Climate change presents two types of risks: those we can adapt to or try to counteract and those beyond our power to cope. The first group includes (1) sea level rise, which threatens much of our infrastructure and cultural patrimony; (2) extreme weather, particularly storm events; (3) climate alterations harmful to agriculture; (4) loss of biodiversity; (5) ocean acidification that interferes with shell production and threatens marine food chains; and (6) threats to human health from disease and especially extreme heat. The second group, which encompasses an unmanageable intensification of all of the first, is the risk of runaway climate change. This can arise if elevated atmospheric carbon concentrations trigger positive feedback mechanisms, like stored methane releases, widespread forest die-offs, reduction of the Earth’s albedo, or changes in prevalent cloud formations that amplify initial warming effects, resulting in a “hothouse Earth.” The tools of standard welfare economics, like calculation of a social cost of carbon and its use in cost–benefit analysis, are unhelpful. Their basis in marginal effects is contradicted by the scale of climate impacts, and their deference to consumer judgment tells us little about the political judgments that must guide policy trade-offs.

Two preliminaries: US experience points to the unprecedented challenge of the rapid, drastic energy transition we face, and the labor needed to accomplish it should regarded as a cost, not a benefit. This chapter thus encourages skepticism regarding claims that the cost of meeting carbon goals will be minimal and proposes questions that should be asked of optimistic studies. The most reliable analyses draw on integrated assessment models, which show we can achieve a two-thirds chance of limiting warming to 2° at moderate cost only by greatly overshooting corresponding carbon budgets, followed by decades of negative emissions using yet-to-be developed carbon removal technologies. Not predicating policy on these technologies, however, results in very high costs. Even so, these models don’t include the likelihood that much of the existing capital stock will be uneconomic to operate at high carbon prices, a potential source of enormous disruption. The closest analogy we have is the post-1989 shock in Eastern Europe when economic opening caused widespread shutdowns. It is important to be honest about costs: rosy forecasts are unconvincing, fail to prepare us for the problems we’ll need to solve and obscure the political economy of policy change.

Absent effective public action, attention has shifted to what individuals and organizations can do on their own, using carbon audits and footprint estimates to pursue the goal of neutrality. Unfortunately, economics long ago demonstrated that the calculation of “physical” prices like embodied carbon is forbiddingly complex and that the interconnectedness of our decision-making makes it impossible to decompose social outcomes into separate individual choices. This is illustrated in case studies of electric versus internal combustion-powered vehicles and the carbon accounting exercises of Microsoft and a public university. Meanwhile, governments have been preoccupied with setting emission targets slated to be reached decades in the future. At best, they have only a loose relationship to the cumulative emissions that drive climate change. The solution is to switch to carbon budgets, limits on total future emissions. Calculation of budgets compatible with 1.5°C or 2°C warming can be only approximate, but climate scientists have given us reasonable estimates. A useful benchmark is the corresponding emission cuts under the simplification of equal annual reductions. This equals 3.5% globally for a 2° target. Social justice and political realism call for much larger percentage cuts in rich nations’ emissions, perhaps about 5% per year.

The Earth surface carbon cycle consists of regular flows between the major sinks: atmosphere, ocean, soils and biota. It is in balance, except for flows to and from long-term storage (methane formations, deep ocean, lithosphere), which comprise the deep Earth carbon cycle. At the beginning of life in earth history, about 500 million years ago, the atmosphere was carbon-rich, and Earth temperatures were vastly hotter than today. Over time most of this carbon was withdrawn from the surface carbon cycle through ocean sedimentation, reactions with weathering rock and migration of organic matter to the lithosphere, where they were transformed into fossil fuels. This eventually produced the temperate Earth, which facilitated human evolution, but now, by extracting and burning fossil energy, humans are recreating conditions for the hotter Earth of earlier times. These direct carbon emissions can be amplified by feedback mechanisms, whereby initial warming releases carbon stored in formerly stable methane deposits and alters the carbon cycle so as to increase the size of the atmospheric sink relative to other sinks or changes in the Earth’s albedo. The politics of controlling emissions is further complicated by lags in warming and subsequent climate impacts.

