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Calculating the Cost of Global Warming

By Andy May

Hopefully, the first two posts in this series, “Do humans harm the environment” and “Population Growth and the Food Supply” have convinced the reader that man-made climate change and global warming are not an existential threat to humanity or the planet. This leaves us in a discussion of the cost of global warming, which is something we can calculate. To do the calculation, we need to estimate the monetary damages caused by global warming, when they will be incurred, and the discount rate of money over that period of time. We will not attempt the calculation here, it is too complex, but we can discuss the parameters and some of the calculations done by others.

We should remind the reader, that the assertion that humans have caused most of the recent global warming has not been proven. The calculation of human influence on climate is based only on unvalidated climate models as described here and here. In fact, most climate models cannot model the global warming from 1910 to 1945. If they can’t hindcast known global warming, how can they accurately forecast it? Forecasting natural warming is obviously critical to computing the magnitude of man’s impact, so we must remain skeptical of any calculation of man’s influence.

To compute a cost for global warming, we have to assume global warming has a cost. Then we must assume a value, in lives and treasure, for that cost. We also need to assume a timetable of the costs and benefits, so we can apply an assumed discount rate for the money spent and the money saved. One might say dubious climate model results are fed into dubious economic models and projections are then made for 100 years.

So, we will assume that human-caused global warming is a danger. We only make this assumption to show that eliminating fossil fuels is not necessarily the correct choice even if the dangers exist. The IPCC WGII AR5 states this with a little more certainty than I like (page 37 of the technical summary):

“Human interference with the climate system is occurring. Climate change poses risks for human and natural systems.”

Humans certainly affect the climate to some degree, many major species do, especially trees and phytoplankton. Climate change, whether natural or man-made, is a risk. There are always two options in dealing with climate changes, we can adapt to the changes or, if we are the cause, we can mitigate them by changing our behavior. The two options can conflict, if mitigation reduces our use of fossil fuels, a cheap form of energy, and we adopt an alternative fuel that is more expensive, we reduce our ability to adapt. Adaptation can involve constructing sea walls, levees and dikes, installing air conditioners, irrigating dry farm land, and many other things that require a lot of energy and transporting large amounts of materials and fuels. Global warming risks and adaptation methods are described in the IPCC WGII AR5 technical summary. Mitigation methods are discussed in the IPCC WGIII AR5 technical summary.

What is the cost of global warming?

Estimating future costs due to global warming is exceedingly difficult, from the IPCC WGII AR5 Technical Summary, page 71:

“Global economic impacts from climate change are difficult to estimate.
Economic impact estimates completed over the past 20 years vary in their coverage of subsets of economic sectors and depend on a large number of assumptions, many of which are disputable, and many estimates do not account for catastrophic changes, tipping points, and many other factors. With these recognized limitations, the incomplete estimates of global annual economic losses for additional temperature increases of ~2°C are between 0.2 and 2.0% of income (±1 standard deviation around the mean) (medium evidence, medium agreement).”

World GDP is currently about $75.5 trillion dollars per year according to the World Bank, so 1% is about $0.755 trillion, that is a lot of money, but that is the IPCC “medium evidence and medium agreement” estimate of the damage global warming can do, +- about 100%, that is 0.15 trillion to 1.51 trillion dollars by 2100! The IPCC estimate of the cost of global warming, is not accurate by any means, the others I will show in this post are not either. But, the estimates are used by pundits, ex-Vice-Presidents, and high school dropout actors, etc. all the time to try and scare us. Let’s examine them.

The quote is specific about the “dangerous temperature” of ~2°C, but does not give us a maximum “safe” temperature. In figure 1 we plot four of the IPCC AR5 model ensemble mean surface temperature predictions. There is no data on the plot, just predictions and hindcasts.

Figure 1, IPCC AR5 surface temperature projections (data source: AR5, data downloaded from the KNMI climate explorer)

The RCP (“Representative Concentration Pathway”) is a name given to a set of climate model parameters. The parameters include predicted greenhouse gas emissions and assumptions about how sensitive the climate is to those emissions. In this case the RCP2.6 scenario is a “safe” set of assumptions, so we assume that the warming under this scenario will cause no damage and this sets a limit of 1.1°C over the 1980-1999 mean temperature. RCP8.5 is a fairly radical “worse case” scenario and under this set of parameters 2°C is reached in 2053. For the sake of argument, we will focus on the RCP4.5 scenario as most analysts do. In this scenario the “dangerous” 2°C temperature is reached in 2096.

