Environmental and Natural Resource Economics A Contemporary Approach Third Edition Jonathan M Harris and Brian Roach www.ebook3000.com Environmental and Natural Resource Economics www.ebook3000.com Page Intentionally Left Blank www.ebook3000.com Environmental and Natural Resource Economics A Contemporary Approach Third Edition Jonathan M Harris and Brian Roach www.ebook3000.com First published 2013 by M.E Sharpe Published 2015 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 2013 Taylor & Francis All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Notices No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use of operation of any methods, products, instructions or ideas contained in the material herein Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe Library of Congress Cataloging-in-Publication Data Harris, Jonathan M Environmental and natural resource economics : a contemporary approach / by Jonathan Harris & Brian Roach.—3rd ed p cm Includes bibliographical references and index ISBN 978–0-7656–3792–5 (hardcover : alk paper) Environmental economics Natural resources Environmental policy I Title HC79.E5H356 2013 333.7—dc22 2012045232 ISBN 13: 9780765637925 (hbk) www.ebook3000.com Contents Note to the Reader Key Terms are bolded in the text, with a sidebar definition All Key Terms in a chapter are listed at the end of the chapter, and the definitions are collected in the Glossary, noting the chapters in which they appear Preface to the Third Edition ix Part I Introduction: The Economy and the Environment 1 Changing Perspectives on the Environment 1.1 Economics and the Environment 1.2 A Framework for Environmental Analysis 1.3 Environmental Microeconomics and Macroeconomics 1.4 A Look Ahead 12 Resources, Environment, and Economic Development 16 2.1 A Brief History of Economic Growth and the Environment 16 2.2 A Summary of Recent Growth 21 2.3 The Future of Economic Growth and the Environment 22 2.4 Sustainable Development 26 Part II Economic Analysis of Environmental Issues 33 The Theory of Environmental Externalities 35 3.1 The Theory of Externalities 35 3.2 Welfare Analysis of Externalities 43 3.3 Property Rights and the Environment 46 Appendix 3.1: Supply, Demand, and Welfare Analysis 57 Appendix 3.2: Externality Analysis: Advanced Material 66 v www.ebook3000.com Common Property Resources and Public Goods 76 4.1 Common Property, Open Access, and Property Rights 76 4.2 The Environment as a Public Good 85 4.3 The Global Commons 88 Resource Allocation Over Time 93 5.1 Allocation of Nonrenewable Resources 93 5.2 Hotelling’s Rule and Time Discounting 101 Valuing the Environment 107 6.1 Total Economic Value 107 6.2 Overview of Valuation Techniques 110 6.3 Revealed Preference Methods 113 6.4 Stated Preference Methods 115 6.5 Cost-Benefit Analysis 119 6.6 Conclusion: The Role of Cost-Benefit Analysis in Policy Decisions 134 Appendix 6.1: Advanced Material on Valuation Methods 143 Appendix 6.2: Using Excel to Perform Present Value Calculations 146 Part III Ecological Economics and Environmental Accounting 149 Ecological Economics: Basic Concepts 151 7.1 An Ecological Perspective 151 7.2 Natural Capital 152 7.3 Issues of Macroeconomic Scale 154 7.4 Long-Term Sustainability 157 7.5 Energy and Entropy 160 National Income and Environmental Accounting 168 8.1 Greening the National Income Accounts 168 8.2 Environmentally Adjusted Net Domestic Product 171 8.3 Adjusted Net Saving 173 8.4 The Genuine Progress Indicator 178 8.5 The Better Life Index 182 8.6 Environmental Asset Accounts 188 8.7 The Future of Alternative Indicators 192 Appendix 8.1: Basic National Income Accounting 198 Part IV Population, Agriculture, and the Environment 203 Population and the Environment 205 9.1 The Dynamics of Population Growth 205 9.2 Predicting Future Population Growth 209 9.3 The Theory of Demographic Transition 215 9.4 Population Growth and Economic Growth 219 9.5 Ecological Perspectives on Population Growth 222 9.6 Population Policies for the Twenty-First Century 227 vi Contents www.ebook3000.com 10 Agriculture, Food, and Environment 232 10.1 Feeding the World: Population and Food Supply 232 10.2 Trends in Global Food Production 235 10.3 Projections for the Future 240 10.4 Agriculture’s Impact on the Environment 243 10.5 Sustainable Agriculture for the Future 251 Part V Energy and Resources 261 11 Nonrenewable Resources: Scarcity and Abundance 263 11.1 The Supply of Nonrenewable Resources 263 11.2 Economic Theory of Nonrenewable Resource Use 265 11.3 Global Scarcity or Increasing Abundance? 268 11.4 Environmental Impacts of Mining 271 11.5 The Potential for Recycling 274 12 Energy: The Great Transition 282 12.1 Energy and Economic Systems 282 12.2 Evaluation of Energy Sources 284 12.3 Energy Trends and Projections 287 12.4 Energy Supplies: Fossil Fuels 291 12.5 The Economics of Alternative Energy Futures 297 12.6 Policies for the Great Energy Transition 304 13 Renewable Resource Use: Fisheries 314 13.1 Principles of Renewable Resource Management 314 13.2 Ecological and Economic Analysis of Fisheries 315 13.3 The Economics of Fisheries in Practice 320 13.4 Policies for Sustainable Fisheries Management 324 14 Ecosystem Management— Forests 335 14.1 The Economics of Forest Management 335 14.2 Forest Loss and Biodiversity 339 14.3 Politics for Sustainable Forest Management 344 14.4 Conclusion: Reconciling Economic and Ecological Principles 347 15 Water Economics and Policy 352 15.1 Global Supply and Demand for Water 352 15.2 Addressing Water Shortages 357 15.3 Water Pricing 359 15.4 Water Markets and Privatization 365 Part VI Pollution: Impacts and Policy Responses 375 16 Pollution: Analysis and Policy 377 16.1 The Economics of Pollution Control 377 16.2 Policies for Pollution Control 380 Contents vii www.ebook3000.com 16.3 The Scale of Pollution Impacts 390 16.4 Assessing Pollution Control Policies 395 16.5 Pollution Control Policies in Practice 400 17 Greening the Economy 408 17.1 The Green Economy: Introduction 408 17.2 The Relationship between Economy and Environment 410 17.3 Industrial Ecology 417 17.4 Does Protecting the Environment Harm the Economy? 