Economic Aspects of Global Warming and Climate Change

Abstract
The issue of global warming and climate change has proven to be one of the most controversial and difficult problems facing all the nations of the world.  Assessing the impact of climate change is extremely complex as it is very difficult to project the future and assess the hypothetical impact it will have on the world.  Additionally, it is unknown how technological progress will respond and potentially alter the effects of global warming.  This paper will focus on some impacts of global warming and climate changes on the global economy and review possible methods of mitigating the adverse effects.

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Introduction
Climate change is one of the most challenging problems facing the world community.  According to NASA, global warming is a natural process.  A layer of greenhouse gases which include water vapor, carbon dioxide (CO2), methane and nitrous oxide acts as a thermal blanket for the Earth, absorbing heat and warming its surface to an average temperature of 59 degrees Fahrenheit which help sustain life (“National Aeronautics and Space Administration”, 2017).  Without this natural cover, the Earth’s surface would be colder than it is today, making the planet freezing and mostly likely uninhabitable.
However, scientists
are concerned that increasing concentrations of greenhouse gases in the
atmosphere are causing an unprecedented rise in global temperatures, with
potentially harmful consequences for the environment, human health and the economy.  We are adding to the natural greenhouse
effect with emissions from industry and agriculture, trapping more energy and
increasing the temperature. The possible causes of global warming are
numerous.  But according to Environmental
Protection Agency, the most concerning and alarming are manmade emissions of CO2
caused by burning fossil fuels and cutting down carbon-absorbing trees.
Other greenhouse gases such as methane and
nitrous oxide are also released through human activities, but their presence is
relatively small when compared to carbon dioxide.  According to a 2016 BBC article, the level and
concentration of CO2 in our atmosphere is significantly higher than it was at
the beginning of the industrial revolution which began in 1750 (“What Is
Climate Change?”, 2016).
Climate change has a broader meaning as it not only refers
to the increased temperature trends described by global warming, but also
changes such as sea level rise; ice mass loss in Greenland, Antarctica, the
Arctic and mountain glaciers worldwide; shifts in flower and plant blooming;
and extreme weather events.
Kenneth Green (2002) argues that human
prosperity in many parts of the world, especially developing countries, heavily
depends on climate. Agriculture, tourism, transportation, energy use, and many
other activities that define our economies are largely influenced by
climate.  Therefore, it is crucial to
understand the effects of global warming in short and long run and perform the
cost and benefit analysis to determine what policies and measures should be
taken to mitigate and prevent the climate change and its various impacts.
Climate change is a global issue, but the impacts are
likely to differ in different continents, countries, and regions. Some nations
will likely experience more adverse effects than others. Other nations may
benefit from climate changes. The ability to adapt to climate change can
influence how climate change affects individuals, communities, countries, and
the global population.
This paper will discuss the effects of global warming on the energy industry, agriculture and food supply, production output and inflation.  Next, it will focus on the cost benefit analysis of implementing the policies and procedures to mitigate and/or prevent global warming and climate change. Lastly, the paper will review the possible methods of reducing the effects of global warming and climate change and the mitigation policies to be implemented.
Climate Change Effect on Energy
In my opinion, energy is the key
industry that will be highly affected by global warming and climate change. The
world’s production and use of energy is the primary cause of global
warming.  Climate will affect energy
consumption by changing consumers’ wants and needs in both the intensive
(short) and extensive (long) terms.
There are several ways in which climate may affect energy
consumption. In the residential, commercial and industrial sectors in a warmer world
higher cooling demand is expected, which would lead to increased electricity
consumption. On the other hand, fewer cold winter days would result in
decreased heating demand, which would decrease natural gas, oil and electricity
demand. These are demand side effects.  On
the supply side, one would expect increased use of natural gas on hot days, as
some power plants become less efficient as well as higher natural gas
consumption for generation due to higher electricity demand. During the winter,
there might be a decrease in natural gas demand for generation due to lower
electricity demand.
According to a 2009 report on global climate change, the majority
(87%) of the United States’ greenhouse gas emissions are from the production
and use of energy production.  The research
was primarily on the energy usage in buildings concerning the various heating
and cooling demands. The findings stated that, “the demand for cooling energy
increases from 5 to 20 percent per 1.8°F of warming, and the demand for heating
energy drops by 3 to 15 percent per 1.8°F of warming” (Global Climate Change
Impacts in the United States Report, 2009). 
Additionally, the 2009 report projects that global warming’s increasing
temperatures will increase the peak demand for electricity as it is the main
source used for the cooling of buildings. 
