Economic Issues Bearing on the Decisions Affecting a Global Warming Treaty

By William A. Niskanen
September 30, 1997
Committee on Energy and Natural Resources
United States Senate

Mr. Chairman and members of the committee: My thanks for this opportunity to testify on the economic issues affecting the decisions on a global warming treaty. Our nation risks a serious mistake in the rush to judgement on this proposed treaty, and an understanding of the major economic issues is important to inform this judgement.

Let me start by summarizing the perspective of many economists on these issues, in this case as defined by William Nordhaus of Yale University in his l994 book on MANAGING THE GLOBAL COMMONS. Based on the tentative scientific consensus of the early l990s Nordhaus first estimates that the worldwide cost of global warming would be about 1.3 percent of world product in 2050, an amount less than one year of world economic growth. He then estimates that the net benefits of an optimal emissions control policy would be a small fraction of one percent of future world output. The optimal carbon tax, according to Nordhaus, is about $5.30 per ton increasing to about $10 per ton by 2025 and would only slightly reduce the increase in average global temperatures. It is more important to recognize that Nordhaus estimates that a policy to stabilize emissions at the l990 level would impose net costs on the world of at least $7 trillion (l989 dollars) and that a policy to stabilize the atmospheric concentration of greenhouse gases would impose net costs on the world of at least $12.5 trillion (again, in l989 dollars). In summary: Assuming the prior scientific consensus and the Nordhaus estimates of the cost of global warming are both accurate, only a modest policy response is appropriate.

But there are several reasons to question whether even this modest policy response is appropriate:

  1. For this hearing, I will not comment on the scientific issues, except to point out that estimates of the anthropogenic effects on global temperature are subject to substantial uncertainty and have most recently been challenged by evidence that sunspot cycles may account for most of the observed temperature variation.
  2. It is also not clear that some moderate warming would impose any net costs, especially in the rich countries in the temperate regions. Thomas Gale Moore of the Hoover Institute estimates that moderate warming would generate net benefits to the United States of about one percent of U.S. output.
  3. So far, the proponents of a global warming treaty have assumed, without apparent analysis or evidence, that emissions controls are the most efficient, maybe the only effective, means to control the average global temperature. That may prove to be correct, but it has yet to be demonstrated. There are two alternative types of measures that may be sufficient to offset the effects of increased emissions: Reforestation and spreading trace quantities of iron in the oceans would each increase the absorption of CO2 from the atmosphere. And spreading fine particulates in the upper atmosphere would increase the reflectivity of the atmosphere. Preliminary estimates suggest a very high payoff to “salting” both the oceans and the atmosphere but, as far as I know, no thorough analysis of the relative efficiency of the alternative means to control the global temperature has been undertaken.
  4. The problems of monitoring and enforcing emissions controls have not received adequate attention. The estimates of emissions by country are based on records of the amount of fuel used by type, and a government subject to an emissions limit would have an incentive to understate fuel use; there is also no direct way to monitor the amount of CO2 absorbed over a specific area. There has also been some vague talk about using trade sanctions to enforce such an agreement but sanctions against one country also harm the economies of those countries that had traded with the target country, and these derivative costs will differ substantially among the other countries. This is likely to lead to a relatively ineffective and highly arbitrary enforcement of the sanctions.
  5. The estimates by Nordhaus and other economists generally assume that governments will use the most efficient means to achieve any specific reduction in emissions, such as a uniform carbon tax or a tradeable emissions permit system. Most governments, however, appear to be considering a combination of regulatory measures that are far less efficient.
  6. Since the Berlin Mandate of 1995 the continued negotiations toward a global warming treaty have proposed commitments by the governments of the rich countries to reduce emissions while excluding the poor countries from a similar commitment, at least for the next few decades. Such a treaty would increase the relative cost to the rich countries and substantially dilute and delay any net reduction in carbon emissions. The rich countries would experience an increase in the relative price of fossil fuels, some reduction in economic growth, and a decline in their exchange rate relative to that of countries excluded from a commitment to reduce emissions — with the opposite effects, of course, in the poor countries. In that sense, a global warming treaty that excludes the poor countries, which will soon produce about half of global CO2 emissions, is an indirect form of foreign aid and should be evaluated on that basis. The U.S. Senate was correct to oppose any global warming treaty that exempts the poor countries. Either global warming is a serious problem or it is not. There is a good case to defer consideration of a global warming treaty until our knowledge base is substantially greater. There is no case for exempting any country with substantial carbon emissions, either now or in the future.
  7. Finally, there seems to be no reason for an early decision on the global warming issues. The costs of doing nothing appear to be quite small, and the costs of a commitment to limit the emissions or atmospheric concentration of greenhouse gases appear to be very large. Moreover, we should know a great deal more about these issues in the next decade or so. In 1990, such considerations led William Nordhaus to endorse “three modest steps to slow global warming while avoiding precipitous and ill-designed actions that may later be regretted.”

Improve our knowledge — about the magnitude, causes, and consequences of global warming.

Develop technology — that would reduce the greenhouse emissions per unit of output, sequester carbon emissions, or increase the reflectivity of the atmosphere; and promote

“No regret” policies — that are most likely to be worthwhile on other grounds. As of 1997, that still seems to be a wise judgement.

In conclusion: Scientists have been correct to alert political officials about the possibility that a continued increase in the atmospheric concentration of CO2 may increase average global temperatures. My judgement, however, is that many political officials have over-reacted to this warning, and that many scientists have themselves been swept up in this momentum. As suggested by William Nordhaus, there are some modest near-term measures that are likely to be valuable. There are too many scientific, economic, and political issues yet to be resolved, however, to support an early commitment to control the emissions of greenhouse gases. A global warming treaty in the next decade or so would be a rush to judgement.