ARTICLE IN PRESS
Azar, C. and S.H. Schneider, 2002: “Are the
Economic Costs of Stabilizing the
Atmosphere Prohibitive?” Ecological
Economics, 42:73-80.
www.elsevier.com/locate/ecolecon
Are the economic costs of stabilising the atmosphere
prohibitive?
Christian Azar a,*, Stephen H. Schneider b
a Department of Physical Resource Theory, Chalmers Uni6ersity of Technology/Go¨teborg Uni6ersity, 412 96 Go¨teborg, Sweden
b Department of Biological Sciences, Stanford Uni6ersity, 371 Serra Mall, 94305-5020 Stanford, CA, USA
Received 10 October 2001; received in revised form 25 February 2002; accepted 26 February 2002
Abstract
Macro economic studies of the costs of reducing CO emissions generally estimate the global cost of stabilising the
2
atmospheric concentrations of CO in the range 350 – 550 ppm in trillions of USD. This creates the impression that
2
the cost of CO reductions is so large that it threatens economic development. But, presented in another way, a
2
completely different picture emerges. There is widespread agreement amongst the more pessimistic macro economic
studies that stringent carbon controls are compatible with a significant increase in global and regional economic
welfare. Even if the cost of CO abatement rises to 5% of global income per year by the end of this century, this
2
reduction is minor compared with the tenfold increase in global income that is expected. Since income is assumed to
grow by a couple of percent per year, the trillion USD cost could also be expressed as a few years delay in achieving
an order of magnitude higher income levels. Similar observations can also be made as regards near term abatement
targets such as the Kyoto protocol. A more widespread recognition of the fact that carbon abatement policies will
only marginally affect economic growth, is likely to increase the willingness to introduce carbon abatement policies.
© 2002 Published by Elsevier Science B.V.
Keywords: Atmospheric stabilization; CO ; Economic top – down models
2
1. Very large climate changes are projected
present, they provide 80% of the global energy
requirements and given that the human popula-
Fossil fuels are cheap, abundant and relatively
tion will likely approach 9 – 10 billion people by
easy to handle. They powered the industrial revo-
the end of this century and that there is a wide
lution that created the material wealth of the now
spread demand to increase the material standard
developed countries. Many developing countries
of living to the level that prevails in the North,
intend to repeat that pattern of Victorian indus-
one can expect increasing use of fossil fuels, in
trial development powered by fossil fuels. At
particular coal, over this century. This also means
increasing carbon dioxide emissions. Business as
usual scenarios for the global energy system typi-
* Corresponding author.
cally suggest that global emissions will reach 15
E-mail
addresses:
frtca@fy.chalmers.se
(C.
Azar),
9
shs@stanford.edu (S.H. Schneider).
10 Gton C/year by the end of the 21st century
0921-8009/02/$ - see front matter © 2002 Published by Elsevier Science B.V.
PII: S 0 9 2 1 - 8 0 UNCORRECTED PROOF
0 9 ( 0 2 ) 0 0 0 4 2 - 3

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ARTICLE IN PRESS
2
C. Azar, S.H. Schneider / Ecological Economics 000 (2002) 000 – 000
(IPCC, 1995, 1999). This has the potential to
climate change and significantly improving the
triple by 2100 AD and more than quadruple CO
economic well being of the citizens of the world
2
concentrations after 2100 AD compared with pre-
are consistent goals.
industrial levels, and thus to severely alter global
climate. According to the latest assessment by the
Intergovernmental Panel on Climate Change, the
2. Substantial reduction in emissions is technically
global average surface temperature is projected to
feasible, but at what cost?
increase by 1.4 – 5.8 °C over the next 100 years
(IPCC, 2001a).
