PURCHASING "CLIMATE INSURANCE"
December 7, 2004
Given the costs of mitigating the effect's of global warming, particularly in light of the uncertainty in predicting climate change, some experts advocate doing nothing for several years.
However, economics professor Gary Yohe of the University of Illinois-Champagne and his research team propose implementing a $10 carbon tax (which amounts to about a 5-cents per gallon tax on gasoline), with an assumed starting year of 2005. They claim that this is the optimal amount for a carbon tax, and say that it is important to get the amount right for several reasons:
- If it is too low, costs will rise sharply several years down the road, leading to a loss of maximum gross world product (GWP).
- If it is too high in 2005, it would impose extreme costs on current gross world product, with very few costs down the road.
- Furthermore, doing nothing through 2035 would impose an "adjustment cost" on the gross world product of almost $20 billion, while the carbon tax would impose discounted adjustment costs of less than $10 billion.
Yohe and his colleagues recommend that the tax gradually increase with the interest rate, and peak, for example, at $33 per ton in 2035, allowing for mid-term adjustments.
Source: James E. Kloeppel, "Low-cost Climate Change Insurance Could Help Ensure Better Future," EurekAlert, October 14, 2004; and Gary Yohe, Natasha Andronova and Michael Schlesinger, "To Hedge or Not Against an Uncertain Climate Future?" Science, October 15, 2004.
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