Growth Commission Climate Control & Economic Growth

8/3/2019 Growth Commission Climate Control & Economic Growth

1/24

Climate Change and

Economic Growth

Robert Mendelsohn

WORKING PAPER NO.60


2/24


3/24

WORKINGPAPERNO.60

ClimateChangeandEconomicGrowth

RobertMendelsohn


4/24

2009TheInternationalBankforReconstructionandDevelopment/TheWorldBank

OnbehalfoftheCommissiononGrowthandDevelopment

1818HStreetNW

Washington,DC20433

Telephone:2024731000

Internet: www.worldbank.org

www.growthcommission.org

Email: [email protected]

[email protected]

Allrightsreserved

1234511100908

ThisworkingpaperisaproductoftheCommissiononGrowthandDevelopment,whichissponsoredby

thefollowingorganizations:

AustralianAgency

for

International

Development

(AusAID)

DutchMinistryofForeignAffairs

SwedishInternationalDevelopmentCooperationAgency(SIDA)

U.K.DepartmentofInternationalDevelopment(DFID)

TheWilliamandFloraHewlettFoundation

TheWorldBankGroup

Thefindings,interpretations,andconclusionsexpressedhereindonotnecessarilyreflecttheviewsofthe

sponsoringorganizationsorthegovernmentstheyrepresent.

Thesponsoringorganizationsdonotguaranteetheaccuracyofthedataincludedinthiswork.The

boundaries,colors,

denominations,

and

other

information

shown

on

any

map

in

this

work

do

not

imply

anyjudgmentonthepartofthesponsoringorganizationsconcerningthelegalstatusofanyterritoryor

theendorsementoracceptanceofsuchboundaries.

Allqueriesonrightsandlicenses,includingsubsidiaryrights,shouldbeaddressedtothe

OfficeofthePublisher,TheWorldBank,1818HStreetNW,Washington,DC20433,USA;

fax:2025222422;email:[email protected].

Coverdesign:NaylorDesign


5/24

Climate Change and Economic Growth iii

AbouttheSeriesThe Commission on Growth and Development led by Nobel Laureate Mike

SpencewasestablishedinApril2006asaresponsetotwoinsights.First,poverty

cannotbereduced in isolationfromeconomicgrowthanobservation thathas

been

overlooked

in

the

thinking

and

strategies

of

many

practitioners.

Second,

thereisgrowingawarenessthatknowledgeabouteconomicgrowthismuchless

definitivethancommonlythought.Consequently,theCommissionsmandateis

totakestockof thestateof theoreticalandempiricalknowledgeoneconomic

growthwithaviewtodrawing implicationsforpolicyfor thecurrentandnext

generationofpolicymakers.

To help explore the state of knowledge, the Commission invited leading

academics and policy makers from developing and industrialized countries to

explore and discuss economic issues it thought relevant for growth and

development, including controversial ideas. Thematic papers assessed

knowledgeand

highlighted

ongoing

debates

in

areas

such

as

monetary

and

fiscal

policies, climate change, and equity and growth. Additionally, 25 country case

studieswerecommissionedtoexplorethedynamicsofgrowthandchangeinthe

contextofspecificcountries.

WorkingpapersinthisserieswerepresentedandreviewedatCommission

workshops, which were held in 200708 in Washington, D.C., New York City,

and New Haven, Connecticut. Each paper benefited from comments by

workshop participants, including academics, policy makers, development

practitioners, representatives of bilateral and multilateral institutions, and

Commissionmembers.

The

working

papers,

and

all

thematic

papers

and

case

studies

written

ascontributions to the work of the Commission, were made possibleby support

fromtheAustralianAgencyforInternationalDevelopment(AusAID),theDutch

MinistryofForeignAffairs,theSwedishInternationalDevelopmentCooperation

Agency (SIDA), theU.K.Departmentof InternationalDevelopment (DFID), the

WilliamandFloraHewlettFoundation,andtheWorldBankGroup.

TheworkingpaperserieswasproducedunderthegeneralguidanceofMike

SpenceandDannyLeipziger,ChairandViceChairoftheCommission,andthe

Commissions Secretariat, which is based in the Poverty Reduction and

Economic Management Network of the World Bank. Papers in this series

representtheindependentviewoftheauthors.


6/24

iv Robert Mendelsohn

AbstractGrim descriptionsof the longtermconsequencesofclimatechangehavegiven

the impression that the climate impacts from greenhouse gases threaten long

term economic growth. However, the impact of climate change on the global

economyis

likely

to

be

quite

small

over

the

next

50

years.

Severe

impacts

even

by the end of the century are unlikely. The greatest threat that climate change

poses to longterm economic growth is from potentially excessive nearterm

mitigationefforts.