Mitigation and adaptation

Since the IPCC is convinced that man-made CO2 is the main driver of climate change, they believe that mitigation must be a component of the climate change solution. They describe mitigation (AR5 WGIII technical summary, page 37) as:

“‘Mitigation’, in the context of climate change, is a human intervention to reduce the sources or enhance the sinks of greenhouse gases (GHGs).”

The IPCC describes adaptation in this way (AR5 WGII technical summary, page 40):

“The process of adjustment to actual or expected climate and its effects. In human systems, adaptation seeks to moderate or avoid harm or exploit beneficial opportunities. In some natural systems, human intervention may facilitate adjustment to expected climate and its effects.”

We adopt these definitions for this post.

In any discussion of potentially dangerous global warming, several potential costs or hazards are bound to be brought up. Aren’t hurricanes and other severe weather events more severe due to climate change? We will discuss this in post 6. Isn’t sea level rising at a dangerous and accelerating rate? This is the subject of post 7. Isn’t the cost of global warming going to be astronomical? The topic of this post. Won’t there be far more heat-related deaths? The subject of post 5. There are peer reviewed papers, cited in AR5, that predict these scenarios. The predictions are based on unvalidated models, but there are little or no actual data to support any of them. We will discuss the predictions and the data. I’ve previously written about the benefits of additional atmospheric CO2
here, so we will not cover that ground again.

The recent rise in global average temperature, whether natural or man-made, is not unusual (see here). But, if man-made CO2 is causing most of the current warming, is it better to reduce fossil fuel use? Or should we spend our money adapting to the warmer temperatures? To answer these questions, we must be quantitative. Reducing fossil fuel use increases the cost of energy (see figures 1 and 2 here) and reduces our ability to adapt, since all adaptation methods require energy. From AR5 WGIII, Technical Summary, page 67:

“Particular mitigation actions can affect sectoral climate vulnerability, both by influencing exposure to impacts and by altering the capacity to adapt to them.”

The time value of money and the discount rate

Further, reducing fossil fuel use has an immediate impact on our well-being, for a possible and unproven improvement on well-being over 100 years from now. It is fairly likely that currently we are benefiting from the additional CO2 in the atmosphere and it will continue to be beneficial for at least several more decades, if not longer, see the NASA assessment here. Also see the section “Energy and Agriculture” here.

From the IPCC AR5 WGIII technical summary, page 61:

“Investments aimed at mitigating climate change will bear fruit far in the future, much of it more than 100 years from now. To decide whether a particular investment is worthwhile, its future benefits need to be weighed against its present costs. In doing this, economists do not normally take a quantity of commodities at one time as equal in value to the same quantity of the same commodities at a different time. They normally give less value to later commodities than to earlier ones. They ‘discount’ later commodities, that is to say. The rate at which the weight given to future goods diminishes through time is known as the ‘discount rate’ on commodities.”

In other words, the “present value” of benefits paid in the far future is very small, due to the “time value of money.” Or, one could simply say “a bird in the hand is worth more than two birds in a bush.” If we assume climate change is dangerous and that man’s emissions are the cause, two big “ifs,” then how much do we spend today to avert dangerous climate change in 100 years or more? If the dangers were certain and known, some expenditure would be worth it. But, if the prospective dangers are like those predicted by Thomas Malthus in 1798 or Paul Ehrlich in 1968 (see post 2, Population Growth and the Food Supply), not so much. If we wait until we are sure of the dangers, is the wait dangerous? These are the questions that we need to address.

