The Cost of Delaying Action to Stem Climate Change/Section 1

by Council of Economic Advisers

I. Introduction

The changing climate and increasing atmospheric greenhouse gas (GHG) concentrations are projected to accelerate multiple threats, including more severe storms, droughts, and heat waves, further sea level rise, more frequent and severe storm surge damage, and acidification of the oceans (USGCRP 2014). 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.

Emissions of GHGs such as carbon dioxide (CO₂) generate a cost that is borne by present and future generations, that is, by people other than those generating the emissions. These costs, or economic damages, include costs to health, costs from sea level rise, and damage from increasingly severe storms, droughts, and wildfires. These costs are not reflected in the price of those emissions. In economists’ jargon, emitting CO₂ generates a negative externality and thus a market failure. Because the price of CO₂ emissions does not reflect its true costs, market forces alone are not able to solve the problem of climate change. As a result, without policy action, there will be more emissions and less investment in emissions-reducing technology than there would be if the price of emissions reflected their true costs.

This report examines the cost of delaying policy actions to stem climate change, and reaches two main conclusions. First, delaying action is costly. If a policy delay leads to higher ultimate CO₂ concentrations, then that delay produces persistent additional economic damages caused by higher temperatures, more acidic oceans, and other consequences of higher CO₂ concentrations. Moreover, if delay means that the policy, when implemented, must be more stringent to meet a given target, then it will be more costly.

Second, uncertainty about the most severe, irreversible consequences of climate change adds urgency to implementing climate policies now that reduce GHG emissions. In fact, climate policy can be seen as climate insurance taken out against the most damaging potential consequences of climate change—consequences so severe that these events are sometimes referred to as climate catastrophes. The possibility of climate catastrophes leads to taking prudent steps now to sharply reduce the chances that they occur.

The costs of inaction underscore the importance of taking meaningful steps today towards reducing carbon emissions. An example of such a step is the Environmental Protection Agency’s (EPA) proposed rule (2014) to regulate carbon pollution from existing power plants. By adopting economically efficient mechanisms to reduce emissions over the coming years, this proposed rule would generate large positive net benefits, which EPA estimates to be in the range of $27 - 50 billion annually in 2020 and $49 - 84 billion in 2030. These benefits include benefits to health from reducing particulate emissions as well as benefits from reducing CO₂ emissions.

Delaying 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. As a result, delayed mitigation can result in two types of cost, which we would experience in different proportions depending on subsequent policy choices.

First, if delay means an increase in the ultimate end-point concentration of CO₂, then delay will result in additional warming and additional economic damages resulting from climate change. 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. But global temperatures have already risen nearly 1° above preindustrial levels, and it will require concerted effort to hold temperature increases to within the narrow range consistent with small costs.^[1] For temperature increases of 3° Celsius or more above preindustrial levels, the aggregate economic damages from climate change are expected to increase sharply.

Delay that causes a climate target to be missed creates large estimated economic damages. For example, a calculation in Section II of this report, based on a leading climate model (the DICE model as reported in Nordhaus 2013), shows that if a delay causes the mean global temperature increase to stabilize at 3° Celsius above preindustrial levels, instead of 2°, that delay will induce annual additional damages of approximately 0.9 percent of global output, as shown in Figure 1.^[2] To put this percentage in perspective, 0.9 percent of estimated 2014 U.S. GDP is approximately $150 billion.^[3] The next degree increase, from 3° to 4°, would incur greater additional annual costs of approximately 1.2 percent of global output. These costs are not one-time: they are incurred year after year because of the permanent damage caused by additional climate change resulting from the delay.

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. 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.^[4]

The research discussed in Section II of this report shows that any short run gains from delay tend to be outweighed by the additional costs arising from the need to adopt a more abrupt and stringent policy later.^[5] An analysis of the collective results from that research, described in more detail in Section II, suggests that the cost of hitting a specific climate target increases, on average, by approximately 40 percent for each decade of delay. These costs are higher for more aggressive climate goals: the longer the delay, the more difficult it becomes to hit a climate target. Furthermore, the research also finds that delay substantially decreases the chances that even concerted efforts in the future will hit the most aggressive climate targets.

Although global action is essential to meet climate targets, unilateral steps both encourage broader action and benefit the United States. Climate change is a global problem, and it will require strong international leadership to secure cooperation among both developed and developing countries to solve it. America must help forge a truly global solution to this global challenge by galvanizing international action to significantly reduce emissions. By taking credible steps toward mitigation, the United States will also reap the benefits of early action, such as investing in low-carbon infrastructure now that will reduce the costs of reaching climate targets in the future.

