Economic Aspects of Climate Change

Abstract

Although economists have often disagreed on economic aspects of global warming, views, such as those expressed in the Stern Review, which purports global warming as a major economic problem carrying risks of disaster and demanding the use of major resources, are increasingly common. The idea that with development and technological progress, total greenhouse gas (GHG) emissions or emissions per capita would decrease has now been refuted, as a link between increased economic activity and greater emissions has been established. In general, global emissions of CO₂ have increased at rates correlated with the annual increase of world GDP (WGDP). Furthermore, the annual increase in atmospheric concentrations of CO₂ is correlated with the growth of WGDP. Impacts of climate change and strategies to mitigate them have often been subjected to integrated assessment models (IAMs). For global warming of above 2°C or 3°C, IAMs agree that there will be a reduction in long-term social well-being and a negative impact suffered mostly by low-income regions, but different IAMs strongly disagree on the level of human-induced damage, with estimates ranging from <1% to >10% of WGDP. Direct emissions of GHG related to agriculture are mainly emissions of CH₄ and NO₂. Indirect emissions of GHG from agriculture include large CO₂ emissions from land-use change, i.e., conversion of natural ecosystems into cultivated land. The sum of direct and indirect emissions may represent annually one-fourth of global GHG emissions, with about three-fourths of agricultural GHG emissions coming from low-income countries. Mitigation measures focused on soil carbon sequestration by modifying practices of intensive agriculture and moving toward agroecology or low-carbon agriculture are needed. Permit trading and the implementation of a carbon tax are the major options in the public debate to mitigate climate change. The European Trading Scheme implemented in 2005 has failed to reduce emissions. A carbon tax would reduce emissions by discouraging consumption of “carbon-rich” commodities and, therefore, promoting recycling, reuse, and innovation toward production and consumption of “carbon-poor” commodities, but there have only been some timid steps to implement such a tax in some countries, and there is strong opposition to it.

Keywords:

• Adaptation
• carbon tax
• economic aspects
• greenhouse gas emissions
• integrated assessment models
• mitigation

Acknowledgments

This article was modified and updated from “Dynamics and Economic Aspects of Climate Change” (Chapter 3) in Combating Climate Change: An Agricultural Perspective, edited by Manjit S. Kang and Surinder S. Banga. Copyright 2013 by Taylor & Francis Group, LLC. Reprinted with permission.

Notes

1. In France, the nuclear power share of electricity generation grew from 25% to 77% between 1980 and 2000; in the United Kingdom, it increased from 12% to 23%; in Germany, it increased from 26% to 38%. Consequences of this energy strategy are the risks of industrial disaster associated with nuclear power (sadly illustrated recently by the disaster of Fukushima, Japan, in 2011) and the production of substantial quantities of radioactive waste.

2. Neoclassical economics is the predominant theoretical approach in economics, but many economists do not subscribe its main tenets and feel closer to other schools (Austrian, institutionalist, Keynesian, post-Keynesian, Marxian, ecological, etc.) of economics.

3. According to the Glossary of Terms used in the IPCC's Third Assessment Report, the terms “top” and “bottom” are “shorthand for aggregate and disaggregated models. The top-down label derives from how modelers applied […] techniques to historical data on consumption, prices, incomes, and factor costs to model final demand […], and supply from main sectors, like the energy sector, transportation, agriculture, and industry. Therefore, top-down models evaluate the system from aggregate economic variables, as compared to bottom-up models that consider technological options or project-specific climate change mitigation policies.”

4. A gigaton equals 10⁹ tons. Emissions are estimated in CO₂-equivalents to measure together emissions of different GHG. In the rest of the chapter Gt CO₂-eq. is the abbreviation for gigatons of CO₂-equivalents.

5. A typical example is soybean production in Argentina that according to FAO increased between 1980 and 2010 from 3.5 to 62.7 million tons, with the area dedicated to the crop expanding from 2 to 18 million hectares (faostat.fao.org). It has been also estimated that 16 million hectares of forest had been lost to soybean production; 95% of the soy presently produced is genetically modified.