Economics of climate change

I’ve written a few posts here about the economics of climate change, and of the sorts of goals the government proposes to adopt in response.  On the one hand, OECD and IPCC work has suggested that, if anything, the New Zealand economy in aggregate is likely to benefit a bit from warming (albeit with sectoral and regional ups and downs –  the sort of thing that is a normal part of economic life).  And, on the other hand, the government’s own modelling, undertaken by NZIER, suggests a very high real economic cost to New Zealanders from pursuing a net-zero target.

And so I was interested to see a headline on the Wall St Journal website this morning

U.S. Government Report Warns of Economic Losses From Climate Change

The story noted

Its conclusions are at odds with statements by President Trump, who has been skeptical of global-warming trends, questioned the validity of climate science, and challenged federal regulations designed to control greenhouse-gas emissions.

“There has been no external interference in the development of this report,” said David Easterling, director of the technical support unit at the National Centers for Environmental Information, who helped prepare the 1,500-page assessment.

That’s good.

But what did it have to say about these economic costs?

The impact of global climate change is being felt across the country and, unchecked, could cause U.S. economic losses totaling hundreds of billions of dollars a year by the end of the century, says a new U.S. government report released Friday.

“Hundreds of billions of dollars a year” is a lot of money, but then (a) the US is a big economy, and (b) the end of the century is a long time away (especially once you apply any sort of discount rate).

How big?  Well, US GDP last year was US$19.4 trillion dollars.

I clicked through to the report document itself.  Unfortunately, there isn’t a distinct economics chapter (although there are sixteen separate topic chapters). But the summary did report these comments.

Some aspects of our economy may see slight near-term improvements in a modestly warmer world. However, the continued warming that is projected to occur without substantial and sustained reductions in global greenhouse gas emissions is expected to cause substantial net damage to the U.S. economy throughout this century, especially in the absence of increased adaptation efforts. With continued growth in emissions at historic rates, annual losses in some economic sectors are projected to reach hundreds of billions of dollars by the end of the century—more than the current gross domestic product (GDP) of many U.S. states.

All of which made me even more curious, as I’d had the hazy impression in my mind that US emissions had already peaked, and yet this report talks of the economic costs of emissions continuing to increase at historical rates.

And sure enough there was this chart on the EPA website


In other words, whatever the historic rates of growth of emissions were, there has been no growth since the early 1990s, and the trend appears to have reversed in the last decade.

I guess the report has in mind global emissions rather than US-specific ones, but then these days China’s choices (and non-choices) are the bigger issue.

And what about the size of the US economy at the end of the century?  If we assume very conservative numbers (no population growth and perhaps 1 per cent per annum productivity growth) then in real terms an economy of US $19.4 trillion in 2017 would be one of about $44 trillion per annum.  If the real economic costs of climate change are “hundred of billions of dollars per annum” by the end of the century that must mean a number less than one trillion dollars. In other words, the scary headline reduces to a cost that is, at most, 2 per cent of GDP.  Not nothing.   But it is (a) long time in the future –  discounted back to today at any reasonable discount rate, it will be equivalent to a lot less than 2 per cent of GDP, and (b) the discussion on the economic impact in the summary does not mention at all the potential economic costs of policy measures to accelerate the reduction in emissions already underway.   Those costs are likely to be materially smaller than those facing New Zealand (the 10 to 22 per cent of GDP estimate from the government’s NZIER modelling, falling most heavily on the poorest) but they aren’t likely to be trivial either.

Whatever the case for doing something dramatic, and potentially quite economically costly, on climate change, it doesn’t seem reasonable or sensible to base any such argument on the economic consequences for rich countries of doing nothing.   It is easy to produce big dollar numbers far enough into the future, but no credible modelling I’ve heard of suggests that climate change is a material long-term economic threat to existing advanced economies –  and certainly not to New Zealand.