November 3, 2006 4:49PM

Global Warming Costs & Benefits

A few days ago, the British government released the Stern report, a voluminous study arguing that the costs associated with stabilizing carbon dioxide concentrations at 550 parts per million were far less than the costs associated with doing nothing. Although the study acknowledged rather large bounds of uncertainty, the median estimates therein suggested that business as usual (that is, we do nothing) would mean a loss of 5–10% of global GDP every year forever. Most of those harms, however, could be avoided if we spent 1% of global GDP to cut back on greenhouse gas emissions.

There are very good reasons to suspect that Stern's estimates regarding the cost of cutting back on greenhouse gas emissions are too low and that the damages forecast by Stern are too high. The underlying assumptions of the analysis producing Stern's estimates have been well dissected by statistician Bjorn Lomborg, climate scientist Roger Pielke, Jr., and economist Richard Tol. But for the moment, let's put those complaints aside.

My colleague Peter Van Doren and I have done three present value calculations assuming that business as usual (BAU) will reduce global GDP by 2%, 5%, and 10% beginning in 2056 and then in each and every year through the end of time. Don't worry about the silliness of such a proposition. Oddly enough, once you try calculating beyond 200 years, the numbers don't really change much given the need to discount future costs and benefits by 5%.

First, we calculated the cost of using 1% of GDP every year through the end of time to reduce greenhouse gas emissions. The net present value of that cost is $15,541 per person in the United States.

Then, we calculated the benefits for U.S. citizens (global GDP figures are pretty dodgy, so we stuck with U.S. GDP figures for the purposes of this exercise). They amount to $36,447 is you accept -10% GDP as your BAU scenario, $18,239 if you accept -5% GDP as your BAU scenario, and $7,295 if you accept -2% GDP as your BAU scenario.

In other words, Stern's investment advice makes sense only if you think that warming will hammer GDP by 10% a year. You don't gain much at all from emission cuts, however, if you think GDP will only drop by 5% a year if we do nothing. And if you think warming will only cost the global economy 2% of GDP every year (the "concensus" belief among economists, which comes from a widely cited analysis from Yale economist William Nordhaus), then Stern's investment advice is shere lunacy.

And that's not even taking into consideration the fact that reducing greenhouse gas emissions might produce no benefits at all. The latest IPCC report — as all other reports before it — acknowledge that the evidence that anthropogenic emissions are primarily driving the warming we’ve detected is strong but circumstantial. Scientists disagree about how large the chances are that we're wasting our time cutting greenhouse gas emissions, but there’s no disagreement within the latest IPCC report that there’s a chance that anthropogenic emissions are not particularly important factors in climate at present.

Is global warming insurance a good buy? Probably not. And that's particularly true given the fact that the relative poor (us) will pay the premium so that the relatively rich (our children and grandchildren) will get the benefits if there are any. For example, since 1950 real GDP per capita has increased by about 2% per year. Given that growth rate, U.S. GDP per capita in 100 years would be $321,684 in current dollars, or more than seven times higher than it is at present ($44,403). If global warming cuts GDP by even 10%, then GDP per capita will be $289,515 in 2106 rather than $321,684. Would anyone, let alone liberals, ever propose a 1% tax on those who make $44,000 to create benefits for those who make $289,000?