420 17.5 Creating a Green Economy .425 18 Global Climate Change 433 18.1 Causes and Consequences of Climate Change 433 18.2 Responses to Climate Change 441 18.3 Economic Analysis of Climate Change 442 19 Global Climate Change: Policy Responses 455 19.1 Adaptation and Mitigation 455 19.2 Climate Change Mitigation: Economic Policy Options 459 19.3 Climate Change: The Technical Challenge 468 19.4 Climate Change Policy in Practice 473 19.5 Economic Policy Proposals 477 19.6 Conclusion 483 Part VII Environment, Trade, and Development 489 20 World Trade and the Environment 491 20.1 Environmental Impacts of Trade 491 20.2 Trade and Environment: Policy and Practice 495 20.3 Trade Agreements and the Environment 499 20.4 Strategies for Sustainable Trade 502 21 Institutions and Policies for Sustainable Development 509 21.1 The Concept of Sustainable Development 509 21.2 The Economics of Sustainable Development 510 21.3 Reforming Global Institutions 514 21.4 New Goals and New Production Methods 520 Glossary 531 Index 553 About the Authors 569 viii Contents www.ebook3000.com Preface to the Third Edition The third edition of Environmental and Natural Resource Economics: A Contemporary Approach maintains its essential focus on making environmental issues accessible to a broad range of students The text is a product of twenty years of teaching environmental and natural resource economics at the undergraduate and graduate levels It reflects the conviction that environmental issues are of fundamental importance and that a broad approach to understanding the relationship of the human economy and the natural world is essential Typically, students come to an environmental economics course with an awareness that environmental problems are serious and that local, national, and global policy solutions are needed Some students may be interested in careers in environmental policy; others in gaining an understanding of issues that are likely to be relevant in their careers, personal lives, and communities In either case, the current importance of the topics gives the course a special spark of enthusiasm that is a heaven-sent boon to any instructor trying to breathe life into marginal cost and benefit curves There is a distinct danger, however, that this initial enthusiasm can be dampened rather quickly by the use of a strictly conventional approach to environmental economics One major limitation of this approach is its almost exclusive use of neoclassical microeconomic techniques The standard microeconomic perspective strongly implies that anything of importance can be expressed in terms of price—even though many important environmental functions cannot be fully captured in dollar terms Also, this perspective makes it difficult to focus on the inherently “macro” environmental issues such as global climate change, ocean pollution, ozone depletion, population growth, and global carbon, nitrogen, and water cycles For these reasons, the authors have developed an alternative approach that draws on the broader perspective that has come to be known as ecological economics, in addition to presenting standard economic theory In our view, these two approaches are complementary rather than in conflict Many elements of standard microeconomic analysis are essential for analyzing resource and environmental issues At the same time, it is important to recognize the limitations of a strictly cost-benefit approach and to introduce ecological and biophysical perspectives on the interactions of human and natural systems ix www.ebook3000.com Warmer temperatures have produced noticeable effects on ecosystems In most regions of the world, glaciers are retreating For example, Glacier National Park in Montana had 150 glaciers when the park was established in 1910 As of 2010 only 25 glaciers remained, and by 2030 it is estimated that the park will no longer have any of its namesake glaciers Climate change is also leading to rising sea levels Sea-level rise is attributed to the melting of glaciers and ice sheets and to the fact that water expands when it is heated In 2012 the global average ocean temperature was about 0.5°C above the twentieth-century average The combination of warmer oceans and melting ice has led sea levels to rise about millimeters per year (see Figure 18.5 and Box 18.2).7 Figure 18.5 Sea-Level Rise, 1880–2000 6HDOHYHO PP Source: IPCC, 2007a Note: Solid line shows average of different studies; shaded area shows 90 percent confidence intervals Box 18.2 Pacific Islands Disappear as Oceans Rise Two islands in the Pacific Ocean country of Kiribati—Tebua