7/24

Climate Change and Economic Growth v

ContentsAbouttheSeries ............................................................................................................. iiiAbstract ............................................................................................................................ivIntroduction ...................................................................................................................... 7Efficient

Policy..................................................................................................................8

ClimateChangeImpacts.................................................................................................9 MitigationCosts .............................................................................................................12Conclusion ......................................................................................................................13References .......................................................................................................................15


8/24


9/24

Climate Change and Economic Growth 7

ClimateChangeandEconomicGrowthRobertMendelsohn1

IntroductionThereisnoquestionthatthecontinuedbuildupofgreenhousegaseswillcause

the earth to warm (IPCC 2007a). However, there is considerable debate about

what isthesensiblepolicyresponsetothisproblem.Economists,weighingcost

and damages, advocate abalanced mitigation program that starts slowly and

gradually becomes more severe over the century. Scientists and

environmentalists,

in

contrast,

advocate

more

extreme

nearterm

mitigation

policies. Which approach is followed will have a largebearing on economic

growth. Thebalanced economic approach to the problem will address climate

change with minimal reductions in economic growth. The moreaggressive the

neartermmitigationprogram,however,thegreatertheriskthatclimatechange

willslowlongtermeconomicgrowth.

Itshouldbeunderstoodthatclimateisnotastableunchangingphenomena

even when left to natural forces alone. There havebeen several major glacial

periodsinjustthe lastmillionyears.Muchofthisperiodhasbeensignificantly

colderthantheclimateinthelast20,000years.IcecoveredmostofCanadaand

Scandinavia

and

frozen

tundra

extended

well

into

New

Jersey

and

the

Great

Plains in the United States. These cold periods have been quite hostile,

discouraginghumansfromlivinginmuchofthenorthernpartsofthenorthern

hemisphere.Inaddition,withintheselongglacialswings,thereisalsoincreasing

evidence that therehavebeenmanyexamplesofabruptclimatechange (Weiss

and Bradley 2001). These natural changes have had major impacts on past

civilizationscausingdramaticadaptationsandsometimeswholesalemigrations.

Climatechangeisnotnew.Humaninducedclimatechangeissimplyanadded

disturbancetothisnaturalvariation.

The heart of the debate about climate change comes from a number of

warnings from scientists and others that give the impression that human

induced climate change is an immediate threat to society (IPCC 2007a,b; Stern

2006).Millionsofpeoplemightbevulnerabletohealtheffects(IPCC2007b),crop

1 Robert O. Mendelsohn is Edwin Weyerhaeuser Davis Professor, Yale School of Forestry and

Environmental Studies, YaleUniversity. Professor Mendelsohn studiesa range of economic and

environmentalissues,frommeasuringhazardouswastedamagestoestimatingwelfarecosts,from

timberharvestingwithfluctuatingpricestomeasuringtheeconomicvalueoftraditionalmedicine

fromtropicalrainforests.


10/24

8 Robert Mendelsohn

production might fall in the low latitudes (IPCC 2007b), water supplies might

dwindle (IPCC 2007b), precipitation might fall in arid regions (IPCC 2007b),

extremeeventswillgrowexponentially(Stern2006),andbetween2030percent

of species will risk extinction (IPCC 2007b). Even worse, there may be

catastrophic events such as the melting of Greenland or Antarctic ice sheets

causing

severe

sea

level

rise,

which

would

inundate

hundreds

of

millions

of

people(Dasguptaetal.2009).Proponentsarguethereisnotimetowaste.Unless

greenhouse gases are cut dramatically today, economic growth and wellbeing

maybeatrisk(Stern2006).

These statements are largely alarmist and misleading. Although climate

changeisaseriousproblemthatdeservesattention,societysimmediatebehavior

has an extremely low probability of leading to catastrophic consequences. The

science and economics of climate change is quite clear that emissions over the

next few decades will lead to only mild consequences. The severe impacts

predictedbyalarmistsrequireacentury(ortwointhecaseofStern2006)ofno

mitigation.

Many

of

the

predicted

impacts

assume

there

willbe

no

or

little

adaptation.Theneteconomicimpactsfromclimatechangeoverthenext50years

willbesmallregardless.Mostofthemoresevereimpactswilltakemorethana

centuryorevenamillennium tounfoldandmanyofthesepotential impacts

will never occur because people will adapt. It is not at all apparent that

immediate and dramatic policies need tobe developed to thwart longrange

climaterisks.Whatisneededarelongrunbalancedresponses.

Infact,themitigationplansofmanyalarmistswouldposeaseriousriskto

economic growth. The marginal cost function of mitigation is very steep,

especially in the short run. Dramatic immediate policies to reduce greenhouse

gas emissions wouldbe very costly. Further,by rushing into regulations in a

panic,itisverylikelythatnewprogramswouldnotbedesignedefficiently.The

greatest threat that climatechangeposes toeconomic growth is that the world

adoptsacostlyand inefficientmitigationpolicy thatplacesahugedragon the

globaleconomy.

EfficientPolicyThe ideal greenhouse gas policy minimizes the sum of the present value of

mitigation costs plus climate damages (Nordhaus 1992). This implies the

marginalcost

of

mitigation

should

be

equal

to

the

present

value

of

the

marginal

damagesfromclimatechange.Themagnitudeorseverityofmitigationprograms

depends on the magnitude and severity of climate impacts. Mitigation also

dependsuponhowexpensiveitistocontrolgreenhousegasemissions.