This would result in a disproportionate increase in energy infrastructure
investment and possible pollution as most of the nation’s electricity is
currently produced from coal.  This would
potentially increase the nation’s CO2 emissions and slow the development of
alternative “green” energy sources (Global Climate Change Impacts in the United
States Report, 2009).Climate Change Effect on Agriculture
and Food Supply
Since temperature and
precipitation are direct inputs in agricultural production, this sector will
experience significant effects as well.  Recent
droughts worldwide have highlighted that the advances in modern farming
techniques and technologies cannot insulate the world’s food production and
supply.  In fact, rising CO2
concentrations could increase production of some crops, such as rice, soybean
and wheat (Clark, 2012).  However, Clark
(2012) also stated, “the changing climate would affect the length and quality
of the growing season and farmers could experience increasing damage to their
crops, caused by a rising intensity of extreme weather events such as droughts,
flooding or fires”.  Furthermore, in many
developing regions, agriculture is of major importance for national economies, as
it represents the large share in gross domestic product (GDP).  Therefore, with prospects of continued global
warming, the damages for poor regions could be substantial (Clark, 2012).  Climate change’s probable impact on agricultural
production patterns and prices in these regions lower the profitability of
agriculture industry and increase the share of consumers’ income spent on food.
 This
may lead to food shortages or insufficient access to food in some countries or regions.
In addition to agriculture, the
world’s fisheries which provide an important source of food for at least half
the world’s population are very susceptible to climate change.  Fisheries are plagued by two problems,
overexploitation and pollution.  Additionally,
the various marine fish species are encountering their own problems due to
climate change such warming surface waters, and rising sea levels due to
melting ice.  Clark (2012) states, “some
marine fish species are already adapting by migrating to the high latitudes,
but others, such as Arctic and freshwater species, have nowhere to go”.  If we are unable to find sustainable solutions
to help the fisheries and fish, we may end up with shortages of edible fish
which will cause prices to soar.
According to Schierhorn (2016), over the last century, the
global population has quadrupled. In 1915, there were 1.8 billion people in the
world. Today, according to the most recent estimate by the UN, there are 7.3
billion people and we may reach 8.5 billion by 2030 (“UN
projects world population to reach 8.5 billion by 2030, driven by growth in
developing countries”, 2015).  This
population growth, along with rising incomes in developing countries, is increasing
global food demand.  Schierhorn’s (2016)
research shows that food demand is expected to increase anywhere between 59 to
98 percent by 2050.  Therefore, the
world’s crop production will need to increase. 
That means there needs to be an expanse of farmable land to grow crops,
and current productivity needs expanded through the use of modern farming
methods (Schierhorn, 2016).
A recent EPA (2016) study concludes
that “climate change is very likely to affect food security at the global,
regional, and local level” and that “climate change can disrupt food
availability, reduce access to food, and affect food quality”.  The study projects that changes in
temperatures and precipitation patterns, along with extreme weather events may
reduce agricultural productivity (Climate Impacts on Agriculture and Food
Supply”, 2016).
The same study further suggests that
“increases in the frequency and severity of extreme weather events can also
interrupt food delivery, and resulting spikes in food prices after extreme
events are expected to be more frequent in the future”.  Increasing temperatures can contribute to food
spoilage and contamination (Climate Impacts on Agriculture and Food
Supply”, 2016).
Furthermore, Clark (2012) argues that food production
itself is a significant emitter of greenhouse gases, as well as a cause of
environmental degradation in many parts of the world. Clark states agriculture
contributes about 15% of all emissions, on a par with transport. He concludes that
to limit the long-run impacts of climate change, food production must become
not only more resilient to climate but also more sustainable and low-carbon
itself (Clark, 2012).Climate Change Effect on Economy Growth
According to a recent study by
Wade (2017), climate change will most likely reduce the capital stock and
productivity in the world economy. Global warming is expected to increase the
frequency and severity of extreme weather events causing property and
infrastructure loss.
While the initial economic response to recover the damages may
be positive for GDP while it is possible, in the long run the world economy will
face an extreme challenge. The harm to economic output may become irreversible.
 Wade (2017) argues that it will not be
worth for businesses to replace their capital stock unless future damages could
be prevented or the business could be relocated to the safer area.  This could cause a short period of disruption
as businesses relocate, or in the worst case scenario, a permanent loss of
capital stock and output.  As the
temperatures continue to rise, the damages will increase and become permanent
(Wade, 2017).
