Economics of Climate Change

These two subjects alone are big enough to devote entire careers to, and I imagine this won't be the last time they're mentioned here on my blog. I still meet far too many people (one is really too many) that think human activity is not having a significant effect on the climate, or that any environmental protection or consideration for ecological preservation comes at the expense of the economy. I hope this post will help to 'clear the air' on this subject. I know; greenhouse gasses and air pollution are two different subjects, but I couldn't resist the play on words.

After mulling over the options, I chose to start off with climate change denial, and save the exciting stuff - economics - for later.

A very well put together and easy to understand series called How to Talk to a Climate Skeptic breaks down the different kinds of skeptics and their arguments. Here are a few highlights...

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Objection: Current warming is just part of a natural cycle.

Answer: While it is undoubtedly true that there are natural cycles and variations in global climate, those [climate change skeptics] who insist that current warming is purely natural -- or even mostly natural -- have two challenges.

First, they [skeptics] need to identify the mechanism behind this alleged natural cycle. Absent a forcing of some sort, there will be no change in global energy balance. The balance is changing, so natural or otherwise, we need to find this mysterious cause.

Second, they [skeptics] need to come up with an explanation for why a 35% increase in the second most important greenhouse gas does not affect the global temperature. Theory predicts temperature will rise given an enhanced greenhouse effect, so how or why is it not happening?

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Objection: The Earth has had much warmer climates in the past, what is so special about the current climate?

This is one of those arguments that is true enough, but misses the point. Change, not final state, being the real danger.

Answer:
I don't know if there is a meaningful way to define an "optimum" average temperature. Surely it is better on earth now, not having as much land trapped beneath ice sheets as there was 20K years ago. But between the climate 100 or 200 years ago and the worst one we may be heading for with tropical forests inside the arctic circle, one global mean temperature seems just as good as any other. But the critical issue with what is going on today is not where the temperature is or is not at, but how fast it is moving.

Rapid change is the real danger. Human habits and infrastructure are suited to particular weather patterns and sea levels, as are ecosystems and animal behaviours. The rate at which the global temperature is rising today is very likely unique in the history of our species. It is also very rare in geological history though perhaps not unprecedented. But, once you look at the impact similar changes had on biodiversity at the time, the existence of some historical precedent or another becomes anything but reassuring.

What we know about ecosystems and what geologic history demonstrates is that such dramatic changes - up or down or sideways - are a tremendous shock to the biosphere and cause mass extinction events. And that, all in all, is not likely to be a good thing.

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Objection: Correlation is not proof of causation. There is no proof that CO2 is the cause of current warming.

Answer: There is no "proof" in science -- that is a property of mathematics. In science, what matters is the balance of evidence, and theories that can explain that evidence. Where possible, scientists make predictions and design experiments to confirm, modify, or contradict their theories, and must modify these theories as new information comes in.

In the case of anthropogenic global warming, there is a theory (first conceived over 100 years ago) based on well-established laws of physics. It is consistent with mountains of observation and data, both contemporary and historical. It is supported by sophisticated, refined global climate models that can successfully reproduce the climate's behavior over the last century.

Given the lack of any extra planet Earths and a few really large time machines, it is simply impossible to do any better than this.

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Objection: So 2005 was a record year. Records are set all the time. One really warm year is not global warming.

Answer: This is actually not an unreasonable point -- single years taken by themselves can not establish or refute a trend. So 2005 being the hottest globally averaged temperature on record is not convincing. Then how about:

• every year since 1992 has been warmer than 1992;
• the ten hottest years on record occurred in the last 15;
• every year since 1976 has been warmer than 1976;
• the 20 hottest years on record occurred in the last 25;
• every year since 1956 has been warmer than 1956; and
• every year since 1917 has been warmer than 1917.

The five-year mean global temperature in 1910 was .8 degrees Celsius lower than the five year mean in 2002. This, and all of the above, comes from the temperature analysis by NASA GISS.

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That's a lot to digest.

Here's a fun interactive map to make things more... fun and interactive. Click on 'Launch Map' to see how climate change might affect the economic activity of various countries in ten year increments.


This next story is one of many such studies that I think should receive more media attention. From the National Science Foundation: Global Warming Can Trigger Extreme Ocean, Climate Changes

Jan 4, '06

Newly published research results provide evidence that global climate change may have quickly disrupted ocean processes and lead to drastic shifts in environments around the world.

Although the events described unfolded millions of years ago and spanned thousands of years, the researchers, affiliated with the Scripps Institution of Oceanography, say they provide one of the few historical analogs for warming-induced changes in the large-scale sea circulation, and thus may help to illuminate the potential long-term impacts of today's climate warming...

...Modern carbon dioxide input from fossil fuel sources to the earth's surface is approaching the same levels estimated for the PETM [Paleocene/Eocene Thermal Maximum] period, which raises concerns about future climate and changes in ocean circulation, say the scientists. Thus, they say, the Paleocene/Eocene example suggests that human-produced changes may have lasting effects not only on global climate, but on deep ocean circulation.

