Geoscience Reference
In-Depth Information
Part III discusses the economic aspects of strategies to slow climate
change. There are several potential strategies for slowing climate change,
but the most promising is “mitigation,” or reducing emissions of CO
2
and
other GHGs. Unfortunately, this approach is expensive. Studies indi-
cate that it will cost in the range of 1-2 percent of world income ($600-
1,200 billion annually at today's level) to attain international climate
targets, even if this is undertaken in an effi cient manner. While some
miraculous technological breakthroughs might conceivably be discov-
ered that can reduce the costs dramatically, experts do not see them
arriving in the near future.
The economics of climate change is straightforward. When we burn
fossil fuels, we inadvertently emit CO
2
into the atmosphere, and this
leads to many potentially harmful impacts. Such a process is an “exter-
nality,” which occurs because those who produce the emissions do not
pay for that privilege, and those who are harmed are not compensated.
One major lesson from economics is that unregulated markets cannot
effi ciently deal with harmful externalities. Here, unregulated markets
will produce too much CO
2
because there is a zero price on the exter-
nal damages of CO
2
emissions. Global warming is a particularly thorny
externality because it is global and extends for many decades into the
future.
Economics points to one inconvenient truth about climate-change
policy: For any policy to be effective, it must raise the market price of
CO
2
and other GHG emissions. Putting a price on emissions corrects for
the underpricing of the externality in the marketplace. Prices can be
raised by putting a regulatory tradable limit on amount of allowable
emissions (“cap and trade”) or by levying a tax on carbon emissions (a
“carbon tax”). A central lesson of economic history is the power of in-
centives. To slow climate change, the incentive must be for everyone—
millions of fi rms and billions of people spending trillions of dollars—to
increasingly replace their current fossil-fuel-driven consumption with
low-carbon activities. The most effective incentive is a high price for
carbon.
Raising the price on carbon will achieve four goals. First, it will pro-
vide signals to consumers about which goods and services are carbon
