Keeping Our Cool: What to Do about Global Warming

The danger of potentially catastrophic global warming is an almost paradigmatic case of decisionmaking under conditions of extreme uncertainty. Of course, this is just another way of saying that many of the intellectual sinews of libertarianism are central to thinking through this problem.

Let’s start at the beginning.

Carbon dioxide (CO2) is a greenhouse gas, simply meaning that it absorbs and redirects infrared radiation but not shorter-wavelength radiation. All else equal, the more CO2 molecules in the atmosphere, the hotter it gets. How much hotter is a complicated question and has been the subject of intense scientific inquiry over the past several decades.

The United Nations Intergovernmental Panel on Climate Change (IPCC) represents the largest existing global effort to answer such technical questions. The current IPCC consensus forecast is that, under fairly reasonable assumptions for world population and economic growth, global temperatures will rise by about 3 °C by the year 2100. Also according to the IPCC, a 4 °C increase in temperatures would cause total estimated economic losses of 1–5 percent of global GDP. By implication, if we were at 3 °C of warming at the end of this century, we would be well into the 22nd century before we reached a 4 °C rise, with this associated level of cost.

This is the central problem for advocates of rapid, aggressive emissions reductions. Despite the rhetoric, the best available estimate of the damage we face from unconstrained global warming is not “global destruction,” but is instead costs on the order of 3 percent of global GDP in a much wealthier world well over a hundred years from now.

It should not, therefore, be surprising that formal efforts to weigh the near-term costs of emissions abatement against the long-term benefits from avoided global warming show few net benefits, even in theory. According to the modeling group led by William Nordhaus, a Yale professor widely considered to be the world’s leading expert on this kind of assessment, an optimally designed and implemented global carbon tax would provide an expected net benefit of around $3 trillion, or about 0.2 percent of the present value of global GDP over the next several centuries. While not everything that matters can be measured by money, this certainly provides a different perspective than the “Earth in the balance” rhetoric would suggest.

Now, in absolute terms, $3 trillion is normally thought of as an amount of money that’s worth pursuing. So why shouldn’t we implement such a tax?

To understand why, let’s move from the world of academic model-building to the real world of geostrategic competition and domestic politics. To realize this gain of $3 trillion, we would have to agree to, and enforce, a global, harmonized tax on all significant uses of carbon and other greenhouse gases in any material form. This would require the agreement of — just to take a few examples — the Parliament of India, the Brazilian National Congress, the Chinese Politburo, Vladimir Putin, John Dingell, and the U.S. ethanol lobby. Each of these entities and individuals has been known to elevate narrow, sectarian interests above the comprehensive good of all mankind through all time, to put it mildly. Not to mention the fact that the governments of China and India, the most important emitting nations of the 21st century, continue to reiterate in formal, public statements that they have no intention of sacrificing economic development in order to reduce emissions.

All this aside, let’s imagine we actually could negotiate such a binding agreement. Isn’t it possible that all the side deals that would be required to get this done would create enough economic drag to more than offset the benefit of 0.2 percent of present value of global output? Our track record in closing and implementing such deals as the Kyoto Protocol, or even the current round of WTO negotiation — which, remember, is supposed to make the signatories richer — shouldn’t inspire much confidence that the theoretical net benefits will outweigh the costs created by the agreement. Indeed, today we are not even considering an actual U.S. carbon tax, which is preferred by almost all academic economists for this purpose, but instead a cap-and-trade system (i.e., emissions rationing) because it is more politically palatable to hide the costs to consumers this way. Yet even the staggering list of side-deals, offsets, special auctions, and so forth that were added to the Lieberman–Warner cap-and-trade bill were not enough to build a winning congressional coalition within this inefficient framework.

Further, even if we got to an agreement de jure, we would then have to enforce a set of global laws for hundreds of years that would run directly contrary to the narrow self-interest of most people currently alive on the planet. How likely do you think a rural Chinese official would be to enforce the rules on a local coal-fired power plant? These bottom-up pressures would likely render such an agreement a dead letter, or at least make it in effect a tax applicable only to the law-abiding developed countries that represent an ever-shrinking share of global carbon emissions.

In summary, then, the best available models indicate that 1) global warming is a problem that is expected to have only a limited impact on the world economy and 2) it is economically rational only to reduce slightly this marginal impact through global carbon taxes. Further, practical knowledge of the world indicates that 1) such a global carbon-tax regime would be very unlikely ever to be implemented, and 2) even if it were implemented, the theoretical benefits it might create would almost certainly be more than offset by the economic drag such a regime would produce. Other than that, it sounds like a great idea.

One objection that has been raised against this analysis is that the discount rate embedded in these calculations is immoral because we shouldn’t privilege our welfare at the expense of future generations. The most prominent document arguing for this approach is the “Stern Review,” produced by the British government in 2006. It is cited frequently as demonstrating that the world should begin immediate, aggressive emissions abatement. But consider the practical realism of the Stern discount rate assumption. Imagine a scenario in which global warming would lead to zero costs between now and the year 2200, at which point global economic growth would be permanently reduced by 0.1 percent — in other words, that economic output starting in 2200 would be 99.9 percent of what it would have been had there been no global warming. Under this scenario, how much should we be willing to pay today as a lump sum to avoid this cost? Using the assumptions of the Stern Review, we would pay about $30 trillion, or about half of the world’s entire annual economic output.

