During the transition to climate change, some species will be favored and some disfavored. The net economic consequences will depend on whether and how quickly humans take advantage of the changes.
Most discussions of large-scale ecological change simply assume that the consequences will be harmful and that centralized government action is the best way to mitigate that harm. But change brings opportunity, and markets are masters of capitalizing on opportunity. Indeed, recent research suggests that free markets may help transform global climate change into a source of net benefits for humankind (Sohngen and Mendelsohn 1999).
Brent Sohngen and Robert Mendelsohn have woven together analyses from ecology and economics to assess the likely consequences of global climate change over the next sixty years. They use existing models of climate change and ecology to lay out the most likely scenarios for ecological health. They then combine this with an economic model that enables them to estimate the costs and benefits of each scenario.
Prior attempts to assess the economic impact of climate change have focused on “before and after” comparisons. Sohngen and Mendelsohn vastly improve upon this approach by focusing on the time path of adjustment–which, as it turns out, is where most of the action is. During the transition to climate change, some species will be favored and some disfavored. The net economic consequences will depend on whether and how quickly humans take advantage of the changes. Sohngen and Mendelsohn are the first to explicitly demonstrate the crucial importance of this adjustment process.
The centerpiece of their analysis is the timber industry. The authors find that the changes forecasted by the leading climate models will actually yield net economic benefits in this sector, because higher global temperatures will favor trees that have high economic productivity, such as loblolly pine and other southern forest species. And although the consequences of climate change will no doubt vary across nations and sectors, the authors’ approach is applicable to all forms of economic activity in the presence of ecological change. Hence, their results provide insights on several key issues.
First, even taking as given the meteorological implications of a specific climate change model and focusing only on the impact on U.S. forests leaves great uncertainty about the economic consequences. For example, forest ecologists disagree over whether climate change will cause widespread dieback (increased mortality) among tree species trapped in the wrong climate, or simply impair the ability of species to regenerate. The economic implications are more severe for dieback, yet no one knows now which scenario is more likely.
Second, the human response to changing circumstances will play a key role in determining the effects of climate change. Consider the possibility of dieback. Landowners can hasten the transition to a new ecosystem and reduce potentially harmful economic impacts by replacing old species with new, more appropriate species. Alternatively, if impaired regeneration is the key effect, the process will take many decades if natural forces are left alone to adjust. By selectively planting adaptable species, landowners can greatly accelerate the transition. Under either scenario, profit-seeking human action confers ecological benefits.
Such action has another effect. Because the species that will be favored by climate change are significantly more productive, net economic benefits will occur.
Sohngen and Mendelsohn find that individuals acting through markets also reduce uncertainty. Specifically, when profit-motivated people take into account the full range of both current and future events, they are able to smooth the behavior of prices over time. This reduces the economic disruption that occurs when prices move in unanticipated ways. For example, if the dieback scenario begins to emerge as likely, appropriately timed salvage operations will dampen the magnitude of price movements. Through the operation of futures markets in timber products, this will also produce credible information that other actors can use.
Overall, the authors find that, for the U.S. timber industry, the sort of global climate change most widely forecasted will actually produce net economic benefits of perhaps $20-$25 billion in present value terms. Of far more importance, however, is that their dynamic analysis illuminates the pivotal role played by the market in adjusting to large-scale ecological change. Sensible adaptation to change of this magnitude, over this sort of time scale, calls for extraordinary foresight about the future. It also requires the ability to react now to events that might–or might not–transpire ten or even fifty years in the future.
Markets provide this foresight and flexibility and give individuals the incentives to react appropriately. Moreover, I would argue, it is this sort of environment in which political and bureaucratic institutions, keyed as they are to incumbent appointees or the next election cycle, perform at their worst. Yet a central finding of the paper by Sohngen and Mendelson is that foresight and flexibility are essential if we are to make the most of whatever lies ahead.
The debate over whether and why global climate change is occurring likely will continue for years to come. The message of the present paper is this: Regardless of the outcome of that debate, and regardless of the future path of the world’s ecosystem, it is the market that will enable us to reduce the ecological damage and enhance the economic benefits of what lies ahead.
Sohngen, Brent, and Robert Mendelsohn. 1999. Valuing the Impact of Large-Scale Ecological Change in a Market: The Effect of Climate Change on U.S. Timber.American Economic Review (September): 686-710.
Daniel K. Benjamin is a PERC senior associate and professor of economics at Clemson University. His regular column, “Tangents-Where Research and Policy Meet,” investigates policy implications of recent academic research. He can be reached at: firstname.lastname@example.org
PERC Reports, Volume 17, Number 2, March 1999