Economic Aspects of Global Warming and Climate Change (2022)

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Abstract

The issue of global warming and climate change has proven to be one of the most controversial and difficult problems facing all the nations of the world. Assessing the impact of climate change is extremely complex as it is very difficult to project the future and assess the hypothetical impact it will have on the world. Additionally, it is unknown how technological progress will respond and potentially alter the effects of global warming. This paper will focus on some impacts of global warming and climate changes on the global economy and review possible methods of mitigating the adverse effects.

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Introduction

Climate change is one of the most challenging problems facing the world community. According to NASA, global warming is a natural process. A layer of greenhouse gases which include water vapor, carbon dioxide (CO2), methane and nitrous oxide acts as a thermal blanket for the Earth, absorbing heat and warming its surface to an average temperature of 59 degrees Fahrenheit which help sustain life (“National Aeronautics and Space Administration”, 2017). Without this natural cover, the Earth’s surface would be colder than it is today, making the planet freezing and mostly likely uninhabitable.

However, scientistsare concerned that increasing concentrations of greenhouse gases in theatmosphere are causing an unprecedented rise in global temperatures, withpotentially harmful consequences for the environment, human health and the economy. We are adding to the natural greenhouseeffect with emissions from industry and agriculture, trapping more energy andincreasing the temperature. The possible causes of global warming arenumerous. But according to EnvironmentalProtection Agency, the most concerning and alarming are manmade emissions of CO2caused by burning fossil fuels and cutting down carbon-absorbing trees.

Other greenhouse gases such as methane andnitrous oxide are also released through human activities, but their presence isrelatively small when compared to carbon dioxide. According to a 2016 BBC article, the level andconcentration of CO2 in our atmosphere is significantly higher than it was atthe beginning of the industrial revolution which began in 1750 (“What IsClimate Change?”, 2016).

Climate change has a broader meaning as it not only refersto the increased temperature trends described by global warming, but alsochanges such as sea level rise; ice mass loss in Greenland, Antarctica, theArctic and mountain glaciers worldwide; shifts in flower and plant blooming;and extreme weather events.

Kenneth Green (2002) argues that humanprosperity in many parts of the world, especially developing countries, heavilydepends on climate. Agriculture, tourism, transportation, energy use, and manyother activities that define our economies are largely influenced byclimate. Therefore, it is crucial tounderstand the effects of global warming in short and long run and perform thecost and benefit analysis to determine what policies and measures should betaken to mitigate and prevent the climate change and its various impacts.

Climate change is a global issue, but the impacts arelikely to differ in different continents, countries, and regions. Some nationswill likely experience more adverse effects than others. Other nations maybenefit from climate changes. The ability to adapt to climate change caninfluence how climate change affects individuals, communities, countries, andthe global population.

This paper will discuss the effects of global warming on the energy industry, agriculture and food supply, production output and inflation. Next, it will focus on the cost benefit analysis of implementing the policies and procedures to mitigate and/or prevent global warming and climate change. Lastly, the paper will review the possible methods of reducing the effects of global warming and climate change and the mitigation policies to be implemented.

Climate Change Effect on Energy

In my opinion, energy is the keyindustry that will be highly affected by global warming and climate change. Theworld’s production and use of energy is the primary cause of globalwarming. Climate will affect energyconsumption by changing consumers’ wants and needs in both the intensive(short) and extensive (long) terms.

There are several ways in which climate may affect energyconsumption. In the residential, commercial and industrial sectors in a warmer worldhigher cooling demand is expected, which would lead to increased electricityconsumption. On the other hand, fewer cold winter days would result indecreased heating demand, which would decrease natural gas, oil and electricitydemand. These are demand side effects. Onthe supply side, one would expect increased use of natural gas on hot days, assome power plants become less efficient as well as higher natural gasconsumption for generation due to higher electricity demand. During the winter,there might be a decrease in natural gas demand for generation due to lowerelectricity demand.

