Can $15 Per Ton Be The Right Price?

The figure commonly thrown about for damages from global warming is roughly $15 per ton of carbon. This startlingly reasonable number has left me wondering whether our methods of damage estimation are correct.

I haven't scrutinized these exact estimates but typically we do damage estimation by calculating either the willingness-to-pay to avoid the externality or the willingness-to-accept to live with it.

That is, we figure out either how much people would pay, if they could, to get rid of the problem of global warming or how much we would have to pay them so that they would rather take global warming and the money than be without either.

This is all very normal and accepted.

The problem comes in when the people who are creating the externality and the people who are going to suffer from the externality are radically and systematically different. In this case the United States is the world's largest producer of carbon emissions and also happens to be the wealthiest nation in the world. On the other hand by many account Bangladesh will suffer some the worst consequences of global warming and is among the poorest nations in the world.

All else being equal the more money you have the higher your willingness-to-pay to avoid externalities will be, this is in part because rich people have more time to be concerned with these types of things, but more importantly its because rich people simply have more money to pay.

Before my economist readers pooh-pooh this line of reasoning as being dealt with by Kaldor-Hicks let me weave a story that I think is important.

Suppose we continue with the example of the US and Bangladesh. The US is emitting carbon which we will assume has little to no impact on the quality of life in the US but will potentially kill roughly 10 Million Bangladeshis because of the rise in sea levels.

Now we could say - Look America, the Bangladeshis have a right to life and property which you are infringing upon. Please cease and desist. By many accounts this would be fair. I don't have the right to fire bullets into a crowd or start uncontrollable fires in my backyard because I could be taking other people's lives. Why does the US have the right to pump carbon into the atmosphere? The fair thing to do would be to make America stop.

Economists rush in, however, and say - Look, it may or may not be fair but it is certainly not efficient. No particular Bangladeshi will die with certainty in the floods and many risk death every day from other things. I think some of them would rather have money which they could use to buy food and medicine for their families and then just chance the flood.

So, we figure up how much medicine we'd have to give the Bangladeshis to make them indifferent to global warming and we call that the damages. If we just charge that to the US then by the miracle of markets we've managed to make the Bangladeshis whole and reduce the cost to the US to a mere fraction of what it would be if we stopped carbon all together.

The problem with the story is this - The miracle was possible in large part because Americans had to give up very little happiness in the form of money to make the Bangladeshis very happy with medicine.

In other words here, the major gain is that in this example there are huge gains from trade between the United States and Bangladesh. That gain, however, is only realized if in fact we trade with Bangladesh. If we keep the tax money and use it to reduce our own income taxes we haven't taken advantage of that gain and so the calculations we used to come up with the marginal damages are invalid.

Another way to think about this, suppose that each human being has the right to produce a given amount of carbon, a personal carbon permit. Bangladesh would have about half as many permits as the US but a fraction of the carbon. They would gladly trade some of their permits in exchange for life saving resources.

America, in desperate need of permits would take the exchange. However, in the end this transaction involves two parts. A given reduction in US carbon emissionas and an increase in medicine in Bangladesh. The first part does not make sense without the second.

If we aren't going to give the money to Americans then we have to ask another question. What would an American pay to avoid the consquences the average Bangledeshi is going to experience. My guess is that that number is significantly higher.

hat tip to mankiw