The Greenhouse Effect: Damages, Costs and Abatement

Ayres, R.U. & Walter, J. (1991). The Greenhouse Effect: Damages, Costs and Abatement. IIASA Research Report. IIASA, Laxenburg, Austria: RR-91-012

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Abstract

The buildup of so-called "greenhouse gases" in the atmosphere -- CO2 in particular -- appears to be having an adverse impact on the global climate. This paper briefly reviews current expectations with regard to physical and biological effects, their potential costs to society, and likely costs of abatement. For a "worst case" scenario it is impossible to assess, in economic terms, the full range of possible nonlinear synergistic effects. In the "most favorable" (although not necessarily "likely") case (of slow-paced climate change), however, it seems likely that the impacts are within the "affordable" range, at least in the industrialized countries of the world. In the "third world" the notion of affordability is of doubtful relevance, making the problem of quantitative evaluation almost impossible. We tentatively assess the lower limit of quantifiable climate-induced damages at US$30 to US$35 per ton of CO2 equivalent", worldwide, with the higher level of damages being concentrated in regions most adversely affected by sea-level rise. The non-quantifiable environmental damages are also significant and should by no means be disregarded.

The costs and benefits of (1) reducing CFC use, and (2) reducing fossil fuel consumption, as a means of abatement, are considered in some detail. This strategy has remarkably high indirect benefits in terms of reduced air pollution damage and even direct cost savings to consumers. The indirect benefits of reduced air pollution and its associated health and environmental effects from fossil-fuel combustion in the industrialized countries range from US$20 to US$60 per ton of CO2 eliminated. In addition, there is good evidence that modest (e.g., 25%) reductions in CO2 emissions may be achievable by the USA (and, by implication, for other countries) by a combination of increased energy efficiency and restructuring that would permit simultaneous direct economic benefits (savings) to energy consumers of the order of US$50 per ton of CO2 saved. A higher level of overall emissions reduction -- possibly approaching 50% -- could probably be achieved, at little or no net cost, by taking advantage of these savings.

We suggest the use of taxes on fossil fuel extraction (or a carbon tax) as a reasonable way of inducing the structural changes that would be required to achieve significant reduction in energy use and CO2 emissions. To minimize the economic burden (and create a political constituency in support of the approach) we suggest the substitution of resource-based taxes in general for other types of taxes (on labor, income, real estate, or trade) that are now the main sources of government revenue. While it is conceded that it would be difficult to calculate the "optimal" tax on extractive resources, we do not think this is a necessary prerequisite to policy-making. In fact, we note that the existing tax system has never been optimized according to theoretical principles, and is far from optimal by any reasonable criteria.

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