The Impact of Climate Change on the Balanced Growth Equivalent: An Application of FUND

The Stern Review added balanced growth equivalents (BGE) to the economic climate change research agenda. We first propose rigorous definitions of the BGE for multiple regions and under uncertainty. We show that the change in the BGE is independent of the assumed scenario of per capita income. For comparable welfare economic assumptions as the Stern Review, we calculate lower changes in BGE between a business as usual scenario and one without climate impacts with the model FUND than the Stern Review found with the model PAGE. We find that mitigation policies give even lower changes in BGE and argue that those policy choices should be the focus of the research effort rather than total damage estimates. According to our results, the current carbon tax should be below $55/tC. Sensitivity analyses show that the Stern Review chose parameters that imply high impact estimates. However, for regionally disaggregated welfare functions, we find changes in BGE that are significantly higher than the results from the Stern Review both for total damage as for policy analysis. With regional disaggregation and high risk aversion, we observe fat tails and with that very high welfare losses.

[1]  Partha Dasgupta,et al.  Commentary: The Stern Review's Economics of Climate Change: , 2007 .

[2]  Charles Blackorby,et al.  Social criteria for evaluating population change , 1984 .

[3]  Richard S. J. Tol,et al.  The Stern Review: A deconstruction , 2009 .

[4]  M. Rothschild,et al.  Increasing risk: I. A definition , 1970 .

[5]  Fredrik Carlsson,et al.  Are People Inequality-Averse, or Just Risk-Averse? , 2001 .

[6]  W. Bossert,et al.  Intertemporal population ethics: critical-level utilitarian principles. , 1995, Econometrica : journal of the Econometric Society.

[7]  J. Houghton,et al.  Climate change 1992 : the supplementary report to the IPCC scientific assessment , 1992 .

[8]  Samuel Fankhauser,et al.  Protection versus Retreat: The Economic Costs of Sea-Level Rise , 1995 .

[9]  D. Pearce,et al.  The Aggregation of Climate Change Damages: a Welfare Theoretic Approach , 1997 .

[10]  Partha Dasgupta,et al.  Commentary: The Stern Review's Economics of Climate Change , 2007, National Institute Economic Review.

[11]  Kenneth J. Arrow,et al.  Global Climate Change: A Challenge to Policy , 2007 .

[12]  C. Azar.  Weight Factors in Cost-Benefit Analysis of Climate Change , 1999 .

[13]  D. Anthoff.  Optimal Global Dynamic Carbon Taxation , 2009 .

[14]  R. Tol.  Estimates of the Damage Costs of Climate Change, Part II. Dynamic Estimates , 2002 .

[15]  Richard S. J. Tol,et al.  Discounting and the social cost of carbon: A closer look at uncertainty , 2006 .

[16]  Richard S. J. Tol,et al.  Possible economic impacts of a shutdown of the thermohaline circulation: an application of FUND , 2004 .

[17]  Richard S. J. Tol,et al.  Welfare specifications and optimal control of climate change: an application of fund , 2002 .

[18]  Arthur Cecil Pigou,et al.  A study in public finance , 1947 .

[19]  Cameron Hepburn,et al.  Ethics of the Discount Rate in the Stern Review on the Economics of Climate Change , 2007 .

[20]  Richard S. J. Tol,et al.  A stern reply to the reply to the review of the stern review , 1985 .

[21]  T. Downing,et al.  Distributional aspects of climate change impacts , 2004 .

[22]  J. Weyant,et al.  Vulnerability to climate change and reasons for concern: a synthesis , 2001 .

[23]  R. Tol.  The damage costs of climate change towards a dynamic representation , 1996 .

[24]  R. Tol.  Estimates of the Damage Costs of Climate Change. Part 1: Benchmark Estimates , 2002 .

[25]  W. Nordhaus.  Critical Assumptions in the Stern Review on Climate Change , 2007, Science.

[26]  Richard S. J. Tol,et al.  Is the Uncertainty about Climate Change too Large for Expected Cost-Benefit Analysis? , 2003 .

[27]  N. Stern.  What is the Economics of Climate Change , 2006 .

[28]  W. Cline.  Economics of Global Warming, The , 1992 .

[29]  Richard S. J. Tol,et al.  The Stern Review of the Economics of Climate Change: A Comment , 2006 .

