If there is one thing that economists can universally agree on, it is the need for energy prices to reflect their true cost to human well-being. But estimating the “social cost of carbon” in a way that reflects the uneven distribution of damages across wealthier and lower-income nations has proven to be a challenging endeavour.

Just ask Michael Greenstone, the Milton Friedman distinguished service professor in economics and director of the Energy Policy Institute at the University of Chicago (EPIC), who is one of the key architects of this concept.

Under former US president Barack Obama’s administration, Greenstone helped to value the monetary cost of climate inaction at US$21 per tonne of carbon dioxide in 2010. According to his latest projections, it now sits at US$225 per tonne.

“But what I want to emphasise here is how unequal those damages are going to be allocated around the world,” said Greenstone, when he mentioned this new figure in a presentation he gave at the National University of Singapore (NUS)’s Sustainable And Green Finance Institute summit last month.

Preliminary research by the Climate Impact Lab, which Greenstone co-founded in 2016, shows that the distribution of end of century damages in a world headed towards 3°C warming is highly unequal.

Organisation for Economic Co-operation and Development (OECD) countries – a club of mostly rich nations – are projected to experience nearly no damages, due to the benefits of warmer winters balancing out the damages from hotter summers, said Greenstone. Meanwhile, low-income countries are expected to be the hardest hit, losing about 3.8 per cent of their gross domestic product (GDP), though they are currently consuming relatively lower amounts of fossil fuels.

Yet, the “cruel climate arithmetic” means that even if the OECD countries go carbon neutral, non-OECD nations would still have to cut their emissions by at least 85 per cent to keep warming below 2°C, as set out by the Paris Agreement, said Greenstone.

“This is what makes the global energy challenge so painful, because these are the very places where people are currently dying of effectively low energy consumption and to achieve this goal is to ask those countries to consume much more expensive energy.”

Greenstone stressed that the global energy challenge requires the world to do three things at once: find access to inexpensive and reliable energy, mitigate air pollution and limit climate change. “The global energy challenge recognises that when we make choices about energy – when we decide to use natural gas, coal or renewables – what we’re really doing is making decisions about three goals that directly impact human well-being.”

To address this challenge, apart from pricing energy at its social cost, Greenstone proposed subsidies for technical and policy innovation, emphasising that policy innovation “deserves far more attention”. He cited the case study of the world’s first particulate pollution market in India’s Gujarat state, which he helped to launch in 2019 and has successfully reduced air pollution from coal burning factories by 20 to 30 per cent without increasing their operating costs, leading to the development of similar markets in other cities.

This sentiment was recently echoed by Nobel prize winner William Nordhaus, who has long been an ardent advocate of carbon pricing, to the point that some prominent economists like Nicholas Stern and Joseph Stiglitz have criticised him for over-fixating on it as the ideal climate policy tool.

“The most important support would be government subsidies for fundamental and applied research on green energy technologies,” said Nordhaus in a recent interview he did on the back of the latest update to the DICE model (the Dynamic Integrated Model of Climate and Economy), one of the first integrated assessment models that looked at the economic cost of climate change in the 1990s.

“Major countries today provide only US$40 billion of support for green energy research and development (R&D). This is less than half of the money that companies in the US devote to R&D in pharmaceuticals. We do not have a prayer of reaching our climate goals without strong government research support,” he said.

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Areas of Focus: Climate Change
Climate Change
Climate change is an urgent global challenge. EPIC research is helping to assess its impacts, quantify its costs, and identify an efficient set of policies to reduce emissions and adapt...
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Climate Science
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Climate Law & Policy
As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.