Sunday, April 12, 2009

The Economic Advantage of Combatting Climate Change

I’ve recently been looking at the possible economic impacts of a range of incentives that could be provided by state and local governments to encourage energy efficiency and renewable energy programs. In doing so, I want to see whether the revenue initially lost from such a program would be covered by the increased revenue that is created from direct and indirect jobs from the program. There are various economic models that can be used for this analysis and different approaches that can be taken. Personally, I think the economic argument is always the best route to take when implementing change as it appeals to the masses rather than to the environmentally conscious customer. Anyway, while looking at the different economic arguments that can be made I couldn’t find a holistic analysis that includes both a global and local inspection of reducing energy consumption.

NREL has created a widely accepted economic model for renewable energy that can be used to examine the local effects of wind, solar and biomass projects, and recently, the
Center For American Progress created a similar analysis for a national Energy Efficiency Improvement program Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy. The arguments for all models make a compelling case for implementing programs to stimulate the economy, but none have gone on to strengthen the argument by adding on the global economic impacts of not addressing climate change. This argument is of course hard to make because it is difficult to quantify a global impact, and even more difficult to relate it to local economies.

One of Thomas Friedman’s main arguments in his recent book Hot, Flat, and Crowded: Why We Need a Green Revolution – And How it Can Renew America, is that tackling climate change and our energy security challenges can be the way for America to once again lead the way and establish itself as the world power for many more decades. I happen to agree with this hypothesis and wish there were more attention given to this viewpoint. There has been some movement towards this, especially with the recent focus on creating green jobs through the stimulus, etc., but I don’t really feel that the majority of Americans understand the long-term economic benefits of leading the charge.

Therefore, it seems worthwhile to bring attention to studies that focus on these benefits. One such report that could be combined with the local and national studies I mentioned earlier is The Stern Report: The Economics of Climate Change. We briefly mentioned this report in class earlier in the semester but didn’t really elaborate on what it entailed. The first half of the Review focuses on the economic impacts of climate change, while the second half focuses on the policy challenges involved with implementing the change to a low-carbon economy, and in ensuring that both developed and developing societies are prepared to deal with the consequences of climate change that can no longer be avoided.

Specifically, the Review considers the economic cost of the impacts of climate change, and the costs and benefits of action to reduce the emissions of greenhouse gases (GHGs) that cause it. It does this by:

1. Using disintegrated techniques to consider the physical impacts of climate change on human life, the economy, and the environment, and looking at the resource costs of reducing GHGs.
2. Using integrated economic models to estimate the economic impacts of climate change, and additional economic models that represent the cost and effects of a transition to low-carbon energy systems.
3. Using comparisons of the current level and future predictions of the “social cost” of carbon with the marginal abatement costs.

The findings of the Report estimate that if no action is taken, the overall costs and risks of climate change will result in the loss of 5% of global GDP per year. However, if action were taken the costs would be equivalent to approximately 1% of global GDP.

The report goes on to provide some recommendations for implementing adaptation efforts. One of the primary recommendations is to accelerate efforts in developing countries. There is an argument that although developing countries should take significant action, they should not have to take on the full costs of implementing these changes. The report makes the argument that developed countries can shoulder some of this burden through the economic growth that will be created through changes in energy technologies and in the structure of economies that have created opportunity to decouple growth from GHG emissions.

The findings of the Stern Report paired with the local and national economic models discussed earlier make what seems to me to be a strong rationale for doing everything we can to ensure we are on the forefront of combating climate change so that we can receive the economic benefits that are likely to result.

Currently, one of the primary arguments against combating climate change is that it will hurt our economy. For the reasons I have discussed here, I believe a primary argument for combating climate change should be that it will help the economy long-term instead of hurting it. Perhaps if this viewpoint were used more frequently when addressing politicians and their constituents, there would be a more rapid implementation of policy to combat climate change.


Vladdy Vladdivladstock said...

Thanks, Sam for looking into this Stern Report thing. This is interesting stuff. I've just been browsing the Summary of Conclusions section of the report. Perhaps I need to read the rest of the report but I wonder about something:

If inaction will cost a 5% reduction yearly in global GDP "now and forever,"it seems odd to only carve out 1% of global GDP to combat climate change. They also say: "If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more." If that's really true, then 1% is a pittance, a tiny sum, compared to all the bad that might come from inaction.

It appears that the writers of this report have calculated that we can prevent the worst effects of climate change at a cost that "can be limited to around 1% of global GDP each year." So does that mean that according to their calculations, this investment of 1% of GDP is basically saving the world economy at least 4% (5 minus 1) per year? If so, it's an open and shut case--everybody should easily agree that we want to do this. Also, might it not be smart to commit 2%, or 3% of GDP, if that would make it more likely for us to stave off climate change and save the day? Where's the safety factor? Where are the error bars? It sounds a little too good, the math is too neat and clean for something that is so fraught with uncertainty.

I guess my point is that I feel comfortable with this: "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." I am skeptical of the numbers they are citing, and by providing numbers, they may be introducing more new questions than they are answering.

Brodie Black said...


The cost of inaction can often outweigh the cost of prevention. For example, building a levee might cost $X million, but damage from a storm in absence of the levee might cost $X+Y. The balance might not be a 1:1 ratio.

I would agree that the report introduces more questions than it answers.