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.

18 thoughts on “Economics of climate change

  1. Great conclusion, Michael!

    Just as well, as I’ve yet to see a single piece of credible physical evidence that the rising concentration of carbon dioxide in our planet’s atmosphere is doing anything other than promoting plant growth — and that’s got to be good for everybody.

    Ever wonder why the descriptor Anthropgenic Global Warming (AGW) was ditched in favour of Global Warming, which in turn was ditched in favour of Climate Change?

    I smell a rat — well, lots of them, really.

    Liked by 1 person

    • Melting ice creates a cooling effect even as the temperature warms up. Similarly the oceans are a heat sink which has a cooling effect on surface temperatures even as the oceans warm up. That is why Global warming is now called climate change.


      • Once all the ice is gone it ceases to reflect infra-red back out into space. Dark oceans retain more of the heat, so the cooling effect won’t last long once the Arctic sheets retreat fully in the northern hemisphere summers. the reverse in fact.


      • That is why if all of us painted our roofs white and our roads should be painted white as well should reflect the warming light back out into space. Trying to do my bit I did paint my roof white but within 2 years I have a blanket of moss growing on my roof and water condensation problems on the ceiling. It was a hard job keeping a white roof, white. After 3 years I repainted a dark green roof. No more moss and no more water condensation in the ceiling.

        Liked by 1 person

  2. Looking at some really old maps of the Sahara and it shows great lakes, massive rivers and a huge amount of detail of a network of streams. Does not exist today. Climate change is certainly nothing new in the Earths geographic history. Unfortunately we have signed up to the Paris Agreement and will be caught out having to pay out to meet our carbon dioxide targets.


  3. I am off to the ombudsman again against James Shaw. Trying to get him to reveal whether he knows the cost of global warming as a percentage of New Zealand GDP. He did not know a year ago.


  4. The thing to look at in any economic report is what benefits (if any) are listed. Warmer nights mean less frosts and lower power/ energy consumption. The extra CO2 enhances plant growth, making crops more drought tolerant.

    If no significant benefits are listed, it is just advocacy, not analysis.


    • Frosts are necessary to set fruit on our stone and pip fruit and they kill (reduce many bugs).
      Today’s Middle eastern oils were produced when CO2 made the oceans anoxic and they became slime ponds. The oils were spirited away in rock in the Earth. Don’t mess with nature.


      • Guess we start planning Rice Padi fields. Our volcanic mounts would be ideal to terrace and plant rice.


    • Chris, I agree with your first points. Your last point I’m less clear on. As GGS noted above it is now called climate change. If rainfall patterns change significantly from the long run averages (as is being observed now) we are expected to see more extreme rainfall events, which means loss of topsoil, more runoff, floods etc. That is, the same amount of rain worldwide , but with changing distribution of where and when. That is a problem for agriculture.


  5. There is a YouTube lecture by a Nobel prize winning physicist who made the point that the accuracy of the measurements of temperature were suspect. He is a climate change skeptic and he convincingly said that climate change is now treated more like a religion than science. “” When men choose not to believe in God, they do not thereafter believe in nothing, they then become capable of believing in anything. “”― G.K. Chesterton

    It is an important subject that deserves dispassionate(secular) discussion. The world’s climate has changed rapidly in the past with no human causes and we know there has been a close correlation between CO2 in the atmosphere and average temperatures. Ever increasing CO2 emissions are inevitable so long as the developing world continues to develop. So it is probable our climate will change – to what extent and how fast is difficult to predict (that is where my skepicism kicks in). There is no disputing that ice sheets lifting off land and floating in the ocean would mean instant changes of sea level (however long it took the ice bergs to melt).

    There are a number of intelligent climate change skeptical scientists but the clear majority of scientists are convinced there is a serious issue so our govt ought to listen to them and then determine what is the most intelligent response. If that includes aiming to reduce our carbon emissions then they should be involving economists – the experts in how to share scarce resources.

    You are complacent saying “US emissions had already peaked”; firstly because the rest of the world hasn’t and secondly emissions are cumulative, It will take millenia for released CO2 to be recapured by natural processes so even a single match burning will add to the problem. The theory is CO2 released now will be warming the world to a new temperature equilibrium over many years. If all humans died tomorrow the earth will continue to warm and sea level will increase. That is why many scientists are worried despite evidence of sea level changes in millimetres and the number of days we wipe ice off the family car reducing each year.

    The costs to NZ will not be measured by growing more fruit at higher altitudes; it will be the international political backwash from finding somewhere for millions of Bengalis and Chinese to live.

    Jacinda Ardern mentioned climate change as her priority after child poverty. I will be happier with our govt when it starts facing up to and explaining: “” … own modelling, undertaken by NZIER, suggests a very high real economic cost to New Zealanders from pursuing a net-zero target “” and giving a climate change response to the proposed multi-billion dollar sea-level stadium, etc.

    Liked by 6 people

  6. ref
    which contains this “”sets the key goal of net zero carbon emissions by 2050″” and then read the two page summary

    While broadly in support of Rod Oram’s article that is action on climate change it seems as if the most significant ahievement to date is the branding not the product. “Zero Carbon’ has shades of ‘No Sin’ or at least ‘Balanced Budget’ but reading the summary of the NZIE report that appears to motivate the entire issue it is neither.
    It is clever in putting the target date of 2050 way in the future whereas a committment to cut emissions by a modest margin next year would be political dynamite.
    Then the summary while admitting costs seems to be translated by journalists into “”wealthier, more resilient and more sustainable nation”” whereas honestly it is a decision to accept a loss of wealth to achieve resilience.

    From the summary:
    1. “” .. firms and households will respond to very high carbon prices is challenging””; this has been proved by a rather minor recent increase in fuel prices now being ranked as one of the two top concerns of voters displacing poverty, house prices and inequality.
    2. “”Access to international emissions permits reduces the amount that domestic abatement contributes to meeting a target, but also reduces the economic costs to firms and households. “” Surely this doesn’t mean zero sin/carbon – it means paying other countries to be permitted to keep emitting carbon (there is no solution for aircraft fuel and our waste tips for example). So ‘Zero Carbon’ ought to be rephrased as say 20% carbon if we were to be honest.
    3. “”This target is a 100% reduction on 1990 emissions, after taking into account net sequestration”” The net sequestration presumably is growing forests – this can only be done but only once. It is like balancing your household budget by progressively selling the family silver. I’m troubled by the 100% reduction on 1990 emissions; does it mean 100% reduction or in other words no emissions and the date doesn’t matter or is it claiming that we return to 1990 emissions or half of 1990 emissions? 1990 is not a good base date just because that is when the problem became widely acknowledged, to get to a good base date we need emissions as pre-Maori arrival because that is when emissions and absorption last balanced.

    Happy to be corrected.


    • See the Stuff article today by the Mayor of New Plymouth about whether the government will accept new electricity generation technologies using natural gas but sequestering the CO2. IF they do, then they’re genuinely interested in lowering emissions, especially given the importance of natural gas for security of electricity supply. If they don’t, they’re opposed ideologically to the O&G sector, and don’t care about destroying hte economy of a prosperous region, that’s essentially how he sums it up.


      • Good to hear that the Huntly power station life will be extended due to the ban on new exploration. I am told the coal is now imported from China instead of being mined in Huntly. Keeps my investment properties tenanted. Nice.


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