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Environmental tipping points significantly affect the cost−benefit assessment of climate policies


Cai, Yongyang; Judd, Kenneth L; Lenton, Timothy M; Lontzek, Thomas S; Narita, Daiju (2015). Environmental tipping points significantly affect the cost−benefit assessment of climate policies. Proceedings of the National Academy of Sciences of the United States of America, 112(15):4606-4611.

Abstract

Most current cost-benefit analyses of climate change policies suggest an optimal global climate policy that is significantly less stringent than the level required to meet the internationally agreed 2 °C target. This is partly because the sum of estimated economic damage of climate change across various sectors, such as energy use and changes in agricultural production, results in only a small economic loss or even a small economic gain in the gross world product under predicted levels of climate change. However, those cost-benefit analyses rarely take account of environmental tipping points leading to abrupt and irreversible impacts on market and nonmarket goods and services, including those provided by the climate and by ecosystems. Here we show that including environmental tipping point impacts in a stochastic dynamic integrated assessment model profoundly alters cost-benefit assessment of global climate policy. The risk of a tipping point, even if it only has nonmarket impacts, could substantially increase the present optimal carbon tax. For example, a risk of only 5% loss in nonmarket goods that occurs with a 5% annual probability at 4 °C increase of the global surface temperature causes an immediate two-thirds increase in optimal carbon tax. If the tipping point also has a 5% impact on market goods, the optimal carbon tax increases by more than a factor of 3. Hence existing cost-benefit assessments of global climate policy may be significantly underestimating the needs for controlling climate change.

Abstract

Most current cost-benefit analyses of climate change policies suggest an optimal global climate policy that is significantly less stringent than the level required to meet the internationally agreed 2 °C target. This is partly because the sum of estimated economic damage of climate change across various sectors, such as energy use and changes in agricultural production, results in only a small economic loss or even a small economic gain in the gross world product under predicted levels of climate change. However, those cost-benefit analyses rarely take account of environmental tipping points leading to abrupt and irreversible impacts on market and nonmarket goods and services, including those provided by the climate and by ecosystems. Here we show that including environmental tipping point impacts in a stochastic dynamic integrated assessment model profoundly alters cost-benefit assessment of global climate policy. The risk of a tipping point, even if it only has nonmarket impacts, could substantially increase the present optimal carbon tax. For example, a risk of only 5% loss in nonmarket goods that occurs with a 5% annual probability at 4 °C increase of the global surface temperature causes an immediate two-thirds increase in optimal carbon tax. If the tipping point also has a 5% impact on market goods, the optimal carbon tax increases by more than a factor of 3. Hence existing cost-benefit assessments of global climate policy may be significantly underestimating the needs for controlling climate change.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2015
Deposited On:26 Nov 2015 15:09
Last Modified:14 Feb 2018 09:48
Publisher:National Academy of Sciences
ISSN:0027-8424
OA Status:Closed
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1073/pnas.1503890112
PubMed ID:25825719
Other Identification Number:merlin-id:12516

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