The Cost of Using Global Warming Potentials: Analysing the Trade off Between CO2, CH4 and N2O

Abstract

The metric governing the trade-off between different greenhouse gases in the Kyoto Protocol, the Global Warming Potentials (GWPs), has received ample critique from both scientific and economic points of view. Here we use an integrated climate-economic optimization model to estimate the cost-effective trade-off between CO 2 , CH 4 and N 2 O when meeting a temperature stabilization target. We then estimate the increased cost from using GWPs when meeting the same temperature target. Although the efficient valuation of the gases differs significantly from their respective GWPs, the potential economic benefit of valuing them in a more correct way amounts to 3.8 percent of the overall costs of meeting the temperature stabilization target in the base case. In absolute value, this corresponds to an additional net present value cost of US$ 2000 100 billion. To corroborate our findings we perform a Monte Carlo-analysis where several key parameters are randomly varied simultaneously. The result from this exercise shows that our main result is robust to a wide range of changes in the key parameter values, giving a median economic loss from using GWPs of 4.2 percent.

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