Climate change is often portrayed as the greatest problem of the 21st century. Politicians are promising deep cuts in greenhouse gas emissions. A substantial amount of money has already been spent on climate policy, and much more will be spent if such promises are realised. The EU has promised a transfer of €100 billion per year from rich to poor countries. The new EU climate directive may cost the same amount again. Are such sums justified?
We worry about climate change because of the impacts it might have. The benefits of climate policy are the impacts that would be avoided. In order to justify emission reduction, we need to understand the impacts of climate change. These are uncertain and diverse. The impacts are uncertain because climate change will take place in the future. We do not know how many people there will be, how rich they will be, how much energy they will use and what sort, and how much they will emit. We do not fully understand all mechanisms in the climate system, so we do not know how temperature and rainfall will change – but change they will. We have limited knowledge on the effects of climate change, and these effects will be on a future society that will be radically different from today’s. The impacts of climate change, and thus the benefits of climate policy are very uncertain.
The impacts of climate change are also diverse. Low-lying coasts are vulnerable to sea level rise while mountain areas may see a decline in skiing. The very old and the very young suffer disproportionally from heat stress. Rich people can afford air conditioning and poor people cannot. And there are benefits too. The Baltic coast may become a prime tourist attraction. The costs of heating homes in winter would fall. Fewer people would die of cold-related diseases.
If we want to compare the different impacts of climate change to each other, and if we want to compare the impacts of climate change to the costs of costs of greenhouse gas emission reduction, we need to express the impacts of climate change in money. This is a difficult and controversial step. Economists have developed methods for monetary valuation for almost 50 years. They work roughly as follows. People travel to see beautiful things. The more beautiful it is, the further we are willing to travel to see it. While we do not buy the beauty, we do pay an entrance fee in the form of travel cost and travel time. This entrance fee indicates the value. Similarly, people make an effort to protect themselves from harm, while workers in dangerous jobs demand a higher pay. This is an indication of the value of safety. These methods have been applied to climate change for almost 20 years.
There are a number of robust results from this literature. Climate change has negative as well as positive impacts. Positive impacts dominate in the short term. This is irrelevant, because we cannot affect the course of climate change in the short term. Negative impacts dominate in the longer term. We can influence climate change then. Emission abatement reduces the negative impacts of climate, but leaves the positive impacts as they are. Abatement reduces damages. This is a benefit. There is thus an economic case for greenhouse gas emission reduction. You do not need to be a bleeding heart ecologist to favour climate policy. Cold economic calculus calls for action too.
At the same time, estimates of the impacts of climate change do not support the often dramatic language of the media. Estimates suggest that the overall impact of a century of climate change is equivalent to losing up to 2% of income. The impact of a century of climate change is of the same size as a year of economic growth. In the worst case, impacts may be ten times as large. Still, a deep recession wreaks as much havoc in a year as climate change would do in a century. Climate change is therefore not the biggest problem of humankind.
Climate change implies more malaria and diarrhoea, and this may have killed 100,000 children already in 2009. Poverty also brings malaria and diarrhoea, and this killed 1,000,000 children or more in the same year. Climate change may not even be the biggest environmental problem. The WHO reckons that air pollution kills over 1,000,000 per year in India and China. But although climate change is not the biggest problem, it is still a problem. It will need to be solved.
Climate change primarily affects poor people in faraway places. Poor people often live in hot places. They are more exposed to the weather. They cannot afford to protect themselves against the vagaries of the weather. This means that climate policy is not for our benefit, nor for the benefit of our children and grandchildren. Climate policy is for the benefit of the children and grandchildren of people in distant countries. We have a moral obligation, however, to avoid harming others or to compensate them if we do.
We should also wonder what is in their best interest. Emission abatement would slow the spread of malaria. A malaria vaccine would eradicate the disease. Climate change may cut food production in Africa by one-third. If African farmers would use the latest farming methods, food production would increase ten-fold. Climate policy should therefore not come at the expense of development policy. But it does. A growing share of development aid is spent on climate change.
Some of the impacts of climate change are really impacts of poverty in disguise. If we leave these aside, there is still plenty to worry about climate change. And there are many things that we do not know or understand. The effect on biodiversity is one such area. We know climate change will have widespread negative effects, but we do know how bad it will be. We know that the negative impacts of a gradual warming in the 21st century would be modest, but there has been no serious study of the impacts of more rapid warming or of the impacts in the very long term. If emissions continue unabated, climate change after 2100 could well be much more dramatic than anything foreseen for this century. Nor do we know much about the indirect effects of climate change. Tropical countries tend to grow slower than economies in the temperate zone. If climate is a contributing factor to the inability to develop, as some scholars suspect, then the impacts of climate change are much larger than current estimates suggest. But we simply do not know.
Uncertainty is no reason not to act. In fact, it is the other way around. The impacts of climate change are very uncertain. What we do know, suggests that climate change is a real problem. There is no reason to believe that climate change will make us all rich. There is good reason to believe that there is an unknown (hopefully small) probability that climate change will wreck the livelihood of many people. In this case, uncertainty is a reason to increase the ambition of emission abatement.
The social cost of carbon is a measure of seriousness of climate change. It shows how much damage is done by emitting one tonne of carbon. This is useful because even the government of a middle-sized country like Germany or Italy can only change the climate by a little bit between two elections. Money would be wasted if climate policy costs more, per tonne, than the social cost of carbon.
Almost 300 estimates of the social cost of carbon have been published. Estimates with independent quality control and more recent estimates tend to be lower. The overwhelming majority of estimates are positive. That is, climate change does harm. Reducing emissions improves welfare.
This means that an economist would recommend that greenhouse gas emissions be taxed or otherwise regulated. At the moment, only the European Union has such regulation in place, and it covers only about one-third of emissions. Europe is right to extend its current policy, and other countries should follow suit.
There are four important assumptions in the estimate of the social cost of carbon. How serious is climate change? How much do we care about remote probabilities? How much do we care about people in distant lands? How much do we care about the far future? There is therefore a strong ethical component to any assessment of climate policy. If you do not care about what could happen to someone faraway in the future, then climate change is not a concern. There is, however, strong empirical evidence that people do care about such things. We buy insurance, give to charity, and save for our old age. Following the guidance from such behaviour, the recommended price of carbon is €4/tCO2.
The current price of CO2 emission permits in Europe is €15/tCO2. That is, we are paying almost four times as much as we should. Alternatively, European climate policy reveals an increased concern about the future. This may well be, but the logical implication is that we should then also start to invest much more in education and pensions.
In sum, these results call for a measured policy of greenhouse gas emission reduction. There is reason to believe that European climate policy is overly ambitious. Climate policy outside Europe is surely not ambitious enough.
Dr. Richard S.J. Tol is a research professor at the Economic and Social Research Institute in Dublin and the professor of the economics of climate change at the Vrije Universiteit in Amsterdam.