Economics and the ‘greenhouse effect’

E C O N O M I C S A N D T H E ' G R E E N H O U S E E F F E C T '

C H R I S T O P H E R G R E E N Department of Economics and Centre for Climate and Global Change Research, McGill University, Montreal, Quebec, H3A 2T7, Canada

Abstract. There is growing scientific and public concern that increasing concentrations of greenhouse gases in the atmosphere will produce global warming and other climatic changes. Although economic activity is the main source of greenhouse gas emissions, information and incentive problems make it difficult to trans- late concern about global warming into economic behaviour and policy conducive to reducing emissions. The paper considers a set of near term (carbon tax), intermediate term (afforestation, energy efficiency) and long term (new non-fossil fuel technologies) strategies for reducing CO 2 in the atmosphere. Each strategy has useful attributes, but shortcomings or limitations too. While the near term and intermediate term strategies can slow and perhaps reverse the growth of CO 2 emissions, only a successful long term strategy of fostering the development of some promising non-fossil fuel technologies, such as solar and solar-hydrogen, can eventually halt the build-up of CO2 in the atmosphere. Moreover, public investment in the development of new non-fossil fuel technologies would largely obviate the information and incentive problems that currently stand in the way of an economically viable greenhouse policy.

Introduction

There is growing scientific and public concern that global warming and other attendant climatic changes will occur as a result of increasing concentrations of greenhouse gases (GHG's) in the atmosphere. Greenhouse gases, which include carbon dioxide (CO2) , methane (CH4), nitrous oxide (N20) and some chlorofluorocar- bons (CFC-11 and CFC-12), are translucent to incoming solar radiation but absorb heat that radiates from the Earth's surface, returning some of it earthward, thereby tending to warm the climate (Mitchell, 1989; Firor, 1990).

Emissions of CO2, the main GHG, are chiefly the result of burning fossil fuels. The growth in the use of fossil fuels is closely related to the growth of economic activity, worldwide. Since gross domestic product (GDP), a crude measure of each nation's economic activity, is expected to continue to rise, albeit at modest rates, in most countries, so too will emissions into (a flow) and the concentration (a stock) of carbon dioxide in the atmosphere.

The economy plays a dual role in the greenhouse picture. Increasing economic activity, which depends heavily on energy produced by fossil fuels, is the chief cause of rising atmospheric concentrations of carbon dioxide, as well as other greenhouse gases such as N 2 O and CFC's. But it is also predictable that if rising concentrations of greenhouse gases lead to climatic changes, economic activity, particularly as it relates to agriculture, forestry, health and leisure industries, will be

Climatic Change 22: 265-291, 1992. �9 1992 Kluwer Academic Publishers. Printed in the Netherlands.

266 Chris topher Green

affected. Thus the economy enters as both 'cause' and as 'effect' in the greenhouse picture.

Unfortunately, the statement that economic activity is likely both to cause and be affected by climate change has little economic content. It tells us virtually nothing about the likely behaviour of economic agents (i.e., decision makers, whether individuals, families, firms or governments), nor does it indicate the factors which con- strain their decisions. The difficulty of moving from scientific considerations of the greenhouse effect to considerations of economic behaviour and public policy are twofold. On the one hand there is an information problem that gives rise to substantial uncertainty. 1 On the other hand there is an incentive problem arising out of the externality, global, and intergenerational characteristics of the greenhouse effect. This paper is intended as a tentative exploration of the information and incentive problems as they relate to the predictions of global warming and the implications for economic policy. The paper also explores the implications of the link between energy and growth for the choice of an appropriate energy policy.

The Information Problem

On what is the expectation of global warming based? Numerous general circulation models (GCM's), representing the state of the art in the application of computers to atmospheric and oceanic science, now predict that a doubling of CO2 concentrations in the atmosphere will raise the global mean temperature from 1.5 ~ to 4.5 ~ (IPCC, 1990). There is now an apparent consensus among climate modelers that a rise of 2.5 ~ is the most likely outcome of a doubling of CO 2 that may occur in the next 50 to 75 years. A rise of 2.5 ~ can be better understood by comparing it to the 5 ~ rise since the 'peak' of the last ice age, about 18 000 years ago. For example, a rise of 2.5 ~ during the next century represents an average increase of 0.25 ~ per decade compared to 0.004 ~ rise per decade from the peak of the last 'ice age' to the Postglacial 'Climate Optimum' which occurred about 6000-8000 years ago.

On paper, the predictions of the GCM's should evoke a widespread concern and reaction, including one from economic policy-makers. (See Schneider, 1989.) In reality, the predictions of the GCM's mask important information problems. For example, the treatment of clouds, oceans, and ice in the models is still rather crude and is based on scientific inquiry still in its infancy. Although there is little dispute that, on the whole, the sign of the feedback is positive, the size of the feedback produced by greenhouse warming remains highly uncertain. (See, for example, Dickinson, 1989.) Particularly controversial is the role of clouds, the treatment of

Note that there are at least three layers of uncertainty related to the predict ion of global warming. There is uncer ta inty about the event - at the global level. There is even greater uncer ta inty about its local or regional manifestat ion. Finally, there is uncertainty about the nature of its economic impact - about the extent of damage if any.

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Economics and the 'Greenhouse Effect' 267

which in GCM's accounts for much of the difference in their predictions (Cess et al., 1989).

Equally complex is the transient as opposed to the equilibrium response due to a doubling of CO 2 concentrations. The rate at which warming takes place not only depends on the size of the predicted equilibrium response, but also on the factors (including oceans) which can produce substantial lags in that response (Washington and Meehl, 1989; Stouffer et al., 1989). Just because the concentration of GHG's in the atmosphere is expected to double (relative to preindustrial levels) by 2025, and a doubling is predicted to raise the global mean temperature by, say, 2.5 ~ does not mean that the global mean temperature is predicted to be 2.5 ~ higher in 2025. Little-understood lags, especially those attributable to the complex impact of the oceans on the atmosphere, may drive a substantial wedge between the predicted equilibrium response and the actual time path taken.

These unknowns produce a high degree of scientific 'uncertainty' about the magnitude and rate of warming, and even a few doubters about whether global warming will occur. (See for example Lindzen, 1990; Marshall Institute, 1989.) At the same time, there is a natural inclination among decision makers to seek 'evidence' of change. This is especially the case where decisions involve substantial costs as well as benefits. But, as yet, the desire for hard evidence remains unrequited. The lack of concrete evidence of global warming requires some explanation.

We can begin by asking three questions (the third question has two parts): 1. Has the concentration of greenhouse gases in the atmosphere risen? 2. Is the global mean temperature rising - i.e., is it tending upward? 3. Does the concentration of greenhouse gases in the atmosphere influence tem-

perature? a) as a theoretical proposition? b) as an empirical proposition - i.e. has the (rising) concentration of CO2 and

methane in the atmosphere influenced the global mean temperature? The first question is easily answered in the affirmative. Since 1958 continuous

and accurate monitoring of atmospheric concentrations of CO 2 has been made. The best known record is Keeling's measurements taken at Mauna Loa in Hawaii, which exhibits a continuous year to year rise. Within each year, there is a well defined cycle reflecting the effects of photosynthesis in the spring and respiration in fall. Readings taken in the Antarctic, northern Canada and Alaska also show a continuous rise in CO2, although the amplitude of the annual cycle is much smaller in vegetation-poor Antarctica, situated as it is in the ocean-dominated southern hemisphere. There has also been a dramatic rise in the atmospheric concentration of methane. The sharp rise in methane, which per molecule has twenty times the heat trapping capacity of CO2, but whose atmospheric concentration and lifetime is only a small fraction of that of CO 2, is not quite as closely linked to economic activity as is the rise in CO 2 .

The answer to the second question is somewhat more problematic. Figure 1 presents a series of annual global mean temperatures over the last century. The series


268 Christopher Green

C o.... ILl

0.4 0.2

0.0

,Z- < I 0 w m-0.2

<-0 .4 w

-0.6 w 1870 1890 1910 1930 1950 1970 1990

YEAR

Fig. 1. Global-Mean Combined Land-Air and Sea-Surface Temperatures, 1861-1989, relative to the average for 1951-1980. Bars indicate annual average; solid line indicates 5 year running average. Source: IPCC (1990: XXIX, Figure 11). The IPCC draws heavily on global temperature series con- structed by Hansen and Lebedeff (1987) and Jones et al. (1986).

shows a rise in the global mean temperature between 1890 and 1940, a levelling off, or even a decline during the next three decades, and a rise since 1975. The five or six warmest years on record have occurred since 1980.