Tarawa and Abanuea—have disappeared as a result of rising sea level Others, both in Kiribati and in the neighboring island country of Tuvalu, are nearly gone So far the seas have completely engulfed only uninhabited, relatively small islands, but the crisis is growing all around the shores of the world’s atolls Scientists estimate the current sea level rise in the Pacific at about millimeters per year and expect that rate to accelerate due to climate change Populated islands are already suffering The main islands of Kiribati, Tuvalu, and the Marshall Islands (also in the Pacific) have suffered severe floods as high tides demolish sea walls, bridges and roads, and swamp homes and plantations Almost the entire coastline of the twenty-nine Marshall Islands atolls is eroding World War II graves on its main Majuro atoll are washing away, roads and subsoils have been swept into the sea, and the airport has been flooded several times despite the supposed protection of a high sea wall (continued) 438 Part Six, Chapter 18 Box 18.2 (continued) The people of Tuvalu are finding it difficult to grow their crops because the rising seas are poisoning the soil with salt In both Kiribati and the Marshall Islands families are desperately trying to keep the waves at bay by dumping trucks, cars, and other old machinery in the sea and surrounding them with rocks The situation is so bad that the leaders of Kiribati are considering a plan to move the entire population of 103,000 to Fiji The inhabitants of some villages have already moved It is much the same story far away in the Maldives The Indian Ocean is sweeping away the beaches of one-third of its 200 inhabited islands “Sea-level rise is not a fashionable scientific hypothesis,” says President Gayoom “It is a fact.” The seas are rising partly because global warming is melting ice sheets and glaciers and nibbling away at the polar ice caps, but mainly because the oceans expand as their water warms Scientists’ best estimate is that these processes will raise sea levels by about 1.5 feet over the next century, enough to destroy several island countries The higher the seas rise, the more often storms will sweep the waves across the narrow atolls carrying away the land—and storms are expected to increase as the world warms up Many islands will become uninhabitable long before they physically disappear, as salt from the sea contaminates the underground freshwater supplies on which they depend Sources: “Kiribati Global Warming Fears: Entire Nation May Move to Fiji,” Associated Press, March 12, 2012; Geoffrey Lean, “They’re Going Under; Two Islands Have Disappeared Beneath the Pacific Ocean—Sunk by Global Warming,” The Independent, June 13, 1999, p 15 Also see the documentary “The President’s Dilemma,” http://youtube/nZLWqa5irog ocean acidification increasing acidity of ocean waters as a result of dissolved carbon from CO2 emitted into the atmosphere In addition to rising ocean temperatures, increased CO2 in the atmosphere results in ocean acidification According to the U.S National Oceanic and Atmospheric Administration, “around half of all carbon dioxide produced by humans since the Industrial Revolution has dissolved into the world’s oceans This absorption slows down global warming, but it also lowers the oceans pH, making it more acidic More acidic water can corrode minerals that many marine creatures rely on to build their protective shells and skeletons.”8 A 2012 report in Science magazine finds that the oceans are turning acidic at what may be the fastest pace in 300 million years, with potential severe consequences for marine ecosystems.9 Among the first victims of ocean warming and acidification are coral reefs, because corals can form only within a narrow range of temperatures and acidity of seawater Oyster hatcheries, which have been referred to as “canaries in a coal mine” since they may predict effects on a wide range of ocean ecosystems as ocean acidification increases, are also affected.10 Although some warming may be a natural trend, the Intergovernmental Panel on Climate Change (IPCC) in 2007 concluded: Most of the observed increase in global average temperatures since the mid-twentieth century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations Discernible human influences now extend to other aspects of climate, including ocean warming, continental-average temperatures, temperature extremes, and wind patterns.11 Future projections of climate change depend on the path of future emissions Even if all emissions of greenhouse gases ended today, the world would continue Global Climate Change 439 warming for many decades, and effects such as sea-level rise would continue for centuries, because the ultimate environmental effects of emissions are not realized immediately.12 Based on a wide range of models with different assumptions about future emissions, the IPCC estimates that during the twenty-first century global average temperatures will rise between 1.1°C (2°F) and 6.4°C (11°F), with the range more likely to be between 1.8°C (3°F) and 4°C (7°F) The range of possible temperature increases is shown in Figure 18.6 Figure 18.6 Global Temperature Trends, 1900–2100 'HJUHHV)DKUHQKHLW WRREVHUYDWLRQV +LJKHUHPLVVLRQVVFHQDULR WRVLPXODWLRQ (YHQKLJKHUHPLVVLRQVVFHQDULR /RZHUHPLVVLRQVVFHQDULR Source: U.S Global Change Research Program, www.globalchange.gov