Schmalensee, Richard

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BOOK REVIEWThree Books on Global Climate ChangebyRichard SchmalenseeMIT-CEEPR 93-013WP September 1993MASSACHUSir-S IMSTITUTESEP 0 5 1996LU3HARrt2Counting the Cost of Global Warming. BY JOHN BROOME. Cambridge, UK: White HorsePress, 1992.The Economics of Global Warming. BY WILLIAM R. CLINE. Washington: Institute forInternational Economics, 1992.Buying Greenhouse Insurance: The Economic Costs of CO2 Emission Limits. BY ALAN S.MANNE AND RICHARD G. RICHELS. Cambridge, MA: MIT Press, 1992.These three books deal with various aspects of the economics of global climate change-- an issue of global scope involving potentially huge stakes, time horizons measured incenturies, and deep scientific and economic uncertainties. William Cline's book provides acritical assessment of much of the literature and an analysis of policy options. The shortermonographs by John Broome and by Alan Manne and Richard Richels focus in more depthon intertemporal comparisons and the costs of emissions reduction, respectively. Cline's bookis essential reading for economists any interest in global climate change, while the other twostudies deserve the attention of those with a research interest in this issue.All three books begin with discussions of the large and diverse scientific literature onglobal warming. Cline's is the most comprehensive discussion, but Cline's concern forbottom-line policy conclusions often leads him to understate scientific uncertainty. Forinstance, even though most scientists do not believe that it will be possible for years (forcomputational and other reasons) to generate reliable long-term forecasts of regional climatechanges, Cline sometimes (e.g., p. 61-72) treats this problem as solved. Cline does notalways make it clear when he undertakes to settle debates among scientists or to extrapolatebeyond the scientific literature.Cline argues persuasively that a long time horizon is appropriate in the analysis ofclimate change. Most scientists agree that today's emissions of carbon dioxide (C02) willincrease the net amount of solar radiation absorbed by the earth (radiative forcing) for a2century or more, and climate change appears likely to lag changes in radiative forcing bydecades. Analyses that do not look beyond the middle of the next century thus neglect muchof the climatic impact of even today's emissions. Unfortunately, the farther into the futureone tries to look, the greater the scientific and economic uncertainty one encounters. Cline'sbest estimate (a serious extrapolation beyond the literature) is that without significant policychanges, global average warming would peak at about 10*C (18TF) in about the year 2275, butthe corresponding subjective probability distribution is necessarily quite flat. Moreover,global average warming is of little policy interest, and the regional changes that do matter areconsiderably more uncertain.Whether extending the horizon from 2050, say, to 2275 is likely to affect policyconclusions materially depends critically on the discount rate employed. More generally, ifonly because CO2 emissions have very long-lived effects on the atmosphere, choice of adiscount rate is critical to the analysis of climate change policy. Cline devotes a provocativechapter to this issue and concludes that a relatively low real discount rate of 1.5% should beused in this context.Broome's monograph, the outgrowth of a "desk study" that he and David Ulphprepared for the Economic and Social Research Council (UK), treats in more depthdiscounting and related welfare-theoretic issues in the context of climate change. The originalstudy was apparently done under significant time pressure, and Broome's book provides moreof a critical survey than an attempt to break new ground. Whereas Cline puts bridges of onesort or another across all swamps he encounters, Broome is generally content to erect warningflags, indicating the need for more research, where solid bridges do not already exist.3Broome attempts, with a good deal of success, to integrate the relevant philosophical literatureinto a relatively non-technical and very clear exposition aimed primarily at economists.Broome notes that policies to reduce greenhouse gas emissions generally involve inter-generational redistribution and that one cannot presume that either climate change or policiesto deal with it will have only a marginal impact on society. If only because catastrophicshifts in weather patterns are at least conceivable, population sizes and average lifetimes arelogically endogenous. Broome's analysis begins with an illuminating general discussion ofrelations among such concepts as justice, wellbeing, and preferences in such settings. Ifnothing else, this discussion reveals how heavily conventional welfare economics depends ongenerally unexamined philosophical conclusions.Broome devotes a 60-page chapter to the question of discounting in the climate changecontext. He argues that discounting costs and benefits using the consumer interest rate isunjustifiable for several reasons, most importantly because future people do not participate intoday's markets and because global warming is (at least with some probability) not marginal.He objects to using the producer interest rate even when government investment displacesprivate investment, largely on the grounds that observed private rates of return exceed thecorresponding social rates of return because of unpriced externalities -- an objection thatseems to have more to do with practicality than with principle. Broome then deals with the"pure" discount rate, the rate at which wellbeing is discounted in the objective function. Heargues from first principles that this rate should be zero. The analysis finishes with adiscussion of the treatment of population and lifetimes in the objective function; thisprovocative discussion leads to no sharp conclusions.4On the whole, Broome succeeds in his attempt "to bring some order to the questions,rather than find answers." His monograph does not contain much specific methodologicalguidance, but it should serve as a useful starting point for necessary welfare-theoretic researchon the proper treatment of intertemporal and, critically, intergenerational comparisons in thecontext of climate change.Cline devotes about 40% of his book to estimates of the costs and benefits of reducinggreenhouse gas emissions relative to baseline levels. Relatively little serious quantitativework has been done on benefits -- that is, on the differences in the costs that would beimposed by various rates and levels of climate change. Almost no quantitative analysis hasattempted to look beyond the next century or to value impacts of climate change onunmanaged ecosystems. Cline tends to treat as likely the worst possibilities discussed in athin literature mainly concerned with what might happen in the 21st century. He