Economic Aspects of Global Warming and Climate Change

4212 words (17 pages) Essay in Economics

20/02/19 Economics Reference this

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Abstract

The issue of global warming and climate change has proven to be one of the most controversial and difficult problems facing all the nations of the world.  Assessing the impact of climate change is extremely complex as it is very difficult to project the future and assess the hypothetical impact it will have on the world.  Additionally, it is unknown how technological progress will respond and potentially alter the effects of global warming.  This paper will focus on some impacts of global warming and climate changes on the global economy and review possible methods of mitigating the adverse effects.

Introduction

Climate change is one of the most challenging problems facing the world community.  According to NASA, global warming is a natural process.  A layer of greenhouse gases which include water vapor, carbon dioxide (CO2), methane and nitrous oxide acts as a thermal blanket for the Earth, absorbing heat and warming its surface to an average temperature of 59 degrees Fahrenheit which help sustain life (“National Aeronautics and Space Administration”, 2017).  Without this natural cover, the Earth’s surface would be colder than it is today, making the planet freezing and mostly likely uninhabitable.

However, scientists are concerned that increasing concentrations of greenhouse gases in the atmosphere are causing an unprecedented rise in global temperatures, with potentially harmful consequences for the environment, human health and the economy.  We are adding to the natural greenhouse effect with emissions from industry and agriculture, trapping more energy and increasing the temperature. The possible causes of global warming are numerous.  But according to Environmental Protection Agency, the most concerning and alarming are manmade emissions of CO2 caused by burning fossil fuels and cutting down carbon-absorbing trees.

Other greenhouse gases such as methane and nitrous oxide are also released through human activities, but their presence is relatively small when compared to carbon dioxide.  According to a 2016 BBC article, the level and concentration of CO2 in our atmosphere is significantly higher than it was at the beginning of the industrial revolution which began in 1750 (“What Is Climate Change?”, 2016).

Climate change has a broader meaning as it not only refers to the increased temperature trends described by global warming, but also changes such as sea level rise; ice mass loss in Greenland, Antarctica, the Arctic and mountain glaciers worldwide; shifts in flower and plant blooming; and extreme weather events.

Kenneth Green (2002) argues that human prosperity in many parts of the world, especially developing countries, heavily depends on climate. Agriculture, tourism, transportation, energy use, and many other activities that define our economies are largely influenced by climate.  Therefore, it is crucial to understand the effects of global warming in short and long run and perform the cost and benefit analysis to determine what policies and measures should be taken to mitigate and prevent the climate change and its various impacts.

Climate change is a global issue, but the impacts are likely to differ in different continents, countries, and regions. Some nations will likely experience more adverse effects than others. Other nations may benefit from climate changes. The ability to adapt to climate change can influence how climate change affects individuals, communities, countries, and the global population.

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This paper will discuss the effects of global warming on the energy industry, agriculture and food supply, production output and inflation.  Next, it will focus on the cost benefit analysis of implementing the policies and procedures to mitigate and/or prevent global warming and climate change. Lastly, the paper will review the possible methods of reducing the effects of global warming and climate change and the mitigation policies to be implemented.

Global Warming and Climate Change Economic Impact

Climate Change Effect on Energy

In my opinion, energy is the key industry that will be highly affected by global warming and climate change. The world’s production and use of energy is the primary cause of global warming.  Climate will affect energy consumption by changing consumers’ wants and needs in both the intensive (short) and extensive (long) terms.

There are several ways in which climate may affect energy consumption. In the residential, commercial and industrial sectors in a warmer world higher cooling demand is expected, which would lead to increased electricity consumption. On the other hand, fewer cold winter days would result in decreased heating demand, which would decrease natural gas, oil and electricity demand. These are demand side effects.  On the supply side, one would expect increased use of natural gas on hot days, as some power plants become less efficient as well as higher natural gas consumption for generation due to higher electricity demand. During the winter, there might be a decrease in natural gas demand for generation due to lower electricity demand.

