In sum, the literature on the impact of climate change on development has yet to reach firm conclusions. Climate change could reduce the rate of economic growth and even trap people in poverty. If this occurs, then the dynamic impacts could be larger than the static ones reviewed earlier, which means the social cost of carbon would be much higher. The social cost of carbon is the incremental impact of emitting an additional ton of carbon dioxide, or the benefit of slightly reducing emissions.
When evaluated along an optimal emissions trajectory, the social cost of carbon is the Pigou tax Pigou , that is, the amount GHG emissions should be taxed in order to maximize welfare.
There have been a number of developments concerning the social cost of carbon since my earlier surveys Tol , b. The volume of papers and estimates has increased rapidly, 13 partly, I believe, in response to the U. After a discussion of conceptual issues, I review these new estimates.
Some researchers have argued that current estimates of the social cost of carbon are lower bounds on the true social cost of carbon and that, by implication, climate policy is not ambitious enough. Three arguments are put forward. First, estimates of the social cost of carbon are said to underestimate the true risks of climate change Botzen and van den Bergh ; van den Bergh and Botzen , , although both primary estimates Anthoff, Tol, and Yohe b ; Anthoff and Tol , and meta-analyses Tol ; Arent et al. Second, estimates of the social cost of carbon rely on incomplete impact assessments Revesz et al.
However, incompleteness only implies bias if the missing impacts are all negative Tol ; Arent et al. Third, estimates of the social cost of carbon are partly determined by ethical parameters such as the rates of pure time preference, risk aversion, and inequality aversion Guo et al. Some have argued in favor of particular parameter values Stern , , ; van den Bergh and Botzen , , thus putting bounds on the social cost of carbon.
In any case, the relationship between these ethical parameters and the social cost of carbon is not as simple as some might think. For instance, the impact of inequality aversion is ambiguous, because although poorer countries are more vulnerable to climate change than richer ones, carbon dioxide fertilization 14 disproportionately benefits poorer countries Anthoff, Tol, and Yohe b.
Tourism and Climate Change: Risks and Opportunities (Climate Change, Economies and Society - Leadership and Innovation) [Susanne Becken, John E. Hay]. A Review of “Tourism and climate change: risks and opportunities”. by Susanne Becken and John E. Hay, Clevedon, UK, Channel View.
The social welfare function governs trade-offs between risks, between present and future, and between rich and poor. Models often assume that the social welfare function is identically curved in the three dimensions of time, risk, and regard for others Atkinson et al. As economic growth is typically assumed to continue, this implies an ambiguous effect on the social cost of carbon. Some recent papers separate risk and time Crost and Traeger ; Jensen and Traeger ; Lemoine and Traeger but disregard distributional issues within and between countries.
Some of the controversy concerning the social cost of carbon arises from the complexity of its computation. Golosov et al. This result hinges on the following assumptions: 1 that utility is logarithmic in consumption, 2 that time discounting is exponential, 3 that the carbon cycle follows a linear difference equation, 4 that climate change impacts are proportional to total output, 5 that climate change impacts are proportional to the exponent of the atmospheric concentration of carbon dioxide, and 6 that there are no catastrophic risks.
Unfortunately, none of these assumptions is realistic. The first two assumptions are discussed elsewhere in this article. Maier-Reimer and Hasselmann show that the removal of carbon dioxide from the atmosphere cannot be approximated by a linear difference equation. As argued earlier, poverty implies vulnerability to climate change; that is, impacts are less than proportional to output. The equilibrium temperature is logarithmic in the atmospheric concentration, so Golosov et al. Figure 1 suggests that the relationship between temperature and impact is close to linear. A series of papers Keller, Bolker, and Bradford ; van den Bijgaart et al.
Note that these studies offer little new insight into the optimal carbon tax in the near term. I next examine the probability density of the social cost of carbon for all published estimates see appendix figure 1. The method follows Tol b , 16 with the estimates weighted by study characteristics as in Tol b. I next discuss the new estimates and their policy implications, deep uncertainty, and publication bias. Appendix figure 1 presents the probability density of the social cost of carbon for the entire sample and for those estimates based on a pure rate of time preference PRTP of 0, 1 or 3 percent per year.
