1563. The Benefits of Easing Climate Change: An Economic View

By Eduardo Porter, The New York Times, September 23, 2014

President Obama addresses climate change at the UN meeting

On Tuesday, more than 100 world leaders gathered at the United Nations to open a climate summit meeting that Secretary General Ban Ki-moon hopes will provide momentum to a new round of negotiations toward a global environmental agreement to be signed in Paris next year.

You’re forgiven if you hold your applause. World leaders have been trying without success to cut such a deal for almost two decades, crashing time and again into the fear that slowing the emissions of carbon that are inexorably changing the climate carries an economic cost that few are willing to bear.

This time, though, advocates come armed with a trump card: All things considered, the cost of curbing carbon emissions may be considerably cheaper than earlier estimates had suggested. For all the fears that climate change mitigation would put the brakes on growth, it might actually enhance it.

Whether this can tip the balance toward the global grand bargain that has eluded world leaders so many times depends on a couple of things. The first is to what extent it is true. The second is whether this is, in fact, the issue that matters most to the people making the decisions.

The most recent salvo came in “The New Climate Economy,” a report issued last week by an international commission appointed by a handful of rich and poor countries to take a new look at the economics of climate change.

“There is now huge scope for action which can both enhance growth and reduce climate risk,” it reads. Efficient investments could deliver at least half of the emission cuts needed by 2030 to keep global temperatures in check. And they could do so while delivering extra economic gains on the side.

At first blush, the proposition that replacing fossil fuel with more expensive energy could produce a net economic gain seems implausible. Until now, even many supporters of tough action accepted the idea that there would be a necessary price to pay initially to achieve the long-term goal of avoiding catastrophic climate change.

But the new thinking turns that on its head by taking more careful account of the hidden benefits of mitigating climate change.

“The cost of action is well known,” said Helen Mountford, director of economics at the World Resources Institute, which worked on the “New Climate Economy” report. “The co-benefits, like reduced health costs, are less known.”

The findings are not isolated. Research published this month by Ian Parry and Chandara Veung of the International Monetary Fund and Dirk Heine of the University of Bologna concluded that almost every one of the top 20 carbon emitters would reap economic gains by imposing a hefty carbon tax, if they deployed the revenue to reduce taxes on income.

A tax of $63 per ton of CO₂, for instance, would not only cut China’s emissions by some 17 percent, it would also cut the number of Chinese sickened or killed by pollution from coal. If Beijing used the money to cut other taxes, it would increase economic efficiency, adding up to a net economic gain — on top of any climate impact — of more than 1 percent of China’s gross domestic product.

This finding does not depend on any technological breakthroughs. It happens whether solar energy is cheap or expensive.

“It’s only recently that policy makers are beginning to appreciate the power of fiscal instruments like environmental taxes,” Mr. Parry told me. “And it’s only fairly recently that we’ve been able to value the health and other environment impacts so we’ve only recently got some sense of the substantial and pervasive undercharging for environmental damages.”

While this is all theory, some empirical research also supports the finding.

In 2008, for instance, the Canadian province of British Columbia unilaterally imposed a carbon tax that rose from 10 Canadian dollars per ton of CO₂ in 2010 to 30 dollars in 2012, using the money to reduce personal and corporate income taxes.

An assessment of the experience published last year by economists at the Organization for Economic Cooperation and Development found that fuel use declined, but economic growth remained on the same trajectory as the rest of Canada’s. Notably, British Columbia ended up with the lowest income tax in the country.

Could this new understanding change the debate over climate change?

At the very least, the belief that there is a climate-related free lunch out there might provide welcome harmony to negotiations that usually end in acrimonious finger-pointing. The new research might even help move the debate away from the failed strategy of seeking legally binding emissions targets on every country, providing a blueprint for countries to voluntarily take on ambitious goals because it is in their own self-interest regardless of what other nations do.

Not everybody buys the math, though. And even those who do acknowledge that these efficient pathways to a low-carbon future are very narrow indeed. “Not all climate policies are win-win, and some trade-offs are inevitable,” notes “The New Climate Economy.”

For even if every country reaped net benefits from embracing a low-carbon development path, governments still must allocate costs and benefits within individual economies, mediating between winners and losers.

“Health is a social benefit that is not included in the accounts of private investors,” noted Zou Ji, deputy director of China’s National Center for Climate Change Strategy, a research institute affiliated with the government’s National Development and Reform Commission. “But abatement costs will be felt by private investors.”

Navigating these distributional issues will be tricky. Getting it wrong can be expensive. For instance, Mr. Parry and his co-researchers found that if carbon revenue was not used to reduce other income taxes, the net gain from a carbon tax evaporated and became a net cost.

Germany — perhaps the country most committed to developing an economy powered with renewable energy — has struggled with the trade-offs. First it exempted its export-oriented, energy-intensive industries from the surcharges levied to pay for subsidies to solar and wind generators. More recently, alarmed at the rising cost of power, it has begun reducing its subsidies for renewables, which has led to a drop in the rollout of solar power.

So maybe it’s no surprise that few countries have been willing, at least so far, to commit to take the promised high growth/low carbon path.

Last July, Australia’s newly installed conservative government repealed the carbon tax introduced by the Labor government before it, and the country’s carbon emissions quickly shot up.

“If the Chinese and the Indians found it much more economically efficient to build out solar, nuclear and wind, why are they still building all these coal plants?” asked Ted Nordhaus, chairman of the Breakthrough Institute, a think tank focused on development and the environment.

China’s CO₂ emissions increased 4.2 percent last year, according to the Global Carbon Project, helping drive a global increase of 2.3 percent. China now accounts for 28 percent of the world’s total emissions, more than the United States and the European Union combined.

“I don’t think the Chinese and the Indians are stupid,” Mr. Nordhaus told me. “They are looking at their indigenous energy resources and energy demand and making fairly reasonable decisions.”

For them, combating climate change does not look at all like a free lunch.