What Is It?

The “greenhouse effect” is a complicated process by which the earth is becoming progressively warmer. The earth is bathed in sunlight, some of it reflected back into space and some absorbed. If the absorption is not matched by radiation back into space, the earth will get warmer until the intensity of that radiation matches the incoming sunlight. Some atmospheric gases absorb outward infrared radiation, warming the atmosphere. Carbon dioxide is one of these gases; so are methane, nitrous oxide, and the chlorofluorocarbons (CFCs). The concentrations of these gases are increasing, with the result that the earth is absorbing more sunlight and getting warmer.

This greenhouse phenomenon is truly the result of a “global common” (see The Tragedy of the Commons). Because no one owns the atmosphere, no one has a sufficient incentive to take account of the change to the atmosphere caused by his or her emission of carbon. Also, carbon emitted has the same effect no matter where on earth it happens.


How Serious Is It?

The expected change in global average temperature for a doubling of CO2 is 1.5 to 4.5 degrees centigrade. But translating a change in temperature into a change in climates is full of uncertainties. Meteorologists predict greater temperature change in the polar regions than near the equator. This change could cause changes in circulation of air and water. The results may be warmer temperatures in some places and colder in others, wetter climates in some places and drier in others.

Temperature is useful as an index of climate change. A band of about one degree covers variations in average temperatures since the last ice age. This means that climates will change more in the next one hundred years than in the last ten thousand. But to put this in perspective, remember that people have been migrating great distances for thousands of years, experiencing changes in climate greater than any being forecast.

The models of global warming project only gradual changes. Climates will “migrate” slowly. The climate of Kansas may become like Oklahoma’s, but not like that of Oregon or Massachusetts. But a caveat is in order: the models probably cannot project discontinuities because nothing goes into them that will produce drastic change. There may be phenomena that could produce drastic changes, but they are not known with enough confidence to introduce into the models.

Carbon dioxide has increased about 25 percent since the onset of the industrial revolution. The global average temperature rose almost half a degree during the first forty years of this century, was level for the next forty, and rose during the eighties. Yet whether or not we are witnessing the greenhouse effect is unknown because other decades-long influences such as changes in solar intensity and in the atmosphere’s particulate matter can obscure any smooth greenhouse trend. In other words, the increase in carbon dioxide will, by itself, cause the greenhouse effect, but other changes in the universe may offset it.

Even if we had confident estimates of climate change for different regions of the world, there would be uncertainties about the kind of world we will have fifty or a hundred years from now. Suppose the kind of climate change expected between now and, say, 2080 had already taken place, since 1900. Ask a seventy-five-year-old farm couple living on the same farm where they were born: would the change in the climate be among the most dramatic changes in either their farming or their lifestyle? The answer most likely would be no. Changes from horses to tractors and from kerosene to electricity would be much more important.

Climate change would have made a vastly greater difference to the way people lived and earned their living in 1900 than today. Today, little of our gross domestic product is produced outdoors, and therefore, little is susceptible to climate. Agriculture and forestry are less than 3 percent of total output, and little else is much affected. Even if agricultural productivity declined by a third over the next half-century, the per capita GNP we might have achieved by 2050 we would still achieve in 2051. Considering that agricultural productivity in most parts of the world continues to improve (and that many crops may benefit directly from enhanced photosynthesis due to increased carbon dioxide), it is not at all certain that the net impact on agriculture will be negative or much noticed in the developed world.


Its Effects on Developing Countries

Climate changes would have greater impact in underdeveloped countries. Agriculture provides the livelihoods of 30 percent or more of the population in much of the developing world. While there is no strong presumption that the climates prevailing in different regions fifty or a hundred years from now will be less conducive to food production, those people are vulnerable in a way that Americans and west Europeans are not. Nor can the impact on their health be dismissed. Parasitic and other vectorborne diseases affecting hundreds of millions of people are sensitive to climate.

Yet the trend in developing countries is to be less dependent on agriculture. If per capita income in such countries grows in the next forty years as rapidly as it has in the forty just past, vulnerability to climate change should diminish. This is pertinent to whether developing countries should make sacrifices to minimize the emission of gases that may change climate to their disadvantage. Their best defense against climate change will be their own continued development.