Thanks, but no thanks. Basically, you can’t find a discount rate low enough to lead you to give up a lot of wealth today in return for a few percent of wealth many decades from now, that doesn’t also lead to other results that no practical person would accept.

A second, much more serious, objection is that our forecasts for warming impacts might be wrong, and global warming could turn out to be substantially worse than these models predict. Climate models are, at a minimum, non-validated. Predicting the cost impact of various potential warming scenarios requires us to concatenate these climate predictions with economic models that predict the cost impact of these predicted temperature changes on the economy in the 21st, 22nd, and 23rd centuries. It is hubris to imagine that these can guarantee accuracy, and impossible to validate such a claim in any event.

Now, climate and economics modelers aren’t idiots, so it’s not like this hasn’t occurred to them. Competent modelers don’t assume only the most likely case, but build probability distributions for levels of warming and associated economic impacts (e.g., there is a 5 percent chance of 4.5 °C warming, a 10 percent chance of 4.0 °C warming, and so on). The economic calculations that comprise, for example, the analysis by William Nordhaus that I referenced earlier are executed in just this manner. So, the possibility of “worse than expected” impacts really means, more precisely, “worse than our current estimated probability distribution.” That is, we are concerned here with the inherently unquantifiable possibility that our probability distribution itself is wrong.

So, once we clear away the underbrush, we can see that the case for a carbon tax or a cap-and-trade emissions rationing system is really that it would be a hedge against the risk that actual damages from warming would be much, much worse than current risk-adjusted projections indicate. Would it be a smart investment?

To evaluate this, start with the observation that the primary purpose of such a tax or rationing system is not to encourage conservation per se, but rather to induce the development of new technologies that can de-link economic growth from damaging accumulations of atmospheric carbon dioxide. Increasing the price or scarcity of carbon would cause some direct reduction in fossil-fuel consumption (e.g., biking to work instead of driving), and get more people to use some pre-existing technologies (e.g., efficient light bulbs), but these effects would be limited. Hairshirts are not enough. We would have to develop new technologies that use energy more efficiently, emit less carbon per unit of energy, remove carbon from the atmosphere, and/or reduce the harm done by carbon dioxide. The real costs of a program to address global warming are crucially dependent on how much time and money it would take to develop and diffuse these technologies, plus the incremental costs per unit of energy (if any) they would impose once deployed.

This explains why carbon tax or rationing advocates pay lip service to the naïve idea that the developing world will impose large carbon taxes if we just “lead by example.” Of course, under the reasonable assumption that the relevant technologies will be developed primarily in the United States, Europe, Japan, Canada, and Australia, it doesn’t really matter that much whether the developing world puts a price on carbon or not. The global crusade is a smokescreen. The goal is to create an artificial scarcity of carbon in the developed world.

If you made such a tax high enough, or rationing stringent enough, this would probably “work,” in that it would spur new technological development; but it would be insanely expensive. It’s hard to predict accurately the costs of such a program, but even the kinds of programs currently under debate would certainly start at hundreds of billions of dollars in the United States alone, and would very likely not be high enough to successfully incentivize the creation of the desired technologies.

The only real argument for rapid, aggressive emissions abatement boils down to the point that you can’t prove a negative. If it turns out that even the outer edge of the probability distribution of our predictions for global-warming impacts is enormously conservative, and disaster looms if we don’t change our ways radically and this instant, then we really should start shutting down power plants and confiscating cars tomorrow morning. We have no good evidence that such a disaster scenario is imminent, but nobody can conceivably prove it to be impossible. Once you get past the table-pounding, any rationale for rapid emissions abatement that confronts the facts in evidence is really a more or less sophisticated restatement of the precautionary principle: the somewhat grandiosely named idea that the downside possibilities are so bad that we should pay almost any price to avoid almost any chance of their occurrence.

But to force massive change in the economy based on such a fear is to get lost in the hothouse world of single-issue advocates, and become myopic about risk. We face lots of other unquantifiable threats of at least comparable realism and severity. A regional nuclear war in Central Asia, a global pandemic triggered by a modified version of HIV, or a rogue state weaponizing genetic engineering technology all come immediately to mind. Any of these could kill hundreds of millions of people. Scare stories are meant to be frightening, but we shouldn’t become paralyzed by them.

In the face of massive uncertainty on multiple fronts the best strategy is almost always to hedge your bets and keep your options open. Wealth and technology are raw materials for options. The loss of economic and technological development that would be required to eliminate literally all theorized climate change risk would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk, not to mention our ability to lead productive and interesting lives in the meantime. The precautionary principle is a bottomless well of anxieties, but our resources are finite — it’s possible to buy so much flood insurance that you can’t afford fire insurance.

So if there is a real, though unquantifiably small, possibility of catastrophic climate change, and if we would ideally want some technological hedges as insurance against this unlikely scenario, and if raising the price of carbon to induce private economic actors to develop the technologies would be an enormously more expensive means of accomplishing this than would be advisable, then what, if anything, should we do about the danger?