According to a 2009 report on global climate change, the majority (87%) of the United States’ greenhouse gas emissions are from the production and use of energy production.  The research was primarily on the energy usage in buildings concerning the various heating and cooling demands. The findings stated that, “the demand for cooling energy increases from 5 to 20 percent per 1.8°F of warming, and the demand for heating energy drops by 3 to 15 percent per 1.8°F of warming” (Global Climate Change Impacts in the United States Report, 2009).  Additionally, the 2009 report projects that global warming’s increasing temperatures will increase the peak demand for electricity as it is the main source used for the cooling of buildings.  This would result in a disproportionate increase in energy infrastructure investment and possible pollution as most of the nation’s electricity is currently produced from coal.  This would potentially increase the nation’s CO2 emissions and slow the development of alternative “green” energy sources (Global Climate Change Impacts in the United States Report, 2009).

Climate Change Effect on Agriculture and Food Supply

Since temperature and precipitation are direct inputs in agricultural production, this sector will experience significant effects as well.  Recent droughts worldwide have highlighted that the advances in modern farming techniques and technologies cannot insulate the world’s food production and supply.  In fact, rising CO2 concentrations could increase production of some crops, such as rice, soybean and wheat (Clark, 2012).  However, Clark (2012) also stated, “the changing climate would affect the length and quality of the growing season and farmers could experience increasing damage to their crops, caused by a rising intensity of extreme weather events such as droughts, flooding or fires”.  Furthermore, in many developing regions, agriculture is of major importance for national economies, as it represents the large share in gross domestic product (GDP).  Therefore, with prospects of continued global warming, the damages for poor regions could be substantial (Clark, 2012).  Climate change’s probable impact on agricultural production patterns and prices in these regions lower the profitability of agriculture industry and increase the share of consumers’ income spent on food.  This may lead to food shortages or insufficient access to food in some countries or regions.

In addition to agriculture, the world’s fisheries which provide an important source of food for at least half the world’s population are very susceptible to climate change.  Fisheries are plagued by two problems, overexploitation and pollution.  Additionally, the various marine fish species are encountering their own problems due to climate change such warming surface waters, and rising sea levels due to melting ice.  Clark (2012) states, “some marine fish species are already adapting by migrating to the high latitudes, but others, such as Arctic and freshwater species, have nowhere to go”.  If we are unable to find sustainable solutions to help the fisheries and fish, we may end up with shortages of edible fish which will cause prices to soar.

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According to Schierhorn (2016), over the last century, the global population has quadrupled. In 1915, there were 1.8 billion people in the world. Today, according to the most recent estimate by the UN, there are 7.3 billion people and we may reach 8.5 billion by 2030 (“UN projects world population to reach 8.5 billion by 2030, driven by growth in developing countries”, 2015).  This population growth, along with rising incomes in developing countries, is increasing global food demand.  Schierhorn’s (2016) research shows that food demand is expected to increase anywhere between 59 to 98 percent by 2050.  Therefore, the world’s crop production will need to increase.  That means there needs to be an expanse of farmable land to grow crops, and current productivity needs expanded through the use of modern farming methods (Schierhorn, 2016).

A recent EPA (2016) study concludes that “climate change is very likely to affect food security at the global, regional, and local level” and that “climate change can disrupt food availability, reduce access to food, and affect food quality”.  The study projects that changes in temperatures and precipitation patterns, along with extreme weather events may reduce agricultural productivity (Climate Impacts on Agriculture and Food Supply”, 2016).

The same study further suggests that “increases in the frequency and severity of extreme weather events can also interrupt food delivery, and resulting spikes in food prices after extreme events are expected to be more frequent in the future”.  Increasing temperatures can contribute to food spoilage and contamination (Climate Impacts on Agriculture and Food Supply”, 2016).

Furthermore, Clark (2012) argues that food production itself is a significant emitter of greenhouse gases, as well as a cause of environmental degradation in many parts of the world. Clark states agriculture contributes about 15% of all emissions, on a par with transport. He concludes that to limit the long-run impacts of climate change, food production must become not only more resilient to climate but also more sustainable and low-carbon itself (Clark, 2012).

