The economics of climate change are driven
by phenomenon known as the tragedy of the commons.
Picture a common yard,
in a village, that farmers could graze their sheep on.
I made up a story about sheep to illustrate this idea.
Let's say that the amount of lamb
chops you could get per sheep decreases as
the population of sheep on the common ground increases.
But the total amount of lamb chops you get, is the lamb chops per
sheep times the number of sheep, and that gives you a function that looks like this.
It says that there's an optimum number of sheep that you
could graze on this yard that would provide the most food for everybody.
But the thing is, if you have one sheep and there's already, say, eight on
this yard, and you add one more sheep, the yield from everybody's sheep goes down.
But you now have two sheep, and so
it's in your individual interest to continue to add
more sheep to this common area long past the
optimum number of sheep for the total yield.
Another way of describing this economically is as an external cost.
External means that the cost is not being paid for by the decision-maker.
I have to decide whether to put another sheep in there.
so I just do the calculation based on the
what I have to pay and what I get out of it.
If I am not paying for the damage
to the common, I won't take that into account.
That leads to a distortion of the market, because the true
costs of the decision are not being paid by the person who's making the decision.
The way to address this in economic framework is to internalize the cost,
which means to make the person who's making the decision
pay for it, rather than leaving it for everybody to pay for.
And there's two strategies that are being proposed to
internalize the cost of environmental damage by releasing CO2.
One is a carbon tax, and the other is a scheme called cap and trade.
In cap and trade, the idea is that the governing agency sets the amount of
emissions that they are willing to allow, and then they allow
people to buy and sell the right to emit that carbon.
The advantage is that this allows the market to
find the cheapest way to meet the obligation to decrease the emission.
We have a cap and trade system going
in the U.S. to control SO2 emissions that lead to acid rain.
And it turned out to be wildly cheaper than
anybody had predicted in advance, to cut those emissions.
The advantage of a
tax scheme is that the price of carbon is controlled, and therefore you
can budget for it in the future. Whereas the price for emission permits,
in the cap and trade scheme, where you're buying
and selling these emission permits, is floating.
And so it's more difficult to know what the costs
are going to be next year and the year after that.
And makes it harder for the financial interests
in the company to decide whether to actually invest
in CO2 scrubbing equipment for example, or whether
to just pay for the the permits
in the future.
A tax, I've also heard the argument, would be easier to implement
because the carbon could be taxed
at the source, at the coal mine,
rather than cap and trade, you're trying to tax end users.
The advantage of cap and trade might be
that the actual emissions are controlled,
but a carbon tax could also be tuned up and down
to get emissions down to what you want them to be.
Basically, as far as I am concerned, for what that's
worth, either one of these would be a fabulous thing.
Another issue that comes up in the economic discussion of
climate change is an idea known as the discount rate.
This is based on the idea that you could put money into some sort
of a bank account that yields interest and that money will grow through time.
Let's say you have an option to pay $100 now or
you could put that money in the bank now,
and then you could pay $135 in ten years.
If you're trying to decide whether to fix your roof
now or fix it in ten years, this
is a perfectly reasonable way think about it.
The problem comes in when the
time frame extends beyond an individual lifetime.
For one thing, the growth just gets
crazy if you talk about a hundred years instead.
an obligation in a hundred years, like
climate change is an obligation that somebody would
have to pay for, shrinks down to almost nothing if it's too far into the future.
And it's kind of silly, nobody's going to put $5 in the bank
and let it sit there for a hundred years, but this does
describe the way that money tends to flow.
Like, water flows downhill, money flows
toward a short-term gain, because of this,
this phenomenon.
But weighing the costs of climate change versus the costs of
mitigating climate change is kind of fraught with an ethical problem.
In that it's not the same people who are paying for the
climate damages, as the people who are benefiting from using fossil fuels.
It's basically like saying, I'll save $5 today, and you can pay $100 later.
It loses the ethical justification of the way this worked on
a short time, if you're trying to decide whether to fix your roof in ten years.
Basically, applying a discount rate over long time scales like this is
assuming that people live forever, and that's just you know, not on.
I would close by giving the encouraging perspective that most of the
carbon will really concerned about in changing
Earth's climate, is still in the ground.
We've burned about 300 gigatons
of fossil fuel and 200 gigatons of trees we've cut down.
That's about 500 gigatons of carbon. That's enough to raise
the earth's temperature eventually by about 1 degree C.
Which is not a disaster yet.
But if we keep going, we start getting into warming unlike
any the earth has seen in millions of years and this is bad.
But most of the carbon that we're worried about is
still in the ground, so the world is only in
trouble if we continue to decide to make it so.
And also, most of the carbon that we're worried about is coal.
If you are concerned about driving
funny-looking little cars or something like that,
You can realize that there's not really that much oil
and natural gas in the traditional forms in the ground anyway.
A few hundred gigatons of each maybe.
To really torch the planet requires getting into that coal.
And, my feeling is that if we simply had no more coal, if we just
ran out, if that was the hand we
were dealt, it wouldn't be an existential threat.
We wouldn't be going back to live like
the Flintstones, it would just be a business opportunity.
The only hard part here is to make the decision.