Wade (2017) represents the likely effect of climate change
on output in production function in Figure 1 (See Appendices).  If there is less capital stock available due
to the damage resulted from climate change, the productive capacity of the
world economy will fall.  It is
represented by the downward shift in the world production function as each unit
of labor produces less output (Wade, 2017).
However, lower labor productivity may occur not only due to
a lower level of capital stock.  Global
warming may affect food safety, promote the spread of infections, cause social unrest
and thus reduce availability of labor. Wade (2017) shows this effect as a
supply shock in a supply and demand graph (Figure 2, Appendices).  Global warming is likely to contract supply
at any given price and result in a backward shift of the supply curve (from S1
to S2) (Wade, 2017). As the graph demonstrates, this will result in a lower
level of output (Y2) and a higher price (P2).
This analysis is based on the assumption that the world
will not respond to climate change and no prevention or mitigation measures are
taken.
Climate Change Effect on Inflation
Wade (2017) also proves that as global production output is
reduced, an increase in the general price level will occur as a result of
global warming.
As discussed earlier, higher food prices will affect consumers’
income and overall food price inflation will rise.  Furthermore, reduced land availability may
also contribute to rising inflation. Per Wade (2017) the surge in global
temperatures may eventually cause some areas of the world to become uninhabitable
and cause mass migration. Along with the political and socioeconomic
implications of the migration there will be higher demand for decreasing amount
of land. 
Higher energy costs are also likely to boost inflation. As
discussed earlier, as our climate becomes more extreme the demand for energy
used for cooling will likely to rise.  As
the energy demand will rise, the supply will shrink as the efficiency of
existing power stations is compromised due to higher temperatures (Wade, 2017).  Policy actions by governments to transition
to green energy may further contribute to inflation in the short-run when taxes
are placed on fossil fuel electricity. Since energy is the basis of most of the
world’s production, the effects of higher energy prices on inflation will impact
the global economy (Wade, K. 2017).
Cost-Benefit
Analysis
According to Mendelsohn (2013), “the biggest threat climate
change poses to economic growth is from immediate, aggressive and inefficient
mitigation policies”.
Thomas C. Shelling
believes that climate change is the global public good, because each country’s
emissions of greenhouse gases contribute cumulatively to the increase of the
overall concentration, and each country’s abatements entail higher cost than
benefit, unless effective concerted collective actions take place (Stiglitz & Shelling, 2012).  Therefore, benefit-cost analysis is
a principal tool for deciding if this public good should be altered through
mitigation policy.
There are many conflicting views regarding the true
dimensions of climate change problem and a lot of various policy assessment
models. The most famous are DICE model created by William Nordhaus and the
Stern Review prepared by Sir Nicholas Stern for the British government in
2006. 
The modeling
approach by Nordhaus views climate change as a matter of investment efficiency
and assumes that climate change policies will compete with other investments
such as public health and education.  This model provides estimates of the
appropriate price path on carbon emissions, with prices starting relatively low
and gradually rising as a result of discounting. (William D. Nordhaus and Joseph Boyer, 2000)
The
Stern Review, in contrast to Nordhaus’ model, recommended strong and immediate
action on climate change.  Stern (2006) found that the costs
associated with uncontrolled global warming would be up to a 20 percent drop
per year in the world’s GDP by 2050. The Stern Review incorporated new
scientific evidence suggesting that the climate system may be more sensitive
than previously thought.  Also, it supported the application of much lower
discount rates. (Stern, 2006).
Therefore,
two aspects of the benefit-cost calculation are critical. One is allowance for
uncertainty as the possible outcomes of global warming in the absence of
mitigation are very unclear.  The other critical aspect is the
choice of discount rate as most of the climate-related benefits from current
policy efforts would take the form of avoided damages in the long run with many
of the costs incurred in the short run.
Stiglitz & Shelling (2012)
suggest a number of behavioral changes to mitigate the problem of global
warming such as shifting to fuels with higher ratio of useful energy to CO2
emissions (from coal to oil, from oil to natural gas); developing technologies
that use less energy per unit output; shifting demand to products with lower
energy intensity; planting trees and reducing deforestation; pursuing policy of
sequestering the CO2 by pumping it directly into underground reservoirs.
The process of mitigation will require a temporary economic
transition from consumption to investment, provided that the transitional costs
are small relative to the cost of inaction (Wade, 2017).  However, as the costs of mitigation rise,
budget limitations will become increasingly important.
Possible Mitigation Measures
Despite the disagreements
between nations, in recent years we have witnessed the gradual emergence of a
range of international and domestic climate change policies, including
emissions trading programs, emissions taxes, performance standards, and
technology-promoting programs (Goulder & Pizer, 2006).  At the Paris climate conference (COP21) in
December 2015, 195 countries adopted the first-ever universal, legally binding
global climate agreement that outlined a global action plan to put the world on
track to avoid dangerous climate change by limiting global warming to well
below 2°C.
