Here are the economic highlights from the WSJ's article on the UK climate change report:
Introducing the report, Prime Minister Tony Blair said unabated climate change would eventually cost the world the equivalent of between 5% and 