The temperature record does suggest an affirmative answer to the second question. Global mean temperatures have risen over the past century by about 0.5 "C. 2 But is there a trend? Statistical analysis of the global temperature series employed by Hansen and Lebedeff (1987) indicates that the series does appear to contain a significant trend, which is better modelled by linear deterministic terms than by an unstable root in an autoregressive process leading to a stochastic trend (Galbraith and Green, 1991). However, the long term variability in temperatures, that appears on century as well as decadal and annual time scales, makes it much more difficult to establish whether the rise is part of a very long term departure from the average temperatures experienced over the past few millennia, much less what is the 'cause' of such a trend (Jones and Wigley, 1990). Nor does the cluster of warmest years on record, that has occurred in the last decade, provide confirmatory evidence that greenhouse warming has begun (Solow and Broadus, 1989).

Even the century-long trend in global temperatures can stir debate. Particularly perplexing is the period 1940-70. Is the 1940-70 period an indication that the whole 100 year record is nothing more than a reflection of interdecadal variability or variability on a century scale? Note the three peaks, around 1900, 1940, and in the 1980's. Or is the 1940-70 period to be explained in terms either of 'white noise'variability around, or 'chaotic' behaviour embedded in, a rising trend? Final- ly, could the 1940-70 period be explained, at least in part, by anthropogenic activity that produced atmospheric chemical changes or reactions which tended to

2 After taking account of the urban heat-island effect.



dampen or offset the impact of increases in greenhouse gases? 3 But then why the return to warming in the 1980's? Climate science has, as yet, no reasonably defini- tive answers to these questions. Thus, while the second question, whether the global mean temperature is tending upward, can be given an affirmative answer, there are important caveats.

The third question, the influence of atmospheric concentrations of CO2 (and other greenhouse gases) on the global mean temperature, must be divided into two sub-questions. The first sub-question is theoretical in nature and (implicitly) hedged with the usual ceteris paribus assumptions on which most scientific investi- gation is based. With this limitation in mind, question 3(a) can be definitively answered in the affirmative: the heattrapping and absorbing property of CO 2 (and the other trace gases mentioned above) is one of the longest established and best understood principles in atmospheric physics. On this score there is no controversy.

The second sub-question is another matter altogether. There are, as yet, numerous roadblocks to empirically establishing a (causal) link between increases in CO2 and other greenhouse gases, and rising temperature. For one thing, once one moves from theory to empirical evidence, the ceteris paribus assumptions no longer apply. The climate system is tremendously complex, with numerous, typically nonlinear, feedbacks, some of which may be negative. Although climate scientists are agreed that very large (manifold) increases in the atmospheric concentration of GHG's must raise surface temperatures substantially (an extreme example is Venus), there is much less certainty about the magnitude, if not the sign, of relatively small increases in the atmospheric concentration of greenhouse gases. Moreover, empirical analysis is complicated by unknown and potentially long lags (in good part attributable to the role of oceans in storing heat as well as a sink for CO 2) between the build-up of greenhouse gases and changes in atmospheric temperatures. The problem is akin to that in economics where 'partial equilibrium' analysis may not give much insight into the properties of 'general equilibrium'.

But even if the 'general equilibrium' properties associated with the build-up of greenhouse gases were well-established, it is, as yet, difficult to establish an empirical relationship between the rising concentration of CO 2 and other greenhouse gases in the atmosphere and the observed global mean temperature. There are two main reasons why this is so. First, the interannual (as opposed to intraseasonal) and interdecadal variability of temperature has made even the establishment of a long term temperature trend a matter of debate, as discussed above. For example, some

Kondrateyev (1988) has suggested that above ground nuclear testing, which mainly occurred prior to the 1963 Test Ban treaty, and increasing industrialization caused nitrogen molecules, in the form of nitrogen dioxide (NO2) to enter the stratosphere where they formed aerosols which tend to reflect back some incoming solar radiation. There is also some suggestion (Hofmann, 1990) that increasing stratospheric sulphuric acid aerosols may be playing a similar (reflective) role. One possible source of the increase in stratospheric sulphur is carbonyl sulfide. A recent study (Melillo and Steudler, 1989) indicates that nitrogen fertilizers can produce emissions of carbonyl sulphide into the atmosphere.



of the interannual variability is associated with E1 Nino Southern Oscillation (ENSO) events which have been shown to temporarily influence global temperatures (Mysak and Lin, 1990). Thus, it is not yet certain whether the dependent variable is systematically changing over time. But even if there were certainty that temperature is on a long term upward trend, a deeper problem looms. Green- house gases are not the only factors influencing the climate. Other factors (known and unknown) may also have influenced global temperature, in a more or less sys- tematic, but still little understood manner. As a result, determining whether the CO 2-global mean temperature relationship is causal, or simply a matter of correla- tion remains a ticklish statistical problem. For example, Kuo et al. (1990) using monthly data on CO 2 and global mean temperature for the period 1958-1987 found a 'coherence' between CO2 concentrations and global mean temperatures. They concluded by stating that the levels of CO2 lagged temperature by five months. The implied direction of causation is contrary to expectations. However, the existence of the lag, which is less than one year, may reflect no more than the well-known intra-annual cycle of photosynthesis and respiration. 4 The Kuo et al.

paper neither establishes a causal relationship between CO2 and global mean temperature, nor provides a refutation of a secular, causal relationship running from

CO 2 to global temperature. In sum, rising levels of CO2, while theoretically of great importance for tempera-

ture and climate, have yet to be shown, because of interannual and interdecadal variability, to have clear links to the observed temperature record. As a result, climate scientists are hesitant to state that greenhouse warming has begun. There are even some scientists who question whether it will begin, although there is an apparent consensus among most that it will. The present scientific uncertainty necessarily implies economic uncertainty. Not surprisingly, economic agents have yet to begin to respond to warnings that the twenty-first century may well be, in Schneider's (1990) words, the 'greenhouse century'. 5

The Incentive Problem

Even if the build-up of greenhouse gases in the atmosphere makes substantial global warming certain, there remain important impediments to translating this

4 Another possible explanation for increasing CO2 preceded by increasing temperature, which would operate on less than a one year lag, is the oxidation of peat. 5 My colleague Seamus Hogan has suggested another reason why economic agents may wish to pro- ceed slowly, if at all, until clear evidence of greenhouse warming accumulates. To take costly action on the basis of a theoretical prediction about a truly uncertain (lacks a known probability distribution) and never-before experienced event implies that if the action is effective in preventing significant warming, we will never know whether in fact the action was necessary in the first place. (We have here a social scientific analogy to the Heisenberg principle: any action affects the experiment you really want to do.) In other words, action may inadvertently suppress information that might be important in taking future decisions. It could, perversely, lead to ignoring future scientific predictions of probable harm in much the same way as the child who cries 'wolf' too often is ignored.



certainty into current action. The global and future nature of greenhouse warming create incentives for current inaction. Because the sources of greenhouse gas emissions are now so widely distributed across the planet, the solutions as well as the problem are now global. No one country, much less an individual can, by itself, stem the increasing concentration of greenhouse gases in the atmosphere. Collec- tive action is needed: but collective action is always difficult to achieve. It is made that much more difficult by the fact of many actors as well as the uneven distribution of the costs of controlling emissions. The problem is further accentuated by the likelihood that there will be 'winners' as well as 'losers' from global warming. Moreover, even if (globally) collective behaviour were possible, the long term nature of the benefits are likely to make the costs of taking effective up-front action appear prohibitive. These issues need to be probed in greater depth.

a. The Externality-Free Rider Problem

Greenhouse warming is the ultimate externality. It may give rise to the problem of 'free riding' whenever there are efforts to internalize externalities. Greenhouse gases emitted as a result of activities in one country are quickly dispersed over the globe. The effect of greenhouse gas emissions is global warming, with no specific relationship to the climate of the emitting country. Moreover, no one country accounts for the lion's share of total emissions. The U.S., which leads the world in energy consumption, accounts for only a little over a fifth of greenhouse gas emissions, a percentage which is projected to drop to an eighth by the end of the first quarter of the twenty-first century. Thus even the world's leading economy may have an incentive to act as a 'free-rider', in the absence of explicit and binding (because enforceable) co-operative behaviour.

