By Dennis Markatos-Soriano
Most policymakers and members of the public are waking up to the fact that global warming is an issue that we need to address. Incentives for further efficiency and renewables are being discussed and implemented by governments throughout the world. Emissions reduction targets are proposed by stakeholders from German Chancellor Merkel’s 50% reduction by 2050 to Al Gore’s recent 90% reduction by 2050. Understanding what the optimal route is for us to take is a difficult matter that includes forecasting the costs of business-as-usual (BAU) climate change and then comparing those costs to the reduced costs of mitigated climate change, plus the costs of mitigation. If that sounds a bit confusing, indeed it is a challenge to those who have spent decades dissecting this topic. I aim to lay out the estimates of Yale Environmental Economist William Nordhaus in his latest report on optimal mitigation and compare it to two other contemporary reviews.
Nordhaus has co-developed a modeling system to estimate costs called DICE-2007, Dynamic Integrated model of Climate and the Economy. His latest version is the fifth generation of a model that he created in the late 1970s. While he acknowledges that there is a fair amount of uncertainty in elements such as the future costs estimated, the model is a great anchor for any discussion to help guide policymaking regarding global warming.
First off, the model estimates that climate change damage, from coastal and regional flooding to increased wildfires to the management of unprecedented heat waves, would cost us $22.6 trillion over the many decades to come (all his amounts are in 2005 inflation-adjusted dollars). He then finds that the optimal mitigation costs $2.2 trillion and brings down the cost of climate change damage to $17.3 trillion (a net present-value benefit of more than $3 trillion). His optimal policy recommendation is a globally harmonized carbon tax at $37/ton of carbon (~$10/ton carbon dioxide) in 2010 which rises every gradually to $90/ton in 2050 and $202/ton in 2100. It allows the global mean temperature to rise 2.8 degrees Celsius (C) above 1900 levels by 2100 and 3.4 degrees C by 2200 and the atmospheric carbon dioxide concentration to increase from ~380 now to 586 parts per million (ppm) in 2100 and 658 ppm in 2200. Emissions would continue to grow through 2100, albeit at a slower rate than BAU. These results based on economic efficiency are surprising to those of us focused on climate stewardship who have advocated for levels of reduction in US emissions around 80% by 2050. The DICE model predicts such rapid reduction would cost more than just dealing with the effects of BAU climate change. But then again, the model is measured in terms of utility through human consumption, thus leaving out the value of non-market elements such as intrinsic values of animal and plant species that may go extinct.
Other reports see a higher value in accelerated mitigation efforts, from the Stern Review that came out last Fall to Princeton professor Michael Oppenheimer’s discussion of potential dangerous thresholds to a recent report by Resources for the Future by Sterner and Persson. A key difference in the Stern Review that justified economic optimality of higher mitigation was the inclusion of a low discount rate. The Ramsey rule establishes that a discount rate is made up of the sum of the pure rate of time preference and the product of the growth rate of income and the marginal utility of money. Stern chooses a low time preference of .1% based on the belief that we care about our great-grandchildren almost as much as we do about ourselves, a marginal utility of 1 and a growth rate of income of 1.3%: yielding a discount rate of 1.4%. This belief multiplied the annual GDP losses of inaction from a ~1 percent per year by many other economic studies to from 5-20% per year estimated by Stern, justifying an ~85% reduction in emissions by 2050. Nordhaus explains that he opts for a higher discount rate based on historical rates of return on capital of ~5.5% per year which increases consumption to a much higher level in the future that in turn lowers the marginal utility of consumption so that we should not sacrifice our relatively meager consumption to support our richer descendants of tomorrow.
In a 1998 paper for Nature, Oppenheimer
[see also 2003]
suggests that a larger than two degree C increase above 1900 temperature levels
may trigger the unstoppable melting of the Greenland and/or Western Antarctic
ice sheets and raise the costs of climate change in a non-linear way. Such a melt would increase sea level a number
of meters and inundate hundreds of millions of people in low-lying coastal areas
such as southern
The report by Sterner and Persson mentioned above aligns close to Stern mitigation levels as well by incorporating a notion of relative prices and including non-market elements. While they believe exponential growth may be able to continue in information technology and arts, they argue growth of physical sectors (such as the production of oil, cement, etc.) and environmental services (such as clean air, clean water, and pollination services for agriculture) have finite limits. Such uneven growth would raise the prices of the scarcer material and environmental goods, and thus raise the costs of climate inaction, justifying larger abatement efforts than estimated by Nordhaus. They make the case that these changing prices must be taken into account for us to set an optimal course for decades into the future. When they run the DICE model with the inclusion of increased scarcity and resulting price rises of currently non-market environmental services weighed as 10% of 2005 utility, even a Nordhaus-style high-discount rate scenario calls for Stern level emissions reduction of ~80% by 2050.
The Sterner and Persson case to include potential price increases of finite environmental and physical resources is compelling. For instance, the latest International Energy Agency Medium Term Outlook sees increased tightness in the oil market over the next five years even though prices have tripled since 2002. Non-OPEC supplies have reached a plateau around 50 million barrels per day, which will increase our reliance on OPEC to increase production to meet expected exponential growth in global demand of ~2.2% per year led by China’s unprecedented economic expansion. While some geologists and energy analysts predict that OPEC production will plateau or decline soon, even if they can grow at the rate demand would like - prices will probably increase their march upward due to lower spare capacity. The silver lining of increased prices for the fuel that provides ~38% of global energy today is that the relative cost decreases for cleaner renewable fuels and electricity. But the relative cost of the dirtier and more abundant coal may drive increased production of coal-to-liquid (CTL) fuels that would emit twice the carbon dioxide per gallon compared to regular gasoline. As long as we make climate change mitigation a priority in future energy transitions through incentives and policies (such as carbon taxes, federally requiring carbon capture and storage in any future CTL projects, and extending the US Production Tax Credit for wind power another few years, as it becomes a significant carbonless energy source), then emissions reduction can become an attractive option even at low carbon taxes. If we were to stay with a non-mitigated world, we’d also have to consider the costs of two billion more people in newly industrialized countries driving oil burning cars and the consequences this would have on air and water quality, as well as physical resources.
The development of discourse in all of these reports is encouraging as we search for the optimal political and economic policy for addressing global warming. As long as we can build a common language that maintains enough flexibility to incorporate new insight and realities into our models and presentations to policymakers, a global path for a sustainable energy future can be forged. We will have to resolve key debates on physical resource depletion and whether Oppenheimer is right that a dangerous threshold may be crossed around an additional two degrees Celsius.
There is one area where the models
are unequivocal: for mitigation efforts to be effective, they must include the
Dennis Markatos-Soriano is co-chair of Princeton SURGE, Students
United for a Responsible Global Environment, and 2008 Master in Public Affairs
Candidate with a Certificate in Science, Technology & Environmental Policy
at the Woodrow Wilson School of Public & International Affairs at Princeton
University. www.princeton.edu/~surgers