Climate Change, Climate Science and Economics

Climate change constitutes a particularly tricky policy dilemma as noted by the rhetoric that surrounds both the science and potential response to the threat of global warming. In addition to a brief discussion of the rhetoric surrounding the opposing views of global warming, whether it is unprecedented and anthropogenic in origin – there is clearly no consensus – this chapter provides an introduction to climate science, the issues pertaining to global warming, and the economics of climate change.

Climate scientists use instrumental data from numerous weather stations to develop summary measures of regional and global temperatures. The difficulties of doing this are illustrated using both hypothetical data and information from two weather monitoring stations, where one of the stations is clearly influenced by non-climate factors to a greater extent than the other. Instrumental records are available from numerous weather stations around the globe, but whose numbers and quality have varied over time, and from satellite data. However, as demonstrated using simple data, efforts to remove non-climatic factors (such as the so-called urban heat island effect) from the surface temperature reconstructions prove to be unsuccessful. Statistical analyses indicate that, since the late 1970s, some 50 % of the temperature increase in the reconstructed data is attributable to socioeconomic factors, but that this is not true of temperatures derived from satellite data. The chapter ends by examining the potential for replacing traditional crop insurance, and its inherent drawbacks (adverse selection and moral hazard), with financial weather-based derivatives.

Although individual instrumental records from various places in North America and Europe are examined to determine trends, including the identification of the warmest and coldest years in the records, the main focus of this chapter is on proxy records. Proxy temperature records are constructed from tree ring, ice core and other paleoclimatic data using statistical methods that link the proxies to observed (instrumental) temperature data. The statistical methods are briefly discussed. Climate scientists use the proxy temperature reconstructions to show that global average temperatures remained constant for upwards of two millennia before rising dramatically beginning in the twentieth century – the temperature reconstructions effectively eliminate the Medieval Warm Period and the Little Ice Age or relegate them to local phenomena. This reconstruction became known as the hockey stick, with the long-run period of constant temperatures constituting the shaft and the recent dramatic upturn the blade of the stick. Along with a similar trend in the concentration of atmospheric carbon dioxide, the hockey stick is the key empirical evidence of global warming used by the IPCC. The criticism and defense of the hockey stick graph are discussed in detail, as are some of the other issues regarding the use of instrumental and proxy temperature reconstructions.

Given weak empirical evidence for global warming, climate scientists fall back on climate models to provide the strongest case for climate change. Although computer models of the atmosphere and oceans are solidly grounded in physics, there remains too much that is arbitrary. It is necessary to provide a path of future carbon dioxide emissions before climate models can forecast a future climate scenario. Emission scenarios rely on projections of population and income growth, convergence of per capita incomes between rich and poor countries, technological change, resource availability, et cetera. Not only are the assessment models used to develop emission scenarios spotty, but they assume significant convergence in incomes; indeed, for scenarios that lead to the highest temperature forecasts, the least well off on Earth have per capita incomes that exceed those of rich countries today. Then four types of climate models are described, and a simple energy balance model is used to demonstrate the sensitivity of results to model parameters. Finally, the validity of climate models is considered in greater detail with answers provided to the following questions: How sensitive are numerical solutions of nonlinear models to changes in starting values, solution algorithms and so on? Do climate modelers follow standard guidelines for making forecasts? Do predictions from climate models accord with observation?

Surprisingly, there are many alternative explanations for observed changes in climate. In this chapter, these are categorized by whether they are cosmological in origin or not. Non-cosmological explanations include ocean events that impact the Earth’s climate, such as the Pacific Decadal Oscillation, El Niño and Atlantic Multi-decadal Oscillation. The feedback effect of CO₂ warming on cloud formation is also important, as clouds reflect solar radiation back to space, which increases the Earth’s albedo and lowers global temperatures. Although cloud formation is a complex process that is not considered in climate models, the feedback effect due to water vapor (the most important greenhouse gas) is much diminished by clouds. Of the cosmological explanations considered in this chapter, those related to the sun are most important. Solar cycles impact the amount of radiation reaching Earth – the energy balance that affects temperatures. But the sun’s magnetic field also shields the Earth from cosmic rays that affect cloud formation – a reduction in the magnetic field has been shown to promote cloud formation, thereby cooling the globe. Also discussed in this chapter is the politicization of both climate science research (as found in the so-called climategate e-mails) and the IPCC process.

