How Cost Can Change Climate Policy

Now that COP28 has begun, again we are talking about net zero.

But this time, it’s the cost.

Cost of Climate Policy

Net Zero

For starters, we can imagine a balance scale. On the left side we have the carbon we emit that is warming our planet. The right side is the greenhouse gas emissions that we eliminate from the atmosphere. At net zero, they are equal. As you would expect, it is easier to achieve the balance when the emissions side is lower.

Below you can see when nations project achieving net-zero carbon emissions:

Our focus today, is the right side. Yes, we want offsets. However, as economists, we have to consider the cost. Referring to more than money, cost is all we sacrifice because of a decision.

What are the cost estimates?

A recent paper by climate economist Richard Toll looked at the cost of achieving a maximum global temperature rise of 1.5 degrees Celsius and net zero by 2050. As a foundation, he concluded that current loss from climate change is less than we assume. Along the path to achieving the 1.5 degree goal, we will experience less than a 0.5 percent loss in global GDP by 2050 from climate disasters. Next, we need to ask the cost of mitigation policies (the right side of the scale). The answer is 4.5 percent of global GDP by 2050. As a result, the cost of climate policy is greater than the emissions impact.

Then, also focusing on cost, a second paper from MIT expects it to be more expensive. Looking at our GDP sacrifice, they project Paris policies will create an 8 to 18 percent decrease in annual GDP by 2050.

In dollars, both papers take us to a $27 trillion cost of climate policy while the benefits are $4.5 trillion.

Who will pay the cost?

The cost of a balanced scale takes us to an unfathomable list of decisions (and a time consideration also). Just one of so many possibilities, we can name electric vehicle production and purchase. Then we can add wind and solar power devices and low emission air conditioning units. Also though, we have policies that range from recycling to plastic prohibitions. We have manufacturers with pollution limits and Indian farmers doing less stubble burning.

Each mitigation behavior has a cost that someone has to pay. And consumers, by buying fewer EVs are messaging that they do not want to pay. Similarly, labor’s higher wages indicate an unwillingness to bear the burden. Furthermore, when governments encourage emissions control, they are creating a supply shock that shifts our curve upward and to the left. The result is price increases that incentivize less observance. Expressed by a French economist, we are putting a price on a free resource.

The Balance

Longtime commentator on the environment and Copenhagen Consensus president Bjorn Lomborg suggests we can achieve the cost benefit balance by boosting R&D and moderating abatement policies.

Our Bottom Line: Tradeoffs

Of course, I know that these numbers are debatable estimates. However, the value of pointing a tradeoff lens on climate policy is not.

My sources and more: For climate policy, if you, (as do I),  like to see what Bjorn Lomborg says, do take a look at his recent WSJ opinion piece. Then, also in WSJ, Greg Ip had more about the cost of the “green transition.” In addition, somewhat dated (2019) but ideal for content, these ten facts about climate change policy set the scene.