Global Warming Insurance is a Bad Buy

November 20, 2006 • Commentary
This article appeared on National Review (Online), November 20, 2006.

Does global warming threaten to permanently cripple the global economy? According to a new report from the British Treasury prepared by economist Nicholas Stern, that’s exactly what will happen unless we cut greenhouse gas emissions to 25 percent below current levels by 2050. Should we do it? A close reading of the report reveals that the answer is “not necessarily.”

Not to be flip about it, but why should the relatively poor (us) sacrifice for the relatively rich (our children and grandchildren)? The Stern Report argues that the emissions cuts necessary to stave off disaster will likely cost about 1 percent of global GDP every single year, or about $1,154 in current dollars per household in the United States. A small price to pay, we’re told, when GDP losses will likely total 5–10 percent of global GDP every year if we do absolutely nothing.

But even with a 10% reduction in GDP relative to what it would have been, 100 years from now, people will still be extraordinarily well off by current standards. For example, since 1950 real U.S. GDP per capita has increased by about 2% a year. Given that growth rate, real GDP per capita one hundred years hence would be $321,684, or more than 7 times higher than it is at present ($44,403). If global warming cuts GDP by 10% a year beginning about 50 years from now, 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? In short, paying now to head off warming is a regressive intergenerational tax that takes from the poor and gives to the rich.

The direct costs associated with greenhouse gas emission controls include avoidable deaths in the developing world. The United Nations, for example, reports that about 2 million people on this planet die every year because they don’t have electricity and must burn biomass for heating and cooking. This results in greatly elevated levels of indoor air pollutants and premature deaths. Increasing the cost of electricity – an unavoidable consequence of ridding the global economy of the fossil fuels that generate greenhouse gases – will slow our ability to conquer this problem.

Higher fossil fuel costs will also slow the general march out of poverty. Not only is poverty the number one killer on the planet, it is also the number one cause of environmental ruin. Deforestation, habitat loss, and air and water pollution are all strongly correlated with per capita income.

Nor are citizens in the industrialized West immune from the health effects associated with reduced income. Academics have established that every $15 million reduction of aggregate income causes one statistical death. That stands to reason; the poorer we are, the less likely we are (on average) to eat well, exercise, procure necessary health care services, and avoid unhealthy lifestyles. This effect alone suggests that in the U.S., greenhouse gas abatement, on the scale suggested by the Stern report, would cost more than 8,800 lives per year.

Of course, the Stern Report argues that the GDP losses associated with doing nothing dwarf the GDP losses associated with effective emissions controls. In a world with no doubts, spending 1% of U.S. GDP to eliminate a loss of 10% of U.S. GDP every year beginning 50 years from now passes a cost‐​benefit test if we assume that GDP grows 2% per year, we discount future costs and benefits by 5% a year, and run our analysis out for 1,000 years. That calculation reveals that the present value of the costs would total $15,541 while the present value of the benefits would total $36,477. If the future stream of benefits were only 5% of future GDP, however, then it’s about a wash; $15,541 would get us only $18,239 in benefits.

But climate predictions are not certain. The Stern report argues that there’s at least a 50–50 chance that temperatures will rise 5 degrees Celsius over pre‐​industrial levels if we do nothing. You won’t find that argument in the latest report of the International Panel on Climate Change (IPCC), however, which offers a wide band of possible warming scenarios. The Stern Report’s estimate is within the upper boundary of what’s possible, but median warming projections are around 2–3 degrees Celsius.

It’s worth noting that when economists have crunched those median warming projections in the academic literature, they have found that the costs associated with climate change are 0 – 2% of GDP rather than the 5 – 10% asserted in the Stern report. If the benefits are only 2% of future U.S. GDP, then $15,541 in costs in present value terms produces only $7,295 in benefits.

Finally, none of the above calculations consider the possibility that the costs will buy no benefits at all. The latest IPCC report, for instance, notes that the warming we’ve detected thus far is “unlikely (bordering on very unlikely) to be entirely the result of internal variability,” and that “natural forcing alone [i.e., solar and/​or volcanic activity] is unlikely to explain the increased rate of global warming since the middle of the 20th century.”

No matter how you read that, it’s clear that there is greater than zero chance that greenhouse gas emission cuts will produce no economic gains at all. Accordingly, all the benefit estimates above must be discounted to some degree (how much is in dispute) to reflect that possibility.

Think of the Stern Report as an elaborate economic pitch for an expensive insurance policy. Well, we’re not buying … yet.

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