Climate 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. 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. For example, the Working Group I contribution to the IPCC’s Fifth Assessment Report (IPCC WG I AR5 2013) provides a likely range of 1.5° to 4.5° Celsius for the equilibrium climate sensitivity, which is the long-run increase in global mean surface temperature that is caused by a sustained doubling of atmospheric CO₂ concentrations. The upper end of that range would imply severe climate impacts under current emissions trajectories, and current scientific knowledge indicates that values in excess of this range are also possible.^[6]

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. We are already witnessing one of these events—the rapid trend towards disappearance of late-summer Arctic sea ice. A recent study from the National Research Council (NRC 2013) found that this strong trend toward decreasing sea-ice cover could have large effects on a variety of components of the Arctic ecosystem and could potentially alter large-scale atmospheric circulation and its variability. The NRC also found that another large-scale change has been occurring, which is the critical endangerment or loss of a significant percentage of marine and terrestrial species. Other events judged by the NRC to be likely in the more distant future (after 2100) include, for example, the possible rapid melting of the Western Antarctic ice and Greenland ice sheets and the potential thawing of Arctic permafrost and the consequent release of the potent GHG methane, which would accelerate global warming. These and other potential large-scale changes are irreversible on relevant time scales—if an ice sheet melts, it cannot be reconstituted—and they could potentially have massive global consequences and costs. For many of these events, there is thought to be a “tipping point,” for example a temperature threshold, beyond which the transition to the new state becomes inevitable, but the values or locations of these tipping points are typically unknown.

Section III of this report examines the implications of these possible climate-related catastrophes for climate policy. Research on the economic and policy implications of such threats is relatively recent. As detailed in Section III, a conclusion that clearly emerges from this young but active literature is that the threat of a climate catastrophe, potentially triggered by crossing an unknown tipping point, implies erring on the side of prudence today. Accordingly, in a phrase used by Weitzman (2009, 2012), Pindyck (2011), and others, climate policy can be thought of as “climate insurance.” The logic here is that of risk management, in which one acts now to reduce the chances of worst-case outcomes in the future. Here, too, there is a cost to delay: the longer emission reductions are postponed, the greater are atmospheric concentrations of GHGs, and the greater is the risk arising from delay.

Other Costs of Delay and Benefits of Acting Now

An additional benefit of adopting meaningful mitigation policies now is that doing so sends a strong signal to the market to spur the investments that will reduce mitigation costs in the future. 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. 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.^[7] Thus private sector investment in low-carbon technologies requires confidence that those investments, if successful, will pay off, that is, the private sector needs to have confidence that there will be a market for low-carbon technologies now and in the future. Public policies that set out a clear and ongoing mitigation path provide that confidence. Simply waiting for a technological solution, but not providing any reason for the private sector to create that solution, is not an effective policy. 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. These advances are protected through the patent system and as trade secrets, but those advances will only transpire if it is clear that they will have current and future value. In other words, policy action induces technological change.^[8] Although a full treatment of the literature on technological change is beyond the scope of this report, providing the private sector with the certainty needed to invest in low-carbon technologies and produce such technological change is a benefit of adopting meaningful mitigation policies now.

Finally, because this report examines the economic costs of delay, it focuses on actions or consequences that have a market price. But the total costs of climate change include much that does not trade in the market and to which it is difficult to assign a monetary value, such as the loss of habitat preservation, decreased value of ecosystem goods and services, and mass extinctions. Although some studies have attempted to quantify these costs, including all relevant climate impacts is infeasible. Accordingly, the monetized economic costs of delay analyzed in this report understate the true total cost of delaying action to mitigate climate change.

1. The Working Group III contribution to the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (IPCC WG III AR5 2014) does not analyze scenarios producing temperatures in 2100 less than 1.5 Celsius above preindustrial, because this is considered so difficult to achieve.
2. Nordhaus (2013) stresses that these estimates “are subject to large uncertainties…because of the difficulty of estimating impacts in areas such as the value of lost species and damage to ecosystems.” (pp. 139-140).
3. These percentages apply to gross world output and the application of them to U.S. GDP is illustrative.
4. The 2010 National Research Council, Limiting the Magnitude of Future Climate Change, also stressed the importance of acting now to implement mitigation policies as a way to reduce costs. The NRC emphasized the importance of technology development in holding down costs, including by providing clear signals to the private sector through predictable policies that support development of and investment in low-carbon technologies.
5. The IPCC WG III AR5 (2014) includes an extensive discussion of mitigation, including sectoral detail, potential for technological progress, and the timing of mitigation policies.
6. It is important to note that, as a global average, the equilibrium climate sensitivity masks the expectation that temperature change will be higher over land than the oceans, and that there will be substantial regional variations in temperature increases. The equilibrium climate sensitivity describes a long-term effect and is only one component of determining near term warming due to the buildup of GHGs in the atmosphere.
7. Popp, Newell, and Jaffe (2010) provide a thorough review of the literature regarding technological change and the environment.
8. For example, Popp (2003) provides empirical evidence that Title IV of the 1990 Clean Air Act Amendments (CAAA) led to innovations that reduced the cost of the environmental technologies that reduced SO₂ emissions from coal-fired power plants. Other literature shows evidence linking environmental regulation more broadly to innovation (e.g., Popp 2006, Jaffe and Palmer 1997, Lanjouw and Mody 1996).