The Economic Approach to Environmental and Natural Resources, 3e

Exhaustible Resources, Pollution and the Environment Part II

“The greenhouse effect itself is simple enough to understand and is not in any real dispute. What is in dispute is its magnitude over the coming century, its translation into changes in climates around the globe, and the impact of those climate changes on human welfare and the natural environment.” Thomas C. Schelling, Some Economics of Global Warming

Introduction • This chapter focuses on two global environmental problems: ozone depletion and global warming. • Each is the result of pollutants modifying basic atmospheric chemistry and altering atmospheric processes and function. • Each is caused by stock pollutants that persist in the atmosphere for long periods (up to 100 years) after their emission into the atmosphere. • Each is global in the sense that the environmental problem is independent of location of emissions. • And in each case, there is potential for significant global environmental change and significant impacts on social, economic, and ecological systems.

Introduction • It is much more difficult to estimate a damage function for these types of pollutants than for conventional pollutants. • The only way to increase the number of observations for use in statistical analysis is to observe changes over time. • Because these pollutants persist through time, it is very important to calculate the damages that current emissions will generate in the future. • While there is no need to account for geographic variability in the effects of emissions, it also means that this problem can not be dealt with by one country.

The Depletion of the Ozone Layer • The basic problem leading to depletion of the ozone layer is the emission of a set of chemicals that trigger a reaction in the atmosphere, causing ozone to be converted to oxygen. • Ozone blocks ultraviolet radiation, oxygen does not. • As Figure 7.1 illustrates, the stratosphere (outer layer of atmosphere) is separated from the troposphere (lower atmosphere) by the tropopause. • The lowest level of the stratosphere is warmer than the highest level of the troposphere and there is little mixing of air across this temperature inversion. • Pollutions that make their way to the stratosphere tend to stay there.

Causes of Ozone Depletion • The pollutants that most adversely affect the ozone layer are fluorocarbons, particularly those that contain chloride and bromide. • Most of the depletion of the ozone layer has been attributed to pollutants containing chloride (chlorofluorocarbons or CFCs). CFCs were used in refrigeration and air conditioning systems and as propellants in spray cans. • These chemicals serve as a catalyst in a chemical reaction that converts ozone to oxygen. The presence of ice crystals accelerates the process. • CFCs are not consumed in the reaction but remain in the stratosphere to continue the destruction of the ozone.

Consequences of the Depletion of the Ozone Layer • Ozone in the upper atmosphere performs the critical function of blocking the penetration of ultraviolet light. • Ultraviolet radiation causes living cells to mutate. • In Oct. 1991, a panel of international scientists found there had been a 3 % reduction in stratospheric ozone, which lead to a 6% increase in the amount of ultraviolet radiation striking the earth’s surface. • This increase in radiation had the potential to lead to an additional 12 million cases of skin cancer in the US over the next 50 years.

Consequences of the Depletion of the Ozone Layer • Agricultural yields could be significantly reduced. • Phytoplankton, which form the foundation of the oceanic food web, undergo several metamorphoses before achieving adult form and are very vulnerable to increased ultraviolet radiation. • Ultraviolet radiation also accelerates the deterioration of materials such as plastics and nylon.

Policy toward Ozone Depletion • The first policy the US adopted was not tied to an international agreement. • This 1977 policy banned the use of CFCs as a propellant in spray cans of deodorants, hair sprays, and other consumer products. • While command and control regulations are not usually efficient, this involved a substance with a readily available substitute and as a result, the cost of eliminating these emissions was low compared to the damages created.

Policy toward Ozone Depletion • In the 1980’s the discovery of the hole in the ozone layer above the Antarctic and evidence of continued ozone depletion spurred the development of an international agreement on chemicals. • In 1987, the Montreal Protocol on Substances that Deplete the Ozone Layer was signed by most developed and developing countries. • An important remaining issue is how to treat replacements for CFCs which also have ozone-depleting effects.

Policy toward Ozone Depletion • The Montreal Protocol has been successful for a number of reasons, but primarily because the cost of compliance was very low compared to the damages that would occur. • Costs were low because of the existence of good substitutes.

