I’m always a little concerned about writing about economics/policy, because I don’t have any specific expertise and find myself easily confused. However, I thought I would briefly discuss a figure that Glen Peters posted on Twitter (he also, kindly, clarified a few things via email). The figure (on the right) is from a paper called Emission pathways to achieve 2.0 and 1.5oC climate targets.
As I understand it (and I’m happy to have this clarified or correct if I’m wrong) the figure shows a number of different future carbon price pathways (top panel) and the corresponding percentage GDP loss (bottom panel). Green is a pathway that keeps warming below 1.5oC, blue keeps warming below 2oC, and orange is an optimal pathway, which leads to warming of about 2.5oC. The dashed and solid lines are two different forms of the model, one in which land use and non-CO2 GHGs are fixed (solid) and the other in which they are dynamically adjusted (dashed).
Here’s where I worry that I might be confused. As I understand it the GDP loss is relative to some kind of baseline in which GDP continues to grow. The GDP loss is simply the percentage reduction in GDP. In other words, if we follow a pathway that would keep warming below 1.5oC, in the middle of the century GDP would be 3-4% lower than the baseline case. Another way to think of this is that it produces a small change in GDP growth (for example, in one of the scenarios presented by the IPCC, GDP growth might drop from 2% per year, to 1.94% per year).
My first thought was, wow this seems pretty small, and I tend to think that it is. Of course, you can make it sound big if you want to; if GDP continues to grow, then a 3% reduction in GDP is a big number (a small percentage of a big number is still a big number). Also, the pathways that keep warming below 1.5oC and 2oC would (by around the middle of the century) have losses 2-3 times greater than the optimal pathway, which – again – sounds quite large.
Some additional comments. As I understand it, the baseline pathway is some idealised pathway in which GDP simply continues to grow, unaffected by climate change. It therefore, does not, and cannot, exist. The GDP losses are therefore (if I have this right) relative to a reality we can never actually occupy. The optimal pathway is (again, as I understand it) essentially the pathway over which the costs due to climate policy match the benefits of reduced damage due to climate change [Update: see end of post]. One might immediately argue that this is the pathway that we should then follow. However, I think there are some things to bear in mind.
As I understand it, the uncertainty in climate change damages is quite large. Therefore, it seems that the optimal pathway has a reasonable probability of being quite different to what is presented here. Similarly, I would expect the uncertainty in the policy costs to also be large. In some sense, it would seem unlikely that we can reliably estimate the optimal pathway decades into the future. However, what this analysis does seem to show is that we could introduce a carbon tax that could rise (over the next couple of decades) to more than a $100/tCO2 (2005 prices) that could potentially address climate change without causing massive disruption to the global economy. The key thing, in my view, is simply to get started, rather than arguing about precisely the pathway that we should aim to follow.
It doesn’t cost the world to save the planet.
As James Annan points out in this comment, the optimal pathway is not the pathway over which the costs match the benefits, but over which the marginal costs match the marginal benefits. What this means (which I hope I get right this time) is essentially that if you followed a pathway with a slightly higher carbon tax, then the increased costs (relative to the optimal pathway) would be greater than the increased benefits, and if you followed a pathway with a slightly lower carbon tax, the reduction in costs would be smaller than the reduction in benefits. This site explains it quite well.