General Economic Policy

Economic Costs of Combating Climate Change

The Washington Post had a report on Sunday about the economic costs of climate change. It highlights several important points worth emphasizing.

1) Controlling climate change will be costly. The costs will have to include higher energy prices for traditional carbon based fuels. Tax increases are being proposed to help finance research into alternatives and to reduce consumption. This will make it more expensive to drive your car, heat your home, and warm your water. It will also add to the cost of all goods that need to be transported to you, the consumer. Cost of living will rise for everyone. Of course, this will affect poorer households more than richer ones.

2) It is a fiction to believe that creating new technologies to combat climate change will be good because it will create new industries and new jobs. This belief is based on a misunderstanding of “opportunity cost.” All of the money spent, and jobs created to produce more fuel efficient cars, carbon-capture technologies, wind and geothermal electricity plants, etc., etc., is money that will not be spent on other things, like food, clothing, health care and entertainment. In order to do one thing – i.e., clean the environment – we must not do other things – i.e., provide other goods and services that people want.

3) Currently people do not value environmental cleanup as much as they value the other goods and services they demand and buy. If they did, there would be no need for government to intervene to change what people choose. Government tax and regulatory policies to combat climate change will force people to change to what the government, or environmental advocates, want them to choose.

4) Most Americans, and probably most in the world, do not really want to change much of what they do to combat climate change. If they did, they would welcome higher gasoline prices. Higher oil and gas prices are perhaps the most effective way to reduce consumption of carbon-based fuels. To reduce carbon emissions to the levels suggested in the Kyoto protocol, for example, would require substantial increases in oil and gas prices. But in the US, when gasoline prices rise to levels that are significantly below what prevails elsewhere in the world, Americans scream!!

If we were addicted to gasoline, but recognized that this addiction were harmful, then Americans might respond to higher gas prices grudgingly, but with quiet acceptance. It would be much like a cigarette smoker who wishes to quit and realizes that higher cigarette prices will help him achieve what he really wants. However, Americans don’t respond to higher gas prices this way, at least not most of them. This means Americans, and probably most around the world, will accept climate change policies only if they don’t have to change their behavior very much.

5) The main reason there is so little concern about climate change is because the problem is invisible. Or, if it does affect us in an important way, it won’t be until much later in our lives. It might not even happen till we are long gone. Imagine trying to convince cigarette smokers (in a hypothetical alternative) that although no one has yet died from smoking there is growing evidence that people will die from smoking in the distant future. Do you think many people would quit smoking NOW under these speculative circumstances? I doubt it given that even when people know the full consequences of smoking, many continue to smoke. This is the kind of hurdle faced by climate change advocates. This is also why you will hear that hot summer days and Hurricane Katrina are the results of global warming even though these events are perfectly consistent with a no global warming scenario.

6) Ideally, it would be great if global warming were shown to be false or greatly exaggerated. Personally, I think we should all be rooting for this outcome. We should continue to evaluate how likely it is for catastrophic global warming to arise. Since if global warming were indeed exaggerated, we could go back to using the cheapest most efficient sources of energy available and devote our time and energies to providing more food, clothing, housing, health care, and entertainment services, especially to the people in the world who have not had the good luck to enjoy many of these things. If we have to redirect our best and brightest resources to climate change though, then maybe these folks will have to wait a little longer. Perhaps till their next life!


Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.


  • Steve – while I generally subscribe to your sentiments on economic policy and often consult your website when I need explanations of matters concerning trade econometrics and finance, the issue of climate change, more specifically the economics of it, is a different animal. Unfortunately your take on it is also the typical approach taken by the majority of devout economists, which is misguided and rudimentary. Many fundamental economists have grown to believe that the free market is an end, when in fact it is simply a means to an end: it is not the end all to all issues or global problems. Moreover your point about opportunity costs is extremely short sided. Essentially all of today’s capital, in whatever form, relies on natural capital in one way or another and it is this building block of the global economy (or to state it more humanely, the source of human and non-human wellbeing) that is being prodigiously degraded. To say that all money not spent on material wealth has an unjustifiable opportunity cost attached to it is completely insular and a great example of a misapplication of economics. It is indeed a kind of challenge never before encountered by the global civilization for many of the reasons you quoted (non-specific, a public cost, discounted benefits), however to simply dismiss it as a problem to costly to rectify is impetuous and irresponsible.

  • Steve,Informative post and great analogy with cigarette smoking, I just have a question concerning your comments about opportunity costs in your second point.How can we be sure that it will be an opportunity cost until we determine exactly what were buying? Say instead of putting money into buying what we want now (food, clothing, etc.) we put it into R&D for climate change, but from the research discover some new amazing technology that drastically reduces costs. At that point did we really lose by investing in R&D? Are you not assuming to much to think that all the money will do is clean the environment? While this doesn’t mean this something we must do, it does make things more ambiguous in my mind.A

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