The model you have built integrates both economics and environmental science. How do these two academic fields work together?
This model is at the intersection of economics and climatology. It can be used to forecast the effects of an environmental policy, including the effects on world production and consumption, but also on energy consumption and carbon emissions. Putting it the other way round, it can be used to determine the optimal policy that should be implemented in order to meet a given objective. This is where climatology comes in, because the models developed by climatologists tell us about the climate changes likely to be induced by a certain level of carbon emissions. We then translate this level into an economic cost. It comes full circle: we compute the current and future levels of carbon emissions and climatology reveals the induced environmental impact, which we integrate into an economic model.
What do you call the economic cost of climate change?
It is the sum of all known costs, whether they be agricultural costs, health costs or environmental costs, that will impact the world for the next 150 or 200 years and will jeopardize future world GDP. We should emphasize the fact that all countries will not be equally affected. Some will benefit from global warming while others will suffer from it. Among the “winners” are the cold countries such as Russia or Canada, while some others have a lot to lose, such as sub-Saharan Africa, because of the reduction in water supplies and the outbreak of certain diseases, or Europe, where global warming will hurt agricultural production and may flood Holland or Venice. But overall the losses are greater than the gains: global warming has a negative impact on the world as a whole. What we do is try and measure this global loss.
In order to keep it to a minimum?
No, this is not our job. Political decision-makers must determine a scenario, and decide what constitutes an “acceptable” level of environmental and economic damage. In our model we consider different scenarios and show what must be done if we want them to come true. For instance, a scenario states that the carbon dioxide concentration in the Earth’s atmosphere should not exceed 500 ppm1. We solve the model with respect to this constraint and it gives us the measures that must be taken to keep carbon concentration beneath this level. These measures, the environmental policy, are costly to society, and political leaders must decide how much we will sacrifice in the short term to avoid an even bigger loss in the long term. Since there are an infinite number of possible scenarios, there are an infinite number of possible results. Of course, some of them are clearly not desirable: a laisser-faire policy for instance would probably have dramatic consequences because the carbon concentration would exceed 1000 ppm, causing an increase in temperature of 7 to 8°F, which would be catastrophic according to climatologists. In economic terms, it would cost 5% of world GPD in 2100.
In order to reduce carbon concentration, is it more efficient to tax emissions or to subsidize green energy?
A combination of both is more efficient. And subsidies are not only about green research. We model the effects of subsidies in three different R&D sectors: the efficiency of energy production, the efficiency of the backstop and the efficiency of the Carbone Capture and Sequestration (CSS) process. The latter might be particularly appropriate in countries like China with very large coal reserves. Whatever the sector, research subsidies are necessary because the possibility of copying a technological discovery reduces the incentive to fund R&D departments. The second instrument is the carbon tax, which means putting a price on pollution. We show that using only one of these two policy instruments has very limited impact, while using them in combination is efficient: these tools are complementary. This is an important finding. For instance a carbon tax would impact extraction rate but would have no effect on research and, inversely, R&D subsidies would favor research but would not change the level of extraction. For maximal effect, tax and subsidy policies should be implemented simultaneously.
You have also shown that a carbon tax must increase slowly …
That is correct: a carbon tax must increase with time, but not too fast, or it will induce the owners of fossil fuel resources to anticipate extraction, that is to increase the extraction rate. This is called the “green paradox”: some economic policies that appear to have positive long-term effects and reduce greenhouse gas emissions have adverse effects in the short term. This is not only true for taxes but also for R&D subsidies, since investing in carbon-free energy (solar energy, wind power, nuclear power, etc.) is likely to make it more competitive, making fossil-fuel energy relatively more expensive in the future. Here too, therefore, fossil-fuel owners and consumers would be induced to extract and consume a lot of resource as soon as possible.
Is this why it so difficult to reach an international agreement on a global environmental policy?
This is one of the reasons. The different international summits such as Copenhagen have failed for various reasons. Many of these are related to the social acceptability of an environmental policy. A long-term gain requires a short-term loss: fighting global warming means favoring the generation to come at the expense of the present generation. And this sacrifice will increase inequality because a carbon tax, or more generally an increase in energy prices, will affect poor consumers, for whom transportation is a large share of their budget, more than rich ones. This can be seen as a reverse redistribution policy!
Another reason, maybe the most important, for the failure of international summits is the divergence of interest between countries. We have already underlined the unequal impact of global warming on the different countries. But we must understand that some of them would lose massively if an international policy were to be implemented. Oil exporting countries have absolutely no interest in giving up their oil rent and therefore oppose taxes on their exports. And China and the US are also strong opponents of such taxes, although for different reasons. The US is the largest oil consumer: per capita oil consumption is two or three times higher in the US than in Europe and a restrictive environmental policy would cause a total change to the American way of life. At the moment, China is still a small fossil fuel consumer but consumption is increasing fast because it follows strong Chinese growth. China is one of the largest coal resource owners and intends to use this resource to pursue economic development. For these countries to agree on an environmental policy would require that they be granted large concessions.
Lastly, cultural differences make the situation even more complicated, because different countries have a very different grasp of what is at stake here.
Why seek an international agreement then?
Because only a worldwide policy would have a chance of working. An environmental policy implemented only in some countries would be absolutely useless. It would be nothing more than an example to follow, and it is very doubtful whether other countries would do so. Since global warming is a global externality which affects all countries, though not all in the same way, the solution can only be global. For this solution to be found, one must take into consideration the particular situations of the different countries, because some of them will not accept an agreement without compensation.
Pr. André Grimaud (Toulouse School of Economics)
André Grimaud, who enjoys worldwide fame for his various publications, is a member of the Conseil Français de l’Énergie and of the Center for Economic Studies and the Institute for Economic Research. With co-authors Gilles Lafforgue and Bertrand Magné, he has written a paper that models the economic effects of environmental policies. In this interview, he presents the model and explains the reason why it is so difficult to reach international agreement for a global environmental policy.
Industrial Economics / Macroeconomics / Urban Economics / Environmental Economics
Toulouse School of Economics (TSE) / Laboratoire d’Économie des Ressources NAturelles (LERNA) / Toulouse Business School (TBS)
Climate Change Mitigation Options and Directed Technical Change: A Decentralized Equilibrium Analysis, A. Grimaud, G. Lafforgue et B. Magné.
Published in Resource and Energy Economics, Vol. 33, Issue 4, 938-962, November 2011.