Columnists: John Llewellyn, Llewellyn Consulting

Published on: 10 Jan 2007

A burning issue, 50 years on

I was 11 when my father, a research scientist, told me about greenhouse gases. About how such gases – he spoke about carbon dioxide and water vapour – were transparent to the sun's short-wavelength rays, but non-transparent to the longer-wavelength rays that the earth re-radiates. About how, but for its greenhouse-gas blanket, the Earth would be a markedly cooler and less hospitable place.

He also explained that much of the atmospheric carbon dioxide had come from nature – volcanoes particularly – although he did speculate briefly about the implications of industrialisation and the burning of hydrocarbons. But then my attention wandered, he lit another cigarette, and the moment was gone.

Were he alive today, my father would readily comprehend what has gone on over the 50 years since we had that short conversation. That the flow of man-made carbon into the atmosphere has risen to around seven giga-tonnes per year. And that, while that figure is not large relative to the natural flows in and out of the atmosphere – around 210 giga-tonnes per year in each direction – it is distinctly significant in net terms. After all, as he was fond of saying, if two large forces were in equilibrium, a pea could tip the balance.

Hence, my father would not be surprised that the world is now 0.6C hotter than when he introduced me to greenhouse gases. Nor would he be surprised that climate models are predicting a further 2 to 4.5 degree warming by 2100, and as much as 6 degrees if the warming feeds on itself – by, for example, starting to release some of the huge stocks of natural carbon that currently are locked up, frozen, in the vegetable matter under the permafrost. Such increases would take the planet to temperatures not seen in at least the past 10,000 years.

The future effects of such temperatures on climatic variables cannot be known with certainty. Climate modellers are making impressive progress in simulating the past, but their models are perforce being asked not only to predict, but to predict outside the range of data from which they were estimated.

That is demanding. And then comes a further level of complexity: trying to establish the likely costs of whatever climate change does occur. Nevertheless, some numbers are starting to emerge. In purely economic terms, the cost of remaining on the present emissions path could, after a temperature increase of 2.5C (by, say, 2115), be running at around 1.5 per cent of world GDP per year.

It could be that the economic damage will be less than that: equally, it could be more. For example, there is evidence, if only suggestive, that economic damage rises disproportionately with temperature – more intense hurricanes may be a case in point.

Some policy conclusions are starting to emerge, too. If such estimates are even ball-park correct, then hard-nosed economic cost/benefit analysis suggests that it pays to engage in at least the cheaper currently known ways of reducing carbon emissions, if not the more expensive: it makes sense to spend $5 to save $7, but not $15 to save $10.

Two further conclusions also seem reasonably robust. First, in achieving a given target atmospheric greenhouse gas concentration, it is less costly to start sooner rather than later. And second, the policy action to achieve this should be effected through the price mechanism, which makes the cost explicit – a carbon tax, for example – rather than by regulation, which does not.

Of course, there is more to life than economics. Society may be concerned about the state of the environment as an end in itself. Or it may be concerned with the state of the world that it is handing over to its children. To that extent, it might be prepared to spend $11 to save $10, the extra $1 being an insurance premium. While many people over-insure, the case for insuring against an event becomes compelling if its consequences, however unlikely, could be catastrophic. I don't insure my washing machine, but I do insure my house.

The economist son of the research scientist therefore draws four broad conclusions:

  1. It is economically rational to take at least the less costly steps to reduce carbon emissions.
  2. This is best effected through the price mechanism.
  3. It pays to start taking steps sooner rather than later.
  4. When an event is potentially catastrophic, take out insurance.

My father taught me to try to base action on rationality and evidence. Who knows? Had he appreciated the link between smoking and lung disease before he became addicted to cigarettes, he might have lived long enough for us to discuss the matter further.

Note: This column was originally published Sunday 20 August 2006 in The Observer.

John Llewellyn is senior economic policy adviser for Europe at Lehman Brothers.

The views expressed in this column are those of the columnist and do not necessarily reflect the views of eceee or any of its members.

Other columns by John Llewellyn