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The Failure of Climate Change Economics

In 1896, the Swedish chemist Svante Arrhenius developed a theory to explain the likely impact of burning coal on the climate.  Arrhenius claimed that, due to human activity, the concentration of CO2 in the atmosphere would increase, creating an “enhanced” greenhouse effect.  His theory did not enjoy consensus in his time, but the scientific community today agrees that human beings are responsible for the present global warming trend.1  Why, then, has the United States not signed on to the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), the international document that established legally binding reductions in greenhouse gas emissions, with targets determined on a country-by-country basis?

Cost-benefit analysis has been the main tool used by American policymakers to argue that even a moderate reduction in greenhouse gas emissions, as proposed in the Kyoto Protocol, is at odds with the global capitalist economy.  The Stern Review on the economics of climate change “estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever.”2  Thus far, the Stern Review is the only cost-benefit analysis in which the benefits of reducing emissions outweigh the costs.3  Many pro-business analysts, moreover, have challenged some of the assumptions in the Stern Review, like the use of a low discount rate, which, according to environmental skeptic Bjorn Lomborg, “makes the cost [of not reducing emissions] look much more ominous now.”4 

Cost-Benefit Analysis and the Environment

While in use for decades, cost-benefit analysis has been a crucial instrument for environmental policymakers in the United States, especially under the Reagan Administration but also during President Clinton’s tenure.  President Bush’s declaration that reducing greenhouse gases would not be worth the cost to the American economy shows that cost-effectiveness continues to play a major role in determining governmental action on environmental issues.

The basic rationale for cost-benefit analysis is, as some call it, “organized common sense.”  Individuals or a group of individuals assess the means necessary to achieve the desired ends.  Economist A. Myrick Freeman III explains how this framework is applied to environmental policymaking specifically.  He says, “If we are to make the most of our scarce resources, we should compare what we receive in the form of increased well-being from pollution control and environmental protection activities with what we give up by taking resources from other uses that also contribute to our well-being.”5  Any action to ameliorate the impact of pollution on the health of humans and ecosystems must be justified by the cost-effectiveness of that action.6  Many economists praise parts of the Safe Drinking Water Act, for example, in producing benefits — most importantly, a reduction in the amount of lead found in drinking water — that exceed the costs of implementing the policy.  Conversely, the costs of controlling mobile sources of air pollution (primarily from transportation) under the Clean Air Act, for example, far exceed the benefits.7  That’s the way mainstream policy analysts evaluate whether or not a specific governmental activity is successful.

The mainstream approach based on cost-benefit analysis, however, is clearly unable to combat the tremendous social disparities in exposure to pollution or to drastically reduce humanity’s impact on the ecosphere.  In 2004, the Washington Post reported that the amount of lead in drinking water in a number of American cities exceeded the levels set by the Safe Water Drinking Act.  In fact, the water in Washington, D.C. led the nation in concentration of lead,8 a district where 17 percent of the population lived in poverty in 2004, well above the national average of 12.7 percent.  The Clean Water Act has helped clean up many bodies of water in the United States; however, it has done nothing to reduce the size of hypoxic zone in the Gulf of Mexico, which continues to break record levels since measurements began in 1985.9  Native American lands are often in close proximity to closed military bases with dangerous, unexploded ordnance.10  The Comprehensive Environmental Response, Compensation, and Liability Act (Superfund) is intended to protect all people from abandoned hazardous materials, like those surrounding Native Americans.  Of the 34 military bases on the Superfund list, not one has been cleaned up.11

The Costs and Benefits of Global Warming

Cost-benefit analysis did not always dominate environmental policymaking.  Again, economist A. Myrick Freeman III reports:

In the first two major environmental laws of the early 1970s — the Clean Air Act and the Federal Water Pollution Control Act — Congress explicitly rejected the economic approach to goal setting. . . .  However, more recently Congress has written implicit or explicit economic efficiency criteria into three major environmental laws: the Toxic Substances Control Act of 1976, the Federal Insecticide, Fungicide and Rodenticide Act of 1976 and the Safe Drinking Water Act Amendments of 1996.12

