29 July 2014

Costing Climate: It is all Relative

The White House released a report today on "The Costs of Delaying Action to Stem Climate Change" (here in PDF). The report concludes (based on a summary by William Nordhaus in his book, The Climate Casino):
Based on a leading aggregate damage estimate in the climate economics literature, a delay that results in warming of 3° Celsius above preindustrial levels, instead of 2°, could increase economic damages by approximately 0.9 percent of global output.
The report seeks to place 0.9% of output into context by presenting it in terms of the US economy in 2014:
To put this percentage in perspective, 0.9 percent of estimated 2014 U.S. Gross Domestic Product (GDP) is approximately $150 billion.
The New York Times, mistakenly, assumes from this that the future impacts of climate change will be $150 billion:
Failing to adequately reduce the carbon pollution that contributes to climate change could cost the United States economy $150 billion a year, according to an analysis by the White House Council of Economic Advisers released on Tuesday.
To be fair, the $150 billion as cost of climate change was repeated by many media outlets. Does anyone read the report?

The actual impacts would be much larger, since the US (and global) economy will be larger in the future. But the White House, nor the media, mention this. Here is why.

Let's assume that the US economy grows at 2% per year to 2100 (both 2% and 2100 are round numbers, feel free to pick others if you like them better). That means that the US GDP will be $82.4 trillion in 2100. From that perspective, the cost of climate change will be an astounding $741 billion!

But that is not right either, as the cost reported by the White House was the marginal cost of going from a global temperature increase of 2 degrees Celsius to 3 degrees. According to Nordhaus (Figure 22 in the Climate Casino), the total damage cost of a 3 degree C increase is more like 3.2% of GDP. That equates to a cost of climate change of $2,635 billion! Now we are talking.

So why isn't that huge number presented?

Well, informing people that US GDP in 2100 will increase from $15 trillion today to only $79.7 trillion in 2100, rather than $82.4 trillion, due to the effects of a 3 degree C climate change doesn't sound so scary. This is why William Nordhaus wrote of these estimates in The Climate Casino:
The first surprise is that, for the range of changes that have been calculated, the estimated impacts of climate change are relatively small.
Postscript: For any trouble makers looking to misrepresent my views, I presented a more in depth analysis along these lines before the House Science Committee in 2007 (here in PDF). In that testimony I concluded:
Mitigation provides benefits under all scenarios discussed here, and almost all scenarios presented by the IPCC. According to the IPCC these benefits increase as the time horizon extends further into the future... nothing in this testimony should be interpreted as being opposed to or contrary to the mitigation of greenhouse gases. To the contrary, under all scenarios discussed here the benefits of mitigation exceed its costs. Mitigation is good policy, and many decision makers are now coming to understand that it is good politics, as well. 


  1. Well, now that we have dispensed with claims of skillful prognostications (outside of a limited frame in time and space), there is the question of properly assessing and reasonably mitigating risk. It's unfortunate that advocates of global cooling/warming/climate change misrepresented the quality of their knowledge and skill, which has sabotaged their claims to acting in good faith. Their market and political CCX schemes assured an early loss of credibility. Perhaps some people without a clear association to past schemes will have better luck to present the actual scope of the "catastrophic" change that a consensus managed to build, sell, and lose.

  2. And... the more money mitigation expenditures incur when originating from government, the more 'aggregate demand' would result.

    Paul Krugman would be so pleased-- perhaps the math works out even better for the economy the higher the price tag goes. Otherwise, idle resources, yes?

  3. Experts are no better at predicting the future than a chimp throwing darts. -- Philip Tetlock

  4. Let us consider for a moment this from Matt Ridley published in the Financial Post: "That is to say, even if you pile crazy assumption upon crazy assumption till you have an edifice of vanishingly small probability, you cannot even manage to make climate change cause minor damage in the time of our grandchildren, let alone catastrophe. That’s not me saying this – it’s the IPCC itself." ....Now what were you saying about theoretical costs ? Link:http://www.rationaloptimist.com/blog/the-absurd-assumptions-behind-dangerous-climate-change.aspx

  5. I get annoyed when absolute numbers are given rather than numbers adjusted for inflation. The adjusted GDP is probably not going to increase much at all compared to present, and may even be smaller when adjusted to equivalent dollars. Except for immigration, the birth rate has essentially flatlined in the US and most of Europe. If immigration keeps increasing the population, I do expect some growth in GDP due to innovation increasing productivity, and total population increasing, but average family income is presently actually declining despite the total increasing pie due to automation. However my present gripe is your just not using adjusted dollars.

  6. Dr Pielke, I´m an engineer, but I used to prepare the dynamic models used for long term economic project evaluations. I don´t know if the subject is too specialized to discuss in a blog, but my classic training involved the preparation of multiple profiles, which were escalated for inflation and then present value of net cash flows was estimated using a single discount factor.

    However, because in my career I was in the "receiving end" of old large scale projects (for example when we installed large North Sea platforms), I realized the present value estimates they had prepared didn´t reflect what we, the ones who had to live with their decisions many years later, would have rather seen.

    After scratching my head over this issue and doing a series of trial models, I concluded the optimum solution was to use TWO discount factors. However, the powers that be have always ignored my proposal (when I brought this up at work they told me I was crazy, then after I retired and I ask people in a casual way, they usually ignore me).

    So, here is my question: Have you considered whether the global warming solutions should be evaluated using DUAL discount rates?