Even if it could be shown that the U.S. will bear heavy costs from greenhouse warming, there is still little incentive for the U.S. (or even all OECD countries) to act unilaterally. Unilateral action by the U.S. could require substantial costs (as will be indicated below) with little impact on greenhouse warming, unless the U.S. is followed by all major blocs, including Eastern European and the developing countries. 6 What is true of the U.S. is even more true for other, smaller economies. 7 Finally, even if there were intergovernmental agreement on collective action, en-

~ Industrial countries, including the East European and the Soviet Union ones, which currently account for about 70% of greenhouse gas emissions emanating from fossil fuel use, are expected to account for less than 50% by 2100. Developing countries will increasingly account for additional emissions of greenhouse gases. See Manne and Richels (1990). Moreover, the twenty most highly developed countries now only account for about 43% of CO 2 emissions from fossil fuel use, and only 29% of all CO 2 emissions including that from changing land use and deforestation (World Resources Insti- tute, 1990: 348-49). 7 Yet some European countries, among them Norway, Sweden and the Netherlands, have initiated policies to reduce CO2 emissions by up to 20%. For an analysis of various means of structuring a climate agreement with an assessment of the likely effectiveness of each means in gaining wide accept- ance, see Victor (1991).


272 Chr is topher Green

forcement of the agreement would require expensive and difficult-to-achieve monitoring of greenhouse emissions. This very fact would create incentives for violation of the agreement, particularly among countries who would bear a disproportionate share of the costs in terms of reduced economic growth. Among these are the East European and developing countries, whose hopes of reducing the gap between their own and developed country per capita incomes rest heavily on the growth of relatively energy-intensive economic activities.

b. The Intergenerational Problem

Greenhouse warming is a long run problem. In economic parlance it applies to the 'very long run', a time period, whether logical or historical, about which economists have relatively little to say. In fact, economists have no theory of the 'very long run'. It is a period over which nothing is held constant, including technology - the 'state of the arts'. Since the pace and nature of technological change are notoriously difficult, if not impossible, to predict, economic theorizing about the very long run is of

limited use. Economists have, of course, made projections into the very long run, making

whatever assumptions about changing economic conditions and constraints seem reasonable. However, whenever economic valuations come into play, another 'very long run' problem appears. Because of the tendency for individuals to prefer satis- faction now rather than in the (distant) future, economists apply discount rates to future values. The result is to reduce the value of benefits and costs incurred in the (distant) future to (near) zero. Since the costs of stemming greenhouse warming tend to be up-front, relatively current costs, while the benefits from a successful action will only occur in the long run, discounting disproportionately reduces the present value of the benefits relative to the costs. In benefit-cost terms, discounting tends to make the present value of mainly future benefits seem small relative to the value of the mainly current costs. On paper, then, policies to stem future greenhouse warming may not appear to be (net) economically beneficial to the current generation who must bear much of the costs of taking effective action. 8

The intergenerational nature of the global warming problem creates incentives for inaction. On economic 'efficiency' grounds current action may not be warranted if the ratio of (discounted) benefit to cost is less than one. One might argue, however, that 'equity' considerations ought to dominate 'efficiency' ones. But, if the present generation believes that future generations will be wealthier than our own, there may also be equity grounds for inaction. Only if the present generation believes that greenhouse warming will make future generations economically worse off than our own would there be an unambiguous case, on equity grounds, for taking action now. 9

8 Of course, it is future generat ions which s tand to suffer the consequences of inaction. 9 This a s sumes that the present generat ion would be better off even after nett ing out the costs of policy

Climatic Change Dec ember 1992


Economists qua economists have never been comfortable dealing with matters of equity, the more so if they are intergenerational rather than intragenerational. No single, or simple, decision-rule, whether Utilitarian, Rawlsian, or Paretian, is either widely accepted or is fully capable of handling issues of intergenerational equity. 1~ But even if there were such a rule another problem arises. To decide the equity issue requires having adequate information about the probable economic impact of global warming. But this requires, in turn, knowledge of the regional or local climate changes attendant on global warming. However, regional or local changes in climate are generally less predictable than global warming itself. Because considerations of intergenerational equity are intimately bound up with the little understood and less predictable 'local' consequences of climate change, there is an additional cause for indecisiveness among the present generation.

Stabilizing Greenhouse Emissions

Before one begins to assess policy alternatives (including the 'policy' of doing nothing), it is useful to ask what it would take to stabilize the concentration of greenhouse gases in the atmosphere or, more modestly, to stabilize or reduce world wide emissions of CO 2 by a given amount. Two recent studies provide useful information. One is a Report to Congress by the U.S. Environmental Protection Agency (EPA) (1989); the other is a paper by Alan S. Manne and Richard Richels (1991)."

Given the substantial atmospheric life of greenhouse gases (ranging from four years for methane to a century or more for CO2, N 2 O, and some CFC's) stabilizing greenhouse gas emissions at current levels will not stabilize their concentrations in the atmosphere. The EPA report (cited above) estimates, for example, that if CO2 emissions remained constant at 1985 levels, the concentration of CO2 in the atmosphere would reach 440-500 ppm by 2100, compared with approximately 350 in 1985. The EPA estimates that to stabilize atmospheric concentrations of greenhouse gases at current levels would require emission reductions of 50-80% for CO2, 10-20% for methane, 80-85% for nitrous oxide and 75-100% for CFC's. Clearly, stabilizing atmospheric concentrations of greenhouse gases would require either a tremendous global reduction in economic activity or the sudden discovery of a versatile, easily obtainable, quickly installable, and inexpensive fossil fuel substitute for generating energy. Neither are easily imaginable much less even remotely likely occurrences.

The Manne and Richels paper focuses on the implications of setting a target of a

action to stem greenhouse warming. Incidentally, taking action now need not imply that greenhouse emissions will be (substantially) reduced. Alternatively the present generation could continue emitting greenhouse gases at current rates while making arrangements (perhaps via a 'trust fund' or increased capital stock) to compensate future generations. See Spash and d~Arge (1989). ~0 Roughly, the Utilitarian and Paretian decision rules (social welfare functions - SWF) allow for positive discount rates while the Rawlsian SWF calls for a zero discount rate. (See Hanley, 1990). ~ Also see Manne and Richels, 1990.



20% reduction in worldwide emissions of C02 o12 Manne and Richels employ a model called 'Global 2100" a macroanalytic framework with a well developed energy sector. Global 2100 is based on parallel computations of energy demand and supply for the U.S.A. and four geo-political groupings: Other OECD, USSR- Eastern Europe, China, and rest of the world (ROW). The model is used to estimate the worldwide and blocwide growth of CO2 emissions in the absence of con- trols and then to estimate the impacts of rising energy costs over the 110 year period, 1990-2100, produced by policies aimed at reducing CO2 emissions. 13

The Manne-Richels model suggests that 'in the absence of an international agreement to limit economic growth, carbon emissions are likely to increase considerably, perhaps by a factor of four or more over the next century'. (Manne and Richels, 1991: 105-06.) Whether carbon emissions increase four-fold, or only three or two-fold, depends not only on the rate of economic growth, but on the rate of increase in energy efficiency and the availability of fossil fuel substitutes. In any event, the Global 2100 model implies that economic growth will bring with it a large rise in the atmospheric concentration of CO2.

Suppose there is an attempt to achieve a 20% reduction in worldwide emissions of CO 2 . A key issue is how the 20% cut would be achieved. As Manne and Richels point out, an across-the-board cut of twenty percent is unlikely to be acceptable, if for no other reason than that it would doom the hopes of the developing world of reducing international inequalities in per capita income. 14 If per capita income in-

~2 The final statement from the conference on 'The Changing Atmosphere', held in Toronto in June 1988 called for a 20% worldwide reduction of CO 2 emissions by the year 2005. 13 The Manne-Richels cost estimates are the subject of controversy and criticism (Schneider 1990: 303, 331). The Manne-Richels model suggests that the economic cost of reducing CO 2 emissions is substantial. Although Manne-Richels make no estimate of the benefits flowing from emission reduction, the substantial costs they estimate are likely to outweigh the prospective benefits, even without considering the current generation's discount rate. For example, Manne-Richels (1991: 97-99) estimate the cost of an emission reduction of 20% to be achieved by the year 2020 for the industrialized world and a ceiling equivalent to a doubling of CO 2 emissions by China and other developing countries. Manne and Richels estimate that for the USA to meet the 20% reduction target would mean about a 3.5% reduction in annual GDP by 2030. The estimated annual reduction in GDP is almost 5% for the Soviet Union and Eastern Europe, but only 1 to 2% for the more energy-efficient Other OECD countries. For China and the ROW the ceilings would only begin to bite after 2030. China would ex- perience annual GDP losses of 10% or more by the latter half of the 21st century, while the annual GDP loss for ROW would approach 5% by 2100. Moreover, this price tag, it should be understood, does n o t bring with it freedom from greenhouse warming, since it does not prevent nearly a doubling in the atmospheric concentration of CO2.