Becausemarginaldamagesriseasgreenhousegasesaccumulate,theoptimal

policy isdynamic,growingstricterover time (Nordhaus2008).Emission limits

shouldbe mild at first and graduallybecome more severe. Over the long run,


11/24


cumulative emissions are strongly curtailed. But this optimal policy reduces

emissions in the second half of the century more than the first. Partly, this

dynamicpolicy reflects the scienceofclimatechange;damagesareexpected to

grow with the concentration of greenhouse gases. Partly, this dynamic policy

reflectsthediscountrate,thatimmediatecostsanddamageshaveahighervalue

thanfuture

costs

and

damages.

Partly,

this

dynamic

policy

reflects

the

fact

that

technicalchangeisgoingtoimproveourabilitytocontrolgreenhousegasesover

time. Resources that are saved for the future can be invested in better

technologiesthatwillbemoreeffectiveatreducingtonsofemissions.

ClimateChangeImpactsEconomic research on climate impacts has long revealed that only a limited

fraction of the market economy is vulnerable to climate change: agriculture,

coastal

resources,

energy,

forestry,

tourism,

and

water

(Pearce

et

al.

1996).

These

sectors make up about 5 percent of the global economy and their share is

expectedtoshrinkovertime.Consequently,evenifclimatechangeturnsoutto

be large, there is a limit tohowmuch damageclimatecando to the economy.

Mostsectorsoftheglobaleconomyarenotclimatesensitive.

Ofcourse, theeconomiesofsomecountriesaremorevulnerable toclimate

change than the global average. Developing countries in general have a larger

shareoftheireconomiesinagricultureandforestry.Theyalsotendtobeinthe

lowlatitudeswheretheimpactstothesesectorswillbethemostsevere.Thelow

latitudestendtobetoohotforthemostprofitableagriculturalactivitiesandany

further warming will further reduce productivity. Up to 80 percent of the

damages

from

climate

change

maybe

concentrated

in

low

latitude

countries

(Mendelsohnetal.2006).

Somedamagesfromclimatechangewillnotaffecttheglobaleconomy,but

will simply reduce the quality of life. Ecosystem change will result in massive

shiftsaroundtheplanet.Someoftheseshiftsarealreadyreflectedinagriculture

and timberbut theygobeyond the impacts to these marketsectors.Parks and

other conservation areas will change. Animals will change their range.

Endangeredspeciesmaybelost.Althoughtheseimpactslikelyleadtolossesof

nonmarket goods, it is hard to know what value to assign to these effects.

Another importantsetofnonmarket impacts involvehealtheffects.Heatstress

mayincrease.

Vector

borne

diseases

may

extend

beyond

current

ranges.

Extreme

events could threaten lives. All of these changes could potentially affect many

peopleifwedonotadapt.However,itislikelythatpublichealthinterventions

could minimize many of these risks. Many vectorborne diseases are already

controlled at relatively low cost in developed countries. Heat stress can be

reduced with a modicum of preventive measures. Deaths from extreme events

canbe reducedby a mixture of prevention and relief programs. As the world


12/24

10 Robert Mendelsohn

develops,itislikelythattheserisksmayinvolvehigherpreventioncosts,butnot

necessarilylargelossesoflife.Further,wintersleadtohighermortalityratesthan

summerssoitmaywellbethatwarminghaslittleneteffectonhealth.

AgriculturalstudiesintheUnitedStatessuggestthattheimpactsofclimate

changeinmidlatitudecountriesarelikelytobebeneficialformostofthecentury

and

onlybecome

harmful

towards

the

end

of

the

century

(Adams

et

al.

1990;

Mendelsohnetal.1994).Incontrast,therewillbeharmfulimpactstoagriculture

in African countries (Kurukulasuriya and Mendelsohn 2008a), Latin American

countries (Seo and Mendelsohn 2008a), and China (Wang et al. 2009) starting

almostimmediatelyandrisingwithwarming.Theoverallsizeoftheseimpactsis

lower than earlier analyses predictedbecause of the importance of adaptation.

Irrigation(KurukulasuriyaandMendelsohn2008b),cropchoice(Kurukulasuriya

and Mendelsohn 2008c; Seo and Mendelsohn 2008b; Wang et al. 2009), and

livestockspecieschoice(SeoandMendelsohn2008c)allplayarole inreducing

climate impacts. The studies above document that current farmers are already

usingall

of

these

methods

to

adapt

to

climate

today

in

Africa,

Latin

America,

and

China.

Othersectors thatwereoriginallyexpected tobedamaged include timber,

water,energy,coastal,andrecreation.Forestrymodelsarenowprojectingsmall

benefits in the timber sector from increased productivity as trees respond

positivelytoawarmer,wetter,CO2enrichedworld(Sohngenetal.2002).Water

models tend to predict there willbe damages as flows in major rivers decline.

