Cost-Benefit Analysis of Climate Change Policy

By Anika Horowitz

Problem Statement

In 2019, progressive congresswomen Alexandria Ocasio Cortez claimed that, unless we implement drastic climate change policies, “the world would end in 12 years.” Every day, the media bombards us with alarming messages of how rising sea levels will flood our shores, while wildfires burn our cities. As a result, tens of millions of Americans live in fear for their futures. According to a 2012 study of Denver school children, 82% had apocalyptic views on the future of the environment. But how valid are these children’s fears of catastrophe? And what policies can we implement to control climate change? In 2016, 196 countries signed a treaty to lower carbon emissions, in order to keep the global temperature from increasing more than 3.6 degrees above the pre industrial level.  Climate activists and world leaders alike cheered as the world seemed to enter a green utopia filled with solar panels and wind turbines. But with every major industrialized nation failing to live up to their promises, and with the agreement set to cost the United States over a trillion dollars per year, we must ask whether the Paris Climate Agreement is the right solution. The United States should stay out of the Paris Climate Agreement because the high costs involved will destroy GDP growth and jobs, while doing almost nothing to slow the temperature increase by the end of the century. Instead, the United States should levy a moderate carbon tax (starting at a rate equivalent to 18 cents per gallon of gas), allocate $100 billion per year towards green R&D technologies, and invest a smaller amount in geoengineering technology.   


But before we can discuss possible solutions to curbing the negative effects of climate change, we must first examine the costs in damages that climate change itself brings. This ensures that policy makers can respond accordingly, ensuring that the money spent on climate change remedies will not exceed the costs in damages that climate change itself brings. If absolutely nothing is done to slow the effects of climate change, it would cost 2.6 percent of global GDP by the end of the century (Gillingham 2019). This means that the total amount spent on lowering global temperature should not exceed 2.6 percent of GDP by the end of the century if we are to maximize the efficiency of resource use. Implementing the Paris Agreement will cost the United States one trillion dollars per year (Lomborg 2020). But in order to limit costs to this amount, economists assumed that politicians would implement a uniform carbon tax across all industries. A uniform carbon tax is the most efficient way to scale back emissions because it allows the decentralized forces of the free market to decide the best tradeoffs that have to be made.  But when countries seek to reduce carbon emissions, they often pick winners and invest in inefficient technologies, like solar and wind, resulting in costs that are on average double those of a uniform carbon tax.  This means that, in reality, the agreement will most likely cost the US two trillion dollars a year.  The total United States GDP in 2019 was $21.73 trillion (U.S. Bureau of Economic Analysis 2019). This means that the two trillion dollars spent on reducing carbon emissions would amount to 9.2% of total GDP per year right away, far more than the 2.6% cost in GDP at the end of the century due to climate change itself. To put two trillion dollars into perspective, this is more than the United States spends on defense every year and over 100 times more than the entire world spends on protecting biodiversity (Lomborg 2020). In addition to these general costs spread over the entire economy, the agreement is predicted to cost the United States 6.5 million jobs in the energy sector by 2040 (Barrasso 2019). 

While it is clear that the agreement would have crippling effects on the economy, it is fair to consider upholding the treaty if it had a major impact on lowering global temperature increase. But, according to the Stanford Energy Modeling Forum, if the United States met their Paris promises through 2030, they would only reduce their emissions by 64 gigatons of carbon dioxide. Every 1000 gigatons of carbon dioxide emitted results only in a 0.8 degree Fahrenheit increase in temperature. This means that the 64 gigaton reduction in emissions will only translate to a minuscule 0.05-degree Fahrenheit reduction in temperature increase by the end of the century (Fawcett 2014). Additionally, if not only the United States, but also the rest of the world followed through on their promises throughout the rest of the century, it would only reduce global temperature by 0.4 degrees. This is well below the 2.7-degree UN benchmark to avoid the worst effects of climate change.  Overall, the Paris climate Agreement is the wrong solution to the very real issue of climate change, delivering only 11 cents back to every dollar spent on the pact (Lomborg 2020).  

