Some global economics 233Figure 9.3The
application of classical cost
benefit analysis to the
mitigation of climate
change, showing the
shape of the curve of
damage costs and
mitigation costs as a
function of atmospheric
carbon dioxide emissions.
On the assumption that
economic costs are the
only consideration, the
arrow shows the ‘optimal’
much larger degree of climate change would considerably enhance the reduction level.
possibilities of singular events (see Table 7.4), irreversible change and
of possible surprises.
Since the main contribution to global warming arises from carbon
dioxide emissions, attempts have also been made to express these costs
in terms of the cost per tonne of carbon as carbon dioxide emitted from
human activities. A simple, but crude calculation can be carried out as
follows. Consider the situation when carbon dioxide concentration in
the atmosphere has doubled from its pre-industrial value, which will
occur when an additional amount of carbon as carbon dioxide of about
800 Gt from anthropogenic sources has been emitted into the atmosphere
(see Figure 3.1 and recall that about half the carbon dioxide emitted
accumulates in the atmosphere). This carbon dioxide will remain in the
atmosphere on average for about one hundred years. Assuming a figure
of two per cent of global world product (GWP) – or $US 600 billion per
annum – as the cost of the damage due to global warming in that situation,
and assuming also that the damage remains over the one hundred years
of the life-time of carbon dioxide in the atmosphere, the cost per tonne
of carbon turns out to be about $US 70.
Calculations of the cost per tonne of carbon can be made with much
more sophistication by considering that it is theincrementaldamage cost
(that is, the cost of the damage due to one extra tonne of carbon emitted
now) that is really required and also by allowing through a discount rate
for the fact that it is damage some timein the future that is being costed
now. Estimates made by different economists then range over $US 5–125
per tonne of carbon^10 – the very large range being due to the different as-
sumptions that have been made. The estimates are particularly sensitive
to the discount rate that is assumed; values at the top end of the range
above about $US 50 have assumed a discount rate of less than two per
cent; those at the bottom end have assumed a discount rate around five
per cent.^11 The dominant effect of the discount rate will be clear when it
is realised that over fifty years a two per cent discount rate devalues costs