According to a 2009 report on global climate change, the majority(87%) of the United States’ greenhouse gas emissions are from the productionand use of energy production. The researchwas primarily on the energy usage in buildings concerning the various heatingand cooling demands. The findings stated that, “the demand for cooling energyincreases from 5 to 20 percent per 1.8°F of warming, and the demand for heatingenergy drops by 3 to 15 percent per 1.8°F of warming” (Global Climate ChangeImpacts in the United States Report, 2009).Additionally, the 2009 report projects that global warming’s increasingtemperatures will increase the peak demand for electricity as it is the mainsource used for the cooling of buildings.This would result in a disproportionate increase in energy infrastructureinvestment and possible pollution as most of the nation’s electricity iscurrently produced from coal. This wouldpotentially increase the nation’s CO2 emissions and slow the development ofalternative “green” energy sources (Global Climate Change Impacts in the UnitedStates Report, 2009).

Climate Change Effect on Agricultureand Food Supply

Since temperature andprecipitation are direct inputs in agricultural production, this sector willexperience significant effects as well. Recentdroughts worldwide have highlighted that the advances in modern farmingtechniques and technologies cannot insulate the world’s food production andsupply. In fact, rising CO2concentrations could increase production of some crops, such as rice, soybeanand wheat (Clark, 2012). However, Clark(2012) also stated, “the changing climate would affect the length and qualityof the growing season and farmers could experience increasing damage to theircrops, caused by a rising intensity of extreme weather events such as droughts,flooding or fires”. Furthermore, in manydeveloping regions, agriculture is of major importance for national economies, asit represents the large share in gross domestic product (GDP). Therefore, with prospects of continued globalwarming, the damages for poor regions could be substantial (Clark, 2012). Climate change’s probable impact on agriculturalproduction patterns and prices in these regions lower the profitability ofagriculture industry and increase the share of consumers’ income spent on food.Thismay lead to food shortages or insufficient access to food in some countries or regions.

In addition to agriculture, theworld’s fisheries which provide an important source of food for at least halfthe world’s population are very susceptible to climate change. Fisheries are plagued by two problems,overexploitation and pollution. Additionally,the various marine fish species are encountering their own problems due toclimate change such warming surface waters, and rising sea levels due tomelting ice. Clark (2012) states, “somemarine fish species are already adapting by migrating to the high latitudes,but others, such as Arctic and freshwater species, have nowhere to go”. If we are unable to find sustainable solutionsto help the fisheries and fish, we may end up with shortages of edible fishwhich will cause prices to soar.

According to Schierhorn (2016), over the last century, theglobal population has quadrupled. In 1915, there were 1.8 billion people in theworld. Today, according to the most recent estimate by the UN, there are 7.3billion people and we may reach 8.5 billion by 2030 (“UNprojects world population to reach 8.5 billion by 2030, driven by growth indeveloping countries”, 2015). Thispopulation growth, along with rising incomes in developing countries, is increasingglobal food demand. Schierhorn’s (2016)research shows that food demand is expected to increase anywhere between 59 to98 percent by 2050. Therefore, theworld’s crop production will need to increase.That means there needs to be an expanse of farmable land to grow crops,and current productivity needs expanded through the use of modern farmingmethods (Schierhorn, 2016).

A recent EPA (2016) study concludesthat “climate change is very likely to affect food security at the global,regional, and local level” and that “climate change can disrupt foodavailability, reduce access to food, and affect food quality”. The study projects that changes intemperatures and precipitation patterns, along with extreme weather events mayreduce agricultural productivity (Climate Impacts on Agriculture and FoodSupply”, 2016).

The same study further suggests that“increases in the frequency and severity of extreme weather events can alsointerrupt food delivery, and resulting spikes in food prices after extremeevents are expected to be more frequent in the future”. Increasing temperatures can contribute to foodspoilage and contamination (Climate Impacts on Agriculture and FoodSupply”, 2016).

Furthermore, Clark (2012) argues that food productionitself is a significant emitter of greenhouse gases, as well as a cause ofenvironmental degradation in many parts of the world. Clark states agriculturecontributes about 15% of all emissions, on a par with transport. He concludes thatto limit the long-run impacts of climate change, food production must becomenot only more resilient to climate but also more sustainable and low-carbonitself (Clark, 2012).

Climate Change Effect on Economy Growth

According to a recent study byWade (2017), climate change will most likely reduce the capital stock andproductivity in the world economy. Global warming is expected to increase thefrequency and severity of extreme weather events causing property andinfrastructure loss.

