Technological change and timing reductions in greenhouse gas emissions

In 2007 Nicholas Stern’s Review (in Science 317:201–202, 2007) estimated that global GDP would shrink by 5–20% due to climate change which brought forth calls to reduce emissions by 30–70% in the next 20 years. Stern’s results were contested by Weitzman (in J Econ Lit XLV(3):703–724, 2007) who argued for more modest reductions in the near term, and Nordhaus (in Science 317:201–202, 2007) who questioned the low discount rate and coefficient of relative risk aversion employed in the Stern Review, which caused him to argue that ‘the central question about global-warming policy—how much how, how fast, and how costly—remain open.’ We present a simulation model developed by Färe et al. (in Time substitution with application to data envelopment analysis, 2009) on intertemporal resource allocation that allows us to shine some light on these questions. The empirical specification here constrains the amount of undesirable output a country can produce over a given period by choosing the magnitude and timing of those reductions. We examine the production technology of 28 OECD countries over 1992–2006, in which countries produce real GDP and CO2 using capital and labor and simulate the magnitude and timing necessary to be in compliance with the Kyoto Protocol. This tells us ‘how fast’ and ‘how much’. Comparison of observed GDP and simulated GDP with the emissions constraints tells us ‘how costly’. We find these costs to be relatively low if countries are allowed reallocate production decision across time, and that emissions should be cut gradually at the beginning of the period, with larger cuts starting in 2000.