The technical feasibility of stabilising CO con-
2
The United Nations Framework Convention on
centrations well below a doubling has been
Climate Change (UNFCCC) ratified by 181
demonstrated in several global energy scenarios,
parties, calls for nations to constrain climatic
for instance the LESS scenarios of IPCC (Ishitani
changes so as ‘to prevent dangerous anthropo-
et al., 1996), the ecologically driven scenarios in
genic interference with the climate system’. Precise
the joint study by the International Institute for
calculations of what is ‘dangerous’ is not possible,
Applied Systems analysis and World Energy
since (a) the degree of harm any level of climate
Council (Nakicenovic and et al., 1995), the Fossil
change would bring is itself subject to a variety of
Free Energy Scenario by Stockholm Environment
uncertainties; and (b) because, whether any level
Institute (Lazarus, 1993) and the global energy
of risk is ‘acceptable’ or ‘dangerous’ is a value
and transportation scenarios developed by Azar et
judgement about costs and benefits weighed over
al. (2000). These scenarios allow a substantial
a variety of ‘numeraires’ i.e. measures of impact
increase in the use of energy services in developing
such as monetary loss, loss of life, loss of biodi-
countries, further increases in the material well
versity, loss of cultural heritage sites or changes in
being throughout the world, but still manage to
the distribution of welfare across time, income
stabilise atmospheric CO concentrations at 415
2
groups or peoples (Azar and Rodhe, 1997;
ppm or below. In the near term, this is mainly
Schneider et al., 1999).
done by increasing end-use energy efficiency and
In order to stabilise global climate at a safer
substituting natural gas for coal, but also by a
level, atmospheric concentrations of CO
may
rapid expansion of the use of renewables (see
2
have to be stabilised at 500 ppm or below (see
Johansson et al., 1993; Azar et al., 2000; WEA,
Azar and Rodhe, 1997, for a discussion on atmo-
2000).
spheric stabilisation targets). This would allow
In the longer run, renewables become even
some near term increases in global carbon emis-
more important since the adoption of carbon free
sions, but they would eventually have to drop to
energy technologies is necessary in order to meet
well below current emissions, let alone most sce-
the low carbon emission targets, e.g. biomass,
narios of future emissions. It has been asserted
wind and solar, which has an enormous physical
that this would be ‘extremely costly’ (Nordhaus,
potential. The solar influx to Earth is roughly
1990). But is that necessarily the case?
10 000 times larger than the global anthropogenic
Closing the gap between where we are heading
energy use. Decarbonisation of fossil fuels, i.e. the
and what we may have to do is a major challenge
use of fossil fuels with little or no CO -emissions
2
for citizens, business, and politicians as well as
(for instance via electricity and hydrogen produc-
national and global institutions. Nevertheless, af-
tion), only plays a minor role in just one of these
ter having reviewed the global energy economy
scenarios, but rapid progress in this field would
literature, we conclude that such stabilisation
further increase the possibility to meet the objec-
targets can be met. We find, perhaps somewhat
tives in the climate convention (Parson and Keith,
surprisingly, that there is widespread, if not unan-
1998; Schneider, 2001). Obersteiner et al. (2002)
imous agreement, amongst energy economy ana-
point out the possibility to use biomass energy
lysts (as expressed through their analytic works),
with carbon sequestration. This would offer soci-
that substantially reducing the risks of global
ety energy carriers without carbon (electricity and
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C. Azar, S.H. Schneider / Ecological Economics 000 (2002) 000 – 000
3
hydrogen) and, at the same time, remove CO
energy system technical inefficiencies will have
2
from the atmosphere as long as there is storage
transaction costs as large or larger than the costs
capacity for the sequestered CO .
2
of the energy inefficiencies and thus they do not
The optimism expressed in the technical feasi-
believe that such ‘no regrets’ failures in energy
bility of such renewables-rich scenarios or a hy-
system markets exist. The debate sometimes takes
drogen
economy
should
not
lead
us
to
on a religious character, with assertions and coun-
underestimate how different such development
ter assertions about (largely undemonstrated)
scenarios are from most conventional projections
costs or benefits flung about by both sides.
of our long-term energy future (Hoffert et al.,
The more pessimistic models used by some
1998; Bolin and Kheshgi, 2001). Although it is
economists generally find deep reductions in car-
widely debated whether obstacles to the penetra-
bon emissions to be seemingly prohibitively
tion of such technologies arise from their higher
costly — and count in trillions of dollars. In the
costs, the neglect of externalities from conven-
latest IPCC assessment, the cost of stabilising the
tional energy systems or perverse subsidies to the
atmospheric concentration of CO at 450, 550 and
2
status quo systems, the one point that emerges
650 ppm is estimated to lie in the range 2.5 – 18
clearly is that business as usual will lead to multi-
trillion USD, 1 – 8 trillion USD and roughly 0.5 – 2
ples of current CO concentrations in the long
2
trillion USD, respectively, (see chapter 8 of Work-
term and that the transition to a low greenhouse
ing Group III of the latest IPCC assessment,
gas emissions pathway needs to begin as soon as
IPCC, 2001c). The cost does not only depend on
possible if very large increases in CO concentra-
2
various technology and economy assumptions but
tions are to be avoided.
also the emissions trajectory towards the target
Although the technical feasibility of meeting
(see Wigley et al., 1996). For instance, reaching
low atmospheric CO -stabilisation targets has
2
450 ppm would according to Manne and Richels
been demonstrated, there is still concern about the
(1997) cost the world between 4 and 14 trillion
economic costs of realising such or similar targets.