In order to successfully combat climate change, we need a solution that successfully weighs the costs and benefits of a given policy. Where the Paris climate agreement goes so wrong is that it focuses on carbon cuts in wealthy nations by pouring money into currently inefficient and expensive technologies like wind and solar.  With current technology, wind and solar energy are grossly inefficient energy sources, which are far too expensive to ever replace fossil fuels. Wind turbines produce an average of 1.5 megawatts of power per year. In 2007 coal in the US was responsible for generating 2,016,456 gigawatts of power per year. Because one gigawatt equals 1,000 megawatts, you would need 1.3 billion (2,016,456,000 megawatts / 1.5) wind turbines to replace coal. And because coal only accounts for 48% of electricity production you would need an additional 650,521,333 wind turbines to replace the 13,453,000 megawatts of liquid hydrocarbon-based fuel (petroleum liquids accounting for 49,505,000 megawatts, petroleum coke accounting for 16,234,000 megawatts, natural gas accounting for 896,590,000 megawatts, and other gases accounting for 13,453,000 megawatts) (Rickety). It costs roughly $3-4 million to create and install a wind turbine. This would mean that for wind to be a viable alternative to replace fossil fuels it would at least cost $2.927e24 (Windustry).  

Just like wind power, solar energy is also extremely inefficient. Solar panels can only convert roughly 15-20% of the sun’s energy into electricity during prime daylight hours (Tapase 2018). This figure drops down significantly to around 5-10% on cloudy days or on winter days in the northern hemisphere when the sun’s rays are not directly hitting the earth. Additionally, no matter where you are in the world, solar energy can’t be generated at night.  Another huge problem with solar is that the production process generates huge amounts of heavy metals, such as mercury, chromium and lead, as by-products. Because of heavy metals’ weak intermolecular forces, they are highly volatile. This means that they are able to break the blood brain barrier in living organisms, leading to severe cognitive decline. The loss of species affected by solar panel production has the potential to destroy entire ecosystems. Solar panels manufactured in the US do not pose such a threat to the environment, because US manufacturers properly dispose of the heavy metal by-products. But 70% of all solar panels are produced in China, where the proper safety disposal methods are not followed (Richardson2019).  So not only are solar panels exorbitantly expensive, but their production is extremely harmful to the environment that they are intended to protect.  

But even if the entire developed world was somehow able to adopt wind and solar energy on a massive scale, the combined carbon cuts would have little impact on temperature by the end of the century. This is because, as the developing world continues to industrialize and improve their standard of living, it will be responsible for an exponential increase in carbon emissions over the next few decades. To put things into perspective, the MAGICC climate model predicts that, if the United States economy ground to a halt and did not emit any carbon from now until the end of the century, the global temperature would only be reduced by 0.33 degrees Fahrenheit by the end of the century (Van Vuuren). The United States is currently responsible for 40% of the emissions produced by the industrialized world, which means that, if the remaining 60% of the developed world’s economy also stopped completely, then the total temperature decrease would be projected to be about 0.835 degrees Fahrenheit.This means that the temperature cuts from the developed world alone would not be even close to enough to reach the 2.7-degree UN benchmark to avoid the worst effects of climate change. So, in order for solutions like the Paris Agreement, which are solely focused on cutting carbon emissions, to be effective, the developing world would also have to radically cut emissions. This would force impoverished nations to abide by our climate priorities by stopping development through industrialization. This would be unethical because it would be robbing developing nations of the chance to lift their people out of extreme poverty. For that reason, it would also not be politically feasible. 

Proposed Solution

Recommendation 1: increase R&D spending

This means that the only way we can successfully combat climate change is to find clean energy alternatives that are competitive with fossil fuels, so that developing nations can continue to industrialize without producing carbon emissions.  In order to find such efficient clean energy alternatives, the US must fund R&D in new technologies. According to Bjorn Lomborg, the US Currently spends over $141 billion a year subsidizing inefficient green technology, like solar and wind, that could never replace fossil fuels. (Lomborg 2020) In order to make progress towards finding a substantive solution, Congress should allocate $100 billion a year towards low-carbon energy R&D (Lane 2009). Every dollar invested in R&D is estimated to yield $11 back in avoided climate change damages (Lane 2009) . The beauty of R&D in new technologies is that we simply cannot predict which technology, or combination of technologies, will prevail as the best replacement for fossil fuels. Because of this, we should avoid ceding authority to the government bureaucracy to select which firms and industries will be privileged under a regulatory regime. Instead, we should invest in a multitude of potential innovations. The first main category of R&D is energy capture technologies. Investing in energy capture could yield better forms of batteries that would be able to efferently store energy for long periods of time, creating an economically feasible way to rely on solar and wind energy even when the sun is behind clouds or the wind is not blowing. These new batteries could look far different from the conventional electric batteries we think of today. New batteries could range from more efficient forms of hydropower to compressed air run through generators. The second main category of R&D is nuclear energy. Nuclear power creates carbon-free energy through the fission of atoms. Currently nuclear power is more expensive than fossil fuels because of the high costs involved in building nuclear power plants. But, according to a 2017 study cited in Bjorn Lomborg’s book False Alarm, if the US had not stuck to a singular design for nuclear power plants from the 1950s onwards, the cost of nuclear energy would have already undercut fossil fuels. Creating better batteries and more efficient nuclear plants are just two of the many promising areas in which we can invest in research. Regardless of which areas prove most effective, it is clear that, if developing nations are to continue to lift themselves out of poverty while simultaneously addressing climate change, we must find efficient fossil fuel alternatives through such new innovations.  