CO2 equivalent (CO2e) a measure of total greenhouse gas emissions or concentrations, converting all non-CO2 gases to their CO2 equivalent in warming impact 440 Part Six, Chapter 18 The magnitude of actual warming and other effects will depend upon the level at which atmospheric concentrations of CO2 and other greenhouse gases are ultimately stabilized The current atmospheric CO2 concentration is around 395 parts per million (ppm) When we consider the contribution of other greenhouse gases, the overall effect is equivalent to a concentration of 430 ppm of CO2, referred to as CO2 equivalent (CO2e) Figure 18.7 relates the stabilization level of greenhouse gases, measured in CO2e, to the resulting rise in global average temperatures, incorporating the degree of uncertainty The solid bar at each level of CO2e represents a range of temperature outcomes that is likely to occur with a 90 percent probability The dashed line extending beyond this interval at either end represents the full range of predicted results from the major existing climate models The vertical line around the middle of each bar represents the midpoint of the different predictions Figure 18.7 The Relationship Between the Level of Greenhouse Gas Stabilization and Eventual Temperature Change ϰϬϬƉƉŵKϮ Ğ ϰϱϬƉƉŵKϮ Ğ ϱϱϬƉƉŵKϮ Ğ ϲϱϬƉƉŵKϮ Ğ ϳϱϬƉƉŵKϮ Ğ ϬΣ ϭΣ ϮΣ ϯΣ ϰΣ ϱΣ (YHQWXDO7HPSHUDWXUHFKDQJH UHODWLYHWRSUHLQGXVWULDO Source: Stern, 2007 Note: CO2e = CO2 equivalent; ppm = parts per million This projection suggests that stabilizing greenhouse gas concentrations at 450 ppm CO2e would be 90 percent likely to eventually result in a temperature increase between 1.0 and 3.8°C, with a small probability that the rise could be significantly more than this With current greenhouse gas concentrations in the atmosphere at 430 ppm CO2e, stabilization at 450 ppm would be extremely challenging As we see below, even stabilization at 550 ppm CO2e would require dramatic policy action preventive measures/ preventive strategies actions designed to reduce the extent of climate change by reducing projected emissions of greenhouse gases adaptive strategies See “adaptive measures.” 18.2 Responses to Climate Change The onset of climate change poses a choice between preventive strategies and adaptive strategies Consider, for example, the damage caused by rising sea levels The only way to stop this would be to prevent climate change entirely—something that is now impossible It might be possible in some cases to build dikes and sea walls to hold back the higher waters Those who live close to the sea—including whole island nations that could lose most of their territory to sea-level rise—will suffer major costs under any adaptation strategy But a prevention strategy that could slow, though not stop, sea-level rise would require convincing most of the world’s countries to participate Is it in their interest to so? To answer this question, we have to find a way of evaluating the effects of climate change Scientists have modeled the results of a projected doubling of accumulated carbon dioxide in the earth’s atmosphere Some of the predicted effects are: • Loss of land area, including beaches and wetlands, because of sea-level rise • Loss of species and forest area • Disruption of water supplies to cities and agriculture • Increased air conditioning costs • Health damage and deaths from heat waves and spread of tropical diseases • Loss of agricultural output due to drought Global Climate Change 441 Beneficial outcomes might include: • Increased agricultural production in cold climates • Lower heating costs • Fewer deaths from exposure to cold In addition, other less-predictable but possibly more damaging and permanent effects include: feedback effect the process of changes in a system leading to other changes that either counteract or reinforce the original change cost-benefit analysis (CBA) a tool for policy analysis that attempts to monetize all the costs and benefits of a proposed action to determine the net benefit • Disruption of weather patterns, with increased frequency of hurricanes, droughts, and other extreme weather events • Sudden major climate changes, such as a shift in the Atlantic Gulf Stream, which could change the climate of Europe to that of Alaska • Positive feedback effects, such as an increased release of CO2 from warming arctic tundra, which would speed up global warming.b The IPCC projects that with increasing emissions and higher temperatures, negative effects will intensify and positive effects diminish (Table 18.1) As shown in Figure 18.6, there is considerable uncertainty about the expected global warming in the next century We need to keep such uncertainties in mind as we evaluate economic analyses of global climate change Given these uncertainties, some economists have attempted to place the analysis of global climate change in the context of cost-benefit analysis Others have criticized this approach as an attempt to put a monetary valuation on issues with social, political, and ecological implications that go far beyond dollar value We first examine economists’ efforts to capture the impacts of global climate change through cost-benefit analysis and then return to the debate over how to assess potential greenhouse gas reduction policies 18.3 Economic Analysis of Climate Change Without policy intervention, carbon