This chapter constitutes a survey of economic measurement and social cost-benefit analysis. Economic analysis employs many of the same criteria as financial analysis to determine whether a project or activity is worth undertaking – net present value (NPV), the benefit-benefit ratio (B/C) and internal rate of return (IRR). The main difference relates to what is counted. Economists measure net benefits as surpluses, namely, consumer surplus, producer surplus (or quasi-rent), and differential and scarcity rents. These measures are described in detail, as are techniques (e.g., hedonic pricing, contingent valuation) for measuring non-market or environmental costs and benefits that accrue to citizens and need to be included in a social evaluation of a policy or project. As discussed in this chapter, environmental costs and benefits can be significant and their measurement controversial, and sometimes incorrectly applied. Since costs are incurred and benefits accrue at different times, an aggregation of costs and benefits requires that they be discounted to the present period (or compounded to a common future time) using a discount rate. The controversy as to which discount rate (or rates) is most appropriate to use is examined. Finally, the precautionary principle for addressing extreme events and the possibility of irreversibility is discussed; indeed, a precautionary approach is evident in some cost-benefit analyses of anthropogenic global warming through assumptions of an extremely low discount rate, a high probability of catastrophic future damages, and very low costs of immediate mitigation (as discussed further in Chap.​ 7).

Damages avoided – the principal benefit of mitigating climate change – are investigated in this chapter, particularly the potential adverse impacts on the primary sectors, biodiversity and human health. A review of studies indicates that climate change is unlikely to have much impact on agriculture and forestry; projected climate change will increase productivity in some regions while reducing it in others, leading to a redistribution of land rents with little impact on overall output. When CO₂ fertilization is taken into account, there might even be an overall increase in primary sector productivity that results in more undisturbed land, thus protecting biodiversity. Other findings in this chapter also run counter to current shibboleths: The biggest threat to polar bears is hunting, not climate change; current trends in Arctic ice extent are not without historical precedent; sea level rise is not an imminent threat; extreme weather events are not increasing; malaria is not only a tropical disease; and human health is a function of income, not climate, with bottom-up models using UN data predicting that death rates from almost all causes will be lower with projected global warming than without it. Meanwhile, integrated assessment models (IAMs) simply assume damages are an arbitrary function of temperature; upon balancing discounted costs and benefits, IAMs can be used to find an optimal path (usually of a carbon tax or emissions cap) for mitigating climate change. It is shown that different assumptions regarding damages, the discount rate, and/or the probability of catastrophic damage can be used to justify completely different policies for addressing global warming. Therefore, a carbon tax that is contingent on the temperature in the troposphere above the tropics – where the earliest indication of global warming is predicted to occur – is considered to be the preferred policy strategy as it should appeal to global warming proponents and skeptics alike. Finally, the Kaya identity is used to demonstrate the policy dilemma that decision makers face in reducing CO₂ emissions.

