The Case for Climate Action from a Nobel Economist

Last year, the Stern Review Report on the Economics of Climate Change, a report commissioned by the UK government, caused a stir with its conclusion: The world's economies must pay relatively modest costs today to curb global warming or face an enormous bill later. Cost today? 1% of world GDP. Cost in the future? Reduction in world GDP of 5% to 20%.

It was the first analysis of its kind from a renowned economist, and it's been taken to task for using an incorrect discount rate. Still, the conclusions are hard to knock, evidenced by a recent Stern supporter: Kenneth J. Arrow, Nobel Laureate in Economics and Professor Emeritus of Stanford University. He took a fine, hard look at Stern's conclusions and says they're spot on. Not an ounce of smoke and mirrors:

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...

These calculations indicate that, even with higher discounting, the Stern Review’s 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 CO2 emissions.

His case rests on some important points.

First, C02 emissions are different from other types of environmental pollutants (water pollution, acid rain, or sulfur dioxide) in that they remain in the atmosphere for centuries. They simply can't be mitigated as promptly as the others. Keep spewing emissions under business-as-usual and the atmosphere will just keep soaking up the C02, with mitigation becoming less and less effectual, and more and more expensive.

Second, CO2 emissions are a global problem. They travel around the world in a few days. A single nation acting alone would be hard-pressed to make a dent. A global response is a necessity with the world's largest carbon polluters on board. The US remains the one country that could make it happen. From Arrow:

Since the United States contributes about 25% of the world’s CO2 emissions, its own policy could make a large difference.

In sum: "Mitigation makes economic sense." For the entire world. Immediately. And 1% of GDP per year in cutting greenhouse gases is a fine place to start.

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