Greenhouse Gases and Global Climate • Global warming is linked to the accumulation of a variety of gases in the atmosphere. • These gases, which include carbon dioxide, methane, nitrous oxide, and water vapor, trap infrared radiation that would normally escape from the earth’s atmosphere into space. • This increased gas serves to increase the capacity of the atmosphere to absorb heat. • There is virtually no debate about this relationship. • The debate is centers on the magnitude and timing of the change in heat absorption and the significance to human welfare.

Carbon Cycle • The carbon cycle refers to the movement of carbon from the atmosphere to the earth’s surface. • Carbon is stored in the biomass of every organism. • Carbon dioxide is also dissolved in surface water, with the oceans playing the largest role. • Carbon dioxide is removed from the earth’s atmosphere when a tree grows. • When an animal eats a plant, the carbon is transferred from the plant to the animal. • When an animal or plant dies, it decays and the carbon combines with oxygen to become carbon dioxide.

Carbon Cycle • Anthropogenic activities which upset the carbon cycle include burning of fossil fuels or deforestation. • Fossil fuels, such as oil, coal and natural gas, are the fossilized remains of prehistoric plants and animals and represent stored carbon. • Deforestation has two impacts: the breakdown of carbon in the bi-products of the wood and the loss of trees to draw carbon dioxide out of the atmosphere.

Carbon Cycle • A process called carbon sequestering involves planting new forests to reduce atmospheric carbon dioxide concentrations. • The greatest opportunity for this is in tropical areas where growth rates are the fastest.

Greenhouse Gases • Methane comes from a variety of anthropogenic and natural sources. • Natural sources include wetlands and other areas where anaerobic decay of organic matter takes place. • Anthropocentric sources include emissions from cattle and sheep, wet rice cultivation, emissions from coal mines and oil and natural gas wells. • Nitrous oxide originates from the burning of fossil fuels and biomass and also agricultural fertilizers.

Is Global Warming Increasing? • Virtually all evidence suggests very strongly that the mean global temperature has increased as a result of anthropogenic greenhouse gas emissions and that it will continue to increase. • All the scientific evidence suggests that there will be significant increases in sea level. • Many uncertainties exist about the nature of regional distribution of global climate change. • Table 7.1 contains information on climate change that has already occurred.

Twentieth-Century Changes in the Earth’s Atmosphere, Climate, and Biophysical System

Historical Temperature Record

Twentieth-Century Changes in the Earth’s Atmosphere, Climate, and Biophysical System • Evidence comes from many sources: • Ice core samples of glaciers. • Pollen records from sediments in lakes. • Human records, some historical and some recent and systematic. • Intergovernmental Panel on Climate (IPCC) is an international scientific agency designed to share information and encourage cooperation of scientists.

What is the bottom line of predictions of global climate change?

What is the bottom line of predictions of global climate change? • Based on these scenarios, the IPCC reports that the concentration of CO2 in the atmosphere will increase to between 549 ppm to 970 ppm by 2100 (as compared to 368 in 2000). • Mean global surface temperature will increase between 1.4o C and 5.8o C by 2100. • Temperature will increase over this whole interval, with the projected increase between 0.4o to 1.1o C by 2025. • Estimates of sea-level rise for 1990 to 2100 is 0.09 to 0.88 meter. • Table 7.2 reports other likely physical changes.

Examples of Climate Variability and Extreme Climate Events and Their Impact.

What are the Consequences of Global Climate Change? • In the 1990s much of the economic literature focused on the ability to mitigate damages associated with climate change through adaptation (for example protecting Manhattan with a sea wall or switching agriculture to heat-tolerant varieties). • While the US has a complex network of land-grant universities, government agencies and private industries which will work to investigate and implement strategies to address climate change, this is not true for small farmers in developing countries. • In addition, the ability to adapt to change will depend on the magnitude of the change.