USD, with the lower cost reflecting a (more)
Here, a longstanding debate between bottom – up
cost-effective emission trajectory towards the sta-
and top – down modellers has taken place. The
bilisation target.
former perspective, mainly advocated by physi-
Yale economist William Nordhaus argued a
cists and engineers, has focused on energy use per
se and the potential to improve energy efficiency.
decade ago that ‘a vague premonition of some
Several studies have concluded that the potential
potential disaster is insufficient grounds to plunge
for such reductions is large (see e.g. Goldemberg
the world into depression’ (Nordhaus 1990). More
et al., 1987; Lovins and Lovins, 1991; Department
recently, Linden claims that stabilisation of the
of Energy, 1997; National Academy of Sciences,
atmospheric concentrations of greenhouse gases
1991; Ayres, 1994; WEA, 2000).
‘would essentially destroy the entire global econ-
These and other studies support the view ex-
omy’ (Linden 1996). Or similarly, Hannesson in
pressed by the US former President Clinton
his textbook on petroleum economics argues that
(1998) in a speech to the US congress: ‘‘Every
‘if the emissions of CO are to be stabilised or cut
2
time we have acted to heal our environment,
back at least one of two things must happen.
pessimists have told us it would hurt the econ-
Either the poor masses of the world will continue
omy. Well, today our economy is the strongest in
their toil in poverty or the inhabitants of the rich
a generation and our environment is the cleanest
countries will have to cut back their standards of
in a generation. We have always found a way to
living to levels few would be willing to contem-
clean the environment and grow the economy at
plate’ Hannesson (1998). Greenhouse sceptics
the same time. And when it comes to global
Michaels and Balling (2000) are concerned that
warming, we’ll do it again.’’
the science of global warming could be used as a
The top – down perspective is dominated by
‘basis for sweeping policy recommendations that
economists, many of whom believe that correcting
could gravely harm US prosperity’.
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C. Azar, S.H. Schneider / Ecological Economics 000 (2002) 000 – 000
3. Are the costs of stabilising CO concentrations
2100. Further, we assumed carbon reduction rates
2
prohibitive?
that grow logistically over time and set the dis-
count rate of 5% per year (another typical, but
The purpose of this paper is not to reassess the
highly debatable, assumption).
relative merits of top – down and bottom – up
Under these assumptions, we estimate the
models. Rather, we make the perhaps somewhat
present value of the future abatement costs at
paradoxical observation that resolution of this
18 000, 5200 and 1900 billion USD for reaching
still implacable debate may have surprisingly little
350, 450 and 550 ppm, respectively. (The numbers
significance for the larger policy debate over how
are discounted to 1990 and given in 1990 USD.
much ‘climate insurance’ to buy. Simply put, both
We chose 1990 in order to facilitate comparison
types of models, even the more pessimistic top –
with the IPCC estimates mentioned earlier which
down models, support the conclusion that sub-
are expressed in 1990 USD).
stantial reductions of carbon emissions and
Some may claim that even these conservative
several fold increases in economic welfare are
cost assumptions are too optimistic, whereas oth-
compatible targets.
ers will argue that they are too pessimistic. How-
In this connection, Schneider (1993) in a com-
ever, our purpose is not to attempt to calculate
ment on the Nordhaus (1992) DICE model,
the (very uncertain) exact costs of these reduc-
pointed out that DICE calculated that the draco-
tions, rather they are chosen to reflect typical
nian 20% emissions cut (that had been advocated
cost-estimates obtained by most top – down mod-
at the time by a number of environmental groups
ellers. Our real intention is to show how such
and some governments) that DICE found costly
costs compare with the projected economies of the
and economically inefficient only delayed a cen-
future as given in the same top down models.
tury-long 450% per capita income growth from
Obviously, 18 trillion USD is a huge cost — as
simulated year 2090 to about 2100 in the model.
top – down modellers repeatedly assert. The an-
Schneider argued that a decade delay in achieving
nual output of the global economy in 1990
a phenomenal income growth was surely a politi-
amounts to some 20 trillion (1990) USD. Seen
cally palatable planetary insurance policy to abate
from this perspective (18 vs. 20 trillion USD),
half of global warming.
these estimates create the impression that we have
In order to illustrate this, we make conservative
to make prohibitive cuts in our material standard
(i.e. at the larger end of the range) cost assump-
of living in order to reduce the emissions so as to
tions (that the top – down modelling perspective is
stabilise concentrations below a doubling of CO .