emissions can be expected to continue to rise approximately as projected in Figure 18.2 Aggressive and immediate policy action would be required first to stabilize and then to reduce total CO2 emissions in the coming decades In performing a cost-benefit analysis, we must weigh the consequences of the projected increase in carbon emissions versus the costs of current policy actions to stabilize or even reduce CO2 emissions Strong policy action to prevent climate change will bring benefits equal to the value of damages that are avoided.c These benefits must be compared to the costs of taking action Various economic studies have attempted to estimate these benefits and costs The results of five such studies for the U.S economy are shown in Table 18.2 The studies are based on average temperature increases of 2.5°C to 4°C When the monetized costs are added up, the total annual U.S damages are estimated at between $60 billion and $140 billion (1990 dollars) This is about 1–3 percent of b A feedback effect occurs when an original change in a system causes further changes that either reinforce the original change (positive feedback) or counteract it (negative feedback) c These benefits of preventing damage can also be referred to as avoided costs 442 Part Six, Chapter 18 Table 18.1 Possible Effects of Climate Change Eventual Temperature Rise Relative to Pre-Industrial Temperatures Type of Impact 1°C 2°C 3°C 4°C 5°C Freshwater Supplies Small glaciers in the Andes disappear, threatening water supplies for 50 million people Potential water supply decrease of 20–30% in some regions (Southern Africa and Mediterranean) Serious droughts in southern Europe every 10 years 1–4 billion more people suffer water shortages Potential water supply decrease of 30–50% in southern Africa and Mediterranean Large glaciers in Himalayas possibly disappear, affecting ¼ of China’s population Food and Agriculture Modest increase in yields in temperature regions Declines in crop yields in tropical regions (5–10% in Africa) 150–550 million more people at risk of hunger Yields likely to peak at higher latitudes Yields decline by 15–35% in Africa Some entire regions out of agricultural production Increase in ocean acidity possibly reduces fish stocks Human Health At least 300,000 die each year from climate–related diseases Reduction in winter mortality in high latitudes 40–60 million more exposed to malaria in Africa 1–3 million more potentially people die annually from malnutrition Up to 80 million more people exposed to malaria in Africa Further disease increase and substantial burdens on health care services Coastal Areas Increased damage from coastal flooding Up to 10 million more people exposed to coastal flooding Up to 170 million more people exposed to coastal flooding Up to 300 million more people exposed to coastal flooding Sea-level rise threatens major cities such as New York, Tokyo, and London Ecosystems At least 10% of land species facing extinction Increased wildfire risk 15–40% of species potentially face extinction 20–50% of species potentially face extinction Possible onset of collapse of Amazon forest Loss of half of Arctic tundra Widespread loss of coral reefs Significant extinctions across the globe Sources: IPCC, 2007b; Stern, 2007 U.S gross domestic product (GDP) Although different economic studies come up with different estimates, most of them are in the same range of 1–3 percent GDP Cost estimates for larger temperature change over the longer term rise to around 10 percent of global GDP (Figure 18.8) Note, however, that there are also some “Xs” in the totals—unknown quantities that cannot easily be measured The damage from species extinction, for example, is difficult to estimate in dollar terms: The estimates shown here indicate a cost of at least $1.4–5 billion, with additional unknown costs, which rise with additional warming In addition to the Xs, other monetized estimates could also be challenged on the grounds that they fail to capture the full value of potential losses For example, oceanfront land is more than just real estate Beaches and coastal wetlands have great social, cultural, and ecological value The market value of these lands does not reflect the full scope of the damage society will suffer if they are lost Global Climate Change 443 Table 18.2 Estimates of Annual Damages to the U.S Economy from Global Climate Change (billions of 1990 dollars) Agriculture Forest loss Species loss Sea-level rise Electricity Nonelectric heating Mobile air conditioning Human amenity Human mortality and morbidity Migration Hurricanes Leisure activities Water supply availability Water supply pollution Urban infrastructure Air pollution Total in billions Total as percent of GDP Cline (2.5°C) Fankhauser (2.5°C) Nordhaus (3°C) Titus (4°C) Tol (2.5°C) 17.5 3.3 11.2 –1.3 X X 3.4 0.7 1.4 7.9 X X X 1.1 X X 12.2 1.1 X X 1.2 43.6 X 5.7 5.6 X 2.5 X 10 5.8 0.5 0.8 1.7 X 0.1 3.5 61.1 1.1 11.4 0.6 0.2 X 15.6 X X 7.3 69.5 1.3 0.75% of GDP 55.5 9.4 X X X 11.4 32.6 X 27.2 139.2 2.5 X 8.5 X X X 12 37.4 0.3 X X X X X 74.2 1.5 Source: Nordhaus and Boyer, 2000, p 70 Note: “X” denotes items that are not assessed or quantified GDP = gross domestic product Monetizing the value of human health and life is very controversial, as discussed in Chapter These studies follow a common cost-benefit practice of assigning a value