The net present value calculation that I allude to above is very sensitive to the choice of a discount rate, this is particularly true of investments in climate change mitigation or adaptation, because the payout is 100 years in the future or longer. Because the U.S. S&P 500 collection of stocks, between 1975 and 2017, has an average annual rate of return of 7.5%, adjusted for inflation, with dividends reinvested, this value is reasonable to use as a discount rate. The idea being that if you get a positive net present value at 7.5% you have beat the stock market rate of return with your investment. But, if you can’t beat the S&P 500, just put your money into the stock market instead. Discount rates between 6% and 12% can be used and justified. Before 2100, when all our climate change money goes out and none is coming in, 6% loses twice as much money as 12%, but both lose a lot of money. This money comes out of taxpayers pockets and goes to alternative fuel manufacturers or other organizations meant to reduce greenhouse gas emissions.

Dr. Bjorn Lomborg, Dr. Richard Tol, Alex Epstein, Dr. Matt Ridley, and Dr. Roger Pielke Jr. have written extensively on the economics of climate change. This series of posts are mostly based upon their work and the IPCC AR5 report. We have especially relied upon Lomborg’s Cool It, Epstein’s The Moral Case for Fossil Fuels, Ridley’s The Rational Optimist, and Pielke Jr.’s The Climate Fix.

Like us, they do not question the idea that man is causing some of the recent global warming, they simply use the IPCC climate forecasts to determine the costs of global warming to society. While it has not been proven that man is the cause of most of the warming since the Little Ice Age (see here), it is still useful to discuss the cost of warming and various proposed solutions. The Little Ice Age, which ended in the mid-1800s, was the coldest period in the Holocene. It is not a climate we should be trying to return to, see here.

We list some commonly claimed costs (or hazards) of global warming and, when appropriate, the potential costs of either adapting to the warming or mitigating the temperature change through reductions in fossil fuel use. We will only discuss a few of the more well-known claimed costs, to address all of them would be impossible, climate change has been blamed for a large number of problems, including stunting Chinese manufacturing, starting the Syrian civil war, decimating bumble bees, and so on. A comprehensive list of claimed costs and hazards can be seen in the AR5 WGII technical summary. We will stick to the more conventional claims.

The cost of reducing CO2 emissions

There have been two international agreements to mitigate climate change by reducing fossil fuel use. They are the Kyoto and Paris agreements. These agreements assume that current climate models are correct, and temperatures are mostly increasing due to human fossil fuel emissions. The countries in the agreements pledged to reduce their fossil fuel emissions to mitigate global warming. Here we discuss the cost of this mitigation to achieve a baseline cost.

The Kyoto treaty, if it had been implemented, was expected to cost $180B/year or 0.5% of global GDP (from Cool It, Kindle location 472, original source here).

“For the full Kyoto Protocol with the United States participating, the total cost over the coming century turns out to be more than $5 trillion. There is an environmental benefit, from the slightly lower temperature toward the end of the century: about 0.3°F. The total benefit for the world comes to almost $2 trillion.” Lomborg, Bjorn. Cool It (Kindle Locations 610-613).

Curtailing the fossil fuel industry would have additional repercussions. Since, the oil, natural gas and coal industries amount to about $4 trillion/year or 5.5% of global GDP, limiting or eliminating these industries would cost a lot of jobs and economic disruption. So, the excess cost of mitigation, over the value of the benefits, could be even higher than the estimate of $3 trillion noted above, depending upon what happens to the fossil fuel industry.

If reducing or eliminating fossil fuels reduces world GDP, as most expect, it will increase the number of poor and lower our standard of living. Both of these factors will affect world health as noted in a Journal of Human Resources article “Wealthier is Healthier,” by Lant Pritchett and Lawrence Summers (1996).

The Paris Agreement

If the U. S. had stayed in the Paris agreement, it would have committed the U.S. to reducing its carbon dioxide emissions by 26-28%, relative to 2005, by 2025. This was not achievable with the regulations currently in place and additional regulations and/or taxes would have been required. Estimates of the cost of the additional regulations required, including the, now defunct, CPP (Clean Power Plan), vary from $37 billion (RFF) to $250 billion (NERA) in lost GDP by 2025. Economy-wide job loss estimates vary from no job losses (RFF) to more than 2.7 million by 2025 (NERA). The higher GDP and job losses are from a study by NERA. Lower estimates are from a liberal think tank “Resources for the Future” (RFF) article by Chen and Hafstead, 2016. Both studies acknowledge that regulations and efforts in place in 2016 were not sufficient to meet the U.S. Paris commitments. The Heritage Foundation estimates the U.S. would lose 206,104 manufacturing jobs alone, see figure 2.

