CO2, global warming and the economics

The earth gets warmer and warmer. For the time being, it is a stated fact. As one of the significant factors for global warming, we consider the greenhouse effects. Several substances radiating from the earth’s surface stop the earth’s heat in leaving the earth’s atmosphere. The long-lasting balance of giving the abundant Sun’s heat away to space is under distortion. But carbon dioxide (CO2) is, by far, not the only one gas that results in greenhouse effects. The other substances are water vapor (H2O), methane (CH4), nitrous oxide (N2O), and ozone (O3).


The increase in CO2 concentration in the earth atmosphere generated by human industrial activity is considered today, a significant driver of global warming caused by the human hand >>>. CO2 emissions that can be contributed to the industrial development of the last 250 years distorted to some extent, the earth’s natural cooling process. Combustion of fossil fuels (coal, oil, and gas) in electricity and heat production, as well as in transportation is responsible for 2/3 of global CO2 emissions yearly.

The problem of CO2 emissions was not that severe as only Europe and the United States industrialized. As other countries and continents, including Asia, with China as the economic leader, joined the process, the global emissions accelerated. Europe, including Russia, is still responsible for most of the historical cumulative emissions. In 2017 it was around 33%. The industrialization in Asia matched with its enormous population as of the same year contributed already to 29% of cumulative historical figures. The latter is comparable to the total North America historical emissions of the industrialized era >>>. With more and more countries joining the old economies in the industrialization process, the global warming problem gets severe and severe.


It might get more severe as, according to scientists with yet another centigrade rise in average yearly temperatures, enormous sources of surface methane might be released beyond control with permafrost melting down. And methane is among those other substances causing the greenhouse effect. Global warming might speed up.  Each year of not cutting the global emissions would require an even higher pace in future years to keep within the limit not activating the methane surface resources to unleash >>>. The methane greenhouse effect is twenty-eight times stronger than that of carbon dioxide.

Do we have a 100% guarantee, that this is only CO2 emissions generated by the industry that caused global warming? No, we do not. Are we sure that lowering the emissions would stop the process? No, we are not. But unless proven otherwise, the correlation between those two factors is the only thing we have.


Greta Thunberg was not that long ago criticized for not having a degree in economics but still talking out loud. Does she really have to understand all the technicalities to perceive what the problem we are currently facing is about? She simply understands the rules of the game we are currently involved in. If we do not cut down emissions, already in our lifetime, we could no longer take for granted the lifestyle our parents got used to. And it is not about some fancy stuff. It is about drinkable water and affordable food. It is about not getting sick due to overheating or due to some constant lungs’ insufficiency (caused by pollutants that I omit in this post). It is about not living in constant fear of some natural disasters like unexpected flooding, wide-spreading fires, or drought. 

Translating the problem of industrialization, mainly energy supply, into the language of economics, what we do really have a problem with, is the difference between the private marginal costs and social marginal costs of energy production that, although known to economists for years, had been neglected by decision-makers. With Europe and North America as the primary CO2 emitters, global warming as an economic problem appeared to be a distant future issue. Old economies did not reach the critical mass threshold on a worldwide scale. The difference between private and social costs seemed to be neglectable. With Asia joining the industrialization contributing to as much as CO2 emissions in a short period as North America emitted since the first industrial revolution of XVIIIth century, the global critical mass for tangible temperature increase was reached >>>The difference between private and social costs just got apparent and on the rise.


A short explanation for non-economists. Marginal costs are the costs of producing an additional unit of something. Let us say it is one kWh (a unit of electrical power). Private costs are the costs of energy as we see them on energy bills. They are based on our supplier’s costs of production and distribution, some other company costs and contain a margin. But what with all those environmental costs of carbon dioxide emissions? We bear those costs in paying higher food prices after a drought period. Aussies paid them lately as they had to leave their houses to fire to consume. Not the first time and not the last time. And Aussies do not stand alone … Although we know that 2/3 of those costs can be assigned to the global power generation, there is no financial link between the use of energy and providing for those costs. So, we call those costs external costs or externalities. They are external to our energy bills, but still, somebody must pay for damage caused by energy production. Social costs are those two cost categories summed up together: the private costs billed, and external costs not billed, but still covered by the society.


Now to technicalities. The theory seems to be plain and simple. But …

But how to define or better how to calculate the true extent of the social costs? Should we include the lower purchasing power of societies when produce becomes more expensive after a severe drought period to the calculations? How to include the costs of unexpected flooding? Would the equivalent to investment costs into levees be enough or too far fetched as flooding might be caused by some regular weather factors and not the anomaly? What methodology should be used? What factors should we consider in the calculation? What values should we assign to each of the factors?

Everybody who dealt with this kind of socio-economic analysis in practice knows that several scientific institutes around the world focus on the topic. But when you compare the research results, you see diverging values. And then, you must make the final decision, which of those research results to recommend for the analyses. And you can only apply common sense by choosing values that would not blow up any project you have on your desk. But in fact, you don’t know whether you just underestimated or overestimated. Are private costs of energy production much higher than the social cost or is it the other way around? Which of the lines representing the social marginal cost on the diagram corresponds to what we see around us? In fact, for sure, we know only this: for many years running, we just underestimated, and now we must deal with that by acting. Doing further valuations would be a loss of time. So please do not send Greta Thunberg to lectures in economics when common sense is that what really counts.

Photos by: Chris LeBoutillier, Pixabay, Belle Co and Johannes Plenio