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The ongoing debate over climate policy — and by extension, policies focusing on whether to curb the use of carbon-based fuels — centers largely on what scientists have to say about the effects of emitting carbon into the atmosphere.
Robert Topel, Isidore Brown and Gladys J. Brown Professor in Urban and Labor Economics, thinks that’s a bit of a shame. “Scientists think they know so much about climate change. We have a problem. Ultimately, if we are going to do anything about this, it comes down to economics,” Topel said April 14 at a Becker Brown Bag Series speech, hosted by the Becker Center on Chicago Price Theory, at Harper Center.
Topel advocated bringing economists into discussions on how to affect climate change by reducing the use of carbon based fuels and/or removing excess carbon dioxide from the atmosphere. “I think what economists can bring to the party is that we want to think today about what we’re sacrificing now and how it affects us in the future.”
In simplest terms, economists can use a standard supply-and-demand model to set fossil fuel prices at a level so that they will be used only in quantities the atmosphere can handle. That price ultimately could be set by government taxes or a cap-and-trade model, Topel said.
“We can think of the atmosphere much like an exhaustible resource,” Topel said. “The economic question comes down to how fast do we want to use up the stuff? How fast do we want to use up the oil? How fast do we want to use up the capacity of the atmosphere? That basic solution is well known. At least it is well known to a lot of economists.”
But several factors complicate the policy, Topel said; for instance, current generations are deciding policy for future generations. Also, a solution requires harmonized cooperation among nations.
“That’s something that’s never been done before,” Topel said. And, it’s expected to be more difficult in the future as countries like China and India grow their economies and thus their appetite for fossil fuels.
Among particular interest, Topel pointed out, is the value of not-yet-invented technological advances well into the future that may remove carbon from the atmosphere. “The present value of innovations today, say if you invent a carbon-eating tree 50 years from now, is independent of the growth in prices,” he said. “The distant payoffs are not less valuable. The delay in implementing an optimal policy does not lessen the impact of innovation. Getting the policy right, in effect, is more important than getting it done.”
Still, Topel cautioned, “the cost of waiting is still positive because the longer we wait, the more we dump things into the atmosphere, and the less room we’ve got in a narrower period of time to limit the effects.”
The economic model also looks at the impact of future catastrophes that may be caused by a large carbon build-up. For example, what would be the loss of gross domestic product if there’s a 1 percent loss of life? Such scenarios are important to setting the ultimate starting price, even though it’s difficult to factor in because it’s like predicting the future, Topel said.
Charles Dozin, a second-year student in the Full-Time MBA Program, said he wanted to hear more on the climate change debate. “There’s still a lot of uncertainty, and it’s very theoretical. It’s interesting to see the approach, but to be honest, there is still a lot of work left to be done.”
—Patrick Ferrell