In the case of global warming, however, environmental policy analysts, even in the agenda-setting stage, made a strong argument against greenhouse gas reductions using cost-benefit analysis.  The Kyoto Protocol, they determined, is not cost-effective for the American economy.  This view was then expressed by the policymakers.  The authors of the Byrd-Hagel Resolution of 1997 claimed that this policy “could result in serious harm to the United States economy, including significant job loss, trade disadvantages, increased energy and consumer costs, or any combination thereof.”13  Following Bush’s June 2001 address, where he also acknowledged the negative economic impact of the 1997 protocol to the UNFCCC, major news outlets, like the Wall Street Journal, reported that rejecting these limits economically makes sense.14

Indeed, economists in the US had consistently demonstrated that abiding by the UNFCCC’s 1997 protocol to the letter would be too costly.15  William D. Nordhaus and Joseph Boyer, for instance, calculated “that the worldwide present value cost of the Kyoto Protocol would be $800 billion to $1,500 billion if it were implemented as efficiently as possible.”16  According to Nordhaus and Boyer, these costs outweigh the benefits 10 to 1, the latter of which they estimated to be around $120 billion.  In the book-length edition of their analysis, they provided a more thorough assessment, yet coming to similar conclusions.  Freeman reports on their conclusions:

They found that a “modest” program of emissions reductions is justified on economic grounds but that more aggressive proposals to meet specific reductions targets (for example, those of the Kyoto Protocol), to stabilize emissions at some rate, or to stabilize global average temperatures at 1.5 or 2.5 degrees Celsius above preindustrial levels would have costs substantially in excess of benefits.  However, as the authors acknowledged, these estimates contain substantial uncertainties, and the possibility of catastrophic changes and nonlinear climate responses cannot be ruled out.17

In other words, an environmental catastrophe enormous in scope and damage could make the policy economically rational.  Until that happens, though, “the Kyoto Protocol is an impractical policy focused on achieving an unrealistic and inappropriate goal,” say Brookings Institution economists Warwick J. McKibbin and Peter J. Wilcoxen.18  In fact, some even see a potential for world economic growth in the environmental catastrophes brought on by global warming.  As the Arctic ice melts in the summer, the Northwest Passage opens up, likely benefiting international trade.19

While cost-benefit analysts are dreaming up fantastic benefits of global warming, however, we may be only losing precious time: some scientists have argued that the 2007 International Panel on Climate Change (IPCC) report underestimated the potential future rise in sea levels.  These scientists suggest that by 2100 sea levels globally might be between 1.6-4.6 feet higher than they were in 1990, certainly creating the conditions for a social and environmental catastrophe!20

Assigning Monetary Value

Of course, in order to conduct a cost-benefit analysis of greenhouse gas reduction, monetary values must be assigned.  While the 2001 IPCC report used an average value for all human life, a “careful reading of the fine print [of the 1995 report] revealed that they were valuing lives in rich countries at $1,500,000 . . . and in lowest-income countries at $100,000.”21

In order to assign monetary values, moreover, property rights need to be established.  Commonly held natural resources, like the atmosphere, do not make for an easy cost-benefit analysis, however.  According to a report published by the Congressional Budget Office in 2003, that is in fact a reason why global warming has become the problem that it is.  The authors of the CBO’s “The Economics of Climate Change: A Primer” write:

The Earth’s atmosphere is a global, open-access resource that no one owns, that everyone depends on, and that absorbs emissions from an enormous variety of natural and human activities.  As such, it is vulnerable to overuse, and the climate is vulnerable to degradation — a problem known as the tragedy of the commons.  The atmosphere’s global nature makes it very difficult for communities and nations to agree on and enforce individual rights to and responsibilities for its use.22

This argument, known as the “Tragedy of the Commons,” was popularized by Garret Hardin in a 1968 article published in Science.  “With no evidence whatsoever, except for an obscure nineteenth-century pamphlet,” radical economist Michael Perelman writes, “Hardin insisted that the absence of property rights in the English common lands inevitably led to an environmental disaster.”23  Since Hardin’s argument fit the dominant ideology like a glove, the “Tragedy of the Commons” has become the “economically correct” way of proposing environmental policy in a capitalist society.  While the CBO acknowledges that privatization of the atmosphere would be nearly impossible, global warming is caused, the federal agency argues, not by the waste produced by a growing capitalist economy, but by a lack of coordination between the world’s governments.  Nevertheless, the CBO insists, just in case anyone thinks that government is the solution: “There is . . . no guarantee that governments will be better than markets at managing common resources.”24