While the initial economic response to recover the damages maybe positive for GDP while it is possible, in the long run the world economy willface an extreme challenge. The harm to economic output may become irreversible.Wade (2017) argues that it will not beworth for businesses to replace their capital stock unless future damages couldbe prevented or the business could be relocated to the safer area. This could cause a short period of disruptionas businesses relocate, or in the worst case scenario, a permanent loss ofcapital stock and output. As thetemperatures continue to rise, the damages will increase and become permanent(Wade, 2017).

Wade (2017) represents the likely effect of climate changeon output in production function in Figure 1 (See Appendices). If there is less capital stock available dueto the damage resulted from climate change, the productive capacity of theworld economy will fall. It isrepresented by the downward shift in the world production function as each unitof labor produces less output (Wade, 2017).

However, lower labor productivity may occur not only due toa lower level of capital stock. Globalwarming may affect food safety, promote the spread of infections, cause social unrestand thus reduce availability of labor. Wade (2017) shows this effect as asupply shock in a supply and demand graph (Figure 2, Appendices). Global warming is likely to contract supplyat any given price and result in a backward shift of the supply curve (from S1to S2) (Wade, 2017). As the graph demonstrates, this will result in a lowerlevel of output (Y2) and a higher price (P2).

This analysis is based on the assumption that the worldwill not respond to climate change and no prevention or mitigation measures aretaken.

Climate Change Effect on Inflation

Wade (2017) also proves that as global production output isreduced, an increase in the general price level will occur as a result ofglobal warming.

As discussed earlier, higher food prices will affect consumers’income and overall food price inflation will rise. Furthermore, reduced land availability mayalso contribute to rising inflation. Per Wade (2017) the surge in globaltemperatures may eventually cause some areas of the world to become uninhabitableand cause mass migration. Along with the political and socioeconomicimplications of the migration there will be higher demand for decreasing amountof land.

Higher energy costs are also likely to boost inflation. Asdiscussed earlier, as our climate becomes more extreme the demand for energyused for cooling will likely to rise. Asthe energy demand will rise, the supply will shrink as the efficiency ofexisting power stations is compromised due to higher temperatures (Wade, 2017). Policy actions by governments to transitionto green energy may further contribute to inflation in the short-run when taxesare placed on fossil fuel electricity. Since energy is the basis of most of theworld’s production, the effects of higher energy prices on inflation will impactthe global economy (Wade, K. 2017).

Cost-BenefitAnalysis

According to Mendelsohn (2013), “the biggest threat climatechange poses to economic growth is from immediate, aggressive and inefficientmitigation policies”.

Thomas C. Shellingbelieves that climate change is the global public good, because each country’semissions of greenhouse gases contribute cumulatively to the increase of theoverall concentration, and each country’s abatements entail higher cost thanbenefit, unless effective concerted collective actions take place (Stiglitz & Shelling, 2012). Therefore, benefit-cost analysis isa principal tool for deciding if this public good should be altered throughmitigation policy.

There are many conflicting views regarding the truedimensions of climate change problem and a lot of various policy assessmentmodels. The most famous are DICE model created by William Nordhaus and theStern Review prepared by Sir Nicholas Stern for the British government in2006.

The modelingapproach by Nordhaus views climate change as a matter of investment efficiencyand assumes that climate change policies will compete with other investmentssuch as public health and education. This model provides estimates of theappropriate price path on carbon emissions, with prices starting relatively lowand gradually rising as a result of discounting. (William D. Nordhaus and Joseph Boyer, 2000)

TheStern Review, in contrast to Nordhaus’ model, recommended strong and immediateaction on climate change. Stern (2006) found that the costsassociated with uncontrolled global warming would be up to a 20 percent dropper year in the world’s GDP by 2050. The Stern Review incorporated newscientific evidence suggesting that the climate system may be more sensitivethan previously thought. Also, it supported the application of much lowerdiscount rates. (Stern, 2006).

Therefore,two aspects of the benefit-cost calculation are critical. One is allowance foruncertainty as the possible outcomes of global warming in the absence ofmitigation are very unclear. The other critical aspect is thechoice of discount rate as most of the climate-related benefits from currentpolicy efforts would take the form of avoided damages in the long run with manyof the costs incurred in the short run.

