6. Climate: The Ultimate Resource?

The final chapter treats what might be considered a “new” or unconventional resource: global climate, which obviously affects the environment and also underlies the productivity of renewable resources and agriculture. The starting point is a brief discussion of a perceived disconnect between natural scientists and economists on the importance of climate change, with the former believing it to be perhaps the most important environmental problem of the century, requiring prompt and dramatic action and the latter seeing it in less compelling terms—though not all economists are in agreement here. Recent projections by the Intergovernmental Panel on Climate Change (IPCC) are given, with a discussion suggesting these are likely to be conservative in a variety of ways, including neglect of methane feedback, and for a variety of reasons, including the need for consensus among the parties. A discussion of potential impacts focuses on some often neglected and potentially catastrophic, due to tipping points and extreme events, which can in turn lead to major loss of capital (ports, buildings, coastal agriculture, and so on) not well captured in policy models. Given the time scales involved, discounting is of course key. As considered here, the issue boils down to the choice of how the pure (social) rate of time preference in the Ramsey equation should be specified. Two schools of thought are identified. One argues that it is an ethical choice, reflecting relative weights of different generations, and thus exogenous to the economic problem (though this is consistent, in the equation, with a positive discount rate even if the pure rate of time preference is zero). The other school argues that the rate of time preference must be consistent with observed rates of return on investment in private capital markets. Closely related to discounting is the topic of irreversibility, since the world will be locked into a changed climate and its consequences, such as rising sea levels, essentially forever on human time scales. Again there is a split between (some) economists and climate scientists, with the former pointing out that investment in new energy sources and facilities is also irreversible, and might dominate under certain circumstances. The discussion here focuses on a comparison of time scales associated with the two types of irreversibility. Finally, implications for policy are briefly discussed, including the advantages of a carbon tax, but also a potential problem: to achieve a desired objective the tax might have to be unrealistically high. In this case it might be supplemented by a negative tax in the form of a tax credit on energy conservation and renewables, though this can be distortionary (favors one energy source or technology over another). Some attention is also given to the role of public investment in basic research into innovative technologies that do not involve the emission of greenhouse gases.