1 - Is it cheaper to tolerate climate change or prevent it?

Summary

In the long run, the cumulative economic costs of climate change will be far greater than the cumulative costs of reducing greenhouse gas emissions. The problem is that the emission reduction costs must be incurred soon, but the benefits will only be felt later.

With foresight, the financial costs of avoiding or reducing climate change impacts are minimized if the investments are made several decades before the impacts occur. This is because the climate system has several built-in timelags, and because large and long-term investments are required to avoid future climate change challenges, particularly in the energy sector.

People value income in the future less than income in the present. Economists capture this ‘time preference of money’ as a number known as the discount rate. A high discount rate favours the present over the future, while a low discount rate favours the future. The choice of discount rate used has an enormous effect on which investments are deemed cost-effective. At one extreme, private sector investors equate the discount rate to the cost of borrowing money, which is usually 5% or more above the inflation rate. The social discount rate is the return expected on social investments, and is significantly lower – perhaps 1 to 3% per annum. At the other extreme, some people apply ethical arguments to suggest that the discount rate should be zero or even negative. The basis of this argument is that almost everyone values their children's and grandchildren's lives above their own, and will make great personal sacrifices on their behalf.

Whether it is cheaper to tolerate climate change or to prevent it has always been a technically challenging analysis, given the large uncertainties on both sides. Arguments based on commercial discount rates and promoted by sectors with a strong interest in maintaining the status quo suggest that the costs of avoiding climate change far exceed the costs of adapting to climate change. Their preference is to emit greenhouse gases now and deal with the consequences later. In this view, mitigation costs tend to be overestimated, for instance by not considering the co-benefits of reducing pollution and waste, or underestimating the fall in cost when new, renewable technologies are adopted at large scales. In contrast, the true adaptation costs are underestimated.