"Overturning is very sensitive to surface ocean temperatures and surface ocean salinity," said Norris. "The case described here may be one of the best examples of global warming triggered by the massive release of greenhouse gases. It gives us a perspective on what the long-term impact is likely to be of today's human-caused warming."

I have more research and data collected and saved on my computer, but I'll spare us all from an information overload and move on to the economics of climate change.


The Stern Review really made waves when it was released in October of 2006. Here are some highlights from the short executive summary:

STERN REVIEW: The Economics of Climate Change

Summary of Conclusions

There is still time to avoid the worst impacts of climate change, if we take strong action now.

The scientific evidence is now overwhelming: climate change is a serious global threat, and it demands an urgent global response.

This Review has assessed a wide range of evidence on the impacts of climate change and on the economic costs, and has used a number of different techniques to assess costs and risks. From all of these perspectives, the evidence gathered by the Review leads to a simple conclusion: the benefits of strong and early action far outweigh the economic costs of not acting.

Climate change will affect the basic elements of life for people around the world – access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms.

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year. ..

...climate change will have serious impacts on world output, on human life and on the environment.

All countries will be affected. The most vulnerable – the poorest countries and populations – will suffer earliest and most, even though they have contributed least to the causes of climate change. The costs of extreme weather, including floods, droughts and storms, are already rising, including for rich countries.

Adaptation to climate change – that is, taking steps to build resilience and minimise costs – is essential. It is no longer possible to prevent the climate change that will take place over the next two to three decades, but it is still possible to protect our societies and economies from its impacts to some extent – for example, by providing better information, improved planning and more climate-resilient crops and infrastructure. Adaptation will cost tens of billions of dollars a year in developing countries alone, and will put still further pressure on already scarce resources. Adaptation efforts, particularly in developing countries, should be accelerated.

The costs of stabilising the climate are significant but manageable; delay would be dangerous and much more costly...

...Ultimately, stabilisation – at whatever level – requires that annual emissions be brought down to more than 80% below current levels...

...Action on climate change is required across all countries, and it need not cap the aspirations for growth of rich or poor countries...

...Action on climate change will also create significant business opportunities, as new markets are created in low-carbon energy technologies and other low-carbon goods and services. These markets could grow to be worth hundreds of billions of dollars each year, and employment in these sectors will expand accordingly.

The world does not need to choose between averting climate change and promoting growth and development. Changes in energy technologies and in the structure of economies have created opportunities to decouple growth from greenhouse gas emissions. Indeed, ignoring climate change will eventually damage economic growth.

Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries.

A range of options exists to cut emissions; strong, deliberate policy action is required to motivate their take-up...

...Climate change is the greatest market failure the world has ever seen, and it interacts with other market imperfections. Three elements of policy are required for an effective global response. The first is the pricing of carbon, implemented through tax, trading or regulation. The second is policy to support innovation and the deployment of low-carbon technologies. And the third is action to remove barriers to energy efficiency, and to inform, educate and persuade individuals about what they can do to respond to climate change...

...Key elements of future international frameworks should include:

• Emissions trading: Expanding and linking the growing number of emissions trading schemes around the world is a powerful way to promote cost-effective reductions in emissions and to bring forward action in developing countries: strong targets in rich countries could drive flows amounting to tens of billions of dollars each year to support the transition to low-carbon development paths.
• Technology cooperation: Informal co-ordination as well as formal agreements can boost the effectiveness of investments in innovation around the world. Globally, support for energy R&D should at least double, and support for the deployment of new low-carbon technologies should increase up to five-fold. International cooperation on product standards is a powerful way to boost energy efficiency.
• Action to reduce deforestation: The loss of natural forests around the world contributes more to global emissions each year than the transport sector. Curbing deforestation is a highly cost-effective way to reduce emissions; large-scale international pilot programmes to explore the best ways to do this could get underway very quickly.
• Adaptation: The poorest countries are most vulnerable to climate change. It is essential that climate change be fully integrated into development policy, and that rich countries honour their pledges to increase support through overseas development assistance. International funding should also support improved regional information on climate change impacts, and research into new crop varietie that will be more resilient to drought and flood.

Here's an interesting reply by Stephan Harding...

While I was greatly persuaded by the recommendations made by the Stern review, this is where I believe he misses something vitally important. Simply put, growth, of the wrong kind, no matter how decarbonised, will wreck the planet.

The Stern review ignores a fundamental lesson of ecology: that every species operates within the limits of its surroundings - this is the notion of "carrying capacity". The review effectively acknowledges that there is a limit to the greenhouse gasses we can release into the atmosphere if we wish to avoid dangerous climate change, but it overlooks the many other ecological limits, as yet only dimly recognised by mainstream economists...

...By choosing to ignore the problem of growth, the Stern review, much needed as it is, does no more than reform an economic system that seems doomed to prompt and spectacular failure. Desperate times call for stronger medicine and perhaps it is time for a radical change of paradigm. Perhaps we need to embrace an old idea that inspired the likes of Adam Smith, John Stuart Mill and EF Schumacher: that there are limits to growth.