Population is an important factor. Carbon emissions in developing countries rise with population. For instance, if China holds population growth to near zero for the next couple of generations, it may do as much for the earth’s atmosphere as would a heroic anticarbon program coupled with 2 percent annual population growth. Furthermore, the most likely adverse impact of climate change would be on food production, and in the poorest parts of the world the adequacy of food depends on the number of mouths.


Why Should Developed Countries Do Anything?

Why might developed countries care enough about climate to do anything about it? The answer depends on how much people in developed countries care about people in developing countries and on how expensive it is to do something worthwhile. Abatement programs in a number of econometric models suggest that doing something worthwhile would cost about 2 percent of GNP in perpetuity. Two percent of the U.S. GNP is over $100 billion a year, and that is an annual cost that would continue forever.

One argument for doing something is that the developing countries are vulnerable, and we care about their well-being. But if the developed countries were prepared to invest, say, $200 billion a year in greenhouse gas abatement, explicitly for the benefit of developing countries fifty years or more from now, the developing countries would probably clamor, understandably, to receive the resources immediately in support of their continued development.

A second argument is that our natural environment may be severely damaged. This is the crux of the political debate over the greenhouse effect, but it is an issue that no one really understands. It is difficult to know how to value what is at risk, and difficult even to know just what is at risk. The benefits of slowing climate change by some particular amount are even more uncertain.

A third argument is that the conclusion I reported earlier—that climates will change slowly and not much—may be wrong. The models do not produce surprises. The possibility has to be considered that some atmospheric or oceanic circulatory systems may flip to alternative equilibria, producing regional changes that are sudden and extreme. A currently discussed possibility is in the way oceans behave. If the gulf stream flipped into a new pattern, the climatic consequences might be sudden and severe. (Paradoxically, global warming might severely cool western Europe.)

Is 2 percent of GNP forever, to postpone the doubling of carbon in the atmosphere, a big number or a small one? That depends on what the comparison is. A better question—assuming we were prepared to spend 2 percent of GNP to reduce the damage from climate change—is whether we might find better uses for the money.

I mentioned one such use—directly investing to improve the economies of the poorer countries. Another would be direct investment in preserving species or ecosystems or wilderness areas, if the alternative is to invest trillions in the reduction of carbon emissions.


What Solutions Are Proposed?

What can be done to reduce or offset carbon emissions? Reducing energy use and the carbon content of energy have received most of the attention. There are other possibilities. Trees store carbon. A new forest will absorb carbon until it reaches maturity; it then holds its carbon but does not absorb more. The area available for reforestation throughout the world suggests that reforestation can contribute, but not much.

Stopping or slowing deforestation is important for other reasons but is quantitatively more important than reforestation, partly because forest subsoils typically contain carbon greater than the amount in the trees themselves, and this carbon is subject to oxidation when the trees are removed.

Also, substances or objects can be put in orbit or in the stratosphere to reflect incoming sunlight. Some of these are as apparently innocuous as stimulating cloud formation and some as dramatic as huge mylar balloons in low earth orbit. If in decades to come the greenhouse impact confirms the more alarmist expectations, and if the costs of reducing emissions prove unmanageable, some of these “geoengineering” options will invite attention.

The main responses will be to adapt as the climate changes and to reduce carbon emissions. (CFCs are potent greenhouse gases and, if unchecked, might have rivaled carbon dioxide in decades to come. International actions to reduce or eliminate CFCs are making progress and are among the cheapest ways of reducing greenhouse emissions.)

It is improbable that the developing world, at least for the next several decades, will incur any significant sacrifice in the interest of reduced carbon, nor would it be advisable. Financing energy conservation, energy efficiency, and a switch from high-carbon to lower-carbon or noncarbon fuels in Asia and Africa would not only be a major economic enterprise, but also a complex effort in international diplomacy and politics. If successful, it would increase the costs to the developed world by at least another percent or two on top of the 2 percent I mentioned.

