Crunching Climate Costs

“Nordhaus postulates a more realistic scenario in which at least half the world does not participate in a global campaign, requiring those who do participate to spend more than would otherwise be necessary to reach any given temperature target. In such a half-hearted world, the cost of remediation becomes so great that one can forget about stabilizing warming at 2.3 degrees above baseline. The cost-minimizing strategy would be to cap warming at 3.8 degrees. And even at this elevated level, the income penalty gets outsize, rising to just under 4 percent.” Sanford Rose

Dolors & Sense

By Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—11/18/2013—Economist William Nordhaus has written the best book yet on global warming.

The Climate Casino: Risk, Uncertainty, and Economics for a Warming World offers some well-considered, though tentative, numbers on what it will take to contain the problem.

For an economist, containment means finding the temperature level that will yield the lowest economy-wide costs.

Costs, in climate terms, are divided into 1) those resulting from taking remedial action (say, imposing a carbon tax, which affects national incomes as well as spending patterns) and 2) the current value of the future benefits stemming from that remedial action (in this case, the benefits are really forgone costs, or damages that would have resulted had remediation not been undertaken).

Costs are of course sensitive to a variety of assumptions, the most important of which is the extent of international cooperation.

If there is universal and sincere agreement to participate in a program of abating carbon emissions (the idealized scenario), costs are very much lower than if participation is more limited and efficiency is lower.

Given the idealized state, Nordhaus reckons that the world can hold global warming to only 2.3 degrees Celsius above the 1900 level (the current level is 0.8 degrees above that baseline) at a total cost of just under 3 percent of global annual gross income, assuming no discounting of future benefits.

About two percentage points of the cost come from unavoidable climate damage, while the remaining one point stems from the cost-effective remediation expense.

Unfortunately, in a less-than-ideal world, participation in climate remediation is apt to be far from universal.

Nordhaus postulates a more realistic scenario in which at least half the world does not participate in a global campaign, requiring those who do participate to spend more than would otherwise be necessary to reach any given temperature target.

In such a half-hearted world, the cost of remediation becomes so great that one can forget about stabilizing warming at 2.3 degrees above baseline. The cost-minimizing strategy would be to cap warming at 3.8 degrees. And even at this elevated level, the income penalty gets outsize, rising to just under 4 percent.

Most of this increase comes from the damage side of the ledger, close to 3 percent. That is, it is so expensive to remediate without global burden-sharing that the remediators will accept the damages rather than pay outsize sums to avoid them.

Three other Nordhaus simulations follow. All add in the discounting of those future benefits to their present worth at a real interest rate of 4 percent. Since the value of future benefits is being discounted, the bang for the cost-abatement buck is in effect being reduced, meaning, in other words, that the lowest-cost outcome, which again is equal to abatement costs plus future forgone costs, is achievable only at higher temperature levels.

Thus, assuming full global participation, the cost-minimizing temperature rises from 2.3 in the idealized state without discounting to 2.8 degrees with discounting.

In the more realistic scenario of half-participation, the minimizing temperature comes in at 4 degrees, which is only 0.2 degrees above the 3.8 degrees noted above for half-participation without discounting.

This is a surprisingly modest increment, given the rather, ahem, heated debate in climate circles over the choice of an appropriate discount rate. But discounting does of course reduce the overall hit to incomes because, as noted, today’s value of future damages drops.

A final simulation assumes that a tipping point occurs at 3.5 degrees—e.g., the Greenland glacier collapses into the North Atlantic at higher temperatures. To avoid exceeding the threshold level, and the concomitant explosion in damages, the world would have no choice but to accept mitigation costs equal to about double those in the other scenarios.

Nordhaus’s four conclusions from these simulations:

1. Higher temperatures, bigger damages.
2. Lower temperature targets, higher costs.
3. Weaker international cooperation, higher costs.
4. Higher discount rates, lower damages but a higher cost-minimizing temperature target.

Note: For more on The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, go to http://yalepress.yale.edu/book.asp?isbn=9780300189773.