Tackling Climate Change – A Bargain

The Economist writes on the IPCC’s recent assessment of the costs to tackle climate change.

Technological solutions to climate change, then, are available. But most of those on offer in the power and transport sectors cost more than fossil-fuel generated energy. Fortunately, economics comes to the rescue. Burning fossil fuels imposes a cost to society that is not reflected in their price. Economics says that it should be; and if it were, the price of using fossil fuels would rise in relation to the price of using renewable energy.

Unfortunately, the social cost of carbon is hard to calculate. Plenty of economists have tried, with unconvincing results. It requires estimating the impact of climate change on economic growth, which involves too many unknowns. So the IPCC report starts from the other end. Rather than trying to work out the social cost of carbon, and letting it feed through to reduce greenhouse-gas concentrations in the atmosphere, it starts from a manageable greenhouse-gas concentration and works backwards to a carbon price. Conveniently, it says the “social cost of carbon is at least comparable to, and possibly higher than carbon prices for even the most stringent scenarios assessed by the IPCC”.

And what is the right price? The report says that to stabilise greenhouse-gas concentrations at 550 parts per million (a level most scientists think safeish) would require a price of $20-50 per tonne of carbon by 2020-30. That is along the lines of the carbon price established the European Emissions-Trading Scheme, which varied between $6 and $40 in 2005-06. It has not bankrupted the European economy so far. The IPCC’s economic models reckon, on average, that if the world adopted such a price the global economy would be 1.3% smaller than it otherwise would have been by 2050; or, put another way, global economic growth would be 0.1% a year lower than it otherwise would have been.

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