Academic journal article Contemporary Economic Policy

Economic Modeling and the False Tradeoff between Environmental Protection and Economic Growth

Academic journal article Contemporary Economic Policy

Economic Modeling and the False Tradeoff between Environmental Protection and Economic Growth

Article excerpt


It is important to resolve the controversy over whether sizable net cost-saving energy efficiency investments are available to the global economy. National and international decisions on climate control strategies hinge in part on economic assessments of the costs and benefits of avoiding global warming. On the benefits side, uncertainties in the timing, magnitude, and regional distribution of the effects of increased greenhouse gas concentrations in the atmosphere complicate the assessment process Intergovernmental Panel on Climate Change ([IPCC], 1996; Cline 1992). As the IPCC discussion shows, estimation of the benefits of climate stabilization involve difficult economic and ethical issues of intergenerational equity and decision-making when the consequences of error are truly catastrophic. The cost side of the analysis would seem to be more straightforward. Determining the economic cost of shifting the energy production system away from fossil fuels might appear to be an exercise in conventional economic analysis.

Yet, economists are not even in agreement about the sign of the effect of reducing greenhouse gas emissions on economic growth. (It is generally understood that the goal of climate policies should be to achieve a safe level of atmospheric concentrations of greenhouse gases. Throughout this paper, the term "emissions reductions" is shorthand for policies to reach this objective, because the ultimate concentration target will be approached through some pattern of emissions reductions over time.) The so-called "top down" macroeconomic models generally show that significant emissions reductions would have sizable negative impact on conventionally measured output. The IPCC summarized the results of a comparison of 10 leading top-down models that was conducted by the Energy Modeling Forum of Stanford University. The GDP loss in 2010 from a 20% reduction from the baseline in greenhouse gas emissions ranged from 0.9% of GDP to 1.5% of GDP, with an average of 1.2% (IPCC, 1996, p. 306). (Eight of the 10 models made such an estimate.) Krause et al., (1993, p. ES.4) summarize the top-down results by stating that

[e]ven limited constraints on carbon emissions (such as a stabilization of emissions by the year 2000 or a 20 percent cut by the year 2010 or 2020) will reduce annual growth rates in GDP by 0.05-0.10 percentage points.... Over twenty to thirty years, this leads to cumulative economic losses in the range of about 1-5 percent of GDP. These losses are equivalent to hundreds of billion dollars per year, and reach the trillion dollars range on a cumulated basis.

On the other hand, the "bottom-up" studies of potential economic savings that could be realized by aggressive implementation of energy-saving technologies show just the opposite. The IPCC reviewed 12 bottom-up studies (11 pertaining to the United States and one to Canada). For endpoints in the 2005/10 to 2015/20 interval, the studies estimated that emissions could be reduced by between 0% and 58% (depending on the study and endpoint) at zero net cost (IPCC, 1996, p. 311). The median of the estimates was greater than 24%. According to review Krause et al. (1993, p. ES.12), these studies conclude that

[c]ontrary to common dogma, significant reductions in carbon emissions below business-as-usual projections are feasible at no extra cost or while saving nations and consumers money.... When all available resource options are evaluated on the basis of a consistent societal discount rate, a large unexploited potential for cost-effective demand-side efficiency improvements is found. Mobilizing these unexploited efficiency resources leads to lower costs of energy services, lower product prices, expanded disposable income, and higher economic growth and employment.

These incompatible cost estimates constitute a scientific crisis. Both sets of studies are based on diligent modeling efforts; both rely on painstaking accumulation of empirical evidence as the basis for estimation and calibration of the top-down models and as the engineering and economic data for computation of putative cost savings by the bottom-up models, respectively; and both are represented by long lists of publications in the peer-reviewed literature. …

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