What are the Consequences of Global Climate Change? • Nordhaus (1991) estimated the annual impact on the US economy of doubling of atmospheric CO2 is approximately $12.63 billion, or 0.26% of national income. • Cline’s estimate (1992) was higher (2% of national income) and included nonmarket impacts. • More recent studies tend to report damages on a per ton of carbon basis, allowing for better comparison with cost of reducing emissions. • Damages from global warming may be even greater, because some types of impacts, in particular, the impacts on ecosystems and the reduction in ecological services, are not factored into global warming.

What are the Consequences of Global Climate Change? • One particular aspect of global warming that is likely to be quite costly is the effect of sea-level rise on low-lying Third World countries. • In the future, these areas may be lying entirely under water or at such a low elevation above sea level that they become even more vulnerable to storms. • This may result in a rise in movement of refugees, growing political destabilization and rising costs associated with relocating refugees.

What are the Consequences of Global Climate Change? • Ausabel (1991) argues that the most significant damages from global warming may lie in damages to natural systems, particularly those already under stress. • The climate change taking place with global warming is at a relatively rapid pace. This pace is far too rapid for a forest to adjust by natural selection. • Finally, there is the very important impact of global climate change on the distribution of tropical disease.

The Importance of Surprises • One reason to be extremely cautious about the potential consequences of global climate change is the potential for unpredicted consequences which can come about as a result of the possible existence of threshold effects. • The first type of threshold effect is when increases in emissions generate no damages until a threshold is crossed. • An example would be if global warming progresses to the point that the tundral permafrost begins to melt and this leads to a massive release of methane and intensification of global warming.

The Importance of Surprises • The second type of threshold effect is when marginal changes in emissions lead to marginal increases in damages until a threshold is crossed and then marginal changes lead to large damages. • An example is if temperature change became severe enough to lead to even greater melting of the polar ice caps. Not only would this lead to increased sea-level, but the shrinking of the ice cap would reduce the amount of light reflected by the earth (which would lead to increased heat absorption and intensified global warming).

The Importance of Surprises • Both the melting of the permafrost and the shrinking of the polar ice cap can be classified as positive feedback effects. • Another type of threshold effect would occur if climate changes lead to alterations in ocean currents. • This would lead to Western Europe experiencing colder temperatures, similar to northern latitudes.

Global Warming Policy • Many characteristics of the global warming problem make it substantially different from other environmental problems. These include:

The Necessity to Deal with Many Different Pollutants • One cannot merely look at the cost of reducing a kilogram of carbon dioxide emissions and compare it to the cost of reducing a kilogram of N2O. Each greenhouse gas has a different level of radiative forcing (heat absorbing potential), and each has a different atmospheric life. • The IPCC developed a global warming index (GWPI) to measure the equivalency of greenhouse gases. • While a GWPI can measure the warming potential associated with two gases, it does not consider the different time paths and possible different potential long term damages.

The United Nations Framework Convention on Climate Change and the Kyoto Protocol • Created at the Rio Summit in 1992, this was not an agreement on emissions limitations, but specified a process for arriving at an agreement. • The UNFCCC stated 2 principles that are extremely important in terms of moving toward a treaty. • First – the signatories to the Convention accepted the proposition that anthropogenic activities lead to the accumulation of greenhouse gases, which in turn leads to global climate change. • Second – the signatories agreed that all nations had a common but differentiated responsibility to solve the problem of global climate change.

The Kyoto Protocol • Protocol goes into effect when two conditions are met: • First – 55 percent of the nations of the world must sign and ratify the treaty. • Second – the total 1990 emissions levels of the nations that have ratified the proposal must account for 55 percent of the 1990 emissions totals. • The first condition has been met. • The second condition will not be met unless the US or Russia ratifies the treaty.

The Kyoto Protocol • The major provision of the Kyoto Protocol is to limit emissions of “Annex I” countries, which includes high-income countries and the Warsaw Pact countries, to (more or less) 6 percent below 1990 levels by 2010. • “Annex II” countries, which include all countries not in Annex I, are not required to limit their emissions at all. • An important aspect of the agreement is the specification of “flexibility provisions” which allowed countries with higher marginal abatement costs to find cheaper opportunities to reduce emissions.

