climate change 2007
Confused about the climate? Not sure what’s happening? Exaggerated fears or impending cataclysm?
A good place to start is a publication by Swiss Re. It is done in a straightforward, down-to-earth, no-bullshit and sane manner. The source to the whole document is given at the bottom.
Executive Summary
The Earth is getting warmer, and it is a widely held view in the scientific community that much of the recent warming is due to human activity. As the Earth warms, the net effect of unabated climate change will ultimately lower incomes and reduce public welfare. Because carbon dioxide (CO₂) emissions build up slowly, mitigation costs rise as time passes and the level of CO₂ in the atmosphere increases. As these costs rise, so too do the benefits of reducing CO₂ emissions, eventually yielding net positive returns. Given how CO₂ builds up and remains in the atmosphere, early mitigation efforts are highly likely to put the global economy on a path to achieving net positive benefits sooner rather than later. Hence, the time to act to reduce these emissions is now.The climate is what economists call a “public good”: its benefits are available to everyone and one person’s enjoyment and use of it does not affect another’s. Population growth, increased economic activity and the burning of fossil fuels now pose a threat to the climate. The environment is a free resource, vulnerable to overuse, and human activity is now causing it to change. However, no single entity is responsible for it or owns it. This is referred to as the “tragedy of the commons”: everyone uses it free of charge and eventually depletes or damages it. This is why government intervention is necessary to protect our climate.
Climate is global: emissions in one part of the world have global repercussions. This makes an international government response necessary. Clearly, this will not be easy. The Kyoto Protocol for reducing CO₂ emissions has had some success, but was not considered sufficiently fair to be signed by the United States, the country with the highest volume of CO₂ emissions. Other voluntary agreements, such as the Asia-Pacific Partnership on Clean Development and Climate – which was signed by the US – are encouraging, but not binding. Thus, it is essential that governments implement national and international mandatory policies to effectively reduce carbon emissions in order to ensure the well-being of future generations.
The pace, extent and effects of climate change are not known with certainty. In fact, uncertainty complicates much of the discussion about climate change. Not only is the pace of future economic growth uncertain, but also the carbon dioxide and equivalent (CO₂e) emissions associated with economic growth. Furthermore, the global warming caused by a given quantity of CO₂e emissions is also uncertain, as are the costs and impact of temperature increases.
Though uncertainty is a key feature of climate change and its impact on the global economy, this cannot be an excuse for inaction. The distribution and probability of the future outcomes of climate change are heavily weighted towards large losses in global welfare. The likelihood of positive future outcomes is minor and heavily dependent upon an assumed maximum climate change of 2° Celsius above the pre-industrial average. The probability that a “business as usual” scenario – one with no new emission-mitigation policies – will contain global warming at 2° Celsius is generally considered as negligible. Hence, the “precautionary principle” – erring on the safe side in the face of uncertainty – dictates an immediate and vigorous global mitigation strategy for reducing CO₂e emissions.
There are two major types of mitigation strategies for reducing greenhouse gas emissions: a cap-and-trade system and a tax system. The cap-and-trade system establishes a quantity target, or cap, on emissions and allows emission allocations to be traded between companies, industries and countries. A tax on, for example, carbon emissions could also be imposed, forcing companies to internalize the cost of their emissions to the global climate and economy. Over time, quantity targets and carbon taxes would need to become increasingly restrictive as targets fall and taxes rise. Though both systems have their own merits, the cap-and-trade policy has an edge over the carbon tax, given the uncertainty about the costs and benefits of reducing emissions. First, cap-and-trade policies rely on market mechanisms – fluctuating prices for traded emissions – to induce appropriate mitigating strategies, and have proved effective at reducing other types of noxious gases. Second, caps have an economic advantage over taxes when a given level of emissions is required. There is substantial evidence that emissions need to be capped to restrict global warming to 2 °C above preindustrial levels or a little more than 1 °C compared to today. Given that the stabilization of emissions at current levels will most likely result in another degree rise in temperature and that current economic growth is increasing emissions, the precautionary principle supports a cap-and-trade policy. Finally, cap-and-trade policies are more politically feasible and palatable than carbon taxes. They are more widely used and understood and they do not require a tax increase. They can be implemented with as much or as little revenue-generating capacity as desired. They also offer business and consumers a great deal of choice and flexibility. A cap-and-trade policy should be easier to adopt in a wide variety of political environments and countries.
Whichever system – cap-and-trade or carbon tax – is adopted, there are distributional issues that must be addressed. Under a quantity target, allocation permits have value and can be granted to businesses or auctioned. A carbon tax would raise revenues that could be recycled, for example, into research on energy-efficient technologies. Or the revenues could be used to offset inefficient taxes or to reduce the distributional aspects of the carbon tax.
Source: “The economic justification for imposing restraints on carbon emissions”, Swiss Re, Insights, 2007; PDF
tags: climate change, environment, global warming, economics