to seize or knock out the Persian Gulf Region's oil production facilities. There would be a substantial global economic shock. If military combat were required to free the Persian Gulf Region from Iranian hegemony—especially if Iran gains a nuclear weapons capability as appears reasonably likely in the future—the costs of such combat would be staggering, both in terms of human lives and economics. The $300 billion price tag on Iraq would likely seem miniscule in comparison.

Oil dependency has also contributed greatly to Middle East authoritarianism. Princeton University Professor of Near East Studies, Bernard Lewis explained, “Oil is the Arabs’ disaster, because it enabled governments to accumulate enormous wealth which strengthens their political and military power and destroys democracy and freedom in the bud. ”

Even as Washington stays its course of inaction, California is forging a bold new approach. Under Governor Arnold Schwarzenegger’s leadership, the State seeks to reduce its greenhouse gas emissions to 2000 levels by 2010. By 2020, it seeks to achieve 1990 levels and by 2050 it aims to bring its emissions to 80% below 1990 levels. California is not alone. Britain and California have already concluded a climate change agreement.

With an economy of more than $1.6 trillion, California is well-positioned leverage its economic clout in becoming a veritable laboratory for developing a credible climate mitigation campaign. Given the size of its market, innovative and entrepreneurial companies will likely seize the opportunity to meet California’s standards. Why? Their compliance, especially if others refused to do so, would given them a market share in which they would enjoy little or no competition yet reap attractive profits.

On the global front, one is already seeing such companies as Toyota push ahead with hybrid technologies. If, for example, California's auto market is eventually dominated by Toyota and other companies meeting California's standards, the bar would also drop for other states to take a similar posture. Those states would recognize that there is no technological barrier that precludes their taking similar action on this issue. Then, the companies that chose not to adapt would wind up marginalized and ultimately be confronted with the decision of trying to adapt—the farther behind they fall, the less likely such adaptation would be successful—or risk perishing. Shareholders would not remain content to lock their capital up in companies likely to perish. Therefore, capital would flow increasingly toward the companies making progress in pursuing the opportunities associated with climate mitigation on account of their higher returns.

That outcome is still in the future. In Washington, DC, doing nothing is presently the preferred way of life when it comes to developing a credible energy policy, much less addressing the more ambitious challenge of climate change. However, that may begin to change.

The Stern study has attacked the core excuse for inaction, namely that it is too expensive to act against climate change. Should additional credible economic research corroborate the Stern report’s basic finding that the costs of inaction greatly outweigh those associated with a robust climate mitigation effort, additional data tie the temporary shutdown in the North Atlantic Drift to ongoing climate change, and geopolitical developments increase the risks associated with oil dependency, the public policy scale will tip increasingly toward a strong climate mitigation effort. Then, the risks of doing nothing would be too hazardous and the costs too high to maintain the present course of inaction.

Don Sutherland has researched and written on a wide range of geopolitical issues.

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