Climate Change Effect on Economy Growth

According to a recent study by Wade (2017), climate change will most likely reduce the capital stock and productivity in the world economy. Global warming is expected to increase the frequency and severity of extreme weather events causing property and infrastructure loss.

While the initial economic response to recover the damages may be positive for GDP while it is possible, in the long run the world economy will face an extreme challenge. The harm to economic output may become irreversible.  Wade (2017) argues that it will not be worth for businesses to replace their capital stock unless future damages could be prevented or the business could be relocated to the safer area.  This could cause a short period of disruption as businesses relocate, or in the worst case scenario, a permanent loss of capital stock and output.  As the temperatures continue to rise, the damages will increase and become permanent (Wade, 2017).

Wade (2017) represents the likely effect of climate change on output in production function in Figure 1 (See Appendices).  If there is less capital stock available due to the damage resulted from climate change, the productive capacity of the world economy will fall.  It is represented by the downward shift in the world production function as each unit of labor produces less output (Wade, 2017).

However, lower labor productivity may occur not only due to a lower level of capital stock.  Global warming may affect food safety, promote the spread of infections, cause social unrest and thus reduce availability of labor. Wade (2017) shows this effect as a supply shock in a supply and demand graph (Figure 2, Appendices).  Global warming is likely to contract supply at any given price and result in a backward shift of the supply curve (from S1 to S2) (Wade, 2017). As the graph demonstrates, this will result in a lower level of output (Y2) and a higher price (P2).

This analysis is based on the assumption that the world will not respond to climate change and no prevention or mitigation measures are taken.

Climate Change Effect on Inflation

Wade (2017) also proves that as global production output is reduced, an increase in the general price level will occur as a result of global warming.

As discussed earlier, higher food prices will affect consumers’ income and overall food price inflation will rise.  Furthermore, reduced land availability may also contribute to rising inflation. Per Wade (2017) the surge in global temperatures may eventually cause some areas of the world to become uninhabitable and cause mass migration. Along with the political and socioeconomic implications of the migration there will be higher demand for decreasing amount of land. 

Higher energy costs are also likely to boost inflation. As discussed earlier, as our climate becomes more extreme the demand for energy used for cooling will likely to rise.  As the energy demand will rise, the supply will shrink as the efficiency of existing power stations is compromised due to higher temperatures (Wade, 2017).  Policy actions by governments to transition to green energy may further contribute to inflation in the short-run when taxes are placed on fossil fuel electricity. Since energy is the basis of most of the world’s production, the effects of higher energy prices on inflation will impact the global economy (Wade, K. 2017).

Cost-Benefit Analysis

According to Mendelsohn (2013), “the biggest threat climate change poses to economic growth is from immediate, aggressive and inefficient mitigation policies”.

Thomas C. Shelling believes that climate change is the global public good, because each country’s emissions of greenhouse gases contribute cumulatively to the increase of the overall concentration, and each country’s abatements entail higher cost than benefit, unless effective concerted collective actions take place (Stiglitz & Shelling, 2012).  Therefore, benefit-cost analysis is a principal tool for deciding if this public good should be altered through mitigation policy.

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There are many conflicting views regarding the true dimensions of climate change problem and a lot of various policy assessment models. The most famous are DICE model created by William Nordhaus and the Stern Review prepared by Sir Nicholas Stern for the British government in 2006. 

The modeling approach by Nordhaus views climate change as a matter of investment efficiency and assumes that climate change policies will compete with other investments such as public health and education.  This model provides estimates of the appropriate price path on carbon emissions, with prices starting relatively low and gradually rising as a result of discounting. (William D. Nordhaus and Joseph Boyer, 2000)

The Stern Review, in contrast to Nordhaus’ model, recommended strong and immediate action on climate change.  Stern (2006) found that the costs associated with uncontrolled global warming would be up to a 20 percent drop per year in the world’s GDP by 2050. The Stern Review incorporated new scientific evidence suggesting that the climate system may be more sensitive than previously thought.  Also, it supported the application of much lower discount rates. (Stern, 2006).

