I’m a month late posting this, but here we are. Kenneth Arrow (yes, that Kenneth Arrow) weighs in on the economics of mitigating climate change sooner rather than later. It’s particularly relevant as climate-change deniers shift from “it’s not happening” to “it’s too late (or too expensive) to do anything about it.”
Last fall, the UK issued a major government report on global climate change directed by Sir Nicholas Stern, a top-flight economist. The Stern Review Report on the Economics of Climate Change amounts to a call to action: It argues that huge future costs of global warming can be avoided by incurring relatively modest cost today.
Critics of the report don’t think serious action to limit carbon dioxide emissions is justified, because there remains substantial uncertainty about the extent of the costs of global climate change, and because these costs will be incurred far in the future.
However, I believe that Stern’s fundamental conclusion is justified: We are much better off reducing carbon dioxide emissions substantially than risking the consequences of failing to act, even if, unlike Stern, one heavily discounts uncertainty and the future.
Two factors differentiate global climate change from other environmental problems.
First, whereas most environmental insults — for example, water pollution, acid rain, or sulfur dioxide emissions — are mitigated promptly or in fairly short order when the source is cleaned up, emissions of carbon dioxide and other trace gases remain in the atmosphere for centuries. So reducing emissions today is very valuable to humanity in the distant future.
Second, the externality is truly global in scale, because greenhouse gases travel around the world in a few days. As a result, the nation-state and its subsidiaries, the typical loci for internalizing externalities, are limited in their remedial capacity. (However, since the US contributes about 25 percent of the world’s carbon dioxide emissions, its own policy could make a large difference.) Thus, global climate change is a public “good” — as defined in economic terms — on an enormous scale.
A straightforward calculation shows that mitigation is better than business as usual — that is, the present value of the benefits exceeds the present value of the costs — for any social rate of time preference less than 8.5 percent. No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5 percent.
These calculations indicate that, even with higher discounting, the Stern Review estimates of future benefits and costs imply that mitigation makes economic sense. These calculations rely on the report’s projected time profiles for benefits and its estimate of annual costs, about which there is much disagreement. Still, I believe there can be little serious argument about the importance of a policy aimed at avoiding major further increases in carbon dioxide emissions.