What Does it Take to Control Global Temperatures? A toolbox for testing and estimating the impact of economic policies on climate

Abstract

This paper tests the feasibility and estimates the cost of climate control through economic policies. It provides a toolbox for a statistical historical assessment of a Stochastic Integrated Model of Climate and the Economy, and its use in (possibly counterfactual) policy analysis. Recognizing that stabilization requires supressing a trend, we use an integrated-cointegrated Vector Autoregressive Model estimated using a newly compiled dataset ranging between years A.D. 1000-2008, extending previous results on Control Theory in nonstationary systems. We test statistically whether, and quantify to what extent, carbon abatement policies can effectively stabilize or reduce global temperatures. Our formal test of policy feasibility shows that carbon abatement can have a significant long run impact and policies can render temperatures stationary around a chosen long run mean. In a counterfactual empirical illustration of the possibilities of our modeling strategy, we study a retrospective policy aiming to keep global temperatures close to their 1900 historical level. Achieving this via carbon abatement may cost about 75% of the observed 2008 level of world GDP, a cost equivalent to reverting to levels of output historically observed in the mid 1960s. By contrast, investment in carbon neutral technology could achieve the policy objective and be self-sustainable as long as it costs less than 50% of 2008 global GDP and 75% of consumption.