Economics of a Planetary Experiment

Since climate data began being collected at Mauna Loa in the 1950s, scientists could begin to test the “enhanced” greenhouse effect theory.  The initial results indicated that the Swedish chemist Arrhenius was on the right track; concentrations of CO2 in the atmosphere were going up.  In 1957, these observations led scientists at the Scripps Institution of Oceanography to conclude, “Human beings are now carrying out a large scale geophysical experiment of a kind that could not have happened in the past nor be reproduced in the future.”25  For a while, scientists were able to influence the global warming policy agenda.  Nevertheless, their success in shaping environmental policy would eventually be constrained.  Environmental studies professor Lamont Hempel notes, “once [scientists] succeeded in moving climate issues high on the institutional agendas of governments, the political and economic determinants of policy became dominant once again.  For some policymakers, this meant that scientific advice could be safely judged on the basis of its political and economic acceptability, rather than on its technical merits.”26  Cost-benefit analysis, not the science of global warming, became the guiding policy principle, the use of which has certainly encouraged a view of this planetary experiment that is more acceptable to the ruling class.27

Of course, the negative social and environmental implications of cost-benefit analysis will only make sense in the context of capitalism.  The analytical tools designed in this specific socio-economic setting are not value-free.  Overall, there is a need to justify the exploitative relationship that capitalism carries on with the planet; cost-benefit analysis satisfies this need.  This does not mean that all environmental policy formulation is predetermined to fail because it makes no economic sense.  However, there are circumstances in which the threat to profit accumulation is so great that inaction is the only choice.  Such is the case not only with global warming but also with other ecological disasters, like the collapse of the world’s fisheries.28  In fact, as has happened with the passenger pigeon, market signals suggesting that action be taken to slow down the exhaustion of natural resources may not make themselves clearly known in time.  The resource can become all used up, sometimes without any warning from the market.

The capitalist class has not overpowered every single social organization.  But, it does generally dominate society’s decision making.  While climate scientists dissent, business remains influential over the policy analysts and the mainstream media, among other important groups, who have thus far determined the fate of global warming policy.  The existence of capitalism depends on the exploitation of both humans and the environment.  Anthropogenic global warming is not a “market failure” as the Congressional Budget Office suggests.  Rather, it is the failure of the market economy — and its ideological support mechanisms, all geared towards profit accumulation — to achieve a sustainable relationship with nature.  Only a different socio-economic system can guarantee justice for all humans and sustainable management of the resources in the biosphere.


1  Betsill, Michele.  2005.  “Global Climate Change Policy: Making Progress or Spinning Wheels?” in Regina S. Axelrod, David Leonard Downie and Norman J. Vig, eds. The Global Environment: Institutions, Law, and Policy, 2nd Edition.  Washington, DC: Congressional Quarterly Press: 103-124.


3  Richard S. J. Tol & Gary W. Yohe.  2006.  “A Review of the Stern Review.”   World Economics.  7(4): 233-250.

4  Bjorn Lomborg.  2 November 2006.  “Stern Review: The Dodgy Numbers behind the Latest Warming Scare.”   Wall Street Journal

5  Freeman III, A. Myrick.  2006.  “Economics, Incentives, and Environmental Policy” in Norman J. Vig and Michael E. Kraft, eds. Environmental Policy: New Directions for the Twenty-First Century, 6th Edition.  Washington, DC: Congressional Quarterly Press: 193-214.

6  The method of assigning monetary values to human lives and ecological goods and services is very dubious.  See John Bellamy Foster.  2002.  “Ecological Tyranny of the Bottom Line: The Environmental and Social Consequences of Economic Reductionism” in Ecology against Capitalism.   New York: Monthly Review Press, pp. 26-43.

7  Freeman III, A. Myrick.  2006.  “Environmental Policy Since Earth Day I: What Have We Gained?”   Journal of Economic Perspectives.  16(1): 125-146.

8  Leonnig, Carol D., Jo Becker and David Nakamura.  5 October 2004.  “Lead Levels in Water Misrepresented Across U.S.: Utilities Manipulate or Withhold Test Results to Ward Off Regulators.”   Washington Post.   Page A01

9  National Oceanic and Atmospheric Administration.  17 July 2007.  “NOAA And Louisiana Scientists Say Gulf of Mexico ‘Dead Zone’ Could Be Largest Since Measurements Began in 1985.” 

10  Hooks, Gregory and Chad L. Smith.  2004.  “The Treadmill of Destruction: National Sacrifice Areas and Native Americans.”   American Sociological Review.  69(4): 558-575.

