Economics and the Environment: The Shadow Price of Greenhouse Gases and Aerosols

This paper describes a model which integrates economic growth assumptions and GHG emissions assumptions with a model of the global climate. The model may not be used for the purpose of calculating the business as usual path of global warming over the very long term. Furthermore; given an abatement cost function for Carbon emissions and a temperature dependent damage function culled from the literature the model may also be used to determine the optimal reduction in GHG emissions and the implied shadow price of GHG emissions. The shadow prices are important for determining the cost effectiveness of projects aiming to reduce GHG emissions. The paper calculates the marginal rate at which different GHG emissions can be traded whilst holding the present value of damages constant. In general this rate is different from that suggested by the global warming potential of the different gases. The currently optimal tax on carbon emissions is estimated to be $5.87 per tonne. The paper also deals with sulphate aerosols which are thought to backscatter incoming solar radiation and help to mask the onset of climate change. In some perverse sense sulphur emissions possess an economic value in their ability to fend off global warming. Large scale desulphurisation measures could accelerate global climate change. Using exogenous input assumptions based on the IPCC’s best guess scenario and parameter assumptions which have found support in the literature the paper calculates the impact of business as usual emissions on global GNP. These are compared with the impacts experienced under an optimal control solution and to what GNP would have been in the absence of a Greenhouse Effect. What emerges is that Greenhouse Effect does little to reduce economic growth and that virtually nothing can be done to retrieve these losses anyway even by following the optimal abatement strategy. Furthermore protocols involving the stabilisation of emissions or concentrations at current levels are all much worse than doing nothing. Although the message seems to be that it matters little whether carbon emissions are cut or not such a view would be premature. Great uncertainty is attached to virtually all the parameters in the model, not least those relating to the damage function and the sensitivity of the climate to heightened radiative forcing. Moreover this analysis proceeds by replacing the uncertain parameters with their expected values. The question models such as this therefore address is what would be the optimal policy to follow if all the parameters were known with perfect certainty. But since it is absolutely not the case that all the parameters are known with perfect certainty the results of these exercises are not strictly the policy relevant and may yield poor policy guidance.