Climate economist Prof. Dr. Richard Tol examines the costs and benefits of cutting carbon under different scenarios.
He finds: “A well-designed, gradual policy of carbon cuts could substantially reduce emissions at low cost to society. Ill-designed policies, or policies that seek to do too much too soon can be orders of magnitude more expensive. While the academic literature has focused on the former, policy makers have opted.”
He notes that available estimates suggest that the welfare loss induced by climate change in the year 2100 is in the same order as losing a few percent of income. That is, a century worth of climate change is about as bad as losing one or two years of economic growth.
Tol writes that a clever and gradual abatement policy can substantially reduce emissions (such as stabilizing greenhouse gas emissions at 650 and 550 ppm CO2eq) at an acceptable cost (1 or 2 years of growth out of 100, respectively).
Very stringent targets, however, such as the EU’s target of keeping temperature rises under 2ºC, may be very costly or even infeasible. And suboptimal policy design would substantially add to the costs of emission abatement.
Tol specifically considers five alternative policies for carbon dioxide emission reduction.
At one end of the spectrum, he looks at a $2.5 trillion expenditure on emission reduction in the OECD before 2020. Tol concludes bluntly: “This is rather silly. The benefit-cost ratio is less than 1/100”.
Spending $2.5 trillion across the world before 2020 “is less silly because non-OECD emission reduction is a lot cheaper, but the benefit-cost ratio is still only 1/100”.
The third policy continues the same intensity of climate policy between 2020 and 2100. Most negative impacts of climate change are avoided by this policy, but the costs are so large that the benefit-cost ratio is only 1/50.
In the fourth policy, $2.5 trillion is invested in a trust fund to finance emission reduction over the century. The benefit-cost ratio is 1/4.
In the fifth policy, the trust fund is twenty times as small. The benefit-cost ratio is 3/2. In this policy, a tax of $2/tC is imposed in 2010 on all emissions from all sources in all countries; the tax rises with the rate of discount.
Dr. Ir. Onno Kuik discusses the estimated benefit-cost ratios of carbon mitigation as a solution to climate change. Kuik is in agreement with most of what is written by Richard Tol on the state of the art of economic research into the impacts of climate change and climate change policies, but highlights a complementary approach based on a direct elicitation of preferences for climate change. With respect to the reported benefit-cost rations, Kuik argues that they are low because they do not reflect the substantial concerns about equity and uncertainty; and because a substantial part of the benefits after the year 2100 is not accounted for.
Prof. Roberto Roson notes that Tol’s Assessment Paper is largely based on the FUND model and the results of a set of simulation exercises where a number of policy options are explored and assessed. Roson points out a series of limitations of the FUND model, as well as other points that limit the interpretation of the results. However, Roson concludes that when considering the simulation scenarios, “we could have got about the same findings with a different model”. He suggests that it is important to look beyond the simple assumptions used in a model like FUND, to consider more realistic settings in which incentives may play a key role.
Analysis Papers, written by experts in this field, provide a comprehensive exploration of the costs and benefits of one solution to climate change.
Perspective Papers provide a critique of the assumptions and calculations used in the Analysis Paper, and provide another expert opinion on this solution to climate change.
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Prof. Dr. Richard SJ Tol
Author of An Analysis of Mitigation as a Response to Climate Change. Dr. Richard S. J. Tol is a Research Professor at the Economic and Social Research Institute (Dublin) and the Professor of the Economics of Climate Change at the Vrije Universiteit Amsterdam. An economist and statistician, his work focuses on impacts of climate change, international climate policy, tourism, and land and water use. He is ranked among the 200 best economists in the world. His recent publications include Economic Analysis of Land Use in Global Climate Change (Routledge, 2008) and Environmental Crisis: Science and Policy (Springer, 2007).
Dr. Ir. Onno Kuik
Author of A Perspective Paper on Mitigation as a Response to Climate Change. Dr. Ir. Onno Kuik is a researcher at the Institute for Environmental Studies, Vrije Universiteit, Amsterdam. He has worked for the past twenty years on the economic analysis of environmental policy. He received the Energy Journal’s 2003 Best Paper Award for the paper ‘Trade Liberalization and Carbon Leakage’, co-authored by Reyer Gerlagh.
Prof. Roberto Roson
Author of A Perspective Paper on Mitigation as a Response to Climate Change. Prof. Roberto Roson has been a Visiting Fellow at the Free University of Amsterdam, at the University of Warwick, and at S.Francisco Xavier University (Sucre, Bolivia). He is currently associate professor at Ca’Foscari University, Venice, where he teaches Industrial Organization, International and Antitrust Economics. He is currently collaborating with the Euro-Mediterranean Centre for Climate Change, IEFE- Bocconi University and the World Bank.