Economic Issues Bearing on the Decisions Affecting a Global Warming Treaty

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Mr. Chairman and members of the committee: My thanks for thisopportunity to testify on the economic issues affecting thedecisions on a global warming treaty. Our nation risks a seriousmistake in the rush to judgement on this proposed treaty, and anunderstanding of the major economic issues is important to informthis judgement.

Let me start by summarizing the perspective of many economistson these issues, in this case as defined by William Nordhaus ofYale University in his l994 book on MANAGING THE GLOBAL COMMONS.Based on the tentative scientific consensus of the early l990sNordhaus first estimates that the worldwide cost of global warmingwould be about 1.3 percent of world product in 2050, an amount lessthan one year of world economic growth. He then estimates that thenet benefits of an optimal emissions control policy would be asmall fraction of one percent of future world output. The optimalcarbon tax, according to Nordhaus, is about $5.30 per tonincreasing to about $10 per ton by 2025 and would only slightlyreduce the increase in average global temperatures. It is moreimportant to recognize that Nordhaus estimates that a policy tostabilize emissions at the l990 level would impose netcosts on the world of at least $7 trillion (l989 dollars)and that a policy to stabilize the atmospheric concentration ofgreenhouse gases would impose net costs on the world of atleast $12.5 trillion (again, in l989 dollars). In summary: Assumingthe prior scientific consensus and the Nordhaus estimates of thecost of global warming are both accurate, only a modest policyresponse is appropriate.

But there are several reasons to question whether even thismodest 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 onglobal temperature are subject to substantial uncertainty and havemost recently been challenged by evidence that sunspot cycles mayaccount for most of the observed temperature variation.
  2. It is also not clear that some moderate warming would imposeany net costs, especially in the rich countries in the temperateregions. Thomas Gale Moore of the Hoover Institute estimates thatmoderate warming would generate net benefits to the UnitedStates 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 arethe most efficient, maybe the only effective, means to control theaverage global temperature. That may prove to be correct, but ithas yet to be demonstrated. There are two alternative types ofmeasures that may be sufficient to offset the effects of increasedemissions: Reforestation and spreading trace quantities of iron inthe oceans would each increase the absorption of CO2from the atmosphere. And spreading fine particulates in the upperatmosphere would increase the reflectivity of the atmosphere.Preliminary estimates suggest a very high payoff to "salting" boththe oceans and the atmosphere but, as far as I know, no thoroughanalysis of the relative efficiency of the alternative means tocontrol the global temperature has been undertaken.
  4. The problems of monitoring and enforcing emissions controlshave not received adequate attention. The estimates of emissions bycountry are based on records of the amount of fuel used by type,and a government subject to an emissions limit would have anincentive to understate fuel use; there is also no direct way tomonitor the amount of CO2 absorbed over a specific area.There has also been some vague talk about using trade sanctions toenforce such an agreement but sanctions against one country alsoharm the economies of those countries that had traded with thetarget country, and these derivative costs will differsubstantially among the other countries. This is likely to lead toa relatively ineffective and highly arbitrary enforcement of thesanctions.
  5. The estimates by Nordhaus and other economists generally assumethat governments will use the most efficient means to achieve anyspecific reduction in emissions, such as a uniform carbon tax or atradeable emissions permit system. Most governments, however,appear to be considering a combination of regulatory measures thatare far less efficient.
  6. Since the Berlin Mandate of 1995 the continued negotiationstoward a global warming treaty have proposed commitments by thegovernments of the rich countries to reduce emissions whileexcluding the poor countries from a similar commitment, at leastfor the next few decades. Such a treaty would increase the relativecost to the rich countries and substantially dilute and delay anynet reduction in carbon emissions. The rich countries wouldexperience an increase in the relative price of fossil fuels, somereduction in economic growth, and a decline in their exchange raterelative to that of countries excluded from a commitment to reduceemissions -- with the opposite effects, of course, in the poorcountries. In that sense, a global warming treaty that excludes thepoor countries, which will soon produce about half of globalCO2 emissions, is an indirect form of foreign aid andshould be evaluated on that basis. The U.S. Senate was correct tooppose any global warming treaty that exempts the poor countries.Either global warming is a serious problem or it is not. There is agood case to defer consideration of a global warming treaty untilour knowledge base is substantially greater. There is no case forexempting any country with substantial carbon emissions, either nowor in the future.
  7. Finally, there seems to be no reason for an early decision onthe global warming issues. The costs of doing nothing appear to bequite small, and the costs of a commitment to limit the emissionsor atmospheric concentration of greenhouse gases appear to be verylarge. Moreover, we should know a great deal more about theseissues in the next decade or so. In 1990, such considerations ledWilliam Nordhaus to endorse "three modest steps to slow globalwarming while avoiding precipitous and ill-designed actions thatmay later be regretted."

Improve our knowledge -- about the magnitude, causes, andconsequences of global warming.

Develop technology -- that would reduce the greenhouse emissionsper unit of output, sequester carbon emissions, or increase thereflectivity of the atmosphere; and promote

"No regret" policies -- that are most likely to be worthwhile onother grounds. As of 1997, that still seems to be a wisejudgement.

In conclusion: Scientists have been correct to alert politicalofficials about the possibility that a continued increase in theatmospheric concentration of CO2 may increase averageglobal temperatures. My judgement, however, is that many politicalofficials have over-reacted to this warning, and that manyscientists have themselves been swept up in this momentum. Assuggested by William Nordhaus, there are some modest near-termmeasures that are likely to be valuable. There are too manyscientific, economic, and political issues yet to be resolved,however, to support an early commitment to control the emissions ofgreenhouse gases. A global warming treaty in the next decade or sowould be a rush to judgement.