However,thesizeoftheeconomicdamagescanbegreatlyreducedbyallocating

the remaining water efficiently (Hurd et al 1999; Lund et al. 2006). Energy

models predict that the increased cost of cooling will exceed the reduced

expendituresonheating (Mansuretal.2008).Severalgeographicstudiesofsea

level rise have assumed there wouldbe large coastal losses from inundation

(Nichols 2004; Dasgupta et al. 2009). However, careful economic studies of

coastalareassuggest thatmosthighvaluedcoastswillbeprotected (Neumann

and Livesay 2001; Ng and Mendelsohn 2005).The cost of hard structuresbuilt

over the decades as sea levels rise willbe less than the cost of inundation to

urban populations. Only lessdeveloped coastal areas are at risk of inundation

(Ng and Mendelsohn 2006). Initialstudies of recreation measured the losses to

the ski industry of warming (Smith and Tirpak 1989). Subsequent studies of

recreation, however, noted that summer recreation is substantially larger than

winter recreation and would increase with warming (Mendelsohn and

Markowski

1999;

Loomis

and

Crespi

1999).

The

net

effect

on

recreation

is

thereforelikelytobebeneficial.

Aseconomicresearchonimpactshasimproved,themagnitudeofprojected

damages from climate change has fallen. Early estimates projected that a

doublingofgreenhousegaseswouldyielddamagesequalto2percentofGDPby

2100 (Pearceetal.1996). More recentanalysesof impacts suggestdamagesare

aboutanorderofmagnitudesmaller(closerto0.2percentofGDP)(Tol2002a,b;


13/24


MendelsohnandWilliams2005).Thereasonthatdamageshavebeenshrinkingis

thattheearlystudies(i)didnotalwaystakeintoaccountsomeofthebenefitsof

warming to agriculture, timber, and tourism; (ii) did not integrate adaptation;

and(iii)valuedclimatechangeagainstthecurrenteconomy.Atleastwithsmall

amountsofclimatechange,thebenefitsappeartobeofthesamemagnitudeas

thedamages.

Only

when

climate

change

exceeds

2degrees

Celsius

are

there

net

damages.Manyearlystudiesassumedvictimswouldnotchangetheirbehavior

inresponsetosustaineddamages.Morerecentstudieshaveshownthatagreat

dealofadaptationisendogenous.Ifgovernmentprogramsalsosupportefficient

adaptations,themagnitudeofdamagesfallsdramatically.Finally,byexamining

theeffectofclimatechangeonthecurrenteconomy,earlyresearchersmadetwo

mistakes. First, they overestimated the relative future size of sectors that are

sensitivetoclimatesuchasagriculture.Second,theyunderestimatedthesizeof

thefutureeconomyingeneralrelativetoclimateeffects.

Economicanalysesof impactsalsoreveal that they followadynamicpath,

increasingroughly

by

the

square

of

temperature

change

(Tol

2002b;

Mendelsohn

andWilliam2007).Thechangesoverthenextfewdecadesareexpectedtoresult

inonlysmallneteffects.Mostofthedamagesfromclimatechangeoverthenext

hundredyearswilloccurlateinthecentury.Theseresultsonceagainsupportthe

optimal policy of starting slowly with climate change and increasing the

strictnessofregulationgraduallyovertime.

Incontrasttothe literatureoneconomic impacts, theSternReportpredicts

large damages. However, most of the losses in the Stern Report occur in the

twentysecondcentury.Sterntriestoarguethatthesedamagesareequivalentto

losing5percentofGDPayearstartingimmediately.However,theargumentis

basedonafalseassumptionthat thediscountrate isnearzero.Hearguedthat

theonlyreasontodiscountfortimeatallisbecausethereisapossibilitythatthe

earth wouldbe destroyedby an asteroid. This assumption hasbeen heavily

criticized in the economics literature since it makes no economic sense

(Nordhaus 2007; Dasgupta 2008). Stern also talks about the importance of

adaptation but gives little credence to any impact studies that included

adaptation.InSternsdefense,hedoestakeintoaccountofuncertaintyandlow

probability, highconsequence events. However, in general, he tends to

overestimatetheexpectedvalueoftheseimpacts.Forexample,heassumesthat

climate change will cause extreme events to grow exponentially. This is a

misinterpretationofdataonhistoricdamagesfromextremeeventsthataredue

toeconomic

growth,

not

climate

damages

(Pielke

and

Landsea

1998;

Pielke

and

Downtown2000).

Theconsequencesofcatastrophiceventsarepossiblyquitesevere.Ifthereis

largescalemeltingoftheGreenlandicesheetsorWestAntarctica,itcould lead

todramaticsea levelriseespeciallyafterseveralcenturies.Thereisnoquestion

that this would force mankind to retreat from rising seas andbuild new cities

inland.However,giventhelongtimeframeinvolved,itisnotclearthatthecost


14/24


ofsucharelocationisasdramaticasitmightatfirstseem.Thereisnoquestion

thatthelandalongthecoastwouldbelost.Butnewcoastallandwouldappear

sothatwhatisactuallylostisinteriorland.Buildingswouldnotreallybelostas

newcitieswouldbebuiltinanticipationofrisingseas.Oldercitiesalongtheold

coast would graduallybe depreciated until they are abandoned. Although this

mayseem

like

ahuge

loss,

most

of

the

buildings

built

500

years

ago

no

longer

exist. Finally, it is uncertain whether catastrophic events will occur. These

damagesmustconsequentlybeweighedbythelowprobabilitytheywilloccur.