Stiglitz & Shelling (2012)suggest a number of behavioral changes to mitigate the problem of globalwarming such as shifting to fuels with higher ratio of useful energy to CO2emissions (from coal to oil, from oil to natural gas); developing technologiesthat use less energy per unit output; shifting demand to products with lowerenergy intensity; planting trees and reducing deforestation; pursuing policy ofsequestering the CO2 by pumping it directly into underground reservoirs.

The process of mitigation will require a temporary economictransition from consumption to investment, provided that the transitional costsare small relative to the cost of inaction (Wade, 2017). However, as the costs of mitigation rise,budget limitations will become increasingly important.

Possible Mitigation Measures

Despite the disagreementsbetween nations, in recent years we have witnessed the gradual emergence of arange of international and domestic climate change policies, includingemissions trading programs, emissions taxes, performance standards, andtechnology-promoting programs (Goulder & Pizer, 2006). At the Paris climate conference (COP21) inDecember 2015, 195 countries adopted the first-ever universal, legally bindingglobal climate agreement that outlined a global action plan to put the world ontrack to avoid dangerous climate change by limiting global warming to wellbelow 2°C.

Therefore, there is now an agreement among climateeconomists to consider climate change as a global externality that must becompensated for to recover economic optimality. Hence, basic public economicswisdom requires some mitigation efforts (IPCC, 2007). The issue getscontroversial however when we try to answer the “when” and “how much”questions.

One approach that has becomewidely used is cap and trade. The U.S. Clean Air Act of 1990 establishedemission levels (caps) and permitted companies with emissions below the cap tosell (trade) their rights to remaining permissible amount to firms that haveexceeded the cap. Over time, the government would reduce the cap, thus overallemissions would be gradually reduced.

This approach gives companiesflexibility. It increases the pool of available capital to make reductions,encourages companies to cut pollution faster and rewards innovation. But thecritics pointed out that it allows richer companies to pollute more as they areable to buy those rights.

Another type of emissionscontrol is establishment of emissions charges or fees. Each business would becharged accordingly for the amount of emissions produced. It would become veryexpensive for the companies to pollute and will create incentive for them toclean up. In recent years governments also experimented with various greentaxes and eco-taxes that levy a fee on environmentally damaging behavior.Beside the punishment, governments also offer positive incentives for thecompanies that improve their environmental behavior. For example, thegovernment may decide to purchase only from those firms that meet certainpollution standard or to offer financial aid to those that install pollutioncontrol equipment. Tax incentives such as faster depreciation for pollutioncontrol equipment may also be used.

Overall, the trend has been forgovernments to use more flexible, market oriented approaches such as tradeableallowances, pollution fees and taxes, and incentives, to achieve the goals ofprotecting the environment and mitigating climate change. (Lawrence &Weber, 2017)

Many challenges remain though.2°C stabilization goal set at the Paris Climate Conference requires decarbonization of the world economy.Carbon pricing would be a necessary tool in reaching that goal. The advantagesof carbon pricing would be the following: it would trigger economy-widedecarbonization in a cost efficient manner, generate revenues that can be used forfinancing the sustainable development goals and become a focal point forinternational climate policy cooperation focusing on carbon pricingcoordination.

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For many policy issues, there isan important and clear distinction between the short-run and the long-runresponses by businesses and individuals. The short run is a period when businessesand individuals are locked in to some past decisions and have fixed costs thatthey are not able to avoid. But over a period of time, they might respond bymaking gradual adjustments in their behaviors and choices. They are moreresponsive in the long run than in the short run because they have more timeand opportunities to respond to a change in price. As we know, supply anddemand are generally more elastic in the long run. We can use the example of agas tax that was introduced as a tool to reduce pollution. If we look only atthe short-run elasticity of demand, we might come to conclusion that a gas taxwill have little effect on driving since demand is inelastic. However, if wehad an estimate of the long-run elasticity of demand, we might see that thedemand curve is flatter. As recent studies how, the effectiveness of manymarket-based environmental policies depend on the responsiveness of businessesand individuals to a change in incentives, economists and policymakers should keepin mind the difference between short-run responses and long-run responses(Global Warming Causes, 2017).

