Thoughts on global warming

In addressing climate change, China has a unique opportunity to assert its rising global leadership role, as well as moral authority, writes George A. Akerlof.

Let me start with a few statements to indicate where I am coming from.

First, the theory and evidence that I have seen all seems to strongly suggest that human-related emissions of carbon into the atmosphere is causing, and will in the future cause, significant global warming.

Second, this global warming is on such a scale that it will wreak havoc on both poor and rich countries.  It could even make large sections of the earth uninhabitable.

Third, the costs of abatement are large.

Therefore the decision to curtail emissions is a very serious one and it is clear that these decisions will also cause hardship in poor and in rich countries.

Fourth, despite these high costs, the time has passed that policy makers should still be acting on the null hypothesis that global warming will not occur.

Choice of null

Here I come to the first use of economics.  It turns out that this point is central to current US policy. As I see it, current US policy is that the Federal Government should do continued research to ascertain the extent of global warming and its future path and the  policy tree is to take future action only if the findings of this research are sufficiently conclusive.

In the event of the findings being sufficiently conclusive,  we should take serious corrective action to curtail our own emissions and also to participate in international treaties regarding abatement of emissions.

An alternative null hypothesis—that global warming is already occurring—could be the basis of our policy. Were that to be the case, this alternative hypothesis would cause our policy to be very different : in this case we should be taking active steps now to curb emissions and to participate in international treaties to curb it.

Which of these two null hypotheses guides our policy should be determined by the relative costs and benefits and the relative probabilities of the two hypotheses.

The losses from failing to address global warming if it does occur are truly enormous. Even more serious, the effects are also irreversible. In contrast, the losses from addressing global warming, if it does not occur or if it is not very serious, are not enormous and the losses from addressing the problem  are only very large. In addition, it seems that the likelihood of global warming with serious impacts on large segments of the planet seems now to be very high.

If we add up the relative economic costs and benefits and weight them by their respective probabilities, that seems to show that we should definitely be acting on the presumption that global warming is going to occur.

The unavoidable conclusion is that the current US administration and the US Congress have made the wrong call.

We should be acting to curb it and we should be engaging in international co-operation to do so. And even those who have very serious doubts about whether global warming is occurring should still believe that we should be taking precautions against it. 

Economic remedy

The second topic that I want to address is how we should fight global warming.

Economic theory gives a simple natural way to fight global warming, which is to have escalating taxes on carbon emissions. There is a simple reason why this is the ideal remedy : carbon emissions into the atmosphere constitute a nuisance to everybody on the planet.

People should be taxed to pay a penalty equal to the value of the nuisance that they cause. In this way people who value their emissions more than the nuisance they cause will make those emissions and they will  pay the tax. People whose emissions are not valued as much as the nuisance they cause will curb them and will not  pay the tax. Thus with such a tax, emissions will be curbed insofar as the nuisance they create exceeds their benefits.

The economics here is as simple and straightforward as economics ever gets. It would be hard to find any economist who would disagree.

It may also be worthwhile noting that this may be one place where economists’ judgments may be different from that of other professionals.   We economists tend to  be fairly optimistic about the effects of prices or taxes on people’s behaviour. So the size of the tax necessary to reduce these emissions may be large, but perhaps not extremely large.

The reason for that is that we think that over fairly long periods of time that people are fairly responsive to changes in prices. In addition, there will be substitution of nuclear and other non-carbon forms of electricity generation.

Steve Chu’s talk gave some indication as to how large these taxes would have to be to get important shifts even with current technology to carbon-free generation of electricity.

With a carbon-tax people will switch to smaller and more fuel-efficient methods of transport. With sufficient time for innovation and a tax that is sufficiently high there will be other innovations as well. There are also possible innovations in carbon sequestration.

A further recommendation from standard economics is that there should be large-scale government support for research into new technology that will reduce carbon emissions.

However, this research must be supported by incentives to develop such technology further and put it in place.

But it is important to note that the new technology will not and  cannot be successful unless the appropriate incentives for its use are put into place : you may create the most beautiful inventions, but  unless it pays people to use them, they won’t.

So we need a carbon tax or something like it to provide such incentives.

Finally, because much of the use of energy involves networks of people who are doing the same thing, initial technologies may need some extra push from governmental subsidy and governmental regulations.

Thus the economics of what should be done is fairly simple —  sufficiently simple, in fact,  that it can be easily taught as an application of standard economic principles in a first-year undergraduate course. But it turns out that getting people to follow these economic principles is very difficult indeed.

I have seen this at first hand at Congressional testimony given by my wife, who was the Chair of the Council of Economic Advisers from 1997 to 1999. It was her job to represent the economic case of the Clinton Administration as to why the Congress should support the Kyoto Treaty.

The Congress-people were not willing to vote for this because they felt that the costs of supporting Kyoto were too high relative to the benefits. In a nutshell they were afraid that their constituents would rebel against the increases in the prices that would accompany reductions in carbon emissions called for in the Kyoto Accords.

The moral basis of policy

In retrospect I think that the argument for the carbon tax has been pitched in the wrong way and at the wrong level.

The Clinton Administration framed its argument in terms of costs and benefits, but instead, the issue of global warming needs to be phrased in moral terms. Phrasing it in moral terms  should also be the stance for international agreements.

The morality of it is fairly easy : if somebody does not do anything about global warming, the climate of the earth is likely to change drastically, with severe harm to future generations. Carbon emissions are the cause of this global warming. Therefore it is immoral for any country, any industrial entity, or any person to contribute more than her fair share to this nuisance.

It is like a case of stealing. By adding more carbon to the atmosphere than our fair share, we are taking more than what rightfully belongs to us. We should not feel entitled to that any more than we would feel entitled to enter uninvited into our neighbours' house and partake of the dinner sitting on the table for their family.

Whether or not we should do that is not a question of costs and benefits and even less should it be a question of our costs and our benefits.

It is a question of basic right and wrong.

Opportunity for China

I would like to make a suggestion to the Chinese delegation  regarding the stance that they should take toward global warming. I do not think that you should look to the United States to take the lead before you take your own stance on global warming. China is the rising economic star. China is also  the rising star on the stage of world leadership.

World leadership should be given not to countries because they are rich and powerful. It should be given to countries that have a moral commitment to do what is humanitarian and right.

Global warming is one such area. It is an area where the US especially has abdicated what is right for what is expedient. This is an opportunity, perhaps at not even very great cost, for China to assert its moral authority.

It is a good place to begin the assertion of world leadership that China will increasingly take as this century progresses.