Therefore, two aspects of the benefit-cost calculation are critical. One is allowance for uncertainty as the possible outcomes of global warming in the absence of mitigation are very unclear.  The other critical aspect is the choice of discount rate as most of the climate-related benefits from current policy efforts would take the form of avoided damages in the long run with many of the costs incurred in the short run.

Stiglitz & Shelling (2012) suggest a number of behavioral changes to mitigate the problem of global warming such as shifting to fuels with higher ratio of useful energy to CO2 emissions (from coal to oil, from oil to natural gas); developing technologies that use less energy per unit output; shifting demand to products with lower energy intensity; planting trees and reducing deforestation; pursuing policy of sequestering the CO2 by pumping it directly into underground reservoirs.

The process of mitigation will require a temporary economic transition from consumption to investment, provided that the transitional costs are small relative to the cost of inaction (Wade, 2017).  However, as the costs of mitigation rise, budget limitations will become increasingly important.

Possible Mitigation Measures

Despite the disagreements between nations, in recent years we have witnessed the gradual emergence of a range of international and domestic climate change policies, including emissions trading programs, emissions taxes, performance standards, and technology-promoting programs (Goulder & Pizer, 2006).  At the Paris climate conference (COP21) in December 2015, 195 countries adopted the first-ever universal, legally binding global climate agreement that outlined a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2°C.

Therefore, there is now an agreement among climate economists to consider climate change as a global externality that must be compensated for to recover economic optimality. Hence, basic public economics wisdom requires some mitigation efforts (IPCC, 2007). The issue gets controversial however when we try to answer the “when” and “how much” questions.

One approach that has become widely used is cap and trade. The U.S. Clean Air Act of 1990 established emission levels (caps) and permitted companies with emissions below the cap to sell (trade) their rights to remaining permissible amount to firms that have exceeded the cap. Over time, the government would reduce the cap, thus overall emissions would be gradually reduced.

This approach gives companies flexibility. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation. But the critics pointed out that it allows richer companies to pollute more as they are able to buy those rights. 

Another type of emissions control is establishment of emissions charges or fees. Each business would be charged accordingly for the amount of emissions produced. It would become very expensive for the companies to pollute and will create incentive for them to clean up. In recent years governments also experimented with various green taxes and eco-taxes that levy a fee on environmentally damaging behavior. Beside the punishment, governments also offer positive incentives for the companies that improve their environmental behavior. For example, the government may decide to purchase only from those firms that meet certain pollution standard or to offer financial aid to those that install pollution control equipment. Tax incentives such as faster depreciation for pollution control equipment may also be used.

Overall, the trend has been for governments to use more flexible, market oriented approaches such as tradeable allowances, pollution fees and taxes, and incentives, to achieve the goals of protecting the environment and mitigating climate change. (Lawrence & Weber, 2017)

Many challenges remain though. 2°C stabilization goal set at the Paris Climate Conference   requires decarbonization of the world economy. Carbon pricing would be a necessary tool in reaching that goal. The advantages of carbon pricing would be the following: it would trigger economy-wide decarbonization in a cost efficient manner, generate revenues that can be used for financing the sustainable development goals and become a focal point for international climate policy cooperation focusing on carbon pricing coordination.

For many policy issues, there is an important and clear distinction between the short-run and the long-run responses by businesses and individuals. The short run is a period when businesses and individuals are locked in to some past decisions and have fixed costs that they are not able to avoid. But over a period of time, they might respond by making gradual adjustments in their behaviors and choices. They are more responsive in the long run than in the short run because they have more time and opportunities to respond to a change in price. As we know, supply and demand are generally more elastic in the long run. We can use the example of a gas tax that was introduced as a tool to reduce pollution. If we look only at the short-run elasticity of demand, we might come to conclusion that a gas tax will have little effect on driving since demand is inelastic. However, if we had an estimate of the long-run elasticity of demand, we might see that the demand curve is flatter. As recent studies how, the effectiveness of many market-based environmental policies depend on the responsiveness of businesses and individuals to a change in incentives, economists and policymakers should keep in mind the difference between short-run responses and long-run responses (Global Warming Causes, 2017).

