PAGE95: An Updated Valuation of the Impacts of Global Warming
4. Discussion and Conclusions
Our current best estimate of marginal impacts from PAGE95 is US$2l/tC, with a 90% uncertainty range of US$10-48/tC. To put this measure into context, $21/tC corresponds roughly t o a petroleum t a x of US$2 per barrel, or a petrol t a x of 1.2 cents per liter. Our estimate of t h e marginal impact of a tonne of carbon is based on the following key assumptions and inputs:
An updated climate model with cooling from sulfate aerosols and ozone depletion, and increased climate sensitivity t o atmospheric C 0 2 concen- tration. Impacts grow as a nonlinear function of temperature.
Noneconomic impacts are slightly greater than economic impacts and are also more uncertain. Expressed as a percentage G D P loss, both eco- nomic and noneconomic damages are largest in the developing countries.
Economic growth is region and time specific. Since both climatic change impacts and ecoilomic growth tend t o be concentrated in t h e developing countries, this increases the estiina.ted marginal impact per t C .
Large amounts of adaptatioil t o climate change, such as the building of sea walls and the preventioil of development in vulnerable areas, partic- ularly in the developed world.
A time-variable discount rate conlputed as the sum of world per capita economic growth and a pure rate of time preference of 3%.
This "best" marginal impact estimate is most sensitive t o assumptions about adaptation, nonlinearity, and the discount rate. In t h e case of zero adaptation t o climate change, margiilal impacts rise by 50% t o US$32/tC.
An important interaction effect was observed between t h e degree of adap- tation and nonlinearity in damages as a function of temperature rise above some tolerable level. Recall that the net effect of nonlinearity in the dam- age function is slight under aggressive adaptation, because the decrease in predicted damage early in the time horizon is balanced by the increase in predicted damage later on. This trade-off is highly sensitive t o the tolerable
level of ten1pera.ture inc.rea,se before dama.ge occurs, which in turn depends on the degree of a'dapta.tion. For exanlple, in the absence of adaptation, the tolerable level of temperature increase is assumed t o be zero, as com- pared with 2OC for the developing countries under aggressive adaptation.
Nonlinearity in the damage function makes a substantial contribution t o the difference in marginal impacts under aggressive and zero adaptation. In a similar manner, nonlinearity in the damage function increases the impor- tance of the discount rate.
The most influential assumption examined in this study is the discount rate. Reducing the pure rate of time preference component of the discount rate from 3% t o 2% doubles the mean marginal impact t o US$46/tC. If a zero rate of pure time preference is chosen t o sa.tisfy intergenerational equity, then the mean marginal impa.ct increa.ses by a n order of magnitude t o $440/tC.
In addition t o the issue of iiltergenerational equity, the existence of sec- oizdary benefits to GO2 nbntenaent suggests that our best marginal impact estimate of US$2l/tC may be conservative, even though it is a t the upper end of the range of estimates in the literature (US$5-25/tC; Fankhauser and Pearce, 1993). Fossil fuels are the primary source, not only of COa, but of other air pollutants - CO, SO,, NO,, particulates, and volatile organic compounds. Therefore, a. carbon tax t o reduce fossil fuel use will incur sec- ondary benefits in improved air quality and reduced acid rain. Furthermore, recycling the carbon tax revenues t o reduce other distortional taxes such as value-added taxes (VAT) or pa,yroll taxes will stimulate employment and generally increase the social welfa.re (Barker et al., 1993).
Finally, the 90% range for the ma.rgina1 impact per tonne of carbon emissions found in this study, US$lO-48/tC, is very large in comparison to the uncertain range of US$2-7 estinla,ted in Hope and Maul (1996) or the accepted range of values in the literature, US$5-25/tC. New scientific and economic knowledge, in particular about sulfate aerosols and nonlinearity in damage as a function of temperature rise, suggests that climate-human interactions are even more complex and difficult t o predict than was previ- ously thought. This increase in uncertainty is reflected in the results of our study.
In conclusion, in reading any study on the valuation of global warm- ing impacts, policy makers are advised t o carefully consider the treatment of uncertainty as well as assumptions about adaptation t o climate change, nonlinearity in damage as a function of temperature rise, secondary bene- fits t o C 0 2 abatement, and the discount rate. We have shown that these assumptions, often hidden in the sillall print or not reported a t all, have a profound effect upon the marginal impact calculations.
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