11: Economics Emissions, Impacts, and Policy

Overview

Climate change is the biggest environmental challenge of our and future generations. More humans currently live on the planet than ever before, and population growth is anticipated to continue throughout the remainder of this century. More people, whose incomes are rising because of economic growth, will demand more goods and services (for example, cars, air conditioning, televisions) as well as diets richer in protein. This drives the first challenge discussed in this chapter—the so-called mitigation challenge. In order to produce the goods, services, and foods that current and future humans will want to consume, one requires more inputs to production or much more efficient technology. Some of the inputs required are renewable (for example, lumber, fish, sunshine, wind), and others are nonrenewable (for example, coal, natural gas, metals). The production of this portfolio of inputs is energy intensive and likely results in raised emissions of greenhouse gases. These emissions have been rising globally since the onset of the Industrial Revolution in the eighteenth century and, absent policy intervention, will continue to do so.

These rising emissions pose a challenge. If emissions continue in an unabated fashion, the planet will experience a significant degree of climate change. If we reduce, as has been argued by some noneconomists, emissions to zero, one will prevent a significant degree of climate change—but also possibly forgo many of the benefits derived from the consumption of goods that will not be consumed because of the policy. Economists argue that in order to find the efficient degree of emissions reduction, one should compare the costs of reducing emissions with the benefits of doing so. This is the backbone of a formal methodology called benefit cost analysis, which compares the full damages from additional climate change to the costs of reducing greenhouse gas emissions. In order to conduct such a benefit cost analysis, one clearly needs to have information on what it costs to reduce emissions and how big the damages from additional emissions leading to climate change are. In what follows, I discuss the emission reduction challenge and provide an overview of how economists attempt to quantify the damages from climate change in monetary terms.

The second part of the chapter assumes that we have decided as a society on how large emissions reductions should be. The question is how to get there? The problem here is challenging. First, I discuss this from a single country’s perspective. The problem is similar to losing weight. If you step on the scale and decide that you need to lose 20 pounds, you have many ways to achieve this goal. You generally would like to choose the most efficient (for example, least painful) way to do so. Emissions reductions are similar. If we decided that we want to reduce our emissions by say 10%, we would want to achieve this in the most efficient or, as economists would say, “least cost” way. I outline the main approaches to reducing emissions and compare how efficient they are.

Now, let’s complicate the problem. Since greenhouse gases are global pollutants, meaning their geographic source of origin does not matter, each country needs to do its part. But how do we get each country to do the right thing? Again, turning to losing weight, this is similar to having your extended family decide that you will collectively lose a total of 200 pounds. Each member of your family has an incentive to free ride on others’ weight loss, and your family will likely never achieve this common goal. This is essentially the problem behind the 2015 Paris Agreement, where all countries decided to jointly reduce emissions but each country is “doing its own reducing.” Moreover, the Agreement does not contain significant penalties if a country fails to meet its emissions reduction plan. The chapter ends by briefly discussing the challenges of international cooperation in emissions reduction and the state of affairs. At the very end it lists a number of suggestions for accessible additional readings.