The economic fundamentals of global warming

If unpriced emission of greenhouse gases imposes real costs on future generations, both present and future generations can enjoy a higher consumption of economic goods and services through the correction of this unpriced externality, so there is no real economic opportunity cost to mitigation of global warming. The misperception that control of global warming is costly rests on the mistaken assumption that the investment allocation of the world economy without mitigation measures is efficient, but in the presence of an externality the world economy is not on its efficiency frontier. Once the externality is corrected, global warming presents no novel issues of the distribution of economic welfare between generations that are not already inherent in other investment choices. The costs of greenhouse gas mitigation can be shifted to future generations by reducing conventional investment, rather than by reducing current standards of living. This suggests financing investments in greenhouse gas emission, including compensation of current generations for the necessary substitution away from carbon intensive energy, through borrowing. The question of the appropriate intergenerational discount rate to apply to the benefits of greenhouse gas emission mitigation is irrelevant to global warming policy. The relevant question is the marginal value future generations will put on a lower stock of atmospheric greenhouse gases relative to conventional capital. This value should determine the composition of the entire capital stock, including the stock of greenhouse gases, current generations bestow on the future. Department of Economics, New School for Social Research, 79 Fifth Avenue, New York, NY 10003, [email protected]. This paper was prepared for the Workshop on the Economics of Global Warming sponsored by the Schwartz Center for Economic Policy Analysis, October 12, 2007. I benefitted from comments and suggestions when I gave an earlier version of this paper at the Santa Fe Institute in June, 2007. I’d like to thank Jonathan Harris, Julie Nelson, Lance Taylor, and Gerard M. Foley for helpful comments on earlier drafts.