Council of Economic Advisers

“ The longer that action is postponed, the greater will be the concentration of CO2 in the atmosphere and the greater is the risk. Just as businesses and individuals guard against severe financial risks by purchasing various forms of insurance, policymakers can take actions now that reduce the chances of triggering the most severe climate events. And, unlike conventional insurance policies, climate policy that serves as climate insurance is an investment that also leads to cleaner air, energy security, and benefits that are difficult to monetize like biological diversity. ”

“ Events such as the rapid melting of ice sheets and the consequent increase of global sea levels, or temperature increases on the higher end of the range of scientific uncertainty, could pose such severe economic consequences as reasonably to be thought of as climate catastrophes. Confronting the possibility of climate catastrophes means taking prudent steps now to reduce the future chances of the most severe consequences of climate change. ”

“ But low-carbon technologies, and environmental technologies more generally, face a unique barrier: their benefits – the reduction in global impacts of climate change – accrue to everyone and not just to the developer or adopter of such technologies. ”

“ In each case, a model computes the path of cost-effective mitigation policies, mitigation costs, and climate outcomes over time, constraining the emissions path so that the climate target is hit. Each path weighs technological progress in mitigation technology and other factors that encourage starting out slowly against the costs that arise if mitigation, delayed too long, must be undertaken rapidly. Because the models typically compute the policy in terms of a carbon price, the carbon price path computed by the model starts out relatively low and increases over the course of the policy. ”

“ The second type of cost of delay is the increased cost of reducing emissions more sharply if, instead, the delayed policy is to achieve the same climate target as the non-delayed policy. Taking meaningful steps now sends a signal to the market that reduces long-run costs of meeting the target. Part of this signal is that new carbon-intensive polluting facilities will be seen as bad investments; this reduces the amount of locked-in high-carbon infrastructure that is expensive to replace. ”

“ As is discussed in Section II, economists who have studied the costs of climate change find that temperature increases of 2° Celsius above preindustrial levels or less are likely to result in aggregate economic damages that are a small fraction of GDP. This small net effect masks important differences in which some regions could benefit somewhat from this warming while other regions could experience net costs. ”

“ Although public financing of basic research is warranted because many of the benefits of basic research cannot be privately appropriated, many of the productivity improvements and cost reductions seen in new technologies come from incremental advances and process improvements that only arise through private-sector experience producing the product and learning-by-doing. ”

“ Because CO2 accumulates in the atmosphere, delaying action increases CO2 concentrations. Thus, if a policy delay leads to higher ultimate CO2 concentrations, that delay produces persistent economic damages that arise from higher temperatures and higher CO2 concentrations. Alternatively, if a delayed policy still aims to hit a given climate target, such as limiting CO2 concentration to given level, then that delay means that the policy, when implemented, must be more stringent and thus more costly in subsequent years. ”

“ To avoid this major loss, an individual will buy home insurance. That insurance is provided by the market because an insurance company can offer home insurance to many homeowners in different regions of the country, and through diversification the company will on average have many homeowners paying premiums and a few collecting insurance, so diversification allows the company to run a relatively low-risk business. But risks from severe climate change are not diversifiable because their enormous costs would impact the global economy. ”

“ Beyond the sorts of gradual changes we have already experienced, global warming raises additional threats of large-scale changes, either changes to the global climate system, such as the disappearance of late-summer Arctic sea ice and the melting of large glacial ice sheets, or ecosystem impacts of climate change, such as critical endangerment or extinction of a large number of species. ”

“ The vast majority of studies estimate that delayed action incurs greater mitigation costs compared to immediate action. Furthermore, some models used in the research predict that the most stringent climate targets are feasible only if immediate action is taken under full participation. One implication is that considering only comparisons with numerical cost estimates may understate the true costs of delay, as failing to reach a climate target means incurring the costs from the associated climate change. ”

“ Climate Policy as Climate InsuranceClimate Policy as Climate Insurance Individuals and businesses routinely purchase insurance to guard against various forms of risk such as fire, theft, or other loss. This logic of self-protection also applies to climate change. Much is known about the basic science of climate change: there is a scientific consensus that, because of anthropogenic emissions of CO2 and other GHGs, global temperatures are increasing, sea levels are rising, and the world’s oceans are becoming more acidic. ”

“ An argument sometimes made is that mitigation policies should be postponed until new low-carbon technologies become available. Indeed, ongoing technological progress has dramatically improved productivity and welfare in the United States because of vast inventions and process improvements in the private sector (see for example CEA 2014, Chapter 6) . The private sector invests in research and development, and especially in process improvements, because those technological advances reap private rewards. ”

“ Second, taking steps now to reduce CO2 emissions signals the value of developing new low- and zero-emissions technologies, so additional steps towards a zero-carbon future can be taken as policy action incentivizes the development of new technologies. For both reasons, the least-cost mitigation path to achieve a given concentration target typically starts with a relatively low price of carbon to send these signals to the market, and subsequently increases as new low-carbon technology becomes available. ”

“ These and other climate changes are expected to be harmful, on balance, to the world’s natural and economic systems. Nevertheless, uncertainty remains about the magnitude and timing of these and other aspects of climate change, even if we assume that future climate policies are known in advance. ”

