The Heat Is On

Urjit R. Patel
Urjit R. Patel Former Brookings Expert, Governor - Reserve Bank of India

October 16, 2007

Climate is a classic public good, non-excludable and non-rival; in other words, those who don’t pay for it cannot be excluded from enjoying its benefits, and one person’s enjoyment of the climate does not diminish the capacity of others to enjoy it too. Conversely, if one person damages (or improves) it, he does it for everyone (including future generations) and himself; in addition, the full cost is never borne by the individual responsible for the damage so there is no economic incentive to preserve the atmosphere. We continue to depreciate environmental capital – call it “E-capital” – without provisioning for it. It helps to think of “E-capital” as interacting with all other inputs of production in a Leontief structure, which in plain language means that we need a minimum irreducible amount of it for practically everything that we do (it cannot be substituted). The quantum of greenhouse gases released in the atmosphere each year, of which carbon dioxide is the most prevalent, are much higher than what nature can absorb (ocean and land are natural “sinks”), hence the problem. The greenhouse effect is a natural process that keeps the Earth’s surface around 30oC warmer than it would be otherwise; without this effect all the infrared radiation would escape to outer space and the Earth would be too cold to support life.

While the effects of climate change are negative global externalities in the sense that the damage from emissions is broadly the same irrespective of where they are emitted, impacts are likely to be felt unevenly around the world. The most omprehensive treatment of the risks, challenges and policy instruments that are central to the task of confronting global warming is provided in Stern Review: The Economics of Climate Change (SR, hereafter). The proximate value of SR is its potential to coalesce the (national and global) policy debate, in other words, get stakeholders to at least read from the same page; in fact, it has already made admirable strides in this direction in a few short months. Yes, it is possible that the increase in global mean surface temperature over the last three decades is part of natural variability (cycle) which may correct itself (as opposed to a trend), even as we continue to have a ball with our SUVs and temperature-controlled football stadiums. The cerebral former President of Czechoslovakia, Vaclav Havel, in a recent article likened human beings interface with the environment as borrowing from the future: “ . . . the Euro-American world has been running up a debt, and now other parts of the world are following its example . . . Maybe we should start considering our sojourn on Earth as loan”. (The “excess” analogy is striking with monetary overhang of recent years primarily fuelled by the US Federal Reserve Bank under the not-so-iconic-anymore Alan Greenspan.) It may be no exaggeration to assert that global warming may be the (longest and) most painful hangover that the world is waking up to. The intertemporal nature – essentially, inheritance from the past and endowment to the future – of aspects related to the environment is not new. In his commentary on the Bhagavad-Gita, Gandhiji wrote: “In burning wood [from forests] in this age, we misuse the capital of our forefathers . . . ” (emphasis added).

The methodology deployed by climate scientists is a primary reason why reaching consensus has been painstakingly slow. Models that can replicate past developments and trends is the primary tool that scientists use to assess the power of diverse models (which, in turn, are grounded in researchers hypotheses); the methodology, almost by definition, entails a combination of past observations, some estimated relationships and many assumptions. The balance of climate science evidence that has accumulated suggests clearly (at least in the mind of scientists) that while natural factors such as changes in solar intensity and volcanic eruptions can explain much of the trend in global temperatures in the 19th century, rising levels of greenhouse gases provide the only plausible explanation for the observed trend for at least the past fifty years.

The link between greenhouse gases (GHGs) and climate change comes about from rising atmospheric GHGs changing the energy balance, in turn leading to rising atmospheric and ocean temperatures comprising of local and global feedbacks, for example, changes in clouds, water content of the atmosphere and the amount of sunlight reflected by sea ice. In Integrated Assessment Models (IAMs), the workhorses for cost estimates of global warming, the causality runs from economic activity to emissions to atmospheric concentrations to global climate to regional weather to market and non-market impacts comprising adverse consequences for agriculture, forestry, water cycles, coastal zones, ecosystems as well as mortality from vector-borne diseases, heat stress and cold stress. The SR recognises that the entire subject area is fraught with uncertainty, and hence deploys tools that allow outcomes to vary statistically with the odds calibrated to the latest scientific quantitative evidence on particular risks. Cost estimates of global warming based on IAMs, underscore the need for a modelling approach based on probabilities (deploying Monte Carlo simulation), which means that a scenario is run many times (as many as 1000 times), each time choosing a set of uncertain parameters randomly from pre-determined ranges of possible values. In this way, a probability distribution of results is engendered rather than just a single point estimate. It yields a probability distribution of future income under climate change, where climate-driven damage and the cost of adapting to climate change are subtracted from a baseline GDP growth projection.

Global warming is an outcome of the “mother” of all market failures or, to put it another way, on account of the biggest free lunch in history (interestingly, CO2 had not been identified as a pollutant until about twenty years ago). Targeting reduction of the stock of GHGs is an efficient way to control the risk of catastrophic change in the long term; it is efficient because it focuses on the source of the externality directly. The challenge to fix the problem requires international coordination (at the least, understanding) on a commensurate scale. Therefore, the flurry of recent meetings and conferences in Vienna, Washington, and Sydney on global warming have been exceptionally important on the subject of “grazing” the global commons and then rehabilitating it; the term grazing is apposite because starting from the industrial age, we continue to depreciate the atmospheric environment endowed to us.

Subsequent instalments will, inter alia, summarise and review the scope of the challenge, the facts, the costs of addressing the problem, extant state of international cooperation, and the economic opportunities for emissions reduction. The next piece is titled, “A Stern warning”.