Economic Threat of Global Warming Lies in the Unknown

The potential costs of global warming include damage to agriculture and coastal regions, increased risk of extreme weather events, and the spread of tropical diseases, said Ian Parry, PhD, ’93, senior fellow at Resources for the Future. Still, “these effects aren’t too large from modest amounts of warming,” said Parry, one of the panelists who examined the economic aspects of global warming during Management Conference at Gleacher Center on May 18. “Roughly speaking, we’re talking about 1 percent of global GDP for warming of 3 degrees Celsius.”

Experts are more worried about extreme and irreversible scenarios, including the melting of the earth’s permafrost, collapse of the west Antarctic ice sheet, and potential changes in ocean currents, he said. “Obviously in these scenarios, it becomes more plausible to increase the magnitude of global warming,” Parry said.

Because the probability of such catastrophic events is unknown, one option is to not take any action on global warming, said Richard Posner, senior lecturer in law at the University of Chicago Law School. “If you’re very risk averse, you might feel that we should do something,” Posner said.

Some people might believe it will be easier to take action now to reduce global warming than to do so in 10 or 20 years, he said. “On one hand, we may think technology will eventually take care of the problem,” Posner said. “On the other hand, we might think that reducing the rate at which greenhouse gases are released now will spare us having to make much more costly responses in the future.”

Posner said he favors stiff taxes on carbon dioxide to induce more rapid technological innovations, not necessarily to reduce emissions. “This is different from the effect of having taxes to reduce consumption,” Posner said. “The more significant hope is for technological advancement. Stiff taxes are likely to induce this technology.”

Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics, argued that such a tax might only delay catastrophic or irreversible events by a few years. “That’s not how you think about extreme events,” Murphy said. “The gain in the extreme events world has to be to somehow understand whether it’s going to happen—that is, learn about the probability—or improve our ability to deal with these events when they come.”

Policy makers need to consider the parameters of decision-making under conditions of uncertainty, he said. “My view of what you learn from thinking about catastrophic events is to think about how best we can learn about the options,” Murphy said. “How can we change the distribution of outcomes to help us make better actions and better decisions? Simply slowing down the realization of catastrophic events has very little value.”

Modest changes brought about by global warming are not as costly because people can adapt fairly easily, he said. “Look across the United States,” Murphy said. “You’ve got Maine, Seattle, Phoenix, Houston. They’re all pretty different, but GDP per capita is not so different. People can deal with extremely different weather, and our ability to deal with differences in the environment has changed over time. We’re much better able to deal with those differences today than we were 100 years ago. I would be willing to venture we’ll be much better able to deal with them 100 years from now than we are today.”

If not for the uncertainty surrounding the more extreme events, global warming would not be such a big topic today, he said. “One percent of GDP is very small,” Murphy said. “Uncertainty about political events has at least the same, if not more, importance in the world’s future. The reason global warming is so important is because we know so little about the catastrophic or irreversible events. We need to learn more.”

—Phil Rockrohr