Both of the above items are miles beyond the average Canadians' attitude on this subject. I can only speak from personal experience, but it sure seems like a LOT of people out there haven't yet had the chance to hear the whole story. People are busy and don't have the time to spend hours researching and writing long winded blog posts on this stuff. While it's up to 'us' to individually make a commitment to change, I really don't feel like waiting for our government to decide to take action. Similarly, where's the leadership in restricting harmful chemicals in consumer products? It's really up to the average person to find out what cancer causing ingredients are in the everyday household items they expose themselves to. (video link to above story here)


Sorry, off topic here. Let's get back to it.


Are there any Adbusters readers out there? Have you noticed that over the last few months there has been a lot of articles on economics and a new kind of economist? It seems an unlikely topic for this magazine, but there is a new style of economics out there that is very interesting. This is not an easily dismissed magazine; they fully understand neoclassical economics and the reasons why we need to update and overhaul our economic systems.


From the Ecologist Online comes this article from 2003 on the inadequacies of the GDP.

Measure for measure, GDP is the world’s hidden accounting scandal, the one that neither governments nor media will touch. Jonathan Rowe asks why we worship such a false idol...
...What is going on here? How could we feel better when the experts say we should feel worse, and worse we should feel better? Could it be that economists have got it all wrong?

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Isn’t GDP Wonderful?

There are few human misfortunes that do not have a silver lining where the economic mind is concerned. The result is a strange take on the world that permeates the mainstream media yet goes almost entirely unnoted.

• Teenage girls prone to pathological body-consciousness, egged on by images of physical ‘perfection’ that barrage them in teen magazines, have helped create a teen cosmetic industry worth almost $25bn annually.

• Americans owe over $7 trillion in household debt, used to make purchases that boost the GDP. And in a curious twist, the debt interest payments add $100 billion more.

• For the purchases they don’t really need or use, there is the burgeoning self-storage industry and garage extensions on suburban homes to hold the stuff. The accoutrements alone – shelves etc – are expected to become a $650mn business, according to the Wall Street Journal.

• Growth development problems, otherwise known as erectile dysfunction or impotence, is on the increase, which is excellent news for manufacturers of Viagra – in itself a $1.5bn industry in the USA.

• Over 500,000 Americans contribute to the US GDP with purchases made on stolen credit cards. Add to this identity theft insurance which costs over $100 a year per person.

• Economists love web pornography since it adds some $2bn to America’s GDP.

• Gambling is another affliction that contributes impressively to the US GDP – by some $63.3bn a year.

• GDP also thrives on noise pollution – sound-proofing insulation for an apartment ceiling costs about $400. And the 5.2m American children who have damaged hearing from listening to their headphones too loud are an investment in the GDP as later in life many will require treatments and hearing aids.

• More than half of Americans are overweight. Yippeee! Direct medical costs from diabetes alone add some $44bn to the GDP. And over 50,000 Americans had their stomachs stapled last year at a cost of around $20,000 each.

• Manufacturers of soft drinks are targeting children with hyper-caffeinated sodas, with names like Jolt and Code Red. And to calm them down? Easy. Americans spend $758m on the drug Ritalin. GDP heaven – self-perpetuating supply and demand.

• Approximately one-fifth of America’s food goes to waste, and that’s not counting the vast amount that ends up as flab. This adds about $31bn to the GDP, a figure which could feed those who die of starvation each year twice over.

• American motorists sitting in traffic jams spend over $5bn a year on petrol. In Los Angeles alone the figure is close to $1bn. Note, coincidentally, that Los Angeles also leads the nation in the number of hospital admissions for respiratory problems – more medical costs, higher GDP.

• Depressed – excellent. Over seven million Americans take anti-depressants. Prozac alone has generated over $2.5bn a year. Even better, when the Grim Reaper finally arrives, the typical American funeral costs over $5,000, not counting the price of the cemetery and monument.

From the Green Party 2006 Platform section 'Green Economy'

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...we can redefine economic well-being with more revealing economic indicators that take a broader approach to measuring our success as a country. For too long Canada's economic focus has been on indicators that tell only part of the story. For instance, Canada currently measures its economic success with the Gross Domestic Product (GDP). But if the GDP keeps rising in Canada, why don't Canadians have more confidence that their lives are improving? Why is the number of children and families who live in poverty increasing? It's because factors such as quality of life, volunteerism, job satisfaction and health are not registered by the GDP.

We can more accurately measure Canada's success by incorporating the Canadian Index of Well-being. The CIW is a measure of our national well-being that includes economic production, financial transactions, quality of life, physical health, mental health, environmental conditions, education, housing, volunteerism, stability - all elements of healthy communities and a green economy. By fully appreciating where we are going as a country, we are better equipped to set a course for our fiscal and social policies.

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Final thoughts go to wiser souls than myself...

"What many now call 'growth' will soon be seen as accelerated decay."

Dan Fiscus

"Anyone who thinks that an economy can be expanded forever, within the confines of a finite planet, is either a madman or an economist"
Economist Kenneth Boulding

"Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all."
Economist John Maynard Keynes

"Environmental injury is deficit spending. It’s a way of loading the cost of our generation’s prosperity on to the backs of our children."

Robert F. Kennedy, Jr.