The Economics Of Climate Change

In the long run, we are all dead.” John Maynard KeyÐ'­nes’s apercu is worth keeping in mind when discussing the costs of climate change. Economics has its uses but it’s singularly ill-suited to the making of forecasts that go beyond a person’s lifetime.

Climate change is an intergenerational problem. Its effects are reckoned not in decades but in centuries and even millennia. Despite the work of thousands of scientists much is still unknown about the causes of global warming or, for that matter, global cooling.

The hypothesis that the present warming trend is the result greenhouse gases that had been released into the atmosphere by humans has not been proved either by experiment or by observation. The so-called proof is only in the climate models that were produced by climate scientists with the aid of superÐ'­comÐ'­puters. And these are the models that economists are using to calculate the costs.

This month, the International Panel on Climate Change (IPCC) will release a 35-page report that spells out the costs of reducing greenhouse gas emissions.

The conclusions of Working Group 3 of the IPCC will please most people. Controlling climate change will not push the world economy over the edge nor will it require technologies that still have to be developed.

There are several options for reining in climate change. The most ambitious would come at the estimated cost of a 3-percent decrease in global gross domestic product (GDP). The least costly option might even yield a small net increment for the global economy.

The tools for attaining these objectives are all ready to hand. They include a shift to alternative energy sources, improving energy efficiency, planting more trees, and offering market-based incentives and disincentives.

This point of view is shared, more or less, by William NordÐ'­haus, a professor of economics at Yale University (http://nordhaus.econ.yale.edu/recent_stuff.html). He recommends what he calls a policy ramp whereby “policies to slow global warming increasingly tighten or ramp up over time.” His logic is based on the assumption that “where capital is productive and damages are far into the future, the highest-return investments are primarily in tangible, technological, and human capital. In the coming decades, damages are predicted to rise relative to output. As that occurs, it becomes efficient to shift investments toward more intensive reductions and the accompanying higher carbon taxes.” (Science, July 13, 2007)

The opposite point of view was expressed by Nicholas Stern, the author of The Economics of Climate Change that was published in 2006 by Cambridge University Press. His analysis became