Recommendation 2: levy a reasonable carbon tax

In combination with R&D, a carbon tax best incorporates market-based solutions, by including the environmental costs of producing a good in its price. In an ideal market economy, the price of a good is supposed to reflect all the costs involved in its production. But the use of fossil fuels is a classic example of a market failure, because the damages done by the emission of carbon dioxide do not fall solely on the producer. Instead, they are dispersed between all people living inside the atmosphere in which the emissions are released. Because of this the sticker prices of goods do not reflect the damages that are inflicted upon society due to the greenhouse effect.  Implementing a carbon tax would factor these environmental costs into the price of every good. A carbon tax is a superior policy to a traditional carbon cap. Carbon caps are grossly inefficient because they ensure that a society will forgo all marginal benefits of producing any fossil fuel above the cap level no matter how large that benefit may be to society. In contrast a carbon tax lets the consumer decide if the gain they receive from consuming a carbon-intensive good outweighs the environmental cost. But not all carbon taxes are effective policy. If a carbon tax is too large, then the cost to industry from reduced production will exceed the environmental benefit of the carbon tax. According to William Nordhaus’s DICE model, the optimal carbon tax starts at 18 cents per gallon or $20 per ton and scales up over time to $270 per ton by the end of the century. This would reduce global temperature increase from 7.4 degrees to 6.75 degrees. While this may seem like a small result, it has a 0.4% net benefit to global GDP (Lomborg 2020; Nordhaus, 1992 ). But when choosing a carbon tax, it is crucial that any tax not be significantly higher. Such an excessive tax, if high enough, could reduce GDP by the end of the century more than doing nothing at all, because the costs incurred to industry would far outweigh the climate benefits.  

Recommendation 3: consider the potential of geoengineering

In case the combination of investment in R&D and a carbon tax fail to curb the effects of climate change sufficiently, it is important to have back-up plans. Geoengineering involves physically altering the atmosphere in order to achieve temperature reductions. Geoengineering has the potential to radically reduce global temperature at very low costs.  When Mount Pinatubo erupted in the early 1990s, it released sulfur dioxide into the atmosphere. The sulfur dioxide absorbed 2.5% of the sunlight in earth’s atmosphere, which had the effect of lowering global temperature by almost an entire degree Fahrenheit (Baskin, 2019). And perhaps more surprisingly, the increase in sulfur dioxide did not seem to have other, negative effects on the environment. But this does not mean that we should go ahead and pump enormous amounts of sulfur dioxide into the atmosphere, because scientists have not done enough research on the potential long-term circumstances. It is important to invest in geoengineering because the potential benefits are huge. The projected return on investment is up to $1000 for every dollar spent on research (Lomborg, 2020).  


The issue of climate change produces strong emotions and polarizing opinions on both sides of the political spectrum. It is important for both sides to remember two things. First, climate change is a very real issue that poses serious threats; second, climate change is not the only major issue facing our world today.  So it is vital that we don’t waste resources on inefficient climate policies that could be spent to expand disease immunization, reduce child malnutrition, improve education, and spread ideas that will unleash human freedom and productivity.  In order to rationally address climate change, we must turn away from treaties that spend vast sums of money to reduce emissions in the developed world, only to yield minuscule temperature cuts by the end of the century.  Instead, we must invest in new green technologies that can replace fossil fuels, allowing the developing world to continue to lift their people out of extreme poverty and hunger. We must remember that money wasted on inefficient climate policy is money that could have been used to improve all of our lives in many different ways, including by uplifting billions of impoverished people throughout the world.


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