What policy instruments are available to governments wishing to mitigate climate change by reducing greenhouse gas emissions? What role can and should government play? How effective is government action likely to be in reducing emissions and mitigating climate change? These are the subjects of this chapter. One concern is that government intervention to correct the market failure associated with global emissions of greenhouse gases leads to policy failure that worsens rather than helps the situation. The strengths and weaknesses of the main instruments in the policy – regulation, carbon taxes, subsidies and emissions trading – are examined in detail. While mandates are regularly employed, market instruments (taxes and cap-and-trade) are shown to be more efficient. With respect to emissions trading, corruption can be endemic because of potential windfalls from accessing grandfathered permits, from profits accruing to financial intermediaries, and from sale of dubious certificates or carbon offsets. The European Union’s Emissions Trading System, failed efforts by the U.S. Congress to agree on carbon legislation, and other cases are discussed. Regulation and subsidies play a dominant role, and are often justified on the grounds that they create green jobs; however, mandates and subsidies have resulted in policy failure, high costs to the economy, fewer and not greater numbers of jobs, and little in the way of reduced emissions of greenhouse gases. Evidence provided in the chapter indicates that there is little appetite among the public for mitigating climate change if the costs of doing so are What policy instruments are available to governments wishing to mitigate climate change by reducing greenhouse gas emissions? What role can and should government play? How effective is government action likely to be in reducing emissions and mitigating climate change? These are the subjects of this chapter. One concern is that government intervention to correct the market failure associated with global emissions of greenhouse gases leads to policy failure that worsens rather than helps the situation. The strengths and weaknesses of the main instruments in the policy – regulation, carbon taxes, subsidies and emissions trading – are examined in detail. While mandates are regularly employed, market instruments (taxes and cap-and-trade) are shown to be more efficient. With respect to emissions trading, corruption can be endemic because of potential windfalls from accessing grandfathered permits, from profits accruing to financial intermediaries, and from sale of dubious certificates or carbon offsets. The European Union’s Emissions Trading System, failed efforts by the U.S. Congress to agree on carbon legislation, and other cases are discussed. Regulation and subsidies play a dominant role, and are often justified on the grounds that they create green jobs; however, mandates and subsidies have resulted in policy failure, high costs to the economy, fewer and not greater numbers of jobs, and little in the way of reduced emissions of greenhouse gases. Evidence provided in the chapter indicates that there is little appetite among the public for mitigating climate change if the costs of doing so are $1,000 or more; surveys of policy experts are even less optimistic in this regard.,000 or more; surveys of policy experts are even less optimistic in this regard.

As noted in previous chapters, it is not easy to reduce carbon dioxide emissions – it is technically difficult and the public is willing to pay too little to do so. As a result, governments have looked to land use, land-use change and forestry (LULUCF) activities as a means of removing CO₂ from the atmosphere and sequestering it in terrestrial carbon sinks. This chapter considers economic issues related to, among others, discounting of carbon, questions pertaining to additionality and leakage, transaction costs, the process of certifying carbon offset credits, governance, and corruption. Available data suggest that, compared to emissions reductions, LULUCF activities are a costly alternative for mitigating climate change, although forestry activities in some regions might constitute an exception. Carbon sequestration and its costs are examined over a number of forest rotations encompassing 240 years; costs and carbon uptake depend on tree species, growth rates, the post-harvest use of fiber, and the discount rate. As shown in this chapter, tree-planting activities can be used to earn certified emission reduction (CER) credits under Kyoto’s Clean Development Mechanism, but the approach used to determine the CER differs from the actual carbon flux. Finally, although currently not permitted under Kyoto, activities that Reduce Emissions from Deforestation and forest Degradation (REDD) are being promoted as eligible CER credits. This effort has gone even further, however, in the attempt to link the UN’s Framework Convention on Climate Change (FCCC) and the Convention on Biological Conservation – the definition of REDD credits has been extended to include sustainable management of forests, forest conservation and the enhancement of forest carbon stocks, collectively known as REDD+.

Fossil fuels account for more than three-quarters of global energy consumption with another 10 % or more coming from renewable and waste sources that emit carbon dioxide. Energy consumption is projected to grow by some 50 % in the next quarter century, with the majority of this coming from sources that emit CO₂. While renewable sources of energy will play a greater role in the future, economic development will necessarily continue to rely on abundant and cheap fossil fuels, particularly coal and natural gas. In an era where climate change dominates the energy agenda, the prospects for expanding the use of CO₂-emitting sources of energy (oil, coal, natural gas) and relying more on hydroelectric, solar, wind, geothermal, biomass and nuclear sources are examined. Economic policies in many jurisdictions use a combination of mandates and subsidies to reduce overall reliance on fossil fuels and/or promote generation of electricity from renewable sources. Lessons from biofuel programs, and an economic analysis of feed-in tariffs for electricity, indicate that they are not only expensive but generally ineffective. Despite the setback caused by the near meltdown of the Fukushima nuclear power plant, it is argued that nuclear energy is a safe alternative to many other forms of energy, and that, given the rebound effect associated with conservation and physical limits to the use of renewable energy, a natural gas-to-nuclear scenario might not be unrealistic future course of action.