2
essentially correct): assume that for every ton of
To some, the cost-estimates are perceived as an
carbon emission avoided, it costs the global econ-
unaffordable insurance premium (unless it were
omy 200, 300 and 400 USD, on average for the
believed that unabated climate damages would
550, 450 and 350 ppm cases, respectively. (A 100
amount to the lion’s share of the GDP, see
USD per ton C tax would raise the cost of
Roughgarden and Schneider, 1999).
electricity from natural gas and coal by roughly
However, viewed from another perspective, a
0.01 and 0.02 USD per kWh, respectively, and the
different picture emerges. This is clearly illustrated
cost of gasoline by roughly 0.07 USD per l).
in Fig. 1 where the expected global income path-
The higher costs associated with the lower con-
way without any carbon abatement is compared
centration targets are introduced in order to
with the global income pathway in the case with
reflect the deeper and more immediate emission
carbon emission reductions leading to stabilisa-
reductions and the associated higher transition
tion of the atmospheric concentration of CO in
2
costs. Further, we assume that global income and
the range 350 – 550 ppm. The current concentra-
carbon emissions develop close to the IPCC IS
tion is around 370 ppm. The global income in the
92a scenario: income grows by a factor of ten
350, 450 and 550 ppm scenarios is generated using
(2.1% per year) over the period 1990 – 2100 and
the cost estimates from our simple model de-
global carbon emissions reach 19 Gton C/year by
scribed above. Although trillion dollar costs are
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C. Azar, S.H. Schneider / Ecological Economics 000 (2002) 000 – 000
5
significant, they only have a marginal impact on
whereas as the delay time is only 1 year if income
the overall pattern of global income growth. Since
grows by 3% per year and the abatement cost is
the global economy is expected to be an order of
3% of GDP.
magnitude larger by the end of this century — the
To be ten times richer in 2100 AD versus 2102
prime driver of the increasing carbon emissions —
AD would hardly be noticed and would likely be
we would still be expected to be some five times
politically acceptable as an insurance policy
richer on a per capita basis than at present almost
against the spectre of potential ‘dangerous’ cli-
regardless of the stabilisation target.
matic changes by most risk averse people.
The explanation for this result can be under-
Once again, all numbers presented here are
stood in the following way: top – down models
simply typical of those in the mainstream litera-
typically suggest that the cost of a 50% reduction
ture and should not be interpreted as our ‘best
of global CO emissions from baseline by 2050
guess’ projection; neither do they imply how large
2
would cost some 1 – 4% of global GDP, and a
the range of costs could actually be. But the
75 – 90% reduction by 2100 would cost some 3 –
overall message appears robust: top-down models
6% (Grubb et al., 1993; IPCC, 2001c). But since
of the global energy system suggest that we can
these studies also assume that global income
stabilise climate with CO concentrations well be-
2
grows by 2 – 3% per year, this abatement cost
low 500 ppm and still grow the economy by an
would be overtaken after a few years of income
order of magnitude over this century. Discussions
growth. Thus, the cost of ‘climate insurance’
along these lines have been offered by several
amounts to ‘only’ a couple of years delay in
authors (see e.g. Schneider, 1993; Anderson and
achieving very impressive growth in per capita
Bird, 1992; Grubb et al., 1993; Sterner, 1980, in
income levels. If the cost by the year 2100 is as
the context of the Swedish nuclear power debate).
high as 6% of global GDP and income growth is
It should also be kept in mind that the environ-
2% per year, then the delay time is 3 years,
mental benefits of reducing the emissions have not
Fig. 1. Global income trajectories under Business as Usual and in the case of stabilising the atmosphere at 350, 450 and 550 ppm.
Observe that we have assumed rather pessimistic estimates of the cost of atmospheric stabilisation (average costs to the economy
assumed here are $200/tC for 550 ppm target, $300/tC for 450 ppm and $400/tC for 350 ppm) and that the environmental benefits
(in terms of climate change and reduction of local air pollution) of meeting various stabilisation targets have not been included.