Therefore, there is now an agreement among climate
economists to consider climate change as a global externality that must be
compensated for to recover economic optimality. Hence, basic public economics
wisdom requires some mitigation efforts (IPCC, 2007). The issue gets
controversial however when we try to answer the “when” and “how much”
questions.
One approach that has become
widely used is cap and trade. The U.S. Clean Air Act of 1990 established
emission levels (caps) and permitted companies with emissions below the cap to
sell (trade) their rights to remaining permissible amount to firms that have
exceeded the cap. Over time, the government would reduce the cap, thus overall
emissions would be gradually reduced.
This approach gives companies
flexibility. It increases the pool of available capital to make reductions,
encourages companies to cut pollution faster and rewards innovation. But the
critics pointed out that it allows richer companies to pollute more as they are
able to buy those rights. 
Another type of emissions
control is establishment of emissions charges or fees. Each business would be
charged accordingly for the amount of emissions produced. It would become very
expensive for the companies to pollute and will create incentive for them to
clean up. In recent years governments also experimented with various green
taxes and eco-taxes that levy a fee on environmentally damaging behavior.
Beside the punishment, governments also offer positive incentives for the
companies that improve their environmental behavior. For example, the
government may decide to purchase only from those firms that meet certain
pollution standard or to offer financial aid to those that install pollution
control equipment. Tax incentives such as faster depreciation for pollution
control equipment may also be used.
Overall, the trend has been for
governments to use more flexible, market oriented approaches such as tradeable
allowances, pollution fees and taxes, and incentives, to achieve the goals of
protecting the environment and mitigating climate change. (Lawrence &
Weber, 2017)
Many challenges remain though.
2°C stabilization goal set at the Paris Climate Conference   requires decarbonization of the world economy.
Carbon pricing would be a necessary tool in reaching that goal. The advantages
of carbon pricing would be the following: it would trigger economy-wide
decarbonization in a cost efficient manner, generate revenues that can be used for
financing the sustainable development goals and become a focal point for
international climate policy cooperation focusing on carbon pricing
coordination.
For many policy issues, there is
an important and clear distinction between the short-run and the long-run
responses by businesses and individuals. The short run is a period when businesses
and individuals are locked in to some past decisions and have fixed costs that
they are not able to avoid. But over a period of time, they might respond by
making gradual adjustments in their behaviors and choices. They are more
responsive in the long run than in the short run because they have more time
and opportunities to respond to a change in price. As we know, supply and
demand are generally more elastic in the long run. We can use the example of a
gas tax that was introduced as a tool to reduce pollution. If we look only at
the short-run elasticity of demand, we might come to conclusion that a gas tax
will have little effect on driving since demand is inelastic. However, if we
had an estimate of the long-run elasticity of demand, we might see that the
demand curve is flatter. As recent studies how, the effectiveness of many
market-based environmental policies depend on the responsiveness of businesses
and individuals to a change in incentives, economists and policymakers should keep
in mind the difference between short-run responses and long-run responses
(Global Warming Causes, 2017).
Summary
The
overall effect of climate change on economic growth will most likely be
negative in the long run. Although there will be winners and losers from
climate change at different levels of warming, the impact of climate change
will be widespread due to the financial, political and economic integration of
the world’s economies. Global warming will primarily influence economic growth
through damage to property and infrastructure, lost productivity, mass
migration, security threats.
The issue of global warming and
climate change invokes the highest form of global citizenship. The nations have
to be willing to sacrifice hundreds of billions of dollars of present
consumption in an effort that will largely benefit people in other countries,
considering that the benefit that will not be instant. Moreover, the threat of
climate change is uncertain and based on modeling rather than direct
observation.
In considering climate change
policies, the fundamental trade-off that society faces is between consumption
today and consumption in the future. By taking measures to slow emissions of
greenhouse gases now, the economy reduces the amount of output that can be
devoted to consumption and productive investment. This is the opportunity cost
of the investment into mitigating global warming. However, the return for this
investment is lower damages and higher consumption in the future. The climate
investments involve reducing fossil-fuel consumption and moving to low-carbon
fuels.  In return, the impacts on energy,
agriculture, economic growth and inflation as well as the potential for
catastrophic climate change will be reduced.

Figure 1: Global Production Function (Wade, K., 2017)
Figure 2: Supply and Demand (Wade, K., 2017)
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