[30]  Thomas Sterner,et al.  Discounting and Distributional Considerations in the Context of Global Warming. , 1996 .

[31]  A. Atkinson.  On the measurement of inequality , 1970 .

[32]  William D. Nordhaus,et al.  A Review of the Stern Review on the Economics of Climate Change , 2007 .

[33]  Graciela Chichilnisky,et al.  Who Should Abate Carbon Emissions? An International Viewpoint , 1993 .

[34]  J. Horowitz.  Preferences in the Future , 2002 .

[35]  Robert O. M Endelsohn.  A Critique of the Stern Report , 2007 .

[36]  Ernst Fehr,et al.  Spite and Development , 2008 .

[37]  Dennis Anderson.  The Stern Review and the Costs of Climate Change Mitigation , 2007 .

[38]  M. Schlesinger,et al.  A sequential-decision strategy for abating climate change , 1992, Nature.

[39]  R. Tol.  The Social Cost of Carbon: Trends, Outliers and Catastrophes , 2008 .

[40]  K. Hasselmann,et al.  Transport and storage of CO2 in the ocean ——an inorganic ocean-circulation carbon cycle model , 1987 .

[41]  Dennis Anderson,et al.  Right for the Right Reasons A final rejoinder on the Stern Review , 2007 .

[42]  Nicholas Stern,et al.  Fairly good plans , 1972 .

[43]  N. Stern.  The Economics of Climate Change: Implications of Climate Change for Development , 2007 .

[44]  Richard S. J. Tol,et al.  Equity Weighting and the Marginal Damage Costs of Climate Change , 2007 .

[45]  J. Weyant.  A Critique of the Stern Review's Mitigation Cost Analyses and Integrated Assessment , 2008, Review of Environmental Economics and Policy.

[46]  Roger A. Pielke,et al.  Mistreatment of the economic impacts of extreme events in the Stern Review Report on the Economics of Climate Change , 2007 .

[47]  J. Stone.  Climate change 1995: The science of climate change. Contribution of working group I to the second assessment report of the intergovernmental panel on climate change , 1997 .

[48]  Thomas Sterner,et al.  An Even Sterner Review: Introducing Relative Prices into the Discounting Debate , 2008, Review of Environmental Economics and Policy.

[49]  H. Hotelling.  The Economics of Exhaustible Resources , 1931, Journal of Political Economy.

[50]  Richard S. J. Tol,et al.  New Estimates of the Damage Costs of Climate Change , 1998 .

[51]  M. Weitzman.  A Review of The Stern Review on the Economics of Climate Change , 2007 .

[52]  M. Weitzman,et al.  On Modeling and Interpreting the Economics of Catastrophic Climate Change , 2009, The Review of Economics and Statistics.

[53]  W. Pizer,et al.  Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations? , 2001 .

[54]  Richard S. J. Tol,et al.  Multi-Gas Emission Reduction for Climate Change Policy: An Application of Fund , 2006 .

[55]  Klein Goldewijk Cgm,et al.  The IMAGE 2 Hundred Year (1890 - 1990) Data Base of the Global Environment (HYDE) , 1995 .

[56]  R. Tol.  The damage costs of climate change toward more comprehensive calculations , 1995 .

[57]  Richard S. J. Tol,et al.  On setting changes at energy economics near-term climate policy as the dust begins to settle: The legacy of the stern review , 2007 .

[58]  D. Pearce,et al.  Extensions and alternatives to climate change impact valuation: on the critique of IPCC Working Group III's impact estimates , 1998, Environment and Development Economics.

[59]  An emission intensity protocol for climate change: An application of FUND , 2004 .

[60]  M. Schlesinger,et al.  Comparing impacts across climate models , 2000 .

[61]  Richard S. J. Tol,et al.  A Review of the Stern Review , 2006 .

[62]  Dean Murphy,et al.  On Setting Near-Term Climate Policy While the Dust Begins to Settle , 2007 .

[63]  Richard S. J. Tol,et al.  Precaution And A Dismal Theorem: Implications For Climate Policy And Climate Research , 2007 .

[64]  N. Stern,et al.  Right for the Right Reasons , 2007 .

[65]  Donald J. Wuebbles,et al.  Radiative forcing of climate , 1991 .