One obvious approach is to have the government fund technology research directly. The danger here, of course, is that we end up back in the failed game of industrial policy. Such dangers are not merely theoretical. The federal government was the key sponsor of, for example, the shale oil and large-scale wind turbine debacles in response to the energy crisis thirty years ago. Setting the right scope for such a program and managing the funding process carefully would each be essential to prevent it from becoming corporate welfare.

We should limit government investments to those topics that meet specific criteria. They should be related to detecting or ameliorating the effects of global warming, should serve a public rather than a private need, and should provide no obvious potential source of profit to investors if successful. Important examples include improved global climate prediction capability, visionary biotechnology to capture and recycle carbon dioxide emissions, or geo-engineering projects to change the albedo of the earth’s surface or atmosphere. On the other hand, most technologies that would contribute to the ongoing long-run transition of the economy away from fossil fuels, like more efficient fuel cells for autos or lower-cost solar power sources, need no government funding, since there is ample profit motive to develop them. As evidence, massive amounts of venture funding and large-company internal capital allocations are flowing to these opportunities right now. Government attempts to direct such development would almost certainly destroy value through political allocation of resources.

The agency for funding any government-sponsored research should be explicitly modeled on the Defense Advanced Research Projects Agency (DARPA). The character of such an agency would be a very high-IQ staff with wide flexibility in providing small grants. In addition, this program should have a heavy emphasis on large prizes for accomplishing measurable and audacious goals. As an example, the British entrepreneur Richard Branson has offered a $25 million dollar prize to anyone who demonstrates a device that removes carbon from the atmosphere — what if the U.S. government upped the ante to $1 billion and pledged to make any resulting technology freely available to the world? That would hold the potential for solving any global warming problem that might develop to a one-time cost of less than 0.01% of U.S. GDP.

The incremental cost of this research program could be single-digit billions per year, hopefully with partially offsetting spin-off benefits. DARPA’s total annual budget is about $3 billion, and unlike Al Gore it really did invent the Internet (original name, ARPANet). In fact, it’s important that the honeypot be kept small enough, and be doled out in small enough increments, that it’s not worth it for either Congress or Fortune 100 companies to try to direct the spending politically.

Of course, it would still be a government program, and therefore rife with inefficiencies. But consider that its costs would be on the order of 1/100th of the costs of imposing a large U.S. carbon tax. It could be massively inefficient and we would still be far better off in actually developing the long–lead-time technologies that we would want if faced with a currently unanticipated emergency.

Hedging against the risk to future generations of potential unanticipated impacts from global warming is a legitimate job for the U.S. government. Ideally, it would be tackled by the governments of the small number of countries with a sophisticated technology development capability acting in some kind of coordinated fashion. A massive carbon tax, a cap-and-trade rationing system, and the attempt to use the government to control the evolution of the energy sector of the economy are all billed as prudent reactions to this risk, but each is the opposite: an impractical, panicky reaction unworthy of a serious government.

Also from This Issue

Response Essays

  • A Small Cost Will Avoid a Catastrophe by Joseph Romm

    American Progress Senior Fellow Joseph Romm argues that atmospheric CO2 has already reached an unacceptable level, and that urgent action is needed in the next few years. Fortunately, this action need not involve prohibitive costs. Indeed, many possible options for greenhouse gas abatement will result in economic benefits.

    These changes are desperately needed, too, before global warming reaches a tipping point beyond which the carbon sequestered in permafrost is also released into the atmosphere, aggravating the problem. Should we fail to act, widespread desertification, massive species extinction, and other catastrophic events are predicted, even by authorities whom Jim Manzi also accepts.

  • Reducing Vulnerability to Climate-Sensitive Risks is the Best Insurance Policy by Indur Goklany

    Indur Goklany argues, in response to Jim Manzi and Joseph Romm, that solving the likely problems resulting from global warming will be both cheaper and more effective than any global response aimed at stabilizing or changing the climate itself. Harm reduction will also pay important dividends regardless of the degree of global warming, since it will include the development of new treatments for diseases, better flood protection, improved crops, and general economic advancements for the developing world. When taken together, these factors will help us to face any global warming scenario effectively, and they will also offer even larger benefits outside any considerations of climate.

  • The New Climate Center: How Technology Could Create a Political Breakthrough by Michael Shellenberger and Ted Nordhaus

    Michael Shellenberger and Ted Nordhaus describe what they see as a significant political realignment: Both left and right, they claim, are converging on a state-sponsored and technology-based solution to global warming, one that will emphasize clean energy and/or carbon sequestration technologies. They argue that the debate about climate modeling is largely irrelevant and/or unproductive, because these technologies are generally agreed to be important in their own right and to have positive economic effects regardless of the degree of severity of global warming. They call on policymakers to embrace a large-scale, state-funded effort to achieve these breakthrough technologies and argue that state sponsorship for technological advancement is, historically speaking, the engine of much progress and innovation. This, they argue, is a reason to embrace the same approach with regard to global warming.

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