Summary

Theoverall effect of climate change on economic growth will most likely benegative in the long run. Although there will be winners and losers fromclimate change at different levels of warming, the impact of climate changewill be widespread due to the financial, political and economic integration ofthe world’s economies. Global warming will primarily influence economic growththrough damage to property and infrastructure, lost productivity, massmigration, security threats.

The issue of global warming andclimate change invokes the highest form of global citizenship. The nations haveto be willing to sacrifice hundreds of billions of dollars of presentconsumption in an effort that will largely benefit people in other countries,considering that the benefit that will not be instant. Moreover, the threat ofclimate change is uncertain and based on modeling rather than directobservation.

In considering climate changepolicies, the fundamental trade-off that society faces is between consumptiontoday and consumption in the future. By taking measures to slow emissions ofgreenhouse gases now, the economy reduces the amount of output that can bedevoted to consumption and productive investment. This is the opportunity costof the investment into mitigating global warming. However, the return for thisinvestment is lower damages and higher consumption in the future. The climateinvestments involve reducing fossil-fuel consumption and moving to low-carbonfuels. In return, the impacts on energy,agriculture, economic growth and inflation as well as the potential forcatastrophic climate change will be reduced.

Economic Aspects of Global Warming and Climate Change (1)
Economic Aspects of Global Warming and Climate Change (2)

References

Carbon Pricing for Climate Change Mitigation and Financingthe SDGs. (n.d.). Retrieved April 01, 2017, from https://www.global-economic-symposium.org/about-the-ges/council-of-global-problem-solving/recommendations/carbon-pricing-for-climate-change-mitigation-and-financing-the-sdgs

Clark, D. (2012, September 19). How will climate change affect foodproduction? Retrieved April 16, 2017, from https://www.theguardian.com/environment/2012/sep/19/climate-change-affect-food-production

Climate Change Indicators in the United States. (2016, December 19). RetrievedApril 16, 2017, from https://www.epa.gov/climate-indicators

Green, K. P. (2002). Globalwarming: understanding the debate. Berkeley Heights, NJ: Enslow.

Mendelsohn(2013). Climate Change and Economic Growth, Commission on Growth and Development, Working paper no.60

Global warming / opposing viewpoints. (2002). San Diego, CA: GreenhavenPress.

Global Warming Causes. RSS. N.p., n.d. Web. 23 Apr. 2017. Retrieved April 16, 2017, from https://www.briangwilliams.us/environmental-economics/shortrun-versus-longrun-substitutions.html

Lawrence H. Goulder and William A.Pizer (n.d.). Retrieved April 23, 2017, from http://stanford.academia.edu/LawrenceGoulder

National Aeronautics and Space Administration. (n.d.). Retrieved April 16, 2017, from https://www.nasa.gov/

Schierhorn, M. E. (2016, April 07). Global Demand for Food Is Rising. Can WeMeet It? Retrieved April 16, 2017, from https://hbr.org/2016/04/global-demand-for-food-is-rising-can-we-meet-it

Stern(2006). Stern Review on The Economics ofClimate Change (pre-publication edition).Executive Summary, HM Treasury, London. Archived from the original on 31 January 2010)

Stiglitz, J. E., & Shelling, T.C. (2012). The economists’ voice: top economists take on today’s problems. New York: Columbia Univ. Press.

Wade, K. (n.d.). Climate change & the global economy:Growth and inflation. Retrieved April 16, 2017, from http://www.schroders.com/en/us/institutional/insights/economic-views3/climate-change–the-global-economy-growth-and-inflation

What is climate change? (2016, November 14). Retrieved April 23, 2017, fromhttp://www.bbc.com/news/science-environment-24021772

William D. Nordhaus and JosephBoyer, Warming the World: Economic Modelsof Global Warming. MIT Press, Cambridge Mass., 2000. ISBN 0 262 14071 3.

UN projects world population toreach 8.5 billion by 2030, driven by growth in developing countries. (2015, July 29). Retrieved April 23, 2017, from http://www.un.org/apps/news/story.asp?NewsID=51526#.WP083IWcHIU

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