Using Economics to Cool Down the Environment
2002-2003 Minneapolis Fed's annual student essay contest winner.
Published June 1, 2003 | June 2003 issue
"Global climate change needs global action now. The alarm bells ought to be ringing in every capital of the world" (Greenslade). This quotation from British Environment Secretary John Gummer in 1996 demonstrates the importance of the environmental problem of global warming. Over the past century, the surface of the earth has been getting warmer and this climate change has been accelerating (Watson). Models have suggested that temperatures will rise between 2.5 and 10.4 degrees Fahrenheit over the next century (Heller). Since not everyone agrees with these models, it is important for our leaders and the public to be educated on this subject so they can get the facts and recognize the urgency and extent of the changes which are needed ("Issues"). Experts say global warming has caused thinning of the earth's polar ice caps, retreating glaciers, rising sea levels and changing growing seasons ("Melting"). These changes will impact the world's population and have serious consequences for the world's economies. To decide what to do to reduce the effects of global warming, it is necessary to analyze the benefits of policies that may be enacted and the costs of such actions, and then balance these costs and benefits.
Global warming will have varying effects on different countries' economies, depending upon the extent of the rise in temperature, and the original climate and development stage of each country (Moore). Much of the harmful impact will take place in the tropics and subtropics and be borne by the rural poor (Heller). In these regions, rising temperatures will lower agricultural productivity (due to many factors, including more floods and more extreme weather), which will increase the devastation from malnutrition and create a higher likelihood of disease (Heller). In addition, the lower productivity in the agricultural sector of developing countries will have a devastating impact on their economies, which rely on agriculture for about one-third of their gross domestic product and employ about 70 percent of these countries' populations (Amacher, p. 428).
While many countries would be negatively affected, others may actually benefit from slight increases in temperature. Some studies show that the United States would benefit from modest increases in temperature caused by global warning (Moore). Health costs would fall an estimated $21.7 billion in 1994 dollars from a 4.5 degree Fahrenheit warmer climate, mainly due to fewer cold-related illnesses (Moore). Other benefits would include a longer growing season, lower heating bills, fewer accidents from driving on icy roads and less money spent on clothes (Moore). However, these benefits would only occur at modest temperature increases and apply only to the United States, as well as other middle-latitude industrial countries (Moore). Despite these benefits, problems in other countries would very likely carry over and negatively impact the United States and other countries through the world market.
Due to the international problems of global warming, an agreement, the Kyoto Protocol, was enacted by the industrial nations in 1997 to limit the emission of greenhouse gases to the level in 1990 (Heller). However, not all of the nations have adhered to the agreement and the United States never ratified it, so there is a lot of work left to be done ("Bush"). According to the Kyoto Protocol, the United States would have to emit 550 million metric tons less of carbon dioxide by the year 2010 ("Issues"). Most of these emissions are inherent in the creation of energy by burning fossil fuels ("Issues"). Therefore, these cuts mean changes in the energy sector, which would have many ramifications throughout the economy ("Issues").
One possible way of cutting emissions is by creating a tax on fossil fuels. In the United States, it is projected that a carbon tax of $150 per ton would be needed to meet the goal in the Kyoto agreement ("Issues"). This tax would constitute a 40 percent increase in gas and electricity prices, which would have detrimental economic impacts and would ultimately be paid for by consumers ("Issues"). This would be very difficult to implement politically.
Another method of reducing greenhouse emissions is a national commitment to conserving energy and developing energy-efficient technology ("Issues"). A study by the Energy Department declares that this option could reduce emissions to the 1990 level within 13 years ("Issues"). However, for firms and households to comply with such standards, a tax or an economic incentive would be necessary. Policies such as a conversion to natural gas would not be plausible without these incentives because business leaders would disapprove of them on the basis of short-term costs ("Issues").
Tradable permits are another proposed method of reducing greenhouse emissions. This would establish a limit on emissions and allot reasonable emission amounts to manufacturers (O'Brien). These firms may buy or sell their permits if there is an economic incentive to do so (O'Brien). Studies have shown this method to be successful in reducing the emissions and doing so cost-effectively, by each firm comparing their own marginal costs and marginal benefits when making decisions regarding their greenhouse emissions and tradable permits (O'Brien).
