EC1110

Hot Topics in Economics

The Economics of Global Warming

Peter Midmore

Introduction

Uncertainties and how to deal with

them
The principle of cost-benefit analysis
How to deal with future costs and
benefits
Economic theory into policy

The Science of Global

Warming

Incoming and outgoing solar radiation

Re-radiation: water vapour and

greenhouse gases

Anthropogenic warming

Temperature forcing
Gases with different warming properties

Carbon dioxide, methane, nitrous oxide

Aerosols, sulphur dioxide

Greenhouse Economics
Economic
Activity

Emissions

Atmospheric
Concentrations

Radiative
Forcing

Aggregate
Damage

Impacts

Increased
Temperature

Damage Estimates

Rising sea levels

Freshwater availability
Crop yields
Vector-borne disease
Ecosystem change
Social impacts
Extreme events
Large-scale one-off events

Estimating Damage Costs

Integrated Assessment Models

Depend on rates of growth, adaptation effort

Nordhaus estimates: 1.5-1.9% global GDP

Stern estimates: up to 20% global GDP

Issues:

Non market impacts

Respective welfare of rich and poor
Harm versus emissions relationship is nonlinear

A Strategy for Mitigation

Sterns suggests reduction CO2 levels in

4 ways:

Reduce demand for carbon-intensive

products and services
Increase energy efficiency
Act on non-energy emissions
Low carbon technologies for power, heat,
transport

Estimating Mitigation Costs

Behavioural change and efficiency are

cost-free?
Major costs are of alternative low carbon
energy sources:

Nuclear
Fossil with CCS
Wind and tide
Photovoltaics
Biofuels
Distributed generation

Controversies

Choice of discount rate:

At 4%, 1,000 in 50 years is worth 3.66

today
With a 4% discount rate, would not
sacrifice 1% GDP today to offset 15% loss
in 150 years
Choice of discount rate:

Descriptive
Apriori and ethical ( R g )

Kyoto-Plus

Recent publication of the Garnaut

Review

Existing goals out of date?

E.g. UK needs to cut emissions by 5%
annually to achieve 450 ppm of CO2 by
2050
Even tighter constraints on DCs from 2013
Therefore revise target upwards (from 450
ppm and +2C to 550 ppm and +3C)

Key References
The Stern Review:
http://www.hm-treasury.gov.uk/stern_review_climate_change.htm
House of Lords Economic Affairs Select Committee Report on Climate Change:
http://www.publications.parliament.uk/pa/ld200506/ldselect/ldeconaf/12/12i.pdf
The Garnaut Review:
http://www.garnautreview.org.au/index.htm
Helpful presentation by Adair Turner of Sustainable Development Commission:
http://www.sd-commission.org.uk/publications/downloads/TurnerEconomicsClimateChangeFeb07.pdf

EC1110
Hot Topics in Economics
The Economics of Global Warming

Peter Midmore