The economic case for slashing carbon emissions

Deciding whether it’s worth the price

The range of cost estimates for reaching 350ppm, combined with uncertainties about oil prices and future technologies, make it difficult to choose a single estimate of the total economic cost. Suppose that, for the sake of argument, 2.5 per cent of world output must be spent on climate stabilisation for years to come. Is that an unacceptably large number?

Imagine an economy growing at 2.5 per cent every year (a little slower than the recent US average). Suppose it skips one year’s growth - all too easy to imagine in 2009 - and then resumes growing. That makes GDP 2.5 per cent smaller than it would have been, forever. So the “skip year” has the same effect as spending 2.5 per cent of output on climate protection every year. Household incomes would take 29 years to double, instead of 28.

Alternatively, we know we can afford to devote 2.5 per cent of income to protection against a remote but disastrous threat - because we already do, year after year. In 68 countries, military spending exceeds 2.5 per cent of GDP. In the United States and China, the top greenhouse gas emitters, military spending absorbs more than 4 per cent of GDP. Both countries would be safer, not more vulnerable, if they diverted half of their defence spending to defence against climate crisis.

The most important conclusion of our research involves what we did not find. There are no reasonable studies saying that a 350ppm stabilisation target will destroy the economy. This is not surprising. The ominous recent research on potential climate damages does not examine the cost of doing something; instead, it looks at the cost of doing nothing about emissions.

If the worst happens, our grandchildren will inherit a degraded Earth that does not support anything like the life that we have enjoyed. On the other hand, if we prepare for the worst but it does not quite happen, we will have invested more than was absolutely necessary - in perfect hindsight - in clean energy, conservation, and carbon-free technologies. Which extreme presents the greater danger?

Climate risk and insurance

Think about climate risk as an insurance problem. You don’t buy fire insurance because you’re sure your house will burn down; rather, you are not, and cannot be, sure enough that it will not burn down. Likewise, projections by Hansen and others of dangerous climate risk from staying above 350ppm CO2 are not certainties; they are necessarily uncertain (although becoming more likely as temperatures rise).

The analogy to insurance is important but inexact; there is no climate insurance company to which the world can hand 2.5 per cent of output, if that is what it costs. There is, however, a need for large-scale investment, both in proven emissions-reducing technologies and in research and development.

The role of government in climate policy is not only to set appropriate price signals through a carbon tax or cap-and-trade system; the public sector must also guide research on clean energy technologies. Despite free-market mythology to the contrary, this has worked well in the past. Wind power is profitable today as a result of decades of government investment in the United States and Europe. In another arena, the US government essentially invented microelectronics in the 1950s and 1960s: at first, almost all transistors, integrated circuits, and the like were bought by agencies such as the Pentagon and NASA, because no one else could afford them. Just a few decades of massive government purchases of these items turned microelectronics into the premier private-sector success story of the late-20th century, transforming everyone’s life in countless unexpected ways.

The climate crisis challenges us to do it again, to invent the new technologies and industries that will transform life in the mid-21st century and beyond. We know it’s possible: We can afford to protect the climate, and leave a liveable world to future generations.