Yesterday I looked at the benefits and costs of climate change mitigation from the Stern report, estimates vary from 5% to 20%. None of the newspaper accounts mentioned the time paths of these estimates so I speculated what they might look like and then discounted the benefits and costs of climate change mitigation policies. Knowing full well that I probably got most of that wrong I jumped to chapter 6 of the Stern report, "economic modelling of climate-change impacts," and read the key messages. I was shocked to read this:
Using an Integrated Assessment Model, and with due caution about the ability to model, we estimate the total cost of BAU climate change over the next two centuries to equate to an average reduction in global per-capita consumption of 5%, at a minimum, now and forever.
Those 5% costs of business as usual (BAU) begin today and continue for 200 years. And there's more ...
- non-market environmental and health impacts increases the annual cost, beginning now, to 11% of current world GDP,
- increases in the magnitude of climate response to CO2 due to new scientific evidence increases the cost to 14% of GDP, and
- weighting the impact on poor countries higher than rich countries increases the cost to 20% of GDP (the only number the NYTimes reported yesterday)
Back to the report:
Putting these three additional factors together would increase the total cost of BAU climate change to the equivalent of around a 20% reduction in current per-capita consumption, now and forever. Distributional judgements, a concern with living standards beyond those elements reflected in GDP, and modern approaches to uncertainty all suggest that the appropriate estimate of damages may well lie in the upper part of the range 5 – 20%.
Wow. These numbers are incredibly high. Higher than any previous cost estimate which are reviewed in Figure 6.2:
On the horizontal axis is global mean temperature and on the vertical is the cost of climate change in % of lost GDP. The extremes are the well known Mendelsohn and Nordhaus estimates. The costs from Mendelsohn are very low, indistinguishable from the horizontal axis. The costs from Nordhaus start small at low temperature increases and rise at an increasing rate with temperature. The highest cost is 11%.
So where does the Stern Report deviate, from these well known cost estimates? In other words, how in the world do the costs start at 5% (20%) and stay constant over 200 years?
The analysis is conducted with a new model, Policy Analysis of the Greenhouse Effect 2002 (PAGE2002), that takes account of market impacts, nonmarket impacts and potentially catastrophic events. The initial runs look reasonable, here is Figure 6.5d, that includes all scenarios:
This shows that the % loss in GDP from 2000 to 2200 begins low and rises to 5.3% (the baseline climate change scenario, market impacts and the risk of catastrophe), 7.3% (high climate change scenario, market impacts, and risk of catastrophe) and 13.8% (high climate change scenario, market impacts, nonmarket impacts, and risk of catastrophe).
Note that the 2200 endpoints are very close in value to the annual cost estimates, "now and forever", summarized above. How can this be?
Answer: I don't know. The report goes from the familiar looking graph above measuring impacts as we know them to something called "balanced growth equivalents" via, what appears to me as, some tortured logic. I've never heard of any of this stuff, which doesn't invalidate the analysis (I've never heard of a lot of things that I should have heard about), but makes me a squemish when the next bottom line we're referred to is a welfare cost equivalent to the 5% loss of GDP every year from 2000 to 2200. That is a tremendous increase from a familiar analysis to an unfamiliar analysis.
I don't believe it.
So maybe 5% is the average cost using the discount rate of 0.1% used in the report (a very low rate but maybe appropriate for climate change policy)? I tried to approximate the increasing costs in the graph above and found that the average annual cost is 1.46%, much less than 5%.
I wish I could figure out how we get up to 5%-20% annual costs. [Next day update]
See pp 159-163 of chapter 6 to read it for yourself.
Also, check out Tim Worstall's blog for a chapter by chapter critique of the Stern Review (not Report, as I write above; yet, right now, I'm feeling too lazy to correct it). He is much less accepting of everything else than I am. And, he points out that the review team is more than happy to run mid-level scenarios and scary scenarios, but they don't run the low-level scenario. This gives the entire report the whiff of bias.
Update: The 5% to 20% cost estimate gots legs. Here is something from Kristof's editorial in the NYT (Select: $$$):
If emissions are not curbed, climate change will cut 5 percent to 20 percent of global G.D.P. each year, declared the mammoth report. “In contrast,” it said, “the costs of action — reducing greenhouse gas emissions to avoid the worst impacts of climate change — can be limited to around 1 percent of global G.D.P. each year.” Some analysts put the costs of action higher, but most agree that it makes sense to invest far more in alternative energy sources, both to wean ourselves of oil and to reduce the strain on our planet.
I agree with the next paragraph:
We know what is needed: a carbon tax or cap-and-trade system, a post-Kyoto accord on emissions cutbacks, and major research on alternative energy sources. But as The Times’s Andrew Revkin noted yesterday, spending on energy research and development has fallen by more than half, after inflation, since 1979.
But I'd like the economic justification, a comparison of benefits and costs, to make more sense.