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While the climate science debate is approaching closure on the big questions , the climate economics debate is just beginning. Doubt or uncertainty about the science is no longer important in shaping public policy; the influence of the climate skeptics is rapidly diminishing. Instead, the divisive issue now is the fear that vigorous climate initiatives could hurt the economy—a fear that is implicitly endorsed by many mainstream economists. The alleged danger is that we might do “too much” to reduce emissions , resulting in costs that would outweigh some economists’ estimates of the benefits. As President George W. Bush said in 2005, “Kyoto would have wrecked our economy. I couldn’t in good faith have signed Kyoto.”1 This fear has had bipartisan support: Bush was echoing the conclusion of a 1998 study by the Department of Energy’s Energy Information Administration (EIA), which projected that the moderate emission reductions called for by the Kyoto Protocol could result in losses of up to 4 percent of U.S. gross domestic product (GDP).2 The EIA analysis was based on conventional cost-benefit analyses of climate policy, and was reviewed by some of the most prominent economists in the field. The Kyoto analyses were not an aberration. Many economists have achieved a breathtaking timidity in the face of the climate crisis. For example, Yale economist William Nordhaus, the best-known economist writing about climate change today, pays lip service to scientists’ calls for decisive action. He finds, however, that the “optimal” policy is a very small carbon tax that would reduce emissions only 25 percent below “business as usual” levels by 2050—in other words, allowing emissions to rise to almost double the 1990 level by mid-century.3 (In contrast, several European governments and U.S. states have called for reductions of 50 percent to 80 percent below 1990 levels by 2050.) Yale economist Sheila Olmstead and Harvard economist Robert Stavins 3 Cost-Benefit Analysis of Climate Change: Where It Goes Wrong Frank Ackerman 62 F. Ackerman deem the Kyoto Protocol “deeply flawed” and recommend instead that we allow emissions to rise for a few decades before requiring any reductions .4 AEI-Brookings economist Robert Hahn, MIT economists Paul Joskow and Richard Schmalensee, and others, filed a legal brief before the Supreme Court—funded by automobile dealers associations across the country—opposing EPA regulation of carbon emissions from automobiles , claiming that such regulation would be expensive and inefficient .5 Antienvironmental gadfly Bjørn Lomborg endorses the guess by Richard Tol, a widely published European climate economist, that the optimal tax on carbon dioxide emissions is a mere $2 per ton.6 These recommendations, and similar ones from other economists, rest on a series of errors. High discount rates, standard in economics, trivialize harms occurring in the future: at a 6 percent discount rate, it is not even “worth” spending $3 today to prevent $1000 of damages 100 years from now. Dubious hypotheses about the advantages of global warming have crept into the models; Nordhaus assumes, for example, that rich Northern countries will experience warmer weather as a valuable subjective benefit, offsetting some of the real damages from climate change.7 An abstract, unrealistic theory of efficiency is still widely used to attack commonsense regulation of auto emissions and much more.8 The inescapable uncertainty about the tipping point for catastrophic changes is replaced by “best guess” estimates about future growth and how to increase it. Put enough of these assumptions together, and the problem threatens to disappear : the combination of high discount rates and hypothesized nearterm benefits would, indeed, make the optimal carbon tax appear to be close to zero. Tol’s $2 per ton of carbon dioxide would raise gasoline prices by all of $0.02 per gallon, an increase that would not make the oil industry lose any sleep—or make the world lose any noticeable quantity of emissions. New debate over climate economics erupted in late 2006 with the Stern Review, a report to the British government prepared by former World Bank economist Nicholas Stern. In his review, Stern found that the damages expected from business as usual would be many times more expensive than the costs of a dramatic reduction in carbon emissions. Although it is a ponderous and imperfect document, the Stern Review clearly demonstrates that economic judgments of climate change are strongly dependent on a handful of key assumptions, such as the choice of a discount rate and the treatment of uncertainty. Many economists, deeply...

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