MitigationCostsThe literature on mitigation predicts a wide range of costs. On the more

optimisticside,thereareanumberofbottomupengineeringstudiesthatsuggest

mitigationmaybeinexpensive.Somestudiesarguethatonecouldevenstabilize

greenhouse

gas

concentrations

at

negative

costs

(IPCC

2007c).

The

engineering

studies suggest one could reduce emissionsby 20 to 38 percentby 2030 for as

little as $50 per ton of CO2 (IPCC 2007c). There is even a superoptimistic

technicalchangecampthatarguesemissionscouldbecutby70percentby2050

foraslittleas$50pertonofCO2(Stern2006).

The empirical economic literature suggests mitigation cost functions are

price inelastic (Weyant and Hill 1999). Using todays technology, the average

abatement cost for a 70 percent reduction in carbon in the energy sector is

estimated to be about $400 per ton of CO2 (Anderson 2006). The shortrun

mitigationfunctionisverypriceinelastic.Thelongrunislessclear.Withtime,it

is expected that the shortrun marginal cost curve for mitigation will flatten.

However,

whether

it

ever

gets

as

flat

as

the

optimistic

engineering

models

projectisnotclear.

Aninelasticshortrunmarginalcostfunctionimpliesthatlargereductionsof

emissionsintheshortrunwillbeveryexpensive.Theresimplyisnoinexpensive

way to reduce emissions sharply in the short run. Renewable energy sources

suchashydroelectricityhavelargelybeenexhausted.Solarandwindpowerare

expensive except in ideal locations and circumstances. Other strategiessuch as

shifting from coal to natural gas can work only in the short run as they cause

morerapiddepletionofnaturalgassupplies.

Intheshortrun,arushedpublicpolicyislikelytobeinefficient.Itwilllikely

exempt

major

polluters

as

Europe

now

does

with

coal.

Very

few

national

mitigation programs regulate every source of emission. Most countries have

sought to reduce emissions in only a narrow sector of the national economy.

Rushed programs will likely invest in specific technologies that are ineffective,

such as the United States has done with ethanol. Ethanol produces as much

greenhousegasasgasoline.Theinelasticityofthemarginalcostfunctionimplies

thatmitigationprogramsthatarenotapplieduniversallywillbeverywasteful.


15/24


Regulatedpolluterswillspendalottoeliminateasingletonwhileunregulated

polluterswillspendnothing.

Universal participation also requires that all major emitting countriesbe

included. The signatory countries that limit emissions under the existing

international Kyoto agreement are responsible for only about one quarter of

global

emissions.

The

United

States

and

China

generate

another

one

half

of

emissions and all the remaining developing countries approximately emit the

other quarter. Whereas Kyoto countries arebeginning to spend resources on

mitigation,nonKyoto countries spend little tonothing. Even within the Kyoto

countries, many countries are failing to reach their targets. By failing to get

universal application of regulations, the current regulations are unnecessarily

wasteful. Without near universal participation, the cost of mitigation doubles

(Nordhaus 2008). In fact, the current Kyoto treaty is so ineffective that global

emissionsarerisingat thepacepredictedwithnomitigationatall.GlobalCO2

emissionsin2006were8.4gigatonsofcarbon(GtC).

Stern

and

other

climate

advocates

recommend

that

strict

regulationsbe

placed on emissions immediately. Stern recommends regulations that would

increase the marginal cost of emissions to $300 per ton of CO2. The stricter

regulationswouldreduceemissionsby40GtCperyear(70percent)by2050.If

themarginalcostdoesnotfall, thecostofthisprogramwillbe$1.2 trillionper

yearby2050.Ofcourse, it is likely that longtermmarginalcostswillbe lower

with technical change. Assuming that costs fall by 1 percent per year, the

marginalcostwouldfallto$200pertonofCO2by2050.Theoverallcostofthe

Stern program wouldbe $800billion per year in 2050. The present value of

mitigation costs in theStern program is estimated tobe $28 trillion (Nordhaus

2008).

Theoptimalregulationsthatminimizethepresentvalueofclimatedamages

and mitigation costs are more modest. They wouldbegin with prices closer to

$20pertonofCO2thenriseto$85pertonby2050(Nordhaus2008).Thatwould

lead to a 25 percent reduction in greenhouse gasesby 2050 rather than the 70

percent reduction in the Stern program. The present value of the global

mitigationcostsoftheoptimalprogramthiscenturyisestimatedtobe$2trillion

(Nordhaus2008).Thesecostsareanorderofmagnitudelessthanthecostofthe

Sternprogram.

ConclusionThispaper argues that the impacts from climate change arenot likely toaffect

globaleconomicgrowthoverthenext40years.Thesizeofclimatechangeduring

thisperiodisprojectedtobetoosmalltohavemuchofaglobalnetimpact.Inthe

secondhalfofthecentury,warmingwillbelargeenoughtodetectbutevenby

2100, the annual net market impacts are predicted tobebetween 0.1 and 0.5


16/24


percentofGDP.These impactsaresimplynot large enough toaffecteconomic

growththiscentury.