To understand why so little is being done about climate change, we need to draw on political economy: Who would pay the cost of adhering to a carbon budget, and what say do they have over policy? The cost of capital write-offs discussed in Chapter 5 will be borne primarily by wealth-holders, who have disproportionate political influence in nearly all countries. Although public attention has focused on fossil fuel industries, a wide range of businesses have quietly resisted emission-cutting regulations and ensured that adopted policies would have ample loopholes. The other main cost, much higher energy prices, would be borne regressively by households. To forestall their opposition and protect living standards, it is essential that most carbon revenues be returned to them, ideally as per-capita rebates. The net effect of carbon pricing and rebating would be strongly progressive. Since it is neither feasible nor desirable to compensate wealth-holders for capital losses, however, effective action against catastrophic climate change requires broad, determined collective action to rebalance political power away from control by capital.

The climate crisis is due to the extraction and burning of fossil fuels, but we are often told it is “really” about something else: economic growth, population growth, nature deprivation, deforestation or lack of investment in new energy systems. The first is based on multiple misunderstandings, makes little quantitative sense and reverses cause and effect; nor is “growth ideology” a significant impediment to climate action. The second is even more quantitatively implausible than the first. The third is contradicted by actual rural-urban political patterns. Faith in forest carbon sequestration has given rise to a large offset industry, but forests can readily become a net source rather than a sink in a warming world. Finally, while investments in energy efficiency and renewable sources are essential, they are not the same as equivalent reductions in fossil fuels in a world of expanding energy use. This is made clear by the experience of Germany, a world leader in green development and also a regional laggard in reducing emissions. There are many other goals to be pursued, but directly suppressing fossil fuel use is the sine qua non of avoiding a climate catastrophe.

The global dilemma of climate change can be seen in refrigeration: as warming increases, air conditioning becomes essential for people living in the tropics, but providing it will also contribute to carbon emissions. A successful policy must respect the need for development, yet overcome the collective action barriers to global cooperation. The first step is for each country to propose its own carbon budget, so that negotiations can proceed in light of their combined impact on the carbon cycle. The next step is to initiate a carbon club, in which willing countries agree to coordinate their policies. Advantages of joining include mitigating the free-riding and competitive costs of collective action, sharing research and development expenses, aligning border adjustments and, especially, arranging for global transfers of carbon revenues. A plausible transfer system could rectify shortfalls in development finance and fulfill the climate adaptation pledges made in the Paris Agreement. Global cooperation on climate change can and should also operate as development policy.

The Paleocene-Eocene Thermal Maximum, which occurred 56 million years ago, saw semi-tropical temperatures – and alligators – well above the Arctic Circle. This was likely caused by very high concentrations of carbon dioxide in the atmosphere. Through the burning of fossil fuels, present-day people run the risk of recreating these catastrophic conditions. This book draws the implications of climate science for economics and policy. It welcomes the analytical clarity economics brings to the question of how to control carbon emissions, but it rejects the economic impulse to search for their “optimal” level. As for policy, it works backward from the conditions for avoiding a climate catastrophe rather than forward from what appears politically feasible at the current moment. Along the way it critiques several common assumptions: that policies should try to balance their economic costs and benefits, that the costs of stabilizing the climate will be modest and only the intransigence of the fossil fuel companies stands in the way, that climate change is not “really” about carbon but some deeper ideological problem and that the problem can be solved by actions individuals or organizations can take one at a time.

Voluntary or local renunciation of fossil fuels will not keep us within a carbon budget, and direct control along the lines of wartime rationing would be overbearing and inefficient. This leaves either carbon taxes or carbon permits as the main instrument. At a first approximation these are mirror images of each other: raising the price to reduce emissions or vice versa. Under uncertainty, however, taxes make prices predictable but leave emissions unpredictable, while permit systems do the reverse, which should be an argument for permits. Moreover, quantity controls better manage interdependent (multiple equilibrium) economic structures than price controls. Real-world implementation has been poor, as seen in the European Trading System and California’s Cap-and-Trade program. The culprits are weak targets, widespread exemptions, handouts to business and abundant offsets. The dismal experience of the Clean Development Mechanism shows that such offsets function mainly as loopholes. Better would be a system of permits with universal coverage, auctioned rather than given away, and not exchangeable for offsets. It should be accompanied by other policies to mitigate the distortions caused by rapid carbon price increases and to accelerate the development of non-carbon energy sources and non-carbon-using goods and services.