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
Impacts

Increased
Temperature
Aggregate
Damage
Economic
Activity
Atmospheric
Concentrations
Radiative
Forcing
Emissions

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 non-
linear
A Strategy for Mitigation
Sterns suggests reduction CO
2
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 ( ) g R
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Existing goals out of date?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 CO
2
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/Turner-
EconomicsClimateChangeFeb07.pdf
EC1110
Hot Topics in Economics
The Economics of Global Warming
Peter Midmore