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2018-09-10 | EfD Blog

What does it really cost to save the climate?

Jessica Coria

There are no economic arguments for postponing acting on the climate issue. Past experience shows that costs of action are often overestimated , while the costs of inaction are often underestimated. This argues Jessica Coria in Swedish daily Svenska Dagbladet.

This year’s northern-hemisphere summer has shown that most of the countries worldwide are not yet prepared to the life in the era of the climate change and that perturbations to daily life can be devastating. Just in Sweden, forest fires in 2018 have burned more than 25000 hectares in total (10 times more than the annual average) and the total grain harvested has decreased by at least 25%.
Worldwide, heatwave deaths in Japan, Algeria and Canada, and wildfires in California and Greece have become front-page news around the world.

The wildfires have put climate high on the agenda in the oncoming Swedish election, heating up the discussions about how much action is needed and when is the time for action. But, are there real economic arguments for which climate mitigation must be delayed? Has not the empirical evidence so far showed us that worldwide the costs of environmental protection are often overestimated ex-ante while the costs of inaction are dangerously underestimated, large and irreversible?

The US Acid Rain Program - which in the 1990s resulted in major emission reductions of sulfur dioxide and nitrogen oxides from the power sector - provides us with a good example. Ex-post estimates indicate that the realized costs of this regulation were about half of what was forecasted prior to implementation. This was partly because the regulation brought down abatement costs over time by providing incentives for innovation in equipment and operating procedures but also because it incentivized input substitution, from high to low sulfur coal, as a cost-effective compliance strategy.

And then we have REACH - the regulation on the registration, evaluation, authorization, and restriction of chemicals in the European Union. The regulation was initially demonized under the argument that it would shift chemical-intensive production toward countries or regions with less stringent regulation. Most studies of the potential costs of REACH yielded quite broadly consistent estimates, the ones sponsored by industry groups generated cost estimates several times higher. The best known study of this type was conducted for the German industry confederation and predicted job losses of up 6.4 percent of GDP in Germany alone! Ex-post estimates showed that the actual costs were about 0.8 percent of the companies’ value added and less than 0.2 percent of their revenues - way below those predicted ex-ante.

In the climate arena,  the costs for solar and wind power technologies - one thought to be so high-  has steadily declined over the years, making renewable power sources increasingly competitive and showing that a quick energy transition from fossil fuels to renewables is indeed possible. The rate of cost reduction has been wholly impressive! The cost of electricity from solar photovoltaic modules fell by almost three-quarters in 2010-2017 and continues to decline while wind turbine prices have fallen by around half over a similar period. Estimates indicate that electricity from renewable sources will be consistently cheaper than from fossil fuels by 2020, and in countries like India (the world’s third largest emitter of greenhouse gases) this has already happened!

Thus, the lesson that one can learn from such experiences is that it is easy to overestimate the costs of environmental protection because it is difficult to foresee the role of incentives promoting the search for creative and low cost solutions to environmental problems, as well as the role of learning and continuous technological improvements. Quite the opposite, evidence shows that the costs of “inaction” are often underestimated and that they can turn out to be extremely high. Good examples of this are the storms: even if there are no clear signs that there will be more storms in the future due to climate change, they are expected to become more powerful in a warmer climate and cause more damage.  Many can still remember the effects of the storm Gudrun which hit Sweden in 2005, and it has been rated as the most serious natural disaster that Sweden has faced in modern times. In total, damage costs have been estimated at about SEK 20.8 billion. In addition, buildings, infrastructure and other property were damaged, and 18 people lost their lives.

The costs of climate inaction are also underestimated since they are broad, including not only decreases in productivity or infrastructure, but also increases in mortality and morbidity, the lack of attainment of educational outcomes, and increased social conflicts and crime (since deviations in resource scarcity due to climate fluctuations fuel conflict over their distribution). All these effects are difficult to quantify, they are widely dispersed and often they are not obvious to the public until it is often too late! There are also distributional and gender components, as the poorer and often women are more vulnerable to extreme climate events. Not only are the disadvantaged groups more exposed to climate hazards (as they often live in coastal and near-shore areas more exposed to coastal flooding due to sea level rise and river flooding due to higher precipitation), but they also have a lower ability to cope with and recover from the damage.

2018 has become one of the warmest years ever registered in history. Unfortunately, the same can be said about the previous 3 years. April 2018 marked the 400th consecutive month with temperatures above the 20th century average and the US National Oceanographic and Atmospheric Administration – which has been tracking natural disasters since 1980 - has seen a clear upward trend in their number and severity. We live in the era of climate change and the time of action is now! We need climate policies that do more and do it quicker, and we need policies that allow adapting to a climate that has already changed. Doing nothing will cost more than acting and by continuing to delay significant reductions in greenhouse gas emissions we are handing young people a huge bill for the future; implementing climate change mitigation and adaption measures now is the only way to reduce such a bill.