The Financial Cost Of Climate Change

Climate change: what it costs and who is footing the bill.

Maximilian Auffhammer, Associate Professor and Agricultural and Resource Economics Director at UC Berkeley, looks at the effects of climate change through a different lens than most.  As an environmental economist, Professor Auffhammer breaks down actions that cause damage to the environment and puts a dollar amount to them.  In an interview with Eden Canon, Professor Auffhammer discusses the true cost of climate change and what can be done to discourage actions that cause “negative externalities.”

What is your experience in the field of climate change and agriculture?

“I am an environmental economist, a subfield of economics that looks at what happens if markets fail and how you correct these market failures.  Broadly speaking, the big market failures in the environmental arena all have to do with externalities—where we’re consuming things, or producing things, and not sharing the full cost of our activities. “In the context of climate change, this means that, for example, when you drive your car down the road you are using the atmosphere as a free waste dump for your carbon dioxide. “You are pumping particulate matter, NOx [nitric oxide and nitrogen dioxide], volatile organic compounds into your local environment, which leads to local air pollution… and of course adversely affects kids’ health and agriculture yields directly, along will all sorts of other things.  You are also taking up valuable space on the highway, which leads to congestion and affects how quickly other people get to their destinations—and that is an external cost you impose on others. “So what an environmental economist would argue is that we need to figure out how much damage that CO2 is making and then charge people that full cost of their activities.  This is essentially what is behind a carbon tax or cap and trade. “Under climate change, we expect going forward—and we’ve already seen some of these effects—that the average temperature is going to shift up.  So we’re going to see more heat events, more drought, rising sea levels—all of those things we saw in An Inconvenient Truth, which is, of course, just a summary of the signs.”

How do we mitigate or offset the effects, and causes, of climate change?

“Well, if I ruled the world for a day, or perhaps a little bit longer, as an economist—and you’ll hear all of my colleagues say the same thing—you need to charge people the full price of their activities.  For example, people think of gas at $5 a gallon as outrageously high.  But if you actually think about the full cost of a gallon of gasoline in terms of congestion on roads, local air pollution, vehicular accidents, etc., we’re probably talking about a good, I don’t know—$9 a gallon.  Much closer to what you’d pay in Europe than what you’d pay here. “Whenever I say that, people start yelling and say, ‘How dare you propose that!’  My answer is very simple.  I argue that we tax poorly.  We should make people pay for the use of things that cause damage in the world and stop or decrease taxes on goods.  Goods are income and all kinds of things we want more of.  Currently, if you are looking at it in extreme, by charging people taxes on their income, we’re fining you for working. “We should give you your income but we should charge you a lot for using gasoline, burning natural gas in your house, and other things—like if you eat lots of unhealthy foods or smoke cigarettes—all of these things that have consequences for others, you should be forced to pay the full amount of those activities. “And that doesn’t infringe on your freedom to choose your activities.  You can choose to continue doing what it is that you want to do. “Economists will always argue to provoke change through price signals; others will argue that we should just tell people what to do: you have to drive smaller cars, you may not smoke, the majority of electricity should come from renewable resource.  But I think that in order to do that, you would have to know what the right answer for everything is, and we just don’t. “We already see some programs emerging around the country. There is a so-called cap and trade system on NOx on the East Coast.  California is pretty aggressive and, as of a couple of days ago, they also have a cap and trade on CO2.  The Europeans are doing something about it and parts of Canada have a carbon tax.  You see these things popping out of the woodwork. “It is unfortunately the case that while the developed countries have created this problem, going forward, they alone can’t be the solution.  So somehow the developing world—and calling China a developing country is somewhat silly at this point—these transitioning economies have to be part of the solution. “A global solution to this has been in the works since the Rio de Janeiro conference in 1992 I believe, and yet we still do not have a meaningful carbon agreement on the books to this day. Yes, we have the Kyoto Protocol.  But Kyoto exempts the two biggest emitters, the US and China, from doing any meaningful emissions reduction. Going forward, there are talks of bilateral agreements between the US and China—for example, both charging some sort of carbon tax or agreeing to an emissions reduction—but these are far from becoming a reality.” Maximilian Auffhammer is an Associate Professor with a joint appointment in International Area Studies and Agricultural and Resource Economics. He received his Ph.D. in Economics from the University of California at San Diego. His research agenda focuses on forecasting Greenhouse Gas Emissions as well as studying the impacts of air pollution on agriculture.