A universal carbon tax is a popular proposal among economists because it promises an efficient solution. A carbon tax set equally for all users worldwide would achieve a given reduction in the use of carbon at the lowest cost. If user A values his use of one ton of carbon at two thousand dollars more than its net-of-tax price, and if the tax is four hundred dollars per ton, he will continue to use the carbon because doing so is worthwhile. If user B values his use of one ton at only three hundred dollars more than the net-of-tax price, the tax will induce him to end his use. Thus the tax would eliminate the lowest-valued uses of carbon and would leave the highest-valued ones in place. A carbon tax would require no negotiation except over a tax rate and a formula for distributing the proceeds. But a tax rate that made a big dent in the greenhouse problem would have to be equivalent to around a dollar per gallon on motor fuel, and for the United States alone such a tax on coal, petroleum, and natural gas would currently yield close to half a trillion dollars per year in revenue, almost 10 percent of our GNP. It is doubtful that any greenhouse taxing agency would be allowed to collect that kind of revenue, or that a treaty requiring the United States to levy internal carbon taxation at that level would be ratified.

Tradable permits have been proposed as an alternative to the tax. The main possibilities are estimating “reasonable” emissions country by country and establishing commensurate quotas, or distributing tradable rights in accordance with some “equitable” criterion. Depending on how restrictive the emission rights might be, the latter amounts to distributing trillions of dollars (in present value terms), an unlikely prospect. If quotas are negotiated to correspond to countries’ currently “reasonable” emissions levels, they will surely be renegotiated every few years, and selling an emissions right will be perceived as evidence that a quota was initially too generous.

A helpful model for conceptualizing a greenhouse regime among the richer countries is the negotiations among the nations of Western Europe for distributing Marshall Plan aid after World War II. There was never a formula or explicit criterion, such as equalizing living standards, maximizing aggregate growth, or establishing a floor under levels of living. Baseline dollar-balance-of-payments deficits were a point of departure, but the negotiations took into account other factors such as investment needs and traditional consumption levels. The United States insisted that the recipients argue out and agree on shares. In the end they did not quite make it, the United States having to make the final allocation. But all the submission of data and open argument led, if not to consensus, to a reasonable appreciation of each nation’s needs. Distribution of Marshall Plan funds is the only model of multilateral negotiation involving resources commensurate with the cost of greenhouse abatement. (In the first year Marshall Plan funds were about 1.5 percent of U.S. GNP and—adjusting for overvalued currencies—probably 5 percent of recipient countries’ GNP.)

What the Marshall Plan model suggests is that the participants in a greenhouse regime would submit for each other’s scrutiny and cross-examination plans for reducing carbon emissions. The plans would be accompanied by estimates of emissions, but any commitments would be to the policies, not the emissions.

The alternative is commitments to specific levels of emissions. Because target dates would be a decade or two in the future, monitoring a country’s progress would be more ambiguous than monitoring the implementation of policies.


Thomas C. Schelling is a professor of economics at the University of Maryland School of Public Affairs in College Park. For most of his professional life he was an economics professor at Harvard University. In 1991 he was president of the American Economic Association. He is an elected member of the National Academy of Sciences.


Further Reading

Ausubel, Jesse. “Does Climate Still Matter?” Nature 350, April 25, 1991, 649-52.

Cline, William R. The Greenhouse Effect: Global Economic Consequences. 1992.

Congressional Budget Office. Carbon Charges as a Response to Global Warming: The Effects of Taxing Fossil Fuels. 1990.

Dornbush, Rudiger, and James M. Poterba. Global Warming: Economic Policy Responses. 1991.

Nordhaus, William D. “The Cost of Slowing Climate Change: A Survey.” Energy Journal 12, no. 1 (1991): 37-66.


Related Links

Environmental Quality

Free Market Environmentalism

Pollution Controls

Robert Murphy, The Economics of Climate Change, at Econlib, July 2009.

Pedro Schwartz, Climate Change: A Tragedy of the Commons? at Econlib, March 2020.

Pedro Schwartz, Climate Change: What is (Not) To Be Done, at Econlib, April 2020.

Judith Curry on Climate Change, EconTak podcast, December 23, 2013.

Martin Weitzman on Climate Change, EconTalk podcast, June 1, 2015.