Figure 2, source

The differences in the estimates stem from differing views on the relative future cost of energy from alternative sources and fossil fuels; plus, the costs of meeting the U.S. emission reduction commitments. The NERA estimate uses current cost estimates for alternative fuels that are generally accepted by the EIA and IEA. The RFF essentially assumes, using projections of the current rate of decline of alternative fuel costs, that alternatives will be as cheap, if not cheaper than fossil fuels. This is very unlikely, given the reasons detailed here. Calculating the relative cost of energy produced using different sources is quite complex, but currently and for the foreseeable future solar, wind and biomass energy sources are net negative. That means we use more energy making the fuels and/or operating the power plants than we get out of them. For the details of the calculations involved, see here and here.

Computing job losses depends upon how expensive western energy becomes as they curtail fossil fuel use. India and China will be allowed to use all the fossil fuels they like, so their energy costs will be very low compared to the West. Manufacturing jobs will move to where the cheap energy is. For example, cheap natural gas and electricity is why Voestalpine and Tanjin Pipe group moved to Corpus Christi, Texas.

Due to higher paying manufacturing job losses, people will migrate to lower paying service sector jobs, this will lower family incomes.

Absent a dramatic breakthrough in fusion or conventional nuclear power, renewables, except for hydroelectric, will remain prohibitively expensive, unless heavily subsidized. Conventional nuclear is economic, but regulations make it very difficult to install. Fusion and thorium reactors are not commercialized yet, but if they are they could be a game changer.

The NERA assumptions are more realistic. I know of no credible scenario where alternative fuels could be as cheap or cheaper than fossil fuels, without an enormous carbon tax, that would drastically lower our standard of living. And, since the Paris agreement allows China, India and other developing countries to burn as much fossil fuel as they like; the effect of such a tax would be to transfer jobs and wealth to the developing world. This is a policy very unlikely to succeed or to be very popular in the developed world. Especially in the United States.

The New York Times likes to say that more people work in the solar power generation industry than in the coal power generation industry. This sounds great until you realize that in 2016, according to EIA, solar produced 0.9% of our electricity with 373,807 people, versus coal which produced 30% of our electricity with 160,119 people. Productivity growth is where our standard of living comes from, switching to solar is going in the wrong direction. Its apparent that the NY Times is ignorant of basic economic principles. See the New York Times graphic in figure 3. What this means, is that it takes 83 solar workers to produce the same amount of electricity as 1 coal worker. This only makes economic sense if the solar workers are paid 1.2% of a coal worker’s pay.

Figure 3, source New York Times.

To achieve the U.S. Paris commitment the RFF recommends imposing a $21.22 (in 2013$) per ton tax on CO2 emissions. This is a crippling tax given that the best estimate of the costs associated with CO2 emissions is $2 and the costs of the warming are almost certainly less than $14. We would be paying $7 to almost $20 more than the costs we are avoiding. That is guaranteed to lower our standard of living. From Cool It:

“In a global macroeconomic model, the total present-day cost for a permanent one-dollar CO2 tax is estimated at more than $11 billion. So, we might want to think twice about cranking up the knob to a thirty-dollar CO2 tax, which will cost almost $7 trillion.” Lomborg, Bjorn. Cool It (Kindle Locations 558-561).

“Second, [Richard Tol] finds that with reasonable assumptions the cost is very unlikely to be higher than fourteen dollars per ton of CO2 and likely to be much smaller. When I specifically asked him for his best guess, he wasn’t too enthusiastic about shedding his cautiousness—true researchers invariably are this way—but gave a best estimate of two dollars per ton. Lomborg, Bjorn. Cool It (Kindle Locations 574-578).

The Paris agreement would only have eliminated coal related jobs in the U.S. and other western countries, essentially transferring these jobs to India and China where coal use would continue to increase. This is also true of the steel industry and some portion of the oil and gas industry. Basically, it was a very bad deal for the U.S. and the U.S. withdrew from the agreement for that reason (see here).