Summary

The overall effect of climate change on economic growth will most likely be negative in the long run. Although there will be winners and losers from climate change at different levels of warming, the impact of climate change will be widespread due to the financial, political and economic integration of the world’s economies. Global warming will primarily influence economic growth through damage to property and infrastructure, lost productivity, mass migration, security threats.

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The issue of global warming and climate change invokes the highest form of global citizenship. The nations have to be willing to sacrifice hundreds of billions of dollars of present consumption in an effort that will largely benefit people in other countries, considering that the benefit that will not be instant. Moreover, the threat of climate change is uncertain and based on modeling rather than direct observation.

In considering climate change policies, the fundamental trade-off that society faces is between consumption today and consumption in the future. By taking measures to slow emissions of greenhouse gases now, the economy reduces the amount of output that can be devoted to consumption and productive investment. This is the opportunity cost of the investment into mitigating global warming. However, the return for this investment is lower damages and higher consumption in the future. The climate investments involve reducing fossil-fuel consumption and moving to low-carbon fuels.  In return, the impacts on energy, agriculture, economic growth and inflation as well as the potential for catastrophic climate change will be reduced.

Appendices


Figure 1: Global Production Function (Wade, K., 2017)

Figure 2: Supply and Demand (Wade, K., 2017)

References

Carbon Pricing for Climate Change Mitigation and Financing the SDGs. (n.d.). Retrieved April 01, 2017, from https://www.global-economic-symposium.org/about-the-ges/council-of-global-problem-solving/recommendations/carbon-pricing-for-climate-change-mitigation-and-financing-the-sdgs

Clark, D. (2012, September 19). How will climate change affect food production? Retrieved April 16, 2017, from https://www.theguardian.com/environment/2012/sep/19/climate-change-affect-food-production

Climate Change Indicators in the United States. (2016, December 19). Retrieved April 16, 2017, from https://www.epa.gov/climate-indicators

Green, K. P. (2002). Global warming: understanding the debate. Berkeley Heights, NJ: Enslow.

Mendelsohn (2013).  Climate Change and Economic Growth, Commission on Growth and             Development, Working paper no.60

Global warming / opposing viewpoints. (2002). San Diego, CA: Greenhaven Press.

Global Warming Causes. RSS. N.p., n.d. Web. 23 Apr. 2017. Retrieved April 16, 2017, from https://www.briangwilliams.us/environmental-economics/shortrun-versus-longrun-substitutions.html

Lawrence H. Goulder and William A. Pizer (n.d.). Retrieved April 23, 2017, from http://stanford.academia.edu/LawrenceGoulder

National Aeronautics and Space Administration. (n.d.). Retrieved April 16, 2017, from https://www.nasa.gov/

Schierhorn, M. E. (2016, April 07). Global Demand for Food Is Rising. Can We Meet It? Retrieved April 16, 2017, from https://hbr.org/2016/04/global-demand-for-food-is-rising-can-we-meet-it

Stern (2006). Stern Review on The Economics of Climate Change (pre-publication edition). Executive Summary, HM Treasury, London. Archived from the original on 31 January 2010)

Stiglitz, J. E., & Shelling, T. C. (2012). The economists’ voice: top economists take on today’s problems. New York: Columbia Univ. Press.

Wade, K. (n.d.). Climate change & the global economy: Growth and inflation. Retrieved April 16, 2017, from http://www.schroders.com/en/us/institutional/insights/economic-views3/climate-change–the-global-economy-growth-and-inflation

What is climate change? (2016, November 14). Retrieved April 23, 2017, from http://www.bbc.com/news/science-environment-24021772

William D. Nordhaus and Joseph Boyer, Warming the World: Economic Models of Global Warming. MIT Press, Cambridge Mass., 2000. ISBN 0 262 14071 3.

UN projects world population to reach 8.5 billion by 2030, driven by growth in developing countries. (2015, July 29). Retrieved April 23, 2017, from http://www.un.org/apps/news/story.asp?NewsID=51526#.WP083IWcHIU

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