Catastrophic climate change could impose large annual losses on society.

However,sucheventsarecurrentlyhavealowprobabilityandwilloccurfarinto

the future. It is not selfevident that more dramatic mitigation policies are the

mostappropriate

tool

to

address

low

probability,

high

consequence

events.

It

is

not clear how much mitigation would change the probabilities of these events

occurring. Second, a tool that is more flexible and immediate wouldbe more

effective.Whatisneededisatoolthatcouldbeimplementedonceitisclearthere

is actually a catastrophic event underway. Geoengineeringseeding the upper

atmosphere with particlesappears to be a better strategy for handling

catastrophic events than mitigation. Society can choose to engage in

geoengineering only if it is clear a catastrophe is imminent. Geoengineering is

relatively inexpensive. Butmost importantly, geoengineering is immediate and

can reverse the consequences ofdecadesof greenhousesgases ina matterof a

fewweeks.

Finally,

geoengineering

is

flexible.

The

particles

will

fall

to

earth

in

amatter of a few months. There are of course environmental concerns with

intentionally managing the earths climate. We need to learn more about what

those consequences might be. However, faced with the possibility of a

catastrophe,itseemsthatgeoengineeringissimplytoogoodapolicytoolnotto

develop.

Economically optimal mitigation policies would not pose a great threat to

economicgrowth.Policiesthatbalancemitigationcostsanddamageswouldlead

to regulations that are not especially burdensome. The present value of

mitigationcostsofanoptimalpolicywouldbe$2trillionfortheentirecentury.

Of course, not every country willbe affected alike. Lowlatitude countries

willbear thebruntofclimatedamages (Mendelsohnetal.2006)andwill likely

seedamages immediately.Lowlatitudeeconomieswith largesharesofrainfed

agriculture are especially vulnerable and may see reductions in agricultural

income of 60 percent or moreby 2100 (Seo and Mendelsohn 2008a). Similarly,

some countries may face higher mitigation costs. Countries that are growing

more quickly, are heavier energy consumers, and are more dependent on coal

willfacehighercosts.

Thebiggestthreatclimatechangeposestoeconomicgrowth,however,isnot

fromclimatedamagesorefficientmitigationpolicies,butratherfromimmediate,

aggressive, and inefficient mitigation policies. Immediate aggressive mitigation

policiescould

lead

to

mitigation

costs

equal

to

$28

trillion

(Stern

2006).

This

is

14

timeshigherthanthemitigationcostsofanoptimalpolicy.Ifthesepolicieswere

nomoreefficientthancurrentpolicies,thecostscouldeasilyriseto$56trillion.

Thesemisguidedmitigationprogramsposeaseriousthreattoeconomicgrowth.

Theywouldimposeheavyadditionalcostsontheglobaleconomythatcannotbe

justifiedbythelimitedreductionsinclimateriskthattheyoffer.


17/24


ReferencesAdams,R.M.,C.Rosenzweig,R.Peart,J.Ritchie,B.McCarl,J.Glyer,B.Curry,J.

Jones, K. Boote, and L. Allen. 1990. Global Climate Change and U.S.

Agriculture.Nature345:219224.

Anderson, D. 2006. Costs and Finance ofAbating Carbon Emissions in the Energy

Sector.SupportingDocumentsforSternReview,HMTreasury,London,UK.

Dasgupta,P.2008.DiscountingClimateChange.JournalofRiskandUncertainty

37:141169.

DasguptaS.,B.Laplante,C.Meisner,D.Wheeler,andJ.Yan.2009.TheImpact

of SeaLevel Rise on Developing Countries: A Comparative Analysis.

ClimaticChange93:379388.

Grubb, M., T.Jamasb, and M. Pollitt. 2008. Delivering a LowCarbon Electricity

System.

Cambridge,

UK:

Cambridge

University

Press.

Hurd, B., J. Callaway, J. Smith, and P. Kirshen. 1999. Economic Effects of

Climate Change on US Water Resources. In R. Mendelsohn and J.

Neumann,eds.,The ImpactofClimateChangeon theUnitedStatesEconomy.

Cambridge,UK:CambridgeUniversityPress.

IPCC(IntergovernmentalPanelonClimateChange).2007a.ClimateChange2007

ThePhysicalScienceBasis.TheIntergovernmentalPanelonClimateChange.


. 2007b. Climate Change 2007: Impacts, Adaptation, and Vulnerability.

Intergovernmental

Panel

on

Climate

Change.

Cambridge,

UK:

Cambridge

UniversityPress.

. 2007c. Climate Change 2007: Mitigation. Intergovernmental Panel on

ClimateChange.Cambridge,UK:CambridgeUniversityPress.

Kurukulasuriya, P., and R. Mendelsohn. 2008a. A Ricardian Analysis of the

ImpactofClimateChangeonAfricanCropland.AfricanJournalAgriculture

andResourceEconomics2:123.

