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  • Economic Effects of Climate Change

Economy

20 Jun 2009

Economic Effects of Climate Change

  • By Bill Conerly
  • In Economy
  • 1 comment

I don't pretend to be an expert on the subject, but there is a good summary of this topic by Richard S. J. Tol in the Journal of Economic Perspectives (available only to members of the American Economics Association).  Here are my notes:

What is the economic impact of climate change?  Estimates range from zero percent to -4.8 percent of world gross domestic product.  This cumulative impact is roughly the magnitude of annual economic growth, so it's as if we skipped a year of growth and never made up for it. (sounds kind of like a recession).  [my comment: this is a genuine loss, but it does not justify Al Gore's statement, "This is not a political issue so much as a moral issue."  Maybe it's just a nuts and bolts economic issue.]

Recent estimates of the economic impact of climate change have been smaller than earlier estimates, probably because they have been better at estimating adaptation.  (Example without adaptation: calculate change in production per acre of apples and oranges.  Example with adaptation: calculate how farmers will change the number of acres they plant of each crop, and apply that to the new output/acre estimates.)

Regional variation of economic impact is very large.  One example of an estimate (from Maddison) has a total impact on the world of -0.1 percent of GDP, but South America loses 14.6 percent, while Western Europe gains 2.5 percent.

The social cost of carbon may be around $50 per ton under (what I consider) reasonable assumptions.  The European Union's carbon permits are traded at $78/ton, meaning that they are forcing too much restriction of carbon.

Uncertainty of the economic estimates is large.  However, none of the reasonable estimates for the planet as a whole is nearly as high as I expected to see, given the current state of hysteria.

What do you do when the economic costs are uncertain?  Tol says to err on the side of stricter environmental controls.  I think he's wrong there.  Think of us as having two possible assets in which we can invest.  The returns from traditional capital spending (factories, roads, computers, education) are fairly well understood.  The returns from environmental capital spending (carbon reduction or mitigation) are highly uncertain.  Every finance professor will tell you that when the returns are comparable, you should invest less in the risky (environmental) asset and more in the safe (traditional) asset.

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    Comments

  1. kharris
    June 22, 2009

    You have offered a thumb-nail two-sector model. Good as far as it goes, but you only include (your) assumptions about returns, while leaving out risks. The very fact that the returns to conventional capital investment is better understood than that from environmental capital spending implies that the risks are heavily to one side in this analysis.
    Yours boils down to a conventional argument that the risks from burning carbon are likely to be small, relative to the cost of reducing burning of carbon, but you implicitly use the uncertain risk of green house gas emission (unknown returns from environmental investment) to justify your argument. That is a very odd way of thinking.
    One of the things that thoughtful forecasters understand is that point forecasts are often misleading. A point forecast made with high confidence looks just like a point forecast made with very little confidence at all. If you slap a confidence interval around those point estimates, you might see something much scarier than one year’s output loss.
    These forecaster guys are still groping around for answers, while much of the world takes away from their forecast whatever they want to see. You guess that the new forecast is less dire because the forecast is better than it was. Guessing is naughty. You are guessing in the direction of your own preference – a common and very bad practice.

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