Economics of Climate Change
By Chad A. B. Wilson
Published May 5, 2007, 2:51 pm in Environmental Issues.
Let's talk economics. It's one of those subjects that seems really easy once the idea of supply and demand is grasped. I think even my two-and-a-half year old understands basic economics. If she goes potty on the potty, she gets a sticker. When she has three stickers, she can "sell" them for a sucker. If she doesn't go potty, she doesn't get stickers, so she doesn't get a sucker. It's actually a complicated relationship. I control the supply even though demand is high. It doesn't follow a strict supply and demand scheme because I don't have to give her any suckers or stickers for that matter. I also don't have to charge three stickers for a sucker. I could make that 10 stickers if I wanted to because, well, I don't need the stickers. That's the problem there. But I do want the "work" that is paid for with stickers. I want my child to use the potty, so I try to make it worth her while, while not breaking my bank. If I made it 10 stickers for a sucker, she would lose incentive. The price would too high for it to be worth it to her. So this complicated relationship moves beyond simple economics to something much more complex. Yes, even supply and demand gets tricky.
Multiply that "simple" relationship to the world stage, and thing go haywire. I'm talking about climate change here, and how the U.N. Intergovernmental Panel on Climate Change issued a report that details the economics of emissions. The first thing to notice is that the debate has moved away from whether climate change is occurring. This move happened really quickly, so quickly, in fact, that we now have George Bush admitting that climate change is real. We wouldn't have seen that a year ago, I think. But today, everybody's green. Even conservative home building magazines like "This Old House" feature several green articles every month. It's the future, after all, and it seems that people are finally accepting it.
The question is what do we do about it.
There are several problems here, and most of them have to do with economics and who pays for reforms. Individuals can do their part, and it's good that a lot of people are doing it, but these individual reforms are not cost effective. Consider the cost of a hybrid. A Prius will cost you $21,000. A comparable Corolla will cost you $17,000. Not a big difference, considering how much is being spent on the car in the first place, but it's actually a 19% difference of $4000. Consider the cost of gas: let's assume it's pretty high, probably $3.00 per gallon. The difference is gas mileage is something like 32mpg in a Corolla and 47mpg in a Prius for a difference of about 32%. If the Corolla costs $35 per week to fill up, then the Prius would save you $11.20 a week, which is $582.40 a year, which means that it will take almost 7 years to make up the price difference. If you drive more, you will save more, of course. Here, I'm considering how much I drive, which is about a tank of gas a week. My last car, I had for exactly seven years, and I will probably have my current car for about that long, too. So is it cost effective to reduce my emissions by driving a Prius? Not really. I would have broken even. But then again, I'm not really talking about costs. What we're talking about here is doing your part. If it is more ecologically responsible to drive a Prius, then maybe I should do it. I would feel better about it, and I would probably enjoy the car. Yet I can't quite bring myself to do it. The same goes for fixing up our house. How do we quantify cost savings for things such as new tapered insulation on our flat roof house? It will cost $10,000 to do it, but will we ever make up that cost in energy savings? Probably not. It would just make the house feel better in the summer and would make us not feel so bad about paying our electirc bill.
So for individuals, the money spent on green stuff isn't exactly cost effective. For corporations, it's even worse. As it is, companies make money. They do pretty well with the current regulations. If those regulations were stricter, it would cost them more money. Where would this money come from? There are three options: the company, the government, or the consumer. I doubt the company is going to just eat the money to provide stricter regulations, the government will just raise taxes to pay the companies, so the consumer is stuck fitting the bill. If an oil company has to raise the price of gas to adjust to new regulations, how much higher cost will I see? Estimates are around $0.30 per gallon, which equals $3.20 whenever I fill up, which turns into $166.40 a year. Not too bad, I would say. But these new regulations won't just effect evil gas companies. If my utility company had to do that same and the company that makes my toilet paper had to do the same and the company that makes my TV had to do the same, and one and on, then the costs passed on to me could be astronomical. Do you know what I would do?
First, I would complain, and I would write a lot of angry complaining blog pieces. After that, I would have basically two choices. I could either live with the new costs and hope my pay is adjusted to account for rising costs, or I could conserve by not buying some of those products. Get the cost of gasoline up to $10 per gallon, and then people will really consider alternative fuels. Get the cost of coal so high that people open their windows. Whatever. That's supply and demand. Sometimes the price gets so exorbitant that people decide they don't even need the necessities.
That's what they're doing with the carbon emissions, too. They're trying to say that companies can purchase the right to pollute. Europe has already done something similar. Their, the right to pollute a ton of CO2 is actually traded like in a market, and the going market price is somewhere around $25. So if a company doesn't want to upgrade its plant yet, it can purchase these tickets that allow it to pollute. That's genius, I think. Either way, the company pays (and we pay), but it maeans that in the long run, it's probably more cost effective to go ahead and upgrade.
Maybe I will continue this next time. For now, let's leave at this: we can all expect that our costs will increase. The question is by how much.
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