Because the Manne-Richels cost estimates are controversial, and may not be reliable, I will give them little weight. However, the Manne-Richels paper is, I believe, much more reliable where it is con- cerned with estimates of future levels of CO2 emissions under various scenarios. These estimates are useful in making a few salient textual points about the nature of the hurdles that must be overcome if the atmospheric concentration of CO 2 is to be stabilized. 14 Moreover, across-the-board reductions in emissions would have major effects on trade patterns, leading to large adjustment costs in addition to their impact on the level of GDP and the distribution of income. See J. Whalley and R. Wigle (1991a, 1991b) who use a computable general equilibrium model to estimate the incidepee of alternative forms of a carbon tax and what turn out to be large production, consumption and trade pattern effects of a 50 percent reduction in CO 2 emissions.



equalities are to be significantly reduced, developing countries will have to achieve substantially higher rates of economic growth than their already industrialized counterparts. To raise developing country per capita income and reduce per capita income inequalities while achieving a 20% worldwide reduction in emissions would require allowing the developing countries to increase their CO 2 emissions. If, for example, developing countries agreed to limit their CO 2 emissions to 200% of (i.e. double) their current levels, the developed countries would have to reduce their emissions by nearly 70% in order for the 20% worldwide reduction target to be met.

Because a twenty percent worldwide reduction in CO 2 emissions may be very difficult to achieve in the next few decades, Manne and Richels calculate what a more modest policy of carbon emission limits, one which sets a target of a 20% reduction for developed countries, a doubling or quadrupling for China and a doubling in other developing countries, would mean. They estimate that such a target would result in a 15-37% increase in emissions between 1990 and 2030, but no further increase in emissions thereafter. This more modest set of targets implies that global emissions would be only 25-30% of the level that would have been reached, by 2100, were there no international agreement to reduce emissions (Manne and Richels, 1991: 106). However, a policy which limits CO 2 emissions to 7.5-9 gigatons (compared to current emission levels in the 6-7 gigaton range) will not prevent a relatively rapid build-up of the atmospheric concentration of CO 2 . Certainly, the more modest set of targets would not prevent the atmospheric concentration of CO 2 from doubling over the next century. Stabilizing CO 2 concentration levels will be very difficult indeed.

Policy Alternatives: The Choice of a Strategy

There are various courses of action which could, in principle, slow down the growth of CO 2 emissions; sooner or later reduce the annual flow of emissions; and, if the reduction in emissions is sufficiently great, eventually (the timing here is almost certainly a matter of decades) stabilize the atmospheric concentration of CO 2. In this section, I shall sketch several courses of action or strategies. I somewhat arbitrarily classify these courses of action, or strategies, as 'near term', 'intermediate term', and (very) 'long term'. The strategies are not mutually exclusive; in fact, some or all may have complementary aspects, or they may stimulate the adoption of one another. The purpose of this section is not to assess the strategies in quantitative, cost-benefit terms. That would be a huge undertaking well beyond the scope or interest of the paper. 15 Rather, I will evaluate the strategies in a qualitative manner, giving attention to their workability - or even whether they are likely to do

~5 In fact, this is very difficult indeed, if the objective is to establish some widely accepted cost-benefit ratios. There is no agreement on how the benefits are to be valued or whe ther they should be discounted and there is no agreement on what is the correct model for est imating costs. For a herculean effort to assess the benefits and costs of some G H G reducing policies, see Nordhaus (1991a).

Climatic Change D e c e m b e r 1992


what they are intended to do. However, in the penultimate section of the paper, I briefly review some recent studies that attempt to say something about the costs and/or benefits of various levels of CO 2 or G H G emission reduction.

(a) Near Term Strategies

Near term strategies are those which act directly on the prices or quantities of CO 2 emitting sources. These include carbon taxes, CO 2 emission rights, programs to halt the destruction of tropical forests, and various command and control regulations on the use of carbon emitting sources. These strategies are defined here as 'near term' not because they are quickly and easily agreed upon (they are not), but rather because once agreed upon they can be relatively quickly implemented and can begin to have a substantial effect in a matter of a few years rather than a decade or more.

Of the 'near term' strategies, I shall focus on the proposal for a 'carbon tax' applied to each barrel (oil), cubic foot (natural gas), or tonne (coal) of fuel, in each case calibrated for the carbon content of the fuel. 16 A carbon tax is the most widely proposed strategy and the one economists are most likely to suggest; it requires less administrative and enforcement machinery than another favourite of many economists - tradeable pollution (in this case CO 2 emission) rights; and it avoids the well-known economic inefficiencies associated with command and control type regulations.

The attractiveness of a carbon tax resides in (a) its ease of administration; (b) the short and long term incentives it creates for consumer-users to conserve on the use of the taxed fuels and for producers to adopt nonfossil fuel alternatives; and (c) the revenues it raises, which can be efficiently employed to (i) reduce other taxes, (ii) reduce the deficit, (iii) subsidize the development of nonfossil fuel sources of energy, or (iv) pay for damages caused by fossil fuel pollution. Carbon taxes would also interact nicely with longer term strategies, by increasing the incentives to become more energy efficient or become less dependent on fossil fuels.

Thus, on paper, carbon taxes appear to have many desirable economic quali- ties. 17 Upon closer examination, however, the case for a carbon tax is not quite so

16 The tax would be applied to the fuel that gives rise to C O 2 emissions rather than to the actual COz emissions themselves. To tax the latter would require a system of monitoring far too complex and costly to merit serious consideration. Unfortunately, a tax on the fuel rather than on emissions themselves provides no inducement to develop and implement fossil-fuel using technologies which are capable of capturing the emissions before release into the atmosphere. Pearee (1991) presents a standard analysis of carbon taxes and a list of the many carbon tax studies and their results. ~7 There are, however, drawbacks. In addition to the political opposition to tax increases, there is the political response of the high cost end of the U.S. petroleum and coal industries, which a carbon tax is likely to eliminate. Moreover, large increases in energy prices could be a two-edged sword. Jorgenson (1986) has found a significant relationship between high energy prices and low productivity growth. In turn, Jorgenson (1990) and his associates have found that productivity growth is typically embodied in new capital goods which bear the fruits of technological progress. The implication is that high energy prices may retard investment which embodies productivity-enhancing technological change including



compelling. Certain characteristics of the world oil industry (and to a lesser extent, perhaps, the natural gas industry) suggest that the impact of a world wide tax levied on each barrel of oil (or each gallon of gasoline or fuel oil) consumed may have only limited impact on oil prices and thus on the quantity demanded. The key to under- standing what follows is to recognize that 60% of the world's known oil reserves (World Resources, 1990-91: 145, 316) and almost all of the world's supply of flush, easy to find, cheaply extracted oil lies in the Persian Gulf (PG), which, for a myriad of reasons, including its past participation in the OPEC oil cartel, supplied only about a fifth of the world's Pre-Gulf War requirements. To determine the impact of a carbon tax, we must examine how such a tax will affect the supply decisions of PG oil states.

For analytical purposes the world oil industry can be divided into the Persian Gulf (PG) and the rest of the world (ROW). (This highly oversimplified bifurcation can be modified to include in PG other OPEC members with supply capabilities similar to PG oil suppliers.) In panel (a) of Figure 2, it is assumed that the flush oil flowing from the huge PG reservoirs can be supplied at a long run marginal cost (in 1990 prices) of LMC. Long run supply of PG oil is perfectly elastic. However, in any given period PG supply is limited by the capacity of the relatively small number of PG oil wells. (Supply may be less than this maximum to the extent OPEC restric- tions actually bind.) Thus, initially, So is supplied per period by PG oil status. To this we may add the supply curve for ROW. SR is upward sloping, reflecting the increasing cost of tapping unconventional or difficult to access crude. The world oil supply curve, Sw, is simply the (horizontal) addition of S G and S R.