While the short-term costs of reducing greenhouse emissions may be high, the long-term costs of doing nothing may be even higher. Alan Blinder, an economics professor at Princeton University, said, "[Reducing reliance on fossil fuels] is an insurance policy against climatic disruptions that could severely damage the world's economies" ("Issues"). Policies to combat the greenhouse effect are necessary, but how far should they be carried and when should they begin? The answer will most likely be different in every country.
When deciding how each nation should deal with the greenhouse effect, policymakers must have accurate data and look at the potential vulnerability of their country. Countries that depend on agriculture, livestock and forestry will be the hardest hit and must take a different stand on the issue than developed countries, such as the United States (Heller). Every country should look at the marginal cost of reducing their emissions and compare that with the marginal benefit of such policies. The marginal benefit is preserving the social and economic aspects of the country and avoiding the estimated costs of not taking any action. In the comparison, it is important to factor in the costs and benefits in terms of lives saved by pursuing these policies and the overall effect on people. Wherever the marginal costs and benefits are equal, the greatest benefit will occur at the least cost. This is the extent to which each country should deal with global warming.
Developing countries must not only create a cushion for future problems by limiting their debt or creating contingency funds, but must also help in the long-term process of limiting greenhouse emissions (Heller). While the reliance on agriculture must be decreased in these countries, their governments must also create incentives to reduce greenhouse emissions as the nations become industrialized. Since the developing countries do not currently contribute much to the greenhouse emissions, about 18.5 percent in 1992, their greatest contribution to ending this problem will be seen in the long run as they become industrialized (Gordon). This will affect the fiscal policies enacted by such countries, possibly causing less of their budget to be used for public investment and resulting in less short-term economic growth.
Because global warming will affect the world economy, it is essential that industrialized nations and the international community help with this problem. Each country should contribute to the point where the marginal costs and marginal benefits are equal. Once this is determined, it is up to the governments to create the correct economic incentives for the industries within their nation. People with the power to make changes to reduce greenhouse emissions must act quickly and effectively to escape the devastating impact of global warming on the world economy and keep the environment from becoming permanently damaged.Read other winning essays and learn more about the essay contest and other economic education programs.
Select a major problem concerning the ecological environment.
Using economic analysis, show how this problem could be addressed.
Throughout history, people have improved their standard of living by consuming natural resources. Producers transform materials like timber, minerals and oil into products that increase human efficiency and comfort. However, the benefits of production are not without a price, for the consumption of natural resources also imposes costs on the ecological environment. These costs—whether they be the loss of animal habitat, the rapid erosion of hillsides or the pollution of our land, air and water—create a trade-off with the benefits of production.
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to a Global Greenhouse Gas Reduction Program." 1992. 13 Jan. 2003
Greenslade, Roy. The Observer
21 July 1996. 11 Jan. 2003
Heller, Peter S., and Mutukumara Mani. "Adapting to Climate Change." Finance and Development (March 2002): 29-31. First Search. Hennepin County Lib., Edina. 23 Dec. 2002.
"Issues and Controversies: Global Warming Update." 9 Jan. 1998. Facts on File News Services. Hennepin County Lib., Edina. 23 Dec. 2002
"The Melting of the World's Ice." World Watch v. 13 (2000):5-7. First Search. Hennepin County Lib., Edina. 23 Dec. 2002.
Moore, Thomas Gale. "Health and Amenity Effects of Global Warming." Economic Inquiry (July 1998): 471-488. First Search. Hennepin County Lib., Edina. 23 Dec. 2002.
O'Brien, Rory. "Greenhouse Gas Reductions and Tradable Emissions Permits." 26 March 1998. 13 Jan. 2003 [www.web.net].
Watson, Bruce. Interview with Eric Eskola and Cathy Wurzer. Almanac. KTCA. St. Paul, Minn. 10 Jan. 2002.