11  Heilprin, John.  12 May 2005.  “Dozens of Closed Military Bases on EPA List of Worst Toxic Sites.”  North County Times.

12  Freeman III, A. Myrick.  2006.  “Environmental Policy Since Earth Day I: What Have We Gained?”  Journal of Economic Perspectives.  16(1): 125-146.

13  “Byrd-Hagel Resolution.” 

14  Hilsenrath, Jon.  7 August 2001.  “Eco-Economists Back Bush on Kyoto Pact.”  Wall Street Journal.  Section A; Page 2, Column 2.

15 Foster, John Bellamy.  2002.  “Ecology against Capitalism” in Ecology Against Capitalism.  New York: Monthly Review Press, pp. 9-25.

16  Reported in Warwick J. McKibbin and Peter J. Wilcoxen.  2002.  “The Role of Economics in Climate Change Policy.”   Journal of Economic Perspectives.  16 (2): 107-129.

17  Freeman III, A. Myrick.  2006.  “Economics, Incentives, and Environmental Policy” in Norman J. Vig and Michael E. Kraft, eds. Environmental Policy: New Directions for the Twenty-First Century, 6th Edition.  Washington, DC: Congressional Quarterly Press: 193-214.

18  McKibbin, Warwick J. and Peter J. Wilcoxen.  2002.  “The Role of Economics in Climate Change Policy.”  Journal of Economic Perspectives.  16 (2): 107-129.

19  Belkin, Douglas.  13 September 2007.  “As Arctic Ice Melts, Northwest Passage Beckons Sailors.”   Wall Street Journal

20  Clark, Brett and John Bellamy Foster.  17 February 2007.  “Is the New UN Global Warming Report Too Conservative?”  MRZine.

21 Ackerman, Frank and Lisa Heinzerling.  2004.  Priceless: On Knowing the Price of Everything and the Value of Nothing.  New York: The New Press.  In this case, the method of assigning a lesser value to people living in the Third World generated outrage worldwide.  However, disparate valuations of human lives happen all the time in the insurance industry.

22  Congressional Budget Office.  April 2003.  “The Economics of Climate Change: A Primer.” 

23  Perelman, Michael.  2003.  The Perverse Economy: The Impact of Markets on People and the Environment.   New York: Palgrave Macmillan.

24  Congressional Budget Office.  April 2003.  “The Economics of Climate Change: A Primer.”

25  Quoted in Betsill, Michele.  2005.  “Global Climate Change Policy: Making Progress or Spinning Wheels?” in Regina S. Axelrod, David Leonard Downie and Norman J. Vig, eds. The Global Environment: Institutions, Law, and Policy, 2nd Edition.  Washington, DC: Congressional Quarterly Press: 103-124.

26  Hempel, Lamont C.  2006.  “Climate Policy on the Installment Plan” in Norman J. Vig and Michael E. Kraft, eds. Environmental Policy: New Directions for the Twenty-First Century, 6th Edition.  Washington, DC: Congressional Quarterly Press: 288-310.

27 Obviously, cost-benefit analysis is not the only angle from which greenhouse gas reduction policy is attacked.  Mainstream media commentators have a reputation for questioning the solid science of global warming.  John Stossel from ABC News, syndicated columnist George Will, and the racist and sexist CNN commentator Glenn Beck have all challenged climate change science.  (See Peter Hart, “In Denial on Climate Change: Leading Pundits Reject Science on Global Warming,” Extra! May/June 2007.)  Therefore, not only do the financial elites have at their disposal a specific analytical tool used to discredit environmental policy action; but also, understanding that the top climate scientists are endorsing a policy that would be harmful to business as usual, they support both the research that supposedly disputes the science and the media outlets needed to disseminate the disinformation to the public.  Not surprisingly, a Newsweek poll conducted in August 2007 showed that only 47% of respondents thought that most scientists agree that global warming is largely caused by humans.  See “Environment,”

28  Black, Richard.  2 November 2006.  “‘Only 50 Years Left’ for Sea Fish.”  BBC. 

Matthew Thomas Clement currently lives in Austin, TX with his wife (a postpartum nurse) and their little baby.  His previous contribution (with much help from the editors) to Monthly Review is “Rice Imperialism: The Agribusiness Threat to Third World Rice Production,” which can be found at

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