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Global Warming Threshold: Is 2°C Really Affordable?

April 5, 2016.


Armed with scary scientific evidence from the IPCC*, the Paris Climate Change Conference adopted the goal of limiting the rise in global temperature to 2°C. Unfortunately, the potential economic cost of waging a major war on CO2 emissions could make that goal politically infeasible.


After all, political leaders are loathe to take action that could jeopardize their electability. A clampdown on CO2 is a political hot-potato because it would require citizens to bear higher taxes and energy prices many decades before the promised benefits materialize. So, to achieve a 2° cap, today's elected officials must be willing to make their own constituents worse-off so that future generations can be better-off.


The message is obvious: to rescue the 2°cap from the graveyard of political self-preservation, we need a low cost recipe for stifling CO2 emissions.


Fortunately, the IPCC provided such a recipe to the Paris Conference in the form of a computer simulation. It posits a scenario in which uncoordinated national policies and regulations are replaced by an international carbon tax. It is a recipe for maximum efficiency: by allowing market forces to allocate scarce resources, the simulation curbs CO2 at a rock bottom cost.


The catch, of course, is that the simulation is an imaginary construct based on ideal assumptions. Here is a brief summary of the ideal scenario:

  • Immediately, and in perfect harmony, all nations would levy an escalating tax on their carbon emissions. For example, in 2016 they collect a $50 tax on each ton of CO2 emitted and raise the tax by $10 every year thereafter. This makes fossil fuels more expensive to use, which motivates the producers and consumers of energy to switch to the cheapest clean-energy alternative.

  • All nations would abandon policies that undermine or distort the effects of a carbon tax. So, America would cancel its ethanol mandate and repeal the mortgage interest deduction, while Germany would reverse its stupid phase-out of nuclear energy and Venezuela would stop subsidizing electricity.

  • Technological advancements that are essential for big CO2 reductions in the future, like Carbon Capture and Storage, would always materialize on time.

  • And all of the above would be unperturbed by government malfeasance and game-changing surprises like wars and natural disasters.

The simulation's estimate of "rock-bottom" cost was reported as follows:

If the above scenario were implemented in 2016 and gradually intensified over the next 20 years, by 2035 it would consume only 1.7% of global GDP. In other words, the worldwide annual cost of holding the line at 2° would slowly rise from virtually zero to a piddling 1.7% of global GDP by 2035. However, the U.S. would have to assume about 40%** of the total.


Is that "rock-bottom" cost really low enough to make a 2° cap politically feasible?


To answer this question I converted the percentages into US dollars. The figure below depicts the annual cost of curbing carbon emissions from 2015 to 2035, both worldwide and the U.S. share.


economic cost of halting global warming

What are the chances that American politicians and citizens would be willing to spend the escalating sums depicted in red for the sake of preventing a 2° rise in temperature? Before answering, please consider the list of depressing realities below.


1. In relative terms, the costs presented in the table are huge. From 2020 through 2035 America would spend, on average, $654 billion per year to stay on the 2° target. That sum is greater than the current defense budget and greater than total spending on K-12 education. It's enough to completely cover the health care costs of every American under 65. If the cost were divided equally, each American household would get an annual bill of almost $5,000 per year!


2. Remember, the IPCC's rock-bottom estimates assume extremely efficient carbon abatement. That means America would be spending nearly as much to stifle emissions in other countries as it spends at home. How will American voters and politicians respond to the prospect of transferring billions of dollars to countries of uncertain integrity - China, India, South Africa, Indonesia, Iran, Brazil, and Mexico?


3. Climate change is just one of many worthy demands on America's treasure, but the law of scarce resources makes it it's impossible to fund them all. So, which of the following demands are American voters and politicians willing to sacrifice in order to spend $654 billion/yr on climate change?

  • Within the next 10 years the Federal government will have to make good on its unfunded promise to provide Social Security and Medicare to 70 million retiring baby boomers. It will take 3.8% of our GDP (every year, forever) to permanently erase that deficit; which translates into a cost of $800 billion in 2025 rising to $1,000 billion by 2035.

  • So that those rising costs do not impoverish our descendants, America needs a huge rebound in labor productivity. Since 1972, the annual growth in productivity has fallen from 2.8% to 1.2%. A major reason is insufficient public investment in infrastructure, basic R&D, and early childhood education. It will take $300 billion per year to offset this shortfall.

  • In addition, climate change mitigation will be competing with promises of additional spending by both political parties: military upgrades, naval expansion, free college tuition, student debt relief, Medicare for all, and so on.


Reality bites.


The message of the foregoing litany is that 'the cheapest we could hope for' may not be cheap enough to win political support, in which case global warming will inevitably creep beyond 2°C.


The truth is, the IPCC's idealized model provided the Paris delegates with a practical recipe for optimal success. Indeed, an international carbon tax is exactly the framework that is needed to minimize the cost of cutting emissions.


Yet this model of supreme efficiency is completely absent from the final Paris accord. Instead, the delegates adopted a weak and indecisive agreement: a collection of non-binding promises to cut emissions that fall short of the 2° target. Small comfort that they have promised to return in five years with promises to do better.


So, with eyes wide open, the Paris delegates decided to avoid a binding framework of efficiency and simplicity, which means that the economic price of holding global warming to 2° will be a lot higher than the IPCC's estimates. You can imagine what that means for the course of climate change.

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* The International Panel on Climate Change


**The rationale for the 40% figure is that global warming cannot be capped at 2° unless the U.S., Europe, and Japan pick up most of the tab for the next 20 years. This fait accompli is the result of international treaties which recognize that today's climate problem is a creature of rich countries' industrial revolutions. Ever since Kyoto in the 1990s, climate conventions have held that developing countries should not be burdened with the task of reducing emissions until they reach middle-income status. This leaves China and India, the new juggernauts of CO2 pollution, off the hook until around 2035. By then the duo's CO2 emissions are expected to actually increase by about 7000Gt/yr.


Unless this upsurge of CO2 from developing countries is counteracted by rich countries, it will be impossible to cap warming at 2°, according to IPCC data. To entirely offset the upsurge, rich countries will not only have to cut their own emissions, but for the sake of efficiency they will have to finance carbon clamp-downs in developing countries. This is already a reality: the Paris Accord mandates a climate fund of $100 billion by 2020 to help developing countries deal with climate change.

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