Module 10: Economics

Module 10 Overview

Don’t even think about going to the bathroom in your neighbor’s driveway—you may not do so legally. The government has passed rules and regulations that outlaw such actions. But, this is not the only way to handle pollution. Another approach is to find out how much damage would be done to your neighbor, or to all of your neighbors if you went to the bathroom in one of their driveways, and then allow you to do so if you paid for the damages. But, how would you estimate the damages, and who would be paid?

The value to society of burning fossil fuels is much greater than the value to you of going to the bathroom in someone else’s driveway. So, little consideration is given to immediate rules to outlaw emission of fossil-fuel CO₂ (although some rules to reduce CO₂ are being enacted). Much consideration is being given to ways to estimate the damages caused by the CO₂, and raise the cost of fossil fuels to reflect those damages.

This module looks at the economic side of estimating those damages. Most of the damages will happen in the future, because the costs of climate change go up exponentially as the temperature rises, and the temperature will remain elevated for a long time if we don’t take actions. So, some way is needed to estimate the present value of those future damages.

Economists typically do this with integrated assessment models, which allow for the use of money to reduce the damages of warming now or in the future, and all of the other uses of money, such as investing to help future generations be wealthy and have the resources to deal with the damages of climate change.

These analyses show that emitting CO₂ to the air does have costs for society. Following usual economic assumptions about getting the most good for people from the things they consume, a response to reduce CO₂ emissions is economically justified. But, because other uses of money are also valuable, the optimal response starts slowly, doing a little about climate change now and doing more later, while still allowing much climate change to occur. Many uncertainties are associated with these calculations, and it appears that most point to doing more now to reduce warming than this economically efficient path.