The importance of reliable electricity to the economy continues to expand, and much of the focus of climate policy is on the generation of electricity from non-fossil fuel, non-nuclear sources. Global electricity use is expected to increase dramatically as a result of the information age, policies to electrify vehicles, and rapid economic growth in China, India, Brazil and other developing countries. However, with the exception of hydro and biomass sources, alternative renewable sources of energy are variable or intermittent. This imposes additional costs on electrical grids and creates problems for managing them. In this chapter, the operation of electricity markets (grids) is described, as is the effect on electricity markets when an intermittent source of power is introduced into a grid. Because the largest increase in renewable generating capacity has come from wind turbines, wind power is used to illustrate the challenge of increasing reliance on intermittent energy sources. The need for extra reserves is discussed, and a grid model is used to evaluate the economic costs of integrating wind power into an existing electricity grid. If the system operator can invest or decommission generating assets and a carbon tax is employed, wind generation will not entirely replace coal until the tax becomes exorbitant; however, if investment in nuclear power is permitted, the analysis in this chapter indicates wind will have no role to play. Wind energy will provide an important contribution to future electricity supply, but its role will be limited by lack of storage and all the more so in regions lacking access to hydro reservoirs.

In this concluding chapter, the main issues developed throughout the book are briefly reviewed. The concern about climate change is then discussed in broader terms, viewing it in much the same way as earlier concerns about resource scarcity, population growth and the potential adverse impact that humans have on the environment. From this perspective, global warming is an environmental issue and much less a scientific one. The only real difference would seem to be the fact that it has the backing of the United Nations. UN involvement is a mixed blessing, because the UN must reconcile its climate agenda with its economic development goals, including its Millennium Development Goal (to halve the number of people living below In this concluding chapter, the main issues developed throughout the book are briefly reviewed. The concern about climate change is then discussed in broader terms, viewing it in much the same way as earlier concerns about resource scarcity, population growth and the potential adverse impact that humans have on the environment. From this perspective, global warming is an environmental issue and much less a scientific one. The only real difference would seem to be the fact that it has the backing of the United Nations. UN involvement is a mixed blessing, because the UN must reconcile its climate agenda with its economic development goals, including its Millennium Development Goal (to halve the number of people living below $1.25 per day by 2015). Economic development on that scale cannot occur without vast amounts of high-quality, high-density energy that is only available from fossil fuels. Rich countries have agreed to facilitate convergence of incomes in poor countries to those of the rich, but they have also agreed to de-carbonize the global economy. These objectives are incompatible, as illustrated by the rise in CO₂ emissions that accompanied economic growth in China. Mitigation is too costly, imposes a large burden on the poor, and is unlikely to prevent global warming – the concentration of CO₂ in the atmospheric keeps increasing and human emissions show no sign of slowing. Therefore, climate engineering and adaptation are preferred to mitigation, particularly since the science is less than adequate for making firm statements about the Earth’s future climate..25 per day by 2015). Economic development on that scale cannot occur without vast amounts of high-quality, high-density energy that is only available from fossil fuels. Rich countries have agreed to facilitate convergence of incomes in poor countries to those of the rich, but they have also agreed to de-carbonize the global economy. These objectives are incompatible, as illustrated by the rise in CO₂ emissions that accompanied economic growth in China. Mitigation is too costly, imposes a large burden on the poor, and is unlikely to prevent global warming – the concentration of CO₂ in the atmospheric keeps increasing and human emissions show no sign of slowing. Therefore, climate engineering and adaptation are preferred to mitigation, particularly since the science is less than adequate for making firm statements about the Earth’s future climate.