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C. Azar, S.H. Schneider / Ecological Economics 000 (2002) 000 – 000
been included here, so the lines on Fig. 1 are not
Finally, all this does not suggest that policies
intended as ‘optimal’ paths from a cost-benefit
involving global emissions trading and/or carbon
analysis. Depending on the values of climate dam-
taxes would not be needed to achieve large cost
ages assumed, such optimal paths could vary by a
reductions nor does it mean that the transition
very large amount (Azar and Sterner, 1996; Azar,
towards a CO -stabilised energy system below 500
2
1998). Furthermore, if the more optimistic views
ppm would be easy or will happen by itself. On
of the bottom – up believers (or those who think
the contrary, such a transition would require the
endogenous technological growth spurred by cli-
adoption of strong policies, e.g. carbon taxes,
mate policies, see Goulder and Schneider, 1999)
tradable emission rights, regulations on energy
were considered, then costs would be very much
efficiency, transfer payments to deal with distribu-
lower than on Fig. 1 and the costs of ‘climate
tional inequities, enhanced R and D on new en-
insurance’ could be only an imperceptible delay in
ergy technologies, etc. There will be winners and
achieving the spectacular per capita economic well
losers, and difficult negotiations will be required
being growth levels typically projected in top –
within and across nations to devise a cost-effective
down models.
and fair burden sharing of transition costs. But, if
Thus, the way the cost estimates are perceived
further debate leads to the consensus judgement
by the policy community depends critically on the
that preventing ‘dangerous’ anthropogenic climate
way the cost estimates are presented. Using the
change implies stabilisation of CO concentrations
perspective in Fig. 1 makes it clear that both
2
below 500 ppm, then it should no longer be
top – down and bottom up models find that:
possible to use conventional energy-economy
“ low stabilisation targets can be met at the same
models to dismiss credibly the demand for deeply
time as the global economy grows several fold
reduced carbon emissions on the basis that such
over this century (allowing for enormous in-
reductions will not be compatible with overall
come growth in both the South and the North);
economic development — let alone to defend stri-
“ the difference in annual average growth rates
dent claims that carbon policies will devastate the
between a case with an unconstrained use of
economy.
fossil fuels, and a case with strong restrictions
Hopefully, a broader recognition that reduced
on the use of fossil fuels would likely be less
CO -emissions will at most only marginally affect
than a tenth of a percent per year over this
2
century.
economic growth rates by delaying overall eco-
Similar observations can be made when it
nomic expansion by only a few years in a century
comes to meeting near term emissions targets,
(and that with pessimistic cost assumptions and
such as the Kyoto protocol. For instance, if the
no benefits for the averted climate changes), will
cost of meeting the Kyoto protocol would be 1%
increase the acceptability and willingness amongst
of the Annex 1 countries’ GDP (as some rather
politicians to adopt much stricter abatement poli-
pessimistic studies suggest, see IPCC, 2001c), it
cies
than
is
currently
considered
politically
would amount to a reduction in the average
feasible.
growth rate by 0.1% per year over the years
2000 – 2010. With a growth rate of 2% per year in
the absence of carbon abatement, the Kyoto pro-
4. Uncited references
tocol would imply that we would get 20% richer
by June 2010 rather than in January 2010.
Ayres, 1989; Grubb, 1997; Azar and Dowlata-
Whether that is a big cost or a small cost is of
badi, 1999; Hourcade et al., 1996; IPCC, 2001b.
course a value judgement, but it is difficult to
agree with L.B. Lindsey, (2001), President Bush’s
assistant on economic policy, who states that ‘the
Acknowledgements
Kyoto protocol could damage our collective pros-
perity and, in so doing, actually put our long-term
CA acknowledges support from the Swedish
environmental health at risk’.
Council for Planning and Co-ordination of Re-
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C. Azar, S.H. Schneider / Ecological Economics 000 (2002) 000 – 000
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UNCORRECTED PROOF

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Document Outline

• Are the economic costs of stabilising the atmosphere prohibitive?
  • Very large climate changes are projected
  • Substantial reduction in emissions is technically feasible, but at what cost?
  • Are the costs of stabilising CO2 concentrations prohibitive?
  • Uncited references
  • Acknowledgements
  • References

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