The Kyoto Protocol • Three flexibility provisions were contained in the Kyoto Protocol. • A “bubble provision” treats a group of countries that are in a formal union as if they were one country. This is important for the EU. • The “joint implementation provision” allows an Annex I country to pay for some emission reductions in another Annex I country. The paying country gets credit for the reduced emissions. • The “clean development mechanism” allows for limited trading opportunities between Annex I and II countries.

What is Wrong with the Kyoto Protocol? • The Kyoto Protocol will be ineffective in slowing the onset of global climate change and reducing its magnitude for 2 reasons. • First, the freezing of emissions at 1990 levels will not stabilize atmospheric concentrations of CO2, because emissions remain in the atmosphere for centuries. • To stabilize concentrations at a less than damaging level, the current level of emissions must be frozen at a level substantially less than 1990 levels.

What is Wrong with the Kyoto Protocol? • Second, the Kyoto Protocol does not require reduced emissions from Annex II countries. • Annex II countries include populous nations with rapidly industrializing economies, such as India, China, and Brazil. • Annex II countries need to stabilize their emissions at some level below the levels currently seen in industrialized countries.

What is the Cost of Reducing Emissions? • The cost of emissions reductions in the US economy was the reason cited by President George W. Bush for pulling out of the Kyoto Protocol process. • Studies of abatement costs generally fall into two categories: top-down studies or bottoms-up studies. • Top-down studies are based on aggregate macroeconomic models, which look at how various sectors of the economy are linked and how a potential disturbance ripples through the economy. • The drawbacks to these types of models have been discussed earlier.

What is the Cost of Reducing Emissions? • According to the 1996 and 2003 IPCC reports, the impact of stabilizing greenhouse gas emissions at 1990 levels that is forecast by the top-down models is to reduce GDP of OECD countries by between 0.5% and 2% of the levels they would otherwise attain. • If full emissions trading were allowed the impact would be much lower.

What is the Cost of Reducing Emissions? • Bottoms-up models look at engineering cost estimates of implementing the type of technologies necessary to achieve the target emissions levels. • The initial capital costs of purchasing and installing more energy-efficient capital is more than offset by the energy savings which result. • In addition are the benefits of reduced emissions of other types of pollution. • Because these policies would result in an increase in social welfare, independent of the benefits of global climate change, Nordhaus (1994,1998) refers to these policies as “no regrets” policies.

What is the Cost of Reducing Emissions? • Why the excitement about costs? • First, there is uncertainty about the true costs. • Second, there is a high up front cost as energy inefficient capital is replaced, while cost savings are spread over time. • Third, some sectors of the economy will be hurt more drastically than others (for example the fossil fuel industry).

Rethinking an International Treaty on Global Climate Change • Four problems associated with the Kyoto Protocol have been delineated: • Ineffectiveness of initial levels of emissions reductions in preventing global climate change. • Lack of provisions to generate future reductions below initial levels. • Lack of emissions reductions by developing countries. • Potential high costs of emissions reductions.

Rethinking an International Treaty on Global Climate Change • For a treaty to be successful it must deal with all four of these issues. • If a treaty can generate effective reductions without objectively high costs, then there is a good probability that the nations of the world would participate in an accord. • It will be difficult to achieve higher levels of emission reductions, if developing countries will not accept emission reductions. • Cooper(1998) proposes an alternative treaty based on a tax level rather than limits on emissions.

Rethinking an International Treaty on Global Climate Change • The primary component of the proposed tax system is a set of differential taxes. • For a tax to be effective it must, at a minimum, be inflation-proof. • A further advantage of a tax system is that it reduces uncertainty about the costs of attaining emissions reductions. The cost can be no higher than the tax multiplied by the emissions level. • Developed countries with higher per tax emissions could face a higher tax, increasing the competitiveness of developing countries. • Taxes collected in developing countries would stay in country.

Summary • Global warming and depletion of the ozone layer are important environmental problems. • The long lags between emissions and damages, the long lifetimes of the pollutants, and the complexity of the scientific relationships make the development of policy difficult. • While there have been international agreements developed regarding the restrictions on ozone-depleting chemicals, the movement toward resolution of global climate change has been much less successful.

The Economic Approach to Environmental and Natural Resources, 3e