Early and stringent action to rapidly and dramatically cut climate pollution is the best path for the global economy, according to a new working paper by American scientists.
“Inactivity leads to temperature change, increased CO2 in the atmosphere and economic damage that cannot be undone by spending more on abatement,” wrote Adam Michael Bauer and Christian Proistosescu of the University of Illinois at Urbana-Champaign and Gernot Wagner of Columbia Business School.
Many climate economy models have traditionally shown that cutting emissions as strongly as would be required by the Paris Climate Agreement of 2015 would be too costly. According to that agreement, emissions would need to be reduced by 45% by 2030 and reach net zero by 2050 to keep global warming to no more than 1.5 degrees Celsius.
"Inactivity leads to temperature change, increased CO2 in the atmosphere and economic damage that cannot be undone by spending more on abatement."Adam Michael Bauer and Christian Proistosescu
This new model is the first integrated assessment to provide economic support for the Paris warming targets.
Israel has signed the Paris Agreement and has set a goal to reduce greenhouse gas emissions by 27% from 2015 levels by 2030, and by 85% by 2050.
Israeli greenhouse gas emissions have fallen by around 10% in per-capita terms in the past decade, according to the latest OECD Economic Survey on the country. However, emissions from transport, industrial processes and waste have continued to increase enormously, the report said.
Most recently, the government established a ministerial committee on the climate and the environment to oversee the implementation of international obligations, such as the Paris Agreement.
How did the American economists determine the need for speed?
The researchers developed a climate-economics model that includes the latest estimates from the 2022 Intergovernmental Panel on Climate Change (IPCC) report and “builds on three decades of work in the climate-economic literature, merging it with insights from the financial modeling literature have largely been developed in parallel,” the authors explain. They also created what they call the “Carbon Asset Pricing Model” (CAP6), which prices CO2 emissions as an asset with negative returns.
Specifically, the researchers attempt to prove the need to take action now based on three factors. The first is simply the impact of climate damages based on the latest science.
In the past 50 years, the economy has grown at an average rate of around 3.5% annually. However, many recent climate reports show that climate damage and the recovery efforts required to fix it could affect economic growth.
For example, a 2021 survey published by the Institute for Policy Integrity found that 76% of economists surveyed believe that it is “likely or very likely that climate change will negatively affect global economic growth rates.”
Those surveyed had published climate-related research in the field’s highest-ranked academic journals.
“Time is money,” Wagner said. “The beauty and ugliness of compound economic growth mean that early action is significantly more valuable than most think. We saw the warp-speed version during COVID-19, where the action was measured in days, or weeks. With climate, it’s years and decades, but the logic is no different. Act early, and the benefits will be exponentially larger.”
"Learning by doing"
The second factor is the concept of “learning by doing.”
“Learning by doing means that the more we cut emissions, the better we get at cutting emissions, making cutting emissions cheaper,” Wagner told The Jerusalem Post. “It is crucial to include those factors in any model like this. We are not the first to do this, but we show how important this step is.”
Finally, as noted above, unlike most prior such models, the team treats carbon in the atmosphere like an asset, allowing them to apply standard economic and financial models.
“When you treat carbon in the atmosphere like an asset with a negative payoff and apply standard asset pricing models, you get that risk and uncertainty dominate,” Wagner explained. “In other words, we know enough to act, but the stuff we do not know makes things even worse.”
Based on the researchers’ model, CO2 should be priced at minimally $200 per ton.
“The social cost of carbon, the external cost, is indeed very large, and yes, it should be polluters paying rather than society,” Wagner said. “For example, look at flights. Don’t ban them, but view them as a high-value activity that also causes lots of pollution. It is OK to fly as long as you pay for the cost.”
For example, according to Sustainabletravel.org, a roundtrip flight from Tel Aviv to New York would emit about 2.54 metric tons of CO2 per passenger. By Wagner and team’s calculations, there should be a $500 price increase for that flight, which each passenger should pay.
“Someone is already paying for that CO2, of course: society,” Wagner said. “All eight billion of us are paying a fraction of a penny so one of us can book a flight and fly across the Atlantic. The cost must be internalized. As the person aboard the flight, I should pay the full price.”
Wagner said that investing in clean over dirty energy now is often seen as taking out an insurance policy.
“Unmitigated climate change, after all, poses financial risks; cutting carbon, thus, is insurance,” he said. But he said that the whole story is actually must simpler.
“Investing in clean over dirty is investing in technologies over commodities. Commodities like oil, coal and gas will always fluctuate, posing enormous risks and uncertainties. Technologies, meanwhile, can only improve over time. We won’t unlearn. Solar, wind, batteries, etc., will get cheaper and better over time,” Wagner said.
Moreover, the world can afford it. Wagner said that the amount needed to achieve the Paris Agreement goals varies. Canadian economist Mark Carney has posited it would cost around $100 trillion between now and 2050, Wagner said. McKinsey & Company has said it would take $25 trillion.
“Total additional money, though, is significantly smaller,” Wagner said. “In McKinsey’s case, it is the $25 trillion over 30 years or less than $1 trillion per year globally. There are hurdles aplenty, especially the large shifts necessary from dirty to clean, but is there enough money in the world to get the world to net zero? Yes.”