Global warming has the potential to inflict significant social, financial, and environmental damages. Some of these damages will be market damages, measurable as negative influences on gross domestic product (GDP), and some will be nonmarket damages, not accounted for in GDP. A clear example of a market damage that could be attributed to climate change is the loss of tourism associated with the destruction of coral reefs by sea-level rise or temperature change. An example of nonmarket damage is the loss of the ecosystem service of storm protection provided by coastal wetlands in a sea-level-rise scenario. Perhaps ironically, the value of the storm protection services of coastal wetlands increases with climate-induced increases in storm frequency and intensity.

Some impacts of climate change fall into even murkier territory with respect to assigning phenomena as net benefits or costs. Suppose increasing global temperatures cause an increased use of air conditioning around the world, which boosts GDP via increased energy revenues and increased air-conditioner sales and service. This increased use of air conditioning exacerbates climate change, however, through increased carbon dioxide (CO2) emissions. Does this situation represent a market benefit or cost? Does it represent a nonmarket benefit or cost? Traditional economic paradigms are increasingly challenged by environmental problems, and assessing the costs of climate change from a strictly economic perspective is particularly problematic.

Assessing the market and nonmarket damages of climate change is an active, diverse, and contested area of economic and social science research. Climate change presents many complex and problematic market-failure potentials in the categories of public goods, common property, and negative externalities. A public good is an acknowledged market failure, in that a free market will not provide appropriate supplies of it, because it is nonexcludable and nonrival in consumption. A commonly used example is lighthouses. Society benefits from lighthouses, because they prevent damage to life and property in cost-effective ways. However, the private sector will not build lighthouses, because owners of lighthouses cannot charge for their services effectively, nor can they exclude nonpayers from using those services. Governments typically provide public goods, such as street lighting and national defense, for this reason.

Institutions that provide conservation services, such as the U.S. Fish and Wildlife Agency and the Environmental Protection Agency, could be considered public goods. Climate change may necessitate the creation of new institutions that monitor and enforce policies related to various phenomena associated with global warming. Public goods such as ecosystem services are an example of a nonmarketed public good that are threatened in myriad ways by global warming. Common property is another market failure well described in Garrett Hardin's famous paper "The Tragedy of the Commons." Communally owned properties are often not used in economically optimal ways because of conflicts between public and private interests. The atmosphere is a global common property that is used as a greenhouse-gas dumping ground to varying extents by the nations of the world.

Externalities are another market failure that occurs when all of the costs or benefits of an activity are not accounted for. When a university improves its campus with new and appealing buildings and improves its reputation, raising the property values of nearby residential real estate, that represents a positive externality. When a manufacturer pollutes the environment but does not account for the resulting environmental costs by reimbursing the affected community, that represents a negative externality. Climate change will probably involve both positive and negative externalities; nonetheless, the growing consensus is that in the aggregate it will be negative.

Climate change produces negative externalities via sea-level rise, increased frequency and intensity of extreme weather events, and reduced soil moisture. As with much environmental damage, the community responsible for climate change is not necessarily the one that suffers as a result. Greenhouse gas (GHG) emissions of the developed world could cause sea-level rise that swamps small, poor, island nations. If so, serious human and environmental damage will have occurred, and it will be difficult if not impossible to put a dollar value on these damages, or to determine who should be compensated, in what way, and with whose resources. The intra- and intergenerational equity questions raised by the impacts of climate change present the global community with profound ethical questions and institutional challenges.

Monitoring and enforcement of GHG emissions will necessitate the establishment of institutions that are regarded as fair, just, accurate, and effective by the global community in order to be accepted. The establishment and maintenance of these institutions will inevitably require expenditures. These costs may be recouped in the form of improvements to the human economy, such as preventing damage to accrued and inherited wealth, rather than in the form of increased GDP. Wars, wildfires, and extreme weather events such as Hurricane Katrina all increase economic activity and consequently GDP, yet no one would recommend disasters of this nature to create market benefits. An economic paradigm that values current economicactivity (GDP) over established wealth (both marketed and particularly nonmarketed) is increasingly inadequate to many of the most pressing policy questions in relation to climate change. The scale, scope, and costs of this global institutional challenge are unprecedented.

Bibliography:

1)         Costanza, R., et al. "The Value of the World's Ecosystem Services and Natural Capital." Nature 387 (May 15, 1997).

2)         Daily, Gretchen, ed. Nature's Services: Societal Dependence on Natural Ecosystems. Washington, D.C.: Island Press, 1997.

3)         Heal, Geoffrey. Nature and the Marketplace: Capturing the Value of Ecosystem Services. Washington, D.C.: Island Press, 2000.

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