In panel (b) of Figure 2, a world demand curve for oil, Dw, is introduced. So is a large carbon tax, T, levied by each consuming nation on each barrel of oil consumed. 18 As a consequence of the carbon tax, the world supply curve (inclusive of

(a) (b) (c)

S /un i t $ /uni

SC

SW PI

P(

CG

QC Q

S/uni t

QC Q2 Q1 Q

/ S G

( S~g+T )

Sw

LJ/" I LMCG I

, I Q6 Q~, Q

Fig. 2. Response of P G oil p roducers to a carbon tax.

that which is needed for improving energy efficiency as well as that which represents a step toward a less fossil fuel reliant future. ~ The si tuation would be very different if the carbon tax were levied as a product ion tax with producing countr ies receiving the revenues. For example, Whal ley and Wigle (1991b: Table 7) est imate that if oil producers levied a tax sufficiently high to cut global C O 2 emiss ions to 50% of the level that



the tax) shifts up to S w + T, causing the world price of oil to rise from P1 to P2 and the quantity demanded to fall from Q1 to Q2. Thus the initial impact of the tax does precisely what its proponents say it should do - it causes price to rise and induces consumers to economize on their use of oil (and other taxed carbon-based fuels).

However, panel (b) also shows that the carbon tax reduces the incomes of oil producers. Prior to the tax, PG producers received 'rents' (the amount between the price and LMC G equal to P1 GJC). These large rents are attributable to the good fortune of PG states to sit on large amounts of relatively inexpensively developed and extracted oil. The rents provide the foundation of the wealth of PG oil states. After the tax is imposed by the consuming nations, the net (of carbon tax) price of oil falls to P0 and the rents accruing to the PG oil states drop to P0 HJC. Their rents have declined by an amount equal to the shaded area P1 GHP0.

How will PG oil states respond to a cut in their main source of income? If the long run demand for oil is price elastic (which it must be if a carbon tax is a realistic means of reducing CO 2 emissions), the PG oil states are likely to increase output. 19 Suppose PG oil states wish to restore annual rents to roughly their pre-tax level of PI GJC. They can do so only by increasing output to Q~, as shown in panel (c) of Figure 2. This causes the world oil supply curve to shift to S~v and the supply curve inclusive of the per barrel carbon tax to shift to (S w + T). 1 The new equilibrium price is now P~ (< P2) and quantity demanded is Q~ (> Q2). The net (of tax) price of oil is now established at P~. The PG oil states now receive a smaller per barrel rent, P01 C(<P 0 C) than they received prior to increasing supply, but they receive a larger flow of rents P0~KLC(>PoHJC). In fact P0~KLC more or less restores the pre-tax flow of rents, P1 GJC (= p1KLC).

Is raising output a sensible long run strategy for the PG oil states? With such huge reserves and the prospect that the carbon tax is simply the thin edge of a world policy of shifting away from oil and other carbon based fuels, the PG oil states have no reason to hold back on production. Since they may come to view their choice as one of 'using it or losing it', the rational response is to increase production now in order to restore or even to increase (and then reinvest) the rents. Under these circumstances, a carbon tax may have little impact on oil prices and output.

In short, the world is now flush with cheap oil (Adelman 1990), although its cur-

they would reach in 2030 without a change in policy, the present value of oil exporting nations' real gross domestic product (GDP) generated between 1990-2030 would rise by 4.5%. In contrast, North America and Europe would suffer real GDP losses of 4.3 and 4.0% respectively. However, if the tax is levied, and the revenues are received, by oil consuming nations, oil exporters (such as PG) would suffer a huge 18.7% loss in the present value of GDP generated over the 40 year period 1990-2030. In contrast, the EC would reap a real GDP gain of 1.4% while the North American real GDP loss would be 3.6%. Realistically, it is hard to envision a carbon tax that is not of the consumption variety, if indeed any substantial carbon tax is politically feasible. t9 Cutting output by reinvigorating the OPEC cartel would only increase annual oil revenues if the demand for oil is sufficiently inelastic and is expected to remain so for the forseeable future. But on this expectation, a carbon tax per barrel of oil or gallon of gasoline consumed would have little impact on CO 2 emissions.



rent rate of production is not sufficient to prevent price determination at the margin by relatively costly to find, develop and extract oil. But because the supply

of cheap oil can be increased, a carbon tax on oil (or natural gas) may have less impact on oil (or natural gas) prices, and therefore on quantities consumed and CO2 emissions released, than is commonly assumed. In the long run, the main effect of a carbon tax may be to shift a greater share of world oil production to the PG and reduce the share of relatively high cost producers, such as the U.S. (com- pare panels (c) and (b) in Figure 2). From an economic (as opposed to political) standpoint, this is not necessarily bad. Moreover, it could lead to a reduction in C O 2 emissions via fuel substitution in favor of oil and natural gas which have considerably less carbon per energy unit than does coal. That is, a carbon tax is likely to cause a substitution among fossil fuels - away from coal, the supply conditions of which almost assure that a carbon tax will produce a substantial rise in price and toward oil and natural gas which produce less CO 2 per energy unit. Thus, the fore- going analysis should not be interpreted as a case against a carbon tax, but rather a suggestion that a carbon tax may not be nearly as potent a tool for reducing CO 2 emissions as its proponents would like to argue.

There is a lesson here. Climatologists are quick to point out to the layman the immense complexity, the nonlinearities and feedbacks, of the climate system. These complexities are at the heart of the varying predictions about the impact of 2 x CO 2 and the inability to establish a causal relationship between the 25% rise in the CO 2 atmospheric concentration level and the 0.5 ~ rise in global temperatures over the last century. The economic system is not much different. The web of economic behaviour that constitutes an economy is immensely complex. Prediction is difficult, and is made the more so by unforeseen political decisions and by an otherwise uncertain future. Climatologists should not assume that the partial equilibrium or even the otherwise (computable) general equilibrium analyses employed by economists to forecast the impact of various policies designed to reduce CO 2 emissions, such as a carbon tax, are any more (or any less) reliable than the predictions of GCM's. Just as GCM's provide a wide range (1 to 5 ~ of forecasts of the impact of 2 x CO2, there is a wide range of possible responses to a substantial carbon tax. In each case, the results depend on the nature of the feedbacks built into (or left out of) the models. In the case of economic models, some of the feedbacks (which are usually omitted) are in the nature of political decisions.

(b) Intermediate Term Strategies

Intermediate term strategies are those which, if implemented now, would only begin to have an important impact a decade or two hence. Two such strategies are (i) afforestation-energy from biomass and (ii) a broad-based program to attain the benefits of energy efficiency that existing or emerging technologies indicate is technically feasible. The importance of considering intermediate strategies is indicated by the economic and/or political limitations on the effectiveness of near term



strategies (see above) and the technical limitations that currently stand in the way of long term strategies (discussed below).

O) Afforestation The decimation of the tropical rainforests has helped highlight the role that trees and other plants play in storing carbon by absorbing carbon dioxide and producing oxygen through photosynthesis. According to World Resources Institute (1990: 348-49), CO2 emissions from deforestation and other forms of land use change contribute between 25 and 30% of the net addition to CO 2 in the atmosphere. Many are now calling for a world-wide program to halt and then reverse deforestation through a policy of afforestation. One proposal is to cover large tracts of land with new forest as a means of slowing the rise in atmospheric CO2. Dudek and LeBlanc (1990: 32) state that the five gigatons of carbon that fossil fuel use emits into the atmosphere each year worldwide would require planting between 1.3 and 1.7 billion acres of new forests. This estimate can be put in perspective by noting that the area of the U.S. is 2.3 billion acres. Another proposal is to plant fast growing trees which are harvested to provide biomass energy (such as ethanol and methanol) as a substitute for fossil fuels. The CO2 emitted by biomass would be reabsorbed by the continual replanting of fast growing trees which would quickly replace those that are harvested.

