Will Stopping Global Warming Stop our Economy?

The fury around global warming is remarkable.  Unfortunately, radicals on each side get most of the press coverage, generating lots of heat but not much insight.   The chair of the White House’s Environmental Quality Council said that the current proposal from the Intergovernmental Panel on Climate Change would cause, “a global recession.”   Other people have suggested that the costs will be so small that no one will notice them, as small as one tenth of one percent of GDP.

Economics suggests that the costs and the benefits of any decision should be weighed prior to making the decision.  With efforts to reduce or stop global warming, there is only massive uncertainty about what will happen if global warming goes unabated.  But, it is possible to say a few things about the costs of efforts to abate global warming.  If the US enacts regulations like those from the 1970’s, commonly known as “command-and-control regulations,” the costs are likely to be relatively large and it will take a long time for the effects to be realized.   On the other hand, if the regulations are more efficient and market-oriented, the costs will be relatively small and the changes will happen more quickly.

The historical example of the fight to reduce “acid rain” by controlling sulfur oxides (SOx) from coal-burning electric utilities is quite telling.  The early laws produced little progress and relatively high costs.   But, the Clean Air Act Amendments of 1990 changed the approach to what is known as the cap-and-trade approach, where the maximum amount of emissions was set and that number of permits was issued, but firms were allowed to trade the permits.   Industry overwhelmingly opposed the measure, citing expected costs for the permits of $ 2000 to $ 3000 per ton.   But, with a strong incentive to find better technologies and ways to emit less SOx, firms were able to make dramatic changes such that the actual price of the permits has been $ 200 to $ 300 per ton – far below that initial estimate.  At the same time, the $ 200 to $ 300 per ton is a real cost and has had a non-trivial impact on the price of electricity nationwide.

Of course, there is no guarantee that better, and cheaper, technologies will be found to battle global warming, but given that few resources have be devoted to looking for such technologies thus far, it seems likely that the costs will be much smaller than some people are claiming.  And, until there is a strong market-oriented incentive to look for better ways to reduce global warming, these efforts will be under-funded.   But, if the regulations imposed are market-oriented, it seems likely that costs will be modest at worst, certainly not enough to cause a “global recession” or stop our economy.  At the same time, there will be real costs to stopping global warming – costs that most consumers will see as small increases in product prices.

H. David Robison, PhD.