.2008b.ModelingEndogenousIrrigation:TheImpactofClimateChange

onFarmers inAfrica.PolicyResearchWorkingPaper4278.WorldBank,

Washington,DC.

.2008c.CropSwitchingasanAdaptationStrategy toClimateChange.

AfricanJournalAgricultureandResourceEconomics2:105126.

Loomis,J.andJ.Crespi.1999.EstimatedEffectsofClimateChangeonSelected

Outdoor Recreation Activities in the United States. In Mendelsohn and

Neumann,eds.,The ImpactofClimateChangeon theUnitedStatesEconomy.



18/24


Lund,J.,T.Zhu,S.Tunaka,andM.Jenkins.2006.WaterResourceImpacts.InJ.

Smith and R. Mendelsohn, eds.,The Impact ofClimateChange onRegional

Systems:AComprehensiveAnalysisofCalifornia.Northampton,MA:Edward

ElgarPublishing.

Mansur, E., R. Mendelsohn, and W. Morrison. 2008. A Discrete Continuous

ModelofEnergy:MeasuringClimateChangeImpactsonEnergy.Journal

ofEnvironmentalEconomicsandManagement55:175193.

Mendelsohn,R.,A.Dinar,andL.Williams.2006.TheDistributional Impactof

ClimateChangeonRichandPoorCountries.EnvironmentandDevelopment

Economics11:120.

Mendelsohn, R., and M. Markowski. 1999. The Impact of Climate Change on

Outdoor Recreation. In Mendelsohn and Neumann, eds., The Impact of

ClimateChange on theUnited StatesEconomy. Cambridge, UK: Cambridge

UniversityPress.

Mendelsohn, R., and L. Williams. 2004. Comparing Forecasts of the GlobalImpactsofClimateChange.MitigationandAdaptationStrategiesforGlobal

Change9:315333.

.2007.DynamicForecastsoftheSectoralImpactsofClimateChange.In

M.Schlesinger,H.Kheshgi,J.Smith,F.delaChesnaye,J.Reilly,T.Wilson,

and C. Kolstad, eds., HumanInduced Climate Change:An Interdisciplinary

Assessment.Cambridge,UK:CambridgeUniversityPress.

Mendelsohn, R., W. Nordhaus, and D. Shaw. 1994. Measuring the Impact of

GlobalWarmingonAgriculture.AmericanEconomicReview84:753771.

Neumann,J.,

and

N.

Livesay.

2001.

Coastal

Structures:

Dynamic

Economic

Modeling. In R. Mendelsohn, ed., Global Warming and the American

Economy:ARegionalAnalysis.England:EdwardElgarPublishing.

Ng,W.,andR.Mendelsohn.2005.TheImpactofSeaLevelRiseonSingapore.

EnvironmentandDevelopmentEconomics10:201215.

.2006.TheImpactofSeaLevelRiseonNonMarketLandsinSingapore.

Ambio35:289296.

Nicholls, R.J. 2004. Coastal Flooding and Wetland Loss in the 21st Century:

Changes under the SRES Climate and SocioEconomic Scenarios. Global

EnvironmentalChange

14:

6986.

Nordhaus,W.D.1992.AnOptimalTransitionPathforControllingGreenhouse

Gases.Science258:13151319.

. 2007. Critical Assumptions in the Stern Review on Climate Change.

Science317:201202.


19/24


. 2008.AQuestion ofBalance:EconomicModeling ofGlobalWarming. New

Haven:YalePress.

Pearce, D., W. Cline, A. Achanta, S. Fankhauser, R. Pachauri, R. Tol, and P.

Vellinga. 1996. The Social Cost of Climate Change: Greenhouse Damage

and the Benefits of Control. InClimateChange 1995:Economic and Social

DimensionsofClimateChange.IntergovernmentalPanelonClimateChange.

Cambridge,UK:CambridgeUniversityPress,.

Pielke,R.Jr.,andC.W.Landsea.1998.NormalizedHurricaneDamages inthe

UnitedStates:192595.WeatherandForecasting13:621631.

Pielke,R.Jr.,andM.W.Downtown.2000.PrecipitationandDamagingFloods:

TrendsintheUnitedStates,193297.JournalofClimate13:36253637.

Rosenzweig,C.,andM.L.Parry.1994.PotentialImpactofClimateChangeon

WorldFoodSupply.Nature367:133138.

Smith,J.,

and

D.

Tirpak.

1989.

Potential

Effects

of

Global

Climate

Change

on

the

UnitedStates.Washington,DC:USEnvironmentalProtectionAgency.

Seo, N., and R. Mendelsohn. 2008a. A Ricardian Analysis of the Impact of

ClimateChangeonSouthAmericanFarms.ChileanJournalofAgricultural

Research68:6979.

. 2008b. Measuring Impacts and Adaptation to Climate Change: A

StructuralRicardianModelofAfricanLivestockManagement.Agricultural

Economics38:150165.

. 2008c. An Analysis of Crop Choice: Adapting to Climate Change in

Latin

American

Farms.

Ecological

Economics

67:

109116.