A little thought makes apparent the limitations of afforestation and biomass as long run solutions to the greenhouse problem. In our increasingly populated world, there is less and less non-forested land, which is neither used for habitation nor food production, that is available for afforestation. Land area amenable to afforestation is a scarce resource which often has other valuable uses. Nevertheless, while not a long run panacea, afforestation does have a role to play. So does the use of biomass as an energy source. For example, Nordhaus has shown that about 4 or 5% of global carbon emissions can be sequestered through afforestation in a moderately cost-effective manner (Nordhaus, 1991a: 59). But the roles of biomass and afforestation appear to be limited to reducing the growth in CO 2 emissions rather than as a means of sharply cutting world wide emissions over .the next century (Dudek and LeBlanc, 1990: 40; Nordhaus, 1991a: 53-59).

(ii) Energy Efficiency The scope for increased energy efficiency is great (Davis, 1990: 59; Lovins, 1990). This is particularly true in the use of electricity, especially that used for lighting, motor systems, and refrigeration. Fickett et al. (1990) suggest that energy efficiency measures have the potential to reduce electricity consumption in the U.S. by 30- 75% in the next decade or two.

This dramatic estimate of what could be attained by the adoption of technically feasible energy savers needs, however, to be put in perspective. First, the estimate applies to electricity, which accounts for only about 15% of U.S. energy consumption and less than a quarter of CO 2 emissions. Second, the estimate applies to the



U.S., which is technologically and economically in a much better position to adopt and invest in energy efficiency measures than are most other countries. Third, the estimate is based on what could be saved 'if we did everything, did it right and applied the best technologies for efficiency' (Fickett et al. 1990: 66). Among other things, 'doing everything' implies replacing or retrofitting, over the next decade, all existing equipment and structures with the most energy efficient technologies, whatever the useful life remaining. 2~ Finally, the estimate ignores the possible feedback from increased energy efficiency to an increase in the quantity of energy demanded as a result of the impact energy efficiency may have in reducing the relative price of energy.

Nevertheless, it is significant that, in its report on the policy implications of global warming, the consensus position taken by the National Academy of Sciences (1991) and 'welcomed' by the Bush administration (New York Times, 1991), is essentially an energy efficiency strategy. Moreover, the approach taken is regula- tion-based rather than market(price)-oriented. Although the report advocates a 'full social-cost pricing of energy', it does not explicitly propose a carbon tax or similar set of fees, and it avoids establishing CO2 emission reduction targets. Rather, the National Academy report calls for the adoption of energy-efficient building codes, improvement of appliance efficiency standards, an increase in gasoline mileage standards, electric utility regulatory reforms designed to encourage energy efficiency and conservation, and a sharp increase in federal spending on energy research and development. The package of policies, which the National Academy terms 'low cost' (i.e. costs 10 dollars or less for each tonne of heat trapping gas eliminated, per year), is anticipated to eventually cut CO 2 emissions by 10 to 40% of their 1990 levels.

Energy-efficient strategies can slow, but not halt, the build up of greenhouse gases and predicted global warming. Some numbers are instructive. In 1987, a handful of relatively wealthy nations accounted for 43% of net additions of CO 2 to the atmosphere due to fossil fuel use, and for 29% of all net additions, including that from land use, to atmospheric CO2.21 If the handful of 20 countries each adopted programs that reduce CO2 emissions by 30% (not easy for Japan and many European countries which are already far more energy efficient than the U.S. and Canada), the net additions to atmospheric CO2 due to fossil fuel use would decrease by 13% (0.30 x 0.43) and total net additions would decline by about 9%.

2o In the energy efficiency literature much is made of the electricity savings possible by, for example, replacing a standard 100 W incandescent light bulb with a long-lived, 20 W compact florescent light bulb which produces just as much light of equal or superior quality (Keepin and Kats, 1989). However, residential and commercial lighting accounts for only 4% of energy use (measured in BTU's) in the U.S. (Blackburn, 1987:11). It is relatively easy to change a light bulb. It is not so easy, the investment not nearly so small, nor the gains so great, to achieve other increases in energy efficiency. ~ The group consists of 20 nations. They include the U.S., Canada, United Kingdom, Japan, Germany (including the former eastern portion), Austria, Belgium, Denmark, Finland, Sweden, Norway, France, Netherlands, Italy, Switzerland, Iceland, Ireland, Luxemborg, Australia, and New Zealand. (World Resources Institute, 1990: Table 24.2).



If, in addition, developing countries could cut land use-related C O 2 emissions by 50%, by halting deforestation, the decline in net world wide emissions of CO 2 from their 1987 level would be 25%.

The 25% reduction in CO2 emissions implicitly assumes, however, that developing countries adopt programs that limit fossil fuel emissions to their 1987 level. This is hopelessly unrealistic. Even so, what does a 13% reduction in fossil fuel related and a 50% reduction in land-use related CO 2 emissions do for the concentration of CO2 in the atmosphere? It reduces annual CO2 emissions to approximately their 1976 level. At the 1976 emission rate, it would take about 150 years for the atmospheric CO2 level to reach twice the pre-industrial level of 275 ppm. If, more realistically, fossil fuel emissions in all developing countries (including the U.S.S.R.) were to rise to twice their 1987 level, it would take only 108 years to reach 2 x CO 2 . Clearly intermediate strategies can slow down the build-up of CO 2 in the atmosphere; however, they cannot by themselves halt it. To halt the build-up of CO 2 we must look to long term strategies. 22

(c) (Very) Long Term Strategies

These are strategies which, for a combination of technological and economic reasons, can only begin to play a major role three or more decades from now, if ever. I include here the development of alternative, non-fossil fuel, environment- friendly sources of energy, such as solar, solar-hydrogen, nuclear fusion, and wind. Although these potential energy sources, particularly solar and wind, currently meet some energy demands, the fraction of total energy requirements that they do meet is tiny. Before they can begin to make a substantial contribution toward meet- ing total energy demand, major technological breakthroughs associated with their collection and storage must be overcome. For both technical and economic reasons, the timing of the breakthroughs, if they occur, is better measured in decades than in years.

The prospect of harnessing the sun to produce electricity as well as space heating and cooling, and of using some of that electricity to produce hydrogen, an environmentally clean substitute for fossil fuels, is no longer far fetched. During the past decade, an increasing, although still tiny, fraction of the electricity supplied in the state of California has come from power plants whose thermally operated

22 I have, perhaps unfairly, assumed that a nuclear (fission) energy based future is highly unlikely, if not out of the question. Although nuclear energy is CO 2 and other hydrocarbon pollutant free, safety and waste storage problems, and widespread NIMBY (not in my backyard) attitudes, appear to preclude a return to widespread nuclear power plant development. For example, for nuclear power to provide the 55 Quads of energy needed to meet all residential, commercial, and industrial energy demands in the U.S., would require 1654 nuclear facilities with 1000 MW capacity. There is a possibility, however, that technological innovation may make possible new nuclear designs with smaller reactors and greater passive safety features. If so, nuclear energy could contribute to a long run solution, although in the absence of a major breakthrough in fusion, it is unlikely to be the solution to the greenhouse gas problem.



generators are driven by a solar-heated fluid. Ongoing research has also led to improvements in photovoltaic cell technologies which are capable of directly con- verting sunlight into electricity (Ogden and Williams, 1989; Hubbard, 1989; Williams, 1990). The solar energy can be stored by using the electricity to produce hydrogen via electrolysis. Hydrogen is also easily transportable from areas of high insolation to areas of relatively low insolation. Because the production of electro- lytic hydrogen is an energy-intensive process, its economic production in large quantities awaits further increases in the efficiency with which photovoltaic cells convert solar energy into electricity. In the meantime, research is underway with the aim of making hydrogen an economically competitive fuel for use in transport (Ogden and Williams, 1989: 55).

While there is now at least a prospect that a combination of solar energy and hydrogen fuels could, in time, progressively supplant the world's dependence on fossil fuels, there are very important, perhaps insurmountable, technical as well as economic hurdles to overcome. Three illustrations, briefly discussed below, suggest that replacing fossil fuels with solar power, hydrogen and other new energy technologies will take decades to complete, at best.