“ At higher climate sensitivities, the larger temperature response to atmospheric GHG concentrations would make it even more likely that we would cross temperature-related tipping points in the climate system. The potential for additional releases of methane, a potent GHG, from thawing permafrost, thus creating a positive feedback to further increase temperatures, is an example of such a tail risk event. ”

“ Delaying Climate Policies Increases CostsDelaying Climate Policies Increases Costs Delaying climate policies avoids or reduces expenditures on new pollution control technologies in the near term. But this short-term advantage must be set against the disadvantages, which are the costs of delay. The costs of delay are driven by fundamental elements of climate science and economics. Because the lifetime of CO2 in the atmosphere is very long, if a mitigation policy is delayed, it must take as its starting point a higher atmospheric concentration of CO2. ”

“ Small trends in soil carbon releases have been already observed. Increasing release of methane from ocean methane hydrates: This is a particularly potent long-term risk due to hydrate deposits through changes in ocean water temperature; the likely timescale for the physical processes involved spans centuries, however, and there is low risk this century. Rapid state changes in ecosystems, species range shifts, and species boundary changes: Research shows that climate change is an important component of abrupt ecosystem state-changes, with a prominent example being the Sahel region of Africa. ”

“ The costs of delay in these studies depend on a number of factors, including the length of delay, the climate target, modeling assumptions, future baseline emissions, future mitigation technology, delay scenarios, the participants implementing the policy, and geographic location. More aggressive targets are more costly to achieve, and meeting them is predicted to be particularly costly, if not infeasible, if action is delayed. ”

“ Higher carbon dioxide concentrations in the atmosphere, by increasing the acidity of the oceans, could also trigger and lock in permanent changes to ocean ecosystems, such as diminished coral reef-building, which decreases biodiversity supported on reefs and decreases the breakwater effects that protect shorelines. ”

“ In complementary work, Barro (2013) considers a simplified model in which the only benefits of reducing carbon emissions come from reducing the probability of potential climate catastrophes, and finds that this channel alone can justify investment in reducing GHG pollution of one percent of GDP or more, beyond what would normally occur in the market absent climate policy.
↑ This logic has its basis in expected utility theory. Because individuals are risk averse, each additional dollar of consumption provides less value, or utility, to individuals than the previous dollar. ”

“ However, projected temperature increases even under immediate action fall in a range with a strong consensus that the costs of climate change exceed such benefits. The cost estimates presented here are net of any benefits expected to accrue. ↑ Some models explicitly identify the carbon price path that minimizes total social costs. These optimization models always find equal or greater costs for scenarios with a delay constraint. Other models forecast carbon prices that result in the climate target but do not demand that the path results in minimal cost. ”

“ Executive SummaryExecutive Summary The signs of climate change are all around us. The average temperature in the United States during the past decade was 0.8° Celsius (1.5° Fahrenheit) warmer than the 1901-1960 average, and the last decade was the warmest on record both in the United States and globally. Global sea levels are currently rising at approximately 1.25 inches per decade, and the rate of increase appears to be accelerating. Climate change is having different impacts across regions within the United States. ”

“ Each estimate is a paired comparison of a delay scenario and its companion scenario without delay. To make results comparable across studies, we convert the delay cost estimates (presented in the original studies variously as present values of dollars, percent of consumption, or percent of GDP) to percent change in costs as a result of delay. [10] We capture variation across study and experimental designs using variables that encode the length of the delay in years; the target CO2e concentration; whether only the relatively more-developed countries act immediately (partial delay) ”

“ An additional, related source of climate uncertainty is the possibility of irreversible, large-scale changes that have wide-ranging and severe consequences. These are sometimes called abrupt changes because they could occur extremely rapidly as measured in geologic time, and are also sometimes called climate catastrophes. ”

“ Table 1 presents the results of multiple regression analysis that summarizes how various factors affect predictions from the included studies, holding constant the other variables included in the regression. The dependent variable is the cost of delay, measured as the percentage increase relative to the comparable no-delay scenario, and the length of delay is measured in decades. ”

“ One of the challenges in assessing these large-scale events is that some of the most extreme events could occur in the distant future, and valuing consumption losses beyond this century raises additional uncertainty about intervening economic growth rates and questions about how to discount the distant future. ”

“ In the Energy Modeling Forum simulations in Clarke et al. (2009) , the median additional cost (global present value) for a 20-year delay is estimated to be $0.7 trillion for 650 ppm CO2e but a substantially greater $4.7 trillion for 550 ppm CO2e. Many of the models in these studies suggest that delay causes a target of 450 ppm CO2e to be much more costly to achieve, or possibly even infeasible. ”

“ One approach is to build the effects of large-scale changes into IAMs, either by modeling the different risks explicitly or by simulation using heavytailed distributions for key parameters such as the equilibrium climate sensitivity or parameters of the economic damage function. ”

“ The CO2e targets translate roughly into ranges of temperature changes as estimated by climate models and into the cumulative GHG emissions budgets discussed in some other climate literature. More stringent concentration targets decrease the odds that global average temperature exceeds 2°C above preindustrial levels by 2100. ”