Sohngen, B., R. Mendelsohn, and R. Sedjo. 2002. A Global Model of Climate

Change Impacts on Timber Markets.Journal ofAgricultural andResource

Economics26:326343.

Stern,N.2006.TheSternReviewReport:TheEconomicsofClimateChange.London:

HMTreasury.

Tol,R. 2002a.NewEstimatesof the DamageCostsofClimateChange, Part I:

BenchmarkEstimates.EnvironmentalandResourceEconomics21:4773.

.2002b.NewEstimatesoftheDamageCostsofClimateChange,PartII:

DynamicEstimates.

Environmental

and

Resource

Economics

21:

135160.

Wang,J., R. Mendelsohn, A. Dinar,J. Huang, S. Rozelle, and L. Zhang. 2009.

The Impact of Climate Change on Chinas Agriculture. Agricultural

Economics40(forthcoming).

Wang,J.,R.Mendelsohn,A.Dinar,andJ.Huang.2008.HowChinasFarmers

Adapt to Climate Change. Policy Research Working Paper 4758. World

Bank,Washington,DC.


20/24


Weiss, H., and R. Bradley. 2001. What Drives Societal Collapse? Science 291:

609610.

Weyant,J., andJ. Hill. 1999. Introduction and Overview.TheEnergyJournal

(SpecialIssue:TheCostsoftheKyotoProtocol):p.xliv.


21/24


22/24

Eco-Audit

Environmental Benefits Statement

The

Commission

on

Growth

and

Development

is

committed

to

preserving

endangered forests and natural resources. The World Banks Office of the

Publisher has chosen to print these Working Papers on 100 percent

postconsumer recycled paper, processed chlorine free, in accordance with the

recommended standards for paper usage set by Green Press Initiativea

nonprofitprogramsupportingpublishersinusingfiberthatisnotsourcedfrom

endangeredforests.Formoreinformation,visitwww.greenpressinitiative.org.

TheprintingofalltheWorkingPapersinthisSeriesonrecycledpapersavedthe

following:

Trees* SolidWaste Water NetGreenhouseGases TotalEnergy

48 2,247 17,500 4,216 33mil.*40inchesin

heightand68

inchesindiameterPounds Gallons PoundsCO2Equivalent BTUs


23/24

The Commission on Growth and DevelopmentWorking Paper Series

51. Growth Challenges or Latin America: What Has Happened, Why, and How To Reorm The Reorms,

by Ricardo Ffrench-Davis, March 2009

52. Chiles Growth and Development: Leadership, Policy-Making Process, Policies, and Results,

by Klaus Schmidt-Hebbel, March 2009

53. Investment Efciency and the Distribution o Wealth, by Abhijit V. Banerjee, April 2009

54. Aricas Growth Turnaround: From Fewer Mistakes to Sustained Growth, by John Page, April 2009

55. Remarks or Yale Workshop on Global Trends and Challenges: Understanding Global Imbalances,

by Richard N. Cooper, April 200956. Growth and Education, by Philippe Aghion, April 2009

57. From Growth Theory to Policy Design, by Philippe Aghion and Steven Durlauf, April 2009

58. Eight Reasons We Are Given Not to Worry about the U.S. Defcits, by Jeffrey Frankel, April 2009

59. A New Bretton Woods? by Raghuram G. Rajan, June 2009

60. Climate Change and Economic Growth, by Robert Mendelsohn, June 2009

Forthcoming Papers in the Series:

Public Finance and Economic Development: Reections based on the Experience in China,

by Roger H. Gordon (June 2009)

Electronic copies of the working papers in this series are available online at www.growthcommission.org.

They can also be requested by sending an e-mail to [email protected].


24/24

www.growthcommission.org

Commissionon Growth and

DevelopmentMontek AhluwaliaEdmar Bacha

Dr. Boediono

Lord John Browne

Kemal Dervis

Alejandro Foxley

Goh Chok Tong

Han Duck-soo

Danuta Hbner

Carin Jmtin

Pedro-Pablo Kuczynski

Danny Leipziger, Vice ChairTrevor Manuel

Mahmoud Mohieldin

Ngozi N. Okonjo-Iweala

Robert Rubin

Robert Solow

Michael Spence, Chair

Sir K. Dwight Venner

Hiroshi Watanabe

Ernesto Zedillo

Zhou Xiaochuan

The mandate of the

Commission on Growth

and Development is to

gather the best understanding

there is about the policies

and strategies that underlie

rapid economic growth and

poverty reduction.

The Commissions audience

is the leaders of developing

countries. The Commission is

supported by the governments

of Australia, Sweden, the

Netherlands, and United

Kingdom, The William and

Flora Hewlett Foundation,

and The World Bank Group.

Grim descriptions of the long-term consequences of climate change havegiven the impression that the climate impacts from greenhouse gasesthreaten long-term economic growth. However, the impact of climate change onthe global economy is likely to be quite small over the next 50 years. Severe

impacts even by the end of the century are unlikely. The greatest threat that

climate change poses to long-term economic growth is from potentially excessive

near-term mitigation efforts.

Robert Mendelsohn,Professor, Yale University