then inflatesthe corresponding damages to reflect the much greater warming he predicts over the following200 years. While Cline's treatment is thus not exactly inconsistent with the existingliterature, his damage/benefit estimates seem clearly on the high end of the supportable range.Cline's discussion of the costs of slowing climate change (and, in the very distantfuture, perhaps reducing the peak change) considers both engineering and economic estimatesof the cost of reducing CO2 emissions. (Because there is essentially no literature on the costsof reducing emissions of other greenhouse gases, Cline is forced to account for these costs byscaling up the CO2 abatement cost estimates.) Cline attaches considerable weight to theresults in the Manne-Richels monograph, though he adjusts those cost estimates downwards toreflect the large untapped potential for zero-cost energy conservation that engineers tend to5see and economists tend to argue must be an illusion. Cline discusses transitional forestryoptions at some length. (Only growing forests remove CO2 from the atmosphere; matureforests store carbon.)The Manne-Richels monograph describes Global 2100, a five-region, long-term,energy-economy model, and uses it to analyze the effects of a range of emission reductionscenarios during the 1990-2100 period. Even though Global 2100 is necessarily complex,Manne and Richels present the main structural assumptions it embodies and the roles of itskey parameters very clearly. The Manne-Richels monograph is thus useful both because itpresents important and well-defended quantitative results and because it provides cleardiscussions of important modeling issues.Attempts to forecast the structure of the global economy through the end of the nextcentury necessarily involve a mixture of extrapolation and technology forecasting.Computational and data constraints require that any global model embody significantsimplifications. In Global 2100, each region is modeled as a single regional individual withperfect foresight using capital, labor, electrical energy, and non-electrical energy to produceGDP using a putty-clay technology. Each regional individual maximizes the discountedlogarithm of consumption, using a 3% "pure" discount rate. Key production parameters arethe elasticity of substitution between energy and capital-labor aggregates (ESUB) and the rateof autonomous energy-augmenting technical change (AEEI). The model is benchmarked sothat GDP growth rates in the absence of policy change equal the average of rates projected byWorking Group III of the Intergovernmental Panel on Climate Change (IPCC).Global 2100 has a relatively detailed energy sector. Electrical energy may be6produced by five existing technologies and four future technologies, two of which are carbon-free backstops available in unlimited supply. There are nine technologies for producing non-electrical energy, one of which is a carbon-free backstop. The costs assumed for the backstoptechnologies (which are not otherwise described) act as important upper bounds on the costsof reducing CO, emissions. The model allows for depletion and discovery of oil and gasreserves and for international trade in oil and, in some runs, in rights to emit CO2.Manne and Richels forecast baseline global CO2 emissions to increase by nearly afactor of 7 between 1990 and 2100. U.S. emissions are projected to increase by about afactor of 5; about 75% of global emissions growth is projected to occur outside the OECDand the former USSR, most importantly in China and India.Manne and Richels analyze the effects of restricting U.S. emissions to their 1990 levelthrough 2000, reducing them to 80% of this level by 2010, and stabilizing them thereafter. Intheir base case, the relative GDP loss involved in satisfying this constraint at least cost (mostnaturally by imposing a carbon tax) climbs to just over 2% by 2020, rises slowly to 2.5% by2040, and, because of the availability of backstop supply technologies, remains roughlyconstant thereafter. Manne and Richels show that these costs are quite sensitive toassumptions about backstop parameters and the AEEI. Like most other contributors to theabatement cost literature, Manne and Richels do not consider alternatives to cost-minimizingpolicies, even though recent debates about energy policy and energy taxes in the U.S. and theE.C. suggest very strongly that a simple tax on CO2 emissions is likely to be considerably lessattractive politically than more costly regulatory alternatives, such as stringent vehicle andappliance efficiency standards.7In another experiment, Manne and Richels treat total allowable U.S. emissions through2050 as uncertain until 2020 and show that, depending on the probabilities attached toalternative emissions limits, the value of improved information may be high. The Global2100 model is shown to imply substantial international differences in the costs of CO2emissions stabilization and significant potential gains from moving from national to globalemissions constraints (most naturally, by international trade in rights to emit C0 2). Manneand Richels also note that realizing those gains is likely to require a significant flow ofresources from developed to developing nations.Cline's comprehensive analysis culminates in a detailed, clearly presented evaluationof an "aggressive" policy of reducing current global emissions (again, at least cost) by about40% and holding them stable indefinitely. This policy goes well beyond those that havedominated recent intergovernmental discussions. In Cline's preferred case, the benefit/costratio is only 0.74, though it exceeds unity for some parameter combinations he considersplausible. (Much depends on the discount rate and on how available damage estimates areinflated to reflect greater warming in the distant future.) Cline argues that allowing for risk-aversion serves to justify his aggressive policy.In his final chapter, Cline discusses the serious obstacles to internationalimplementation of abatement policy and advocates focusing on relatively inexpensive actionsin the near term. Cline's discussion of what is feasible seems optimistic. Developing nationstypically have much more urgent concerns and are uninterested in devoting resources toimproving the climate their great-great-grandchildren will face. Only a few developed nationshave done anything but talk (in some cases loudly and at length) about reducing their own8CO2 emissions. (Cline's assertion that the E.C. has adopted a carbon tax is, at best,premature.) No donor nations have agreed to pay billions to help China and India use theirvast coal reserves more efficiently.Richard SchmalenseeMassachusetts Institute of Technology

Book review : three books on global climate change

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Book review : three books on global climate change

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