One hurdle to becoming a solar-hydrogen energy based economy is the cost of collecting solar energy. Although most commentators focus on the high cost of a solar collector plate (estimated at S120 per square meter (LaPorta 1990: 243)), another important cost-related problem is likely to be the space necessary to collect sufficient solar energy to meet the energy requirements of any populated area. For example, even in Arizona, where average daily insolation is 2000 BTU per square foot per day, it would take a minimum of 1402 km 2 (541 square miles) to yield one Quad (1015 BTU) of energy per year, assuming current solar cell efficiency at 15%. 23 In reality, the area covered by the collection system would have to be at least twice as large, when one takes account of the adjustment in the angle of the collector plates that is necessary to focus the suns rays over the course of the day and seasons and the space needed for the piping and other collector apparatus. While the area can be reduced as solar cell efficiency increases, 50% solar cell efficiency is probably the 'theoretical' maximum. Clearly, finding and purchasing such large pieces of land for solar collection use will be difficult and costly, even in the U.S. southwest, where insolation is relatively high and population relatively low. It is for these reasons that solar energy's greatest potential in the foreseeable future is as a source of point-of-use energy for space and water heating.

A second hurdle, this one to solar energy becoming a reliable source of base

load electric power, is the problem of storage. Currently, solar energy as a source of electric energy is largely restricted to small generators located in rural areas, chiefly

2.~ It would take about one third of this area to collect solar energy equivalent to the energy provided by a 150 000 barrel a day oil refinery. The calculations were made by Mr. H. Douglas Lightfoot, Mechanical Engineer (retired). In the populated northeast, where insolation is close to 1200 BTU per square foot per day, it would take a minimum of 2000 km 2 (1200 square miles) to supply one Quad of energy, again assuming 15% solar cell efficiency.



villages in less developed countries, or as a source of peaking power to utilities sup- plying population centres in sundrenched sections of developed countries. Thus, for example, the Luz corporation uses solar energy to supply thermal power to Southern California Edison to meet peak demands caused by heavy use of air-con- ditioning on hot, sunny days. However, solar energy is not available in the evening or on cloudy days or even for much of the day in winter, when the sun does not shine. Because no way has yet been found to store solar energy for considerable periods of time (except that which is used to heat water or is used to produce hydrogen), it is not yet a feasible means of providing the main or base electricity load.

A third hurdle, this one to hydrogen replacing liquid hydrocarbons, such as gasoline, as the main source of transportation fuel is the highly desirable physical attributes of liquid hydrocarbons themselves. In terms of the combined attributes of BTU per pound, BTU per cubic foot, and safety in handling and storage, it is difficult to beat liquid hydrocarbons. To be sure, hydrogen gas, which on a cubic foot basis provides 0.0003 of the energy that is provided by gasoline, can be liquified, thereby raising the BTU per cubic foot ratio of hydrogen to gasoline to 0.26. But a liquidified hydrogen fuel tank for an automobile would still have to be about three times as large as a gasoline tank with similar energy carrying capacity. Moreover, if hydrogen gas is to be liquified at one atmosphere it must be kept at -253 ~ This would require very thick, insulated, and thereby heavy, storage tanks. Moreover, if the tanks were to rupture and the escaping vapour ignite as the result of a crash, the result could be a very large explosion. Thus, there are enormous difficulties to overcome before hydrogen can achieve widespread use as a transportation fuel.

Estimates of the Costs and Benefits of C O 2 Emissions Reduction

Recently, several studies have appeared which attempt to estimate the costs (usually in terms of lost or reduced GDP) from CO2 emissions-control programs (Hogan and Jorgenson, 1991; Jorgenson and Wilcoxen, 1990; Nordhaus, 1991a, 1991b, 1991c; Mannc and Richels, 1990, 1991; Whatley and Wigle, 199ta; among others). Perhaps the most useful is a study by Nordhaus (1991a) who provides a survey. Only Nordhaus (1991a, 1991c) has attempted to quantify the benefits (in terms of the value of damage avoided).

The standard approach to estimating the costs of CO 2 emission reduction is to assume an efficient strategy is employed. Carbon taxes are one widely touted efficient strategy; CO2 emission rights another. It is usual to presume that any given program of emission limits, especially if packaged as a program of tradeable emission rights, has a carbon tax counterpart. 24 However, as the earlier discussion of

24 AS Nordhaus (1991a: 45) states, '... we examine model runs that impose a CO2 constraint upon the energy system. The dual variable or shadow price associated with the CO 2 constraints is exactly equivalent to the tax rate that would, in perfectly competitive markets, induce the CO2 constraint in the



the likely adjustment of the Persian Gulf oil exporters to a carbon tax suggests, the equivalence between (i) programs which would set quantitative limits on global

emissions and (ii) programs which are price-based, such as carbon taxes, is ques- tionable. If an agreement to reduce CO 2 emissions takes the form of quotas (tradeable or not) there will be substantial monitoring costs that would otherwise have been avoided by a tax placed on carbon based fuels. Moreover, quantity restric- tions, even those with tradeable rights, are likely to bind more than a policy which attempts to influence price by means of a tax. Thus an emissions-limits policy is likely to both be more successful in reducing emissions and more costly than would a carbon tax.

Nordhaus (1991: 61-63) estimates the long run costs (a measure of costs when all factors of production are allowed to fully adjust) to greenhouse gas (GHG) reductions. He finds that a 10% reduction of GHG from a baseline path can be achieved at very low cost as a result of the 'great cost-effectiveness of CFC reductions' (for which he assumes that there exist substitutes with less powerful warming effects). Much larger reductions in GHG emissions require concentrating on cutting CO2 emissions. A 50% reduction from baseline in GHG emissions (at least 70% of which must come from reduced CO 2 emissions) is estimated by Nordhaus to cost almost $200 billion annually (in 1989 dollars), which is approximately one percent of world output. The CO 2 component of the 50% GHG reduction could be achieved by a tax of S120 per ton of carbon - or an extra $0.36 per gallon of gasoline.

Given the substantial taxes already levied on gasoline (e.g. Canada, most of Europe, and Japan) a S0.36 per gallon tax seems like a relatively modest way in which to substantially reduce CO2 emissions. Yet Nordhaus (1991b) finds that such a reduction is not justified on the basis of cost-benefit analyses, where benefits

are valued in terms of damage avoided. Even employing Nordhaus' 'high damage' estimate only calls for a tax of $66 per tonne of CO2, while the 'medium damage' estimate calls for a $7.30 tax per tonne.

But, Nordhaus' valiant - and commendable - attempt to estimate the benefits from CO2 reduction, is arguably flawed. Nordhaus uses production data to estimate the amount of GDP (mainly in agriculture and forestry, with much smaller impacts on the health and leisure sectors) likely to be affected by global warming. However, economic welfare (and benefits) is more closely related to utility in consumption than it is to production. If the utility gained from consumption is affected by the 'environment' in which consumption takes place (just as a picnic lunch is nicer without rain, ants, and mosquitoes), the use of production data may lead to a substantial underestimation of the 'welfare' losses associated with a warmer, more

model. We can therefore identify the shadow price on C O 2 emiss ions with the tax rate in the earlier runs'. The equivalence is analytically clearest with a stable downward sloping (to the right) d e m a n d curve for carbon (fuel) use and a horizontal (and stable net of tax) long run supply curve (constant cost).



humid climate. 25 (Then again, depending on one's climate preferences, it may lead to over-estimation.)

Nordhaus' estimates of the cost of CO 2 emission reduction are framed by the somewhat higher cost estimates of Manne and Richels (1991) and the lower cost ones of Jorgenson and Wilcoxen (1990). Manne and Richels estimate that it would take a carbon tax of $300 per ton of carbon to reduce global CO 2 emission by 20% from 1990 levels. While the Manne-Richels estimate appears considerably higher than that of Nordhaus, the two are not strictly comparable. Nordhaus' estimate is for a 50% reduction from baseline (trend), a reduction that would still leave emissions well above the target employed by Manne-Richels. In addition, Nordhaus' estimate of S120 per ton carbon equivalent is for a 50% reduction in all GHG sources, with only about 35% points accounted for by reduced fossil fuel u s e . 26

Moreover, the Manne and Richels analysis focuses on achieving their 20% world wide CO2 emission reduction target, with the least amount of harm to the growth prospects of the LDC's. Thus the main brunt of global reduction in CO 2 emissions prior to 2020, in the Manne-Richels model, falls on the industrialized nations.

In contrast, the Jorgenson-Wilcoxen model indicates that carbon emissions can be maintained at 1990 levels with a tax per tonne of carbon of approximately $20. The relatively low cost of CO 2 emission reduction in the Jorgenson-Wilcoxen model is apparently attributable to the assumed high degree of capital malleability in the utility sector of their model (Morgenstern, 1991). Taking the Jorgenson- Wilcoxen model at face value suggests that the cost of stabilizing CO 2 emissions is modest indeed.