To provide some context, burning a barrel of oil emits 0. This suggests that current climate policy can readily be justified by benefit—cost analysis and may indeed need to be tightened. Weitzman argues that the uncertainty about climate change is so large that the expectation of the social cost of carbon is unbounded. However, the evidence in appendix figure 1 challenges this assertion. Havranek et al.
However, the literature on the social cost of carbon does not appear to suffer from confirmation bias. The received wisdom is regularly challenged. However, the median and the 90 percent confidence interval for estimates of the social cost of carbon published in a particular year and published in previous years do not show frequent challenges to the received wisdom see figure 3. Thus figure 3 indicates that neither upward revisions nor downward revisions because the trends are statistically insignificant of the social cost of carbon are supported.
The median and 90 percent confidence interval of estimates of the social cost of carbon published in a particular year dots and bars and in previous years lines.
This review of estimates in the literature indicates that the impact of climate change on the economy and human welfare is likely to be limited, at least in the twenty-first century. In the short to medium run, climate change may well bring gains, particularly to those who depend on rain-fed agriculture as carbon dioxide fertilization makes plants more drought resistant and those who spend substantial money on heating as warming is faster in winter.
However, in the long run, the negative impacts of climate change are likely to outweigh the positive ones. These negative impacts will be substantially greater in poorer, hotter, and lower-lying countries. Because poverty causes vulnerability to climate change, development is a complementary strategy to GHG emissions reduction; any trade-off between slower economic growth and lower emissions needs to be carefully considered.
At the same time, climate change may affect the growth rate of the economy and may trap more people in poverty, although estimates of the size of these effects vary from negligible to substantial. Thus climate change would appear to be an important issue primarily for those who are concerned about the distant future, faraway lands, and remote probabilities.
Moreover, although recent research has substantially improved our understanding of the dynamics of the Pigou tax, our best estimate of the optimal carbon tax in the near term still ranges from a few tens to a few hundreds of dollars per ton of carbon, leaving ample room for political maneuvering. These qualitative insights are robust, but the quantitative assessment of the impacts of climate change is uncertain and incomplete.
This uncertainty is partly irreducible. We are, after all, estimating and valuing the impact of future climate change on future society. Further research is needed concerning several unresolved issues. First, natural scientists and economists tend to disagree about the seriousness of climate change, and have done so for many years Nordhaus a.
However, the reasons for this discrepancy, and indeed whether it is real, are not well understood and thus require further study to determine who is closer to the truth.
Second, the impact of climate change on numerous important issues—water resources, transport, migration, violent conflict, energy supply, space cooling, labor productivity, and tourism and recreation—has not received sufficient attention; there is either very little solid evidence, no conclusive evidence, or no quantification of welfare impacts. This means that the estimates of the impact of climate change are incomplete and we cannot know whether the bias is upwards or downwards until more research is conducted.
This reflects a wider understanding of, and concern for, the impact of climate change, not just on the environment, but also on the sustainability of company earnings. It was the worst flooding in 70 years and came as a result of heavy rainfall and tropical storms. But, like the scientists, they said they did not know how much worse. Planned European CO2 Emission reductions per sector, with the aim of reducing emissions by 80 per cent by relative to Holland, and P.
However, this also increases the uncertainty about the impact of climate change, which strengthens the case for GHG emissions reductions. It is unlikely that future research will overturn the fundamental finding that it is the poor who will suffer most from climate change and reducing poverty should be a key priority for policies aimed at alleviating the impact of climate change.
That being said, the quantification remains problematic and should be researched in greater detail. The impact of climate and climate change on economic growth and development is not well understood, and different studies have reached opposite conclusions. New data, preferably longer time series, and the application of the latest econometric techniques should shed new, perhaps decisive, light on these issues.
Climate policy advice is channeled through estimates of the social cost of carbon, which is very sensitive to the discount rate. However, the social cost of carbon aggregates not only over time, but also between impacts, across species, within and between societies, and across alternative futures. Although recent studies have made some progress in illustrating the importance of other parameters in the welfare function for the social cost of carbon, a comprehensive analysis is still some way off. There is also a disconnect between the assumptions made in integrated assessment models and the insights from behavioral and experimental economics.
Future meta-analyses may be able to determine whether there is a systematic relationship between model structure and the social cost of carbon. Climate policy is one of the defining issues of our time.