Costs versus benefits

World energy consumption continues to increase. Even in the U.S. total energy consumption is increasing, see figure 4. Appliances, houses and cars are more efficient today, but we use energy to power many more things these days.

Figure 4 (source EIA)

According to the BP Energy Outlook for 2017 total energy consumed in the world has quadrupled since 1965 and it is projected to continue to increase, see figure 5.

Figure 5, source BP

Whether we discuss the costs and benefits of Kyoto or Paris, the problem is the same. It is very hard to get the costs of reducing CO2 emissions down to a level that makes economic sense. Lomborg explains:

“Stabilizing the temperature increase to 4.5°F … cost[s] $15.8 trillion. It is instructive to compare this to the total cost of global warming. Models show that if global warming wasn’t happening, the world would end up about $14.5 trillion richer. Thus, the cost of global warming can be estimated at $14.5 trillion. Stabilizing the temperature increase at 4.5°F … means we end up paying more for a partial solution than the cost of the entire problem. That is a bad deal.” Lomborg, Bjorn. Cool It (Kindle Locations 646-650).

The time value of money is also important in this analysis:

“Thus, as one academic paper [Kavuncu & Knabb, 2005] points out, ‘the costs associated with an emissions stabilization program are relatively large for current generations and continue to increase over the next 100 years. The first generation to actually benefit from the stabilization program is born early during the 24th century.’ If our desire is to help the many generations that come before then, along with the world’s poor, cutting emissions is not the best way. Perhaps more surprisingly, cutting emissions is also not the best way to help people in the twenty-fourth century, since we could have focused on solving many other immediate problems that would leave the far future much better off.” Lomborg, Bjorn. Cool It (Kindle Locations 672-677).

“Kyoto is an extraordinarily expensive way of doing very little good far into the future,” Lomborg, Bjorn. Cool It (Kindle Locations 637-638).

Discussion and conclusions

Can climate models be devised to predict that human emissions can cause great financial damage? Yes, they can be constructed, but are they accurate? Are they accurate enough that we must reduce our fossil fuels use? Reducing fossil fuel use raises the cost of energy and makes us poorer, less adaptable, and thus more vulnerable to climate disasters.

“Alarmism has a long history in the climate debate. Perhaps most chillingly, this was evident in the witch trials in medieval Europe. After the Inquisition’s eradication of the actual heretics (like Cathars and Waldensians), most witches from the early 1400s onward were accused of creating bad weather. The pope in 1484 recognized that witches ‘have blasted the produce of the earth, the grapes of the vine, the fruits of the trees, … vineyards, orchards, meadows, pasture-lands, corn, wheat and all other cereals.’ As Europe descended into the Little Ice Age, more and more areas experienced crop failure, high food prices, and hunger; witches became obvious scapegoats in weakly governed areas. As many as half a million individuals were executed between 1500 and 1700, and there was a strong correlation between low temperatures and high numbers of witchcraft trials across the European continent.” Lomborg, Bjorn. Cool It (Kindle Locations 1825-1833).

Even when the cause is obviously natural, society still needs to find someone to blame (more on this topic here). Jumping way ahead of our data, even when done with computer models, and proclaiming that climate change is man-made and dangerous before we see any direct evidence is also dangerous. This will cost us in standard of living, it will reduce the rate of improvement in poverty and malnutrition and income inequality that we have enjoyed for decades. But, most important, it will reduce our ability to adapt to climate changes.

Further, asserting climate is dangerous, using dodgy climate models to project climate into the far future, then taking the output from the models and running it through dodgy economic models to compute costs, is a strange and dangerous fiction. The one takeaway, from this post, that I hope every reader sees is that we really do not know what the climate future is, and we certainly cannot compute the cost. Further, no one credible is predicting any serious costs to global warming, whether natural or man-made, for over 100 years. We have time to wait and see what is going to happen before we impoverish ourselves.

The IPCC only seems to focus on the negative aspects of climate change and not the positive aspects. The positive aspects are most apparent today, increasing crop yields, increasing arable land and fewer dying due to cold. The benefits of global warming outweigh the hazards today, and will for the foreseeable future.

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