However, in another paper, Hogan and Jorgenson (1991) suggest that estimates of the long run costs of CO2 emissions reduction may be much too low. The problem resides in the failure of the standard modelling processes to account for technological change in the nonenergy sector as anything more than a trend. (For example, the model used by Manne-Richels assumes that productivity trends are constant.) Hogan and Jorgenson investigate how technological change in the nonenergy sector affects energy demand. Although most studies show a long term decline in energy per unit of output, Hogan and Jorgenson find that techno-

25 However, the estimation of benefits in welfare terms, faces numerous, in some cases, insolvable problems. One is data. Another is growing evidence of a large gap between what individuals are willing to accept (WTA) in the form of compensation before allowing environmental damage to take place and what they are willing to pay (WTP) to avoid it. Given the nature of property rights, it is the latter which governs behaviour, but not necessarily utility. A growing number of studies (see Kahneman et al., 1991, for a brief survey) indicate that it is common for WTA to be much higher than WTP. The use of production data to estimate benefits (damage avoided) is much more likely to approximate WTP than WTA. 2(, Interpolating, Nordhaus' estimates (1991a: 62; 1991c: 929) suggest that a tax of approximately S250-$275 per tonne of carbon would, in combination with a phaseout of CFC's, reduce GHG emissions by 70% from mid 21st century baseline, a reduction comparable to the 20% reduction from 1990 CO 2 emission levels that Manne-Richels target. Both the Nordhaus and Manne-Richels estimates are well below the $450 per tonne carbon tax that Whalley and Wigle (1991b) estimate is required to reduce CO 2 emissions 50% from baseline (trend).



logical change has tended to be energy-using - i.e. there is an apparent positive 'technical bias'. A positive 'technical bias' implies that a rise in energy prices will reduce, ceteris paribus, energy-use and thereby tend to slow the process of technological change. This means that the longrun cost of CO 2 emissions reduction may turn out to be substantially higher (Hogan and Jorgenson, 1991: 84, suggest perhaps two times higher) than estimates produced by models that fail to capture the 'technical bias'. The Hogan and Jorgenson finding adds importance to long run strategies aimed at research into and the development of relatively inexpensive, environmentally-friendly energy sources.

Conclusion

There are important economic, political, and technical constraints on any effective program of greenhouse gas emission reductions. While, in principle, governments can draw on an arsenal of near term, intermediate term, and long term strategies, in practice, many of these strategies are not politically feasible, cost effective, or likely to have much of an impact on CO 2 emissions or levels. Moreover, any rush to curb the build up of greenhouse gases will strain another essential resource that is almost always in short supply: effective government. Strains on effective government make it particularly difficult to implement near term and intermediate term strategies. For this reason, a de minimus program would devote resources to speeding up the natural replacement of fossil fuels by promising, environmentally safe substitutes. This can be achieved by some combination of research and development grants and experimental programs. If possible, policies aimed at making fossil fuel prices more accurately reflect the social costs associated with their production and use should be adopted, as should the abandonment of explicit and implicit subsidies and other favourable policies for fossil fuel industries.

These conclusions come close to implying a near-to-intermediate term policy of adapting to global warming and attendant climate change. In fact, one interpretation of Nordhaus' benefit-cost analysis is that adaptation is a more cost-effective strategy than are large scale actions to reduce CO2 emissions. However, one must tread carefully here. Even if in the short-to-intermediate term adaptation is the 'best' strategy (at least from an economic standpoint), adaptation is not a 'pure' strategy. That is, adaptation cannot stand-alone as a policy. Here is why. Suppose for argument's sake that it is relatively costless to adapt to the first degree or two of global warming, while at the same time policies aimed at preventing the first degree or two of warming (some of which is undoubtedly in the pipeline anyway) would be very costly. It then follows that adaptation to the first degree or two of global warming is a more cost effective strategy than is prevention. But the same cannot be said for, say, the 4th or 5th degree of global warming, none of which is currently in the pipeline. Not only will preventing the 4th or 5th degree of anthropogenically in- duced warming be less costly than preventing the first or second degree, but the cost of adapting to the 4th or 5th degree will almost certainly be much greater than


288 Chris topher Green

is the cost of adapting to the first degree or two. The implication is, then, that even if adaptation is the appropriate strategy in the short term, it is necessary to com- mence efforts now to develop long term alternatives to fossil fuels that can be put in place before mankind is forced to try to adapt to the 4th or 5th degree of global warming. Thus, even in the short term, it is appropriate policy to concentrate on developing long term strategies. 27

Another advantage of long term programs aimed at developing energy substitutes as a means of combatting the greenhouse effect is that they largely bypass the information and incentive problems that make a direct attack on emissions difficult. Moreover, in terms of current resources employed, it is relatively inexpensive to attempt, via research and development, to improve the opportunities for alternative energy sources to prove their worth. Should these alternatives prove successful, both in technological and in relative cost terms, the market can take over and fossil fuels will be replaced by the 'natural' forces of competition. Moreover, nations pioneering in competitive new energy technologies will benefit from sale of those technologies to other, less innovative nations. In short, there are strong economic as well as environmental reasons why public policy should at least attempt to hasten the development of new energy producing technologies which society would wish to see adopted irrespective of the greenhouse effect. The goal of a de minimus long term strategy to deal with global warming is to find substitutes for present energy sources even if it is not possible in the short to intermediate term to do more than reduce the use of energy to levels that efficiency criteria would dictate with or without the threat of greenhouse warming.

If public policy to deal with a threat of greenhouse warming follows the course advocated above, it will parallel the approach taken by the pathbreaking 'Montreal Protocol', in 1987, to combat the deterioration of the (stratospheric) ozone layer, due to the use of certain CFC's. 28 That international agreement wisely kept in mind the importance of substitutes. On the one hand, it called for the quick elimination of aerosol spray cans that used CFC's, because of the obvious availability of relatively inexpensive substitutes. On the other hand, it called for the gradual phasing out of CFC's as refrigerants in order to give time for their replacement by ozone- harmless substances, already being researched and developed by some leading chemical firms. The approach was to find substitutes, not cut back on the use of refrigerants. Here again we see the emphasis on employing technology to find alternatives.

But a final warning is in order. The search for effective programs to combat the build-up of greenhouse gases should not blind us to the budgetary costs that will have to be faced, in the meantime, should greenhouse warming occur. If climate warming leads to an increase in the frequency and virulence of extreme weather

27 AS Lightfoot and Green (1992) show, the technical hurdles to large scale replacement of fossil fuels by new more env i ronment friendly energy sources such as solar and solar hydrogen are very great indeed, will take many years to solve, if ever, and could turn out to be insurmountable . 28 O n the Mont rea l Protocol, see Smith and Vodden (1989).

Climatic Change D e c e m b e r 1992


events (e.g. droughts, hurricanes, coastal flooding), as some climatologists have predicted, the costs associated with disaster relief may skyrocket. 29 Governments (at least in North America) are the ultimate insurers against weather-related 'Acts of God'. Knowing this, individuals and local governments may not take appropriate action to prepare themselves for the increasing incidence of climatic change-related disasters - a classic example of what the insurance literature terms 'moral hazard'. In the same way that the U.S. government, and ultimately the U.S. taxpayer, are having to foot the huge deposit insurance bill, they will have to foot the bill for weather-related 'disasters' associated with climate warming. Therefore, taking the threat of a greenhouse warming seriously, albeit there remains great uncertainty about its timing and magnitude, is almost certainly the wisest policy.

Acknowledgements

In writing this paper, I benefited from a visit to the National Center for Atmospher- ic Research in Boulder, Colorado. I am particularly grateful for the many helpful comments I received from my colleague, John Galbraith. I am also grateful to Bob Cairns, Philippe Crabb6, John Firor, Tom Kompas, Donald Lenschow, H. Douglas Lightfoot, Lawrence Mysak, Stephen Schneider and three anonymous referees for useful comments on earlier drafts. They, however, are free of responsibility for any remaining errors. I also wish to thank Denis Denisoff and Ann Cossette for typing the various drafts of this paper. The author is grateful to the SSHRCC for financial support under grant 10-89-0205.

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Economics and the ‘greenhouse effect’

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