Figure 1. The 14 estimates of the global economic impact of climate change, expressed as the welfare-equivalent income loss, as a functions of the increase in global mean temperature relative to today.

A study on climate change published Friday, says preventing a global temperature increase of more than 2 degrees Celsius, which is viewed as the safe limit, will be very expensive, while a far less ambitious target would produce a more cost-efficient result for the world economy.

The paper, by Richard Tol, who a research professor at Ireland's Economic and Social Research Institute (ESRI) and Professor of the Economics of Climate Change at the Vrije Universiteit, Amsterdam, The Netherlands, says curbing greenhouse emissions such as methane and soot would be much more cost-effective than focusing exclusively on carbon dioxide.

A group of economists called the Copenhagen Consensus, headed by Danish academic, Bjorn Lomborg, has published the study. Lomborg, who is author of  The Skeptical Environmentalist, says gradual cuts in carbon dioxide, rather than drastic reductions, were a better solution for a UN climate treaty due to be agreed in December in Copenhagen.

"We should cut some carbon, but big cuts right now are a poor decision," Lomborg told Reuters. About 180 nations are meeting in Bonn, Germany,  this week for talks on the new treaty.

The cost of stabilising atmospheric carbon dioxide at 450 parts per million - - the limit viewed as necessary to avoid the worst effects of climate change  -- would be 12.9 per cent of global gross domestic product, Prof. Tol says. It would require a tax of $68 per tonne of CO₂ worldwide, from 2010.

However, that scenario would cost $50 over the course of the century for every dollar saved, he says. By contrast, a much lower worldwide CO₂ tax of 50 cents per tonne would cost only 66 cents for every dollar saved, but under this scenario concentration would stabilise at 850ppm - - a level scientists say would have catastrophic effects on climate

Prof. Tol says the impact of climate change is rather uncertain. Available estimates suggest that the welfare loss induced by climate change in the year 2100 is in the same order as losing a few percent of income. That is, a century worth of climate change is about as bad as losing one or two years of economic growth. The impact of climate policy is better understood. A clever and gradual abatement policy can substantially reduce emissions (e.g., to stabilise greenhouse gas emissions at 650 and 550 ppm CO2eq) at an acceptable cost (1 or 2 years of growth out of 100, respectively). Very stringent targets (e.g., the 2ºC of the EU) may be very costly, however, or even infeasible. Suboptimal policy design would substantially add to the costs of emission abatement.

Richard Tol

Tol specifically considers five alternative policies for carbon dioxide emission reduction.

At one end of the spectrum, he looks at a $2.5 trillion expenditure on emission reduction in the OECD before 2020. Tol concludes bluntly: “This is rather silly. The benefit-cost ratio is less than 1/100”.

Spending $2.5 trillion across the world before 2020“is less silly because non-OECD emission reduction is a lot cheaper, but the benefit-cost ratio is still only 1/100”.

The third policy continues the same intensity of climate policy between 2020 and 2100. Most negative impacts of climate change are avoided by this policy, but the costs are so large that the benefit-cost ratio is only 1/50.

In the fourth policy, $2.5 trillion is invested in a trust fund to finance emission reduction over the century. The benefit-cost ratio is 1/4.

In the fifth policy, the trust fund is twenty times as small. The benefit-cost ratio is 3/2. In this policy, a tax of $2/tC is imposed in 2010 on all emissions from all sources in all countries; the tax rises with the rate of discount.