of about $6 million to a life, based on studies of the amounts that people are willing to pay to avoid life-threatening risk, or are willing to accept (e.g., in extra salary for dangerous jobs) to undertake such risks In addition, these estimates omit the possibility of the much more catastrophic consequences that could result if weather disruption is much worse than anticipated A single hurricane, for example, can cause tens of billions in damage, in addition to loss of life Hurricane Katrina in August 2005, for example, caused over $100 billion in damage, in addition to loss of over 1,800 lives Hurricane Sandy, in 2012, caused about $50 billion in damages, disrupting power to nearly million customers and leaving lasting effects on an extensive area of shoreline in New York and New Jersey If climate change causes severe hurricanes to become much more frequent, the estimate given in Table 18.2 of less than $1 billion in annual losses could be much too low Another of the unknown values—human morbidity, or losses from disease—could well be enormous if tropical diseases extend their range significantly due to warmer weather conditions In a 2008 study, the total annual cost of damage to the U.S economy in a business as usual (BAU) case in 2025 is predicted to be $271 billion or 1.36 percent of total GDP The cost of damage rises over time (Table 18.3) Higher ranges of temperature change lead to dramatically increased damage estimates, as shown in Figure 18.8 These monetized estimates of damage may be subject to controversy and may not cover all aspects of damage (recall the Xs in Table 18.2), but suppose that 444 Part Six, Chapter 18 Table 18.3 Damage to the U.S Economy from Climate Change in billions of 2006 dollars Hurricane damages Real estate losses Energy sector costs Water costs Total costs as a percentage of GDP 2025 2050 2075 2100 2025 2050 2075 2100 10 34 28 200 271 43 80 47 336 506 142 173 82 565 961 422 360 141 950 1873 0.05 0.17 0.14 1.00 1.36 0.12 0.23 0.14 0.98 1.47 0.24 0.29 0.14 0.95 1.62 0.41 0.35 0.14 0.93 1.84 Source: Ackerman and Stanton, 2008 Figure 18.8 Increasing Damages from Rising Global Temperatures 'DPDJHDVRI*OREDO2XWSXW *OREDO7HPSHUDWXUH,QFUHDVH GHJ& Source: Nordhaus, 2000, p 95 Note: National damages are weighted by population to derive global output damage we decide to accept them—at least as a rough estimate We must then weigh the estimated benefits of policies to prevent climate change against the costs of such policies To estimate these costs, economists use models that show how inputs such as labor, capital, and resources produce economic output To lower carbon emissions, we must cut back the use of fossil fuels, substituting other energy sources that may be more expensive Some economic models predict that this substitution would reduce GDP growth One major study showed GDP losses of 1–3 percent of GDP for most countries, with higher potential long-term losses for coal-dependent developing countries such as China.13 If costs and benefits of an aggressive carbon abatement policy are both in the range of 1–3 percent of GDP, how can we decide what to do? Much depends on Global Climate Change 445 future costs and benefits benefits and costs that are expected to occur in the future, usually compared to present costs through discounting discount rate the annual rate at which future benefits or costs are discounted relative to current benefits or costs our evaluation of future costs and benefits The costs of taking action must be borne today or in the near future The benefits of taking action (the avoided costs of damages) are further in the future Our task, then, is to decide today how to balance these future costs and benefits As we saw in Chapter 6, economists evaluate future costs and benefits by the use of a discount rate The problems and implicit value judgments associated with discounting add to the uncertainties that we have already noted in valuing costs and benefits This suggests that we should consider some alternative approaches— including techniques that can incorporate the ecological as well as the economic costs and benefits Economic studies dealing with cost-benefit analysis of climate change have come to very different conclusions about policy According to studies by William Nordhaus and colleagues, the “optimal” economic policies to slow climate change involve modest rates of emissions reductions in the near term, followed by increasing reductions in the medium and long term.14 Until recently, most economic studies of climate change reached conclusions similar to those of the Nordhaus studies, although a few recommended more drastic action The debate on climate change economics changed significantly in 2007, when Nicholas Stern, a former chief economist for the World Bank, released a 700-page report, sponsored by the British government, titled “The Stern Review on the Economics of Climate Change.” 15 Publication of the Stern Review generated significant media attention and has intensified the debate about climate change in policy and academic circles While most previous economic analyses of climate change suggested relatively modest policy responses, the Stern Review strongly recommends immediate and substantial policy action: The scientific evidence is now overwhelming: climate change is a serious global threat, and it demands an urgent global response This Review has assessed a wide range of evidence on the impacts of climate change and on the economic costs, and has used a number of different techniques to assess costs and risks From all these perspectives, the evidence gathered by the Review leads to a simple conclusion: the benefits of strong and early action far outweigh the economic costs of not acting Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least percent of global GDP each year, now and forever If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20 percent of GDP or more In contrast, the costs of action—reducing greenhouse gas emissions to avoid the worst impacts of climate change—can be limited to around percent of global GDP each year.16 What explains the difference between these two approaches to economic analysis of climate change? One major difference is the choice of the discount rate to use in valuing future costs and benefits The present value (PV) of a long-term stream of benefits or costs depends on the discount rate A high discount rate will lead to a low present valuation for benefits that are mainly in the longer term, and a high present valuation for short-term costs In contrast, a low discount rate will lead to a higher present valuation for longerterm benefits The estimated net present value of an aggressive abatement policy will thus be much higher if we choose a low discount rate 446 Part Six, Chapter 18 While both the Stern and Nordhaus studies used standard economic methodology, Stern’s approach gives greater weight to long-term ecological and economic effects The Stern Review uses a low discount rate of 1.4 percent to balance present and future costs Thus even though costs of aggressive action appear higher than benefits for several decades, the high potential long-term damages sway the balance in favor of aggressive action today These are significant both for their monetary and nonmonetary impacts In the long term, damage to the environment from global climate change will have significant negative effects on the economy, too But the use of a standard discount rate in the 5–10 percent range has the effect of reducing the present value of significant long-term future damages to relative insignificance As shown in Figure 18.9, the assessment of the net benefits of action on climate change depends heavily on the weighting of future damages, since short-term costs of action tend to exceed benefits Figure 18.9 Long-Term Costs and Benefits of Abating Global Climate Change, 1990–2270 ĞŶĞĮƚƐ͕ŚŝŐŚĚĂŵĂŐĞĐĂƐĞ 3HUFHQWRI*'3 ĞŶĞĮƚƐ͕ĐĞŶƚƌĂůĐĂƐĞ ŽƐƚƐ Source: Adapted from Cline, 1992 precautionary principle the view that policies should account for uncertainty by taking steps to avoid low-probability but catastrophic events Another difference between the two studies concerns their treatment of uncertainty Stern’s approach gives a heavier weighting to uncertain but potentially catastrophic impacts This reflects the application of a precautionary principle: If a particular outcome could be catastrophic, even though it seems unlikely, strong measures should be taken to avoid it This principle, which has become more widely used in environmental risk management, is especially important for global climate change because of the many unknown but potentially disastrous outcomes possibly associated with continued greenhouse gas accumulation (see Box 18.3) A third area of difference concerns the assessment of the economic costs of action to mitigate climate change Measures taken to prevent global climate change will have economic effects on GDP, consumption, and employment, which explain the Global Climate Change 447 Box 18.3 Climate Tipping Points and Surprises Much of the uncertainty in projections of climate change relates to the issue of feedback loops A feedback loop occurs when an initial change, such as warmer temperatures, produces changes in physical processes, which then amplify or lessen the initial effect (a response that increases the original effect is called a positive feedback loop; a response that reduces it is a negative feedback loop) An example of a positive feedback loop is when warming leads to increased melting of arctic tundra, releasing carbon dioxide and methane, which add to atmospheric greenhouse gas accumulations and speed up the warming process As a result of various feedback loops associated with climate change, recent evidence suggests that warming is occurring faster than most scientists predicted just five or ten years ago This is leading to increasing concern over the potential for “runaway” feedback loops, which could result in dramatic changes in a short period Some scientists suggest that we may be near certain climate tipping points, which, once exceeded, pose the potential for catastrophic effects Perhaps the most disturbing possibility is the rapid collapse of the Greenland and West Antarctic Ice Sheets While the International Panel on Climate Change forecasts a sea-level rise of 0.2 to 0.6 meters (6 inches to feet) by 2100, the melting of these two ice sheets would raise sea levels by 12 meters (nearly 40 feet) or more Such a scenario is still controversial and considered unlikely to occur in the twenty-first century, but new research suggests that changes can occur much more quickly than originally expected In recent studies, scientists found that methane emissions from the Arctic have risen by almost one-third in just five years The discovery follows a string of reports from the region in recent years that previously frozen boggy soils are melting and releasing methane in greater quantities Such arctic soils currently lock away billions of tonnes of methane, a far more potent greenhouse gas than carbon dioxide, leading some scientists to describe melting permafrost as a ticking time bomb that could overwhelm efforts to tackle climate change They fear the warming caused by increased methane emissions will itself release yet more methane and lock the region into a destructive cycle that forces temperatures to rise more rapidly than predicted Sources: David Adam, “Arctic Permafrost Leaking Methane at Record Levels, Figures Show,” The Guardian, 2010, www.guardian.co.uk/environment/2010/jan/14/arctic-permafrost-methane/; Fred Pearce, “Melting Ice Turns up the Heat,” Sydney Morning Herald, November 18, 2006 “backstop” energy technologies technologies such as solar and wind that can replace current energy sources, especially fossil fuels least-cost options actions that can be taken for the lowest overall cost d reluctance of governments to take drastic measures to reduce significantly emissions of CO2 But these effects will not all be negative The Stern Review conducted a comprehensive review of economic models of the costs of carbon reduction These cost estimates depend on the modeling assumptions that are used The predicted costs of stabilizing atmospheric accumulations of CO2 at 450 ppm range from a 3.4 percent decrease to a 3.9 percent increase in GDP The outcomes depend on a range of assumptions including: • The efficiency or inefficiency of economic responses to energy price signals • The availability of noncarbon “backstop” energy technologiesd • Whether countries can trade least-cost options for carbon reduction using a tradable permits scheme The economics of tradable permits were presented in Chapter 16 448 Part Six, Chapter 18 • Whether revenues from taxes on carbon-based fuels are used to lower other taxes • Whether external benefits of carbon reduction, including reduction in groundlevel air pollution, are taken into account.17 Depending on which assumptions are made, policies for emissions reduction could range from a minimalist approach of slightly reducing emissions to drastic CO2 emissions reduction of 80 percent or more Climate Change and Inequality The effects of climate change will fall most heavily upon the poor of the world Regions such as Africa could face severely compromised food production and water shortages, while coastal areas in South, East, and Southeast Asia will be at great risk of flooding Tropical Latin America will see damage to forests and agricultural areas due to drier climate, while in South America changes in precipitation patterns and the disappearance of glaciers will significantly affect water availability.18 While the richer countries may have the economic resources to adapt to many of the effects of climate change, poorer countries will be unable to implement preventive measures, especially those that rely on the newest technologies Recent studies have used geographically distributed impacts models to estimate the impacts of climate change across the global domain As Table 18.4 indicates, the number of coastal flood victims and population at risk of hunger by 2080 will be relatively larger in Africa, South America, and Asia, where most developing countries are located Table 18.4 Regional-Scale Impacts of Climate Change by 2080 (millions of people) Region Europe Asia North America South America Africa Population living in watersheds with an increase in waterresources stress Increase in average annual number of coastal flood victims Additional population at risk of hunger (figures in parentheses assume maximum CO2 enrichment effect) 382–493 892–1197 110–145 430–469 691–909 0.3 14.7 0.1 0.4 12.8 266 (–21) 85 (–4) 200 (–2) Source: Adapted from IPCC, 2007b Note: These estimates are based on a business-as-usual scenario (IPCC A2 scenario) The CO2 enrichment effect is increased plant productivity, which at maximum estimates could actually decrease the number at risk of hunger The way in which economists incorporate inequality into their analyses can have a significant impact on their policy recommendations If all costs are evaluated in money terms, a loss of, say, 10 percent of GDP in a poor country is likely to be much less, in dollars, than a loss of percent of GDP in a rich country Thus the damages from climate change in poor countries, which may be large as a percentage of GDP, would receive relatively little weight because the losses are relatively small in dollar Global Climate Change 449 .. .Environmental and Natural Resource Economics www.ebook3000.com Page Intentionally Left Blank www.ebook3000.com Environmental and Natural Resource Economics A Contemporary Approach Third Edition. .. Environmental and natural resource economics : a contemporary approach / by Jonathan Harris & Brian Roach. 3rd ed p cm Includes bibliographical references and index ISBN 978–0-7656–3792–5 (hardcover : alk... Edition The third edition of Environmental and Natural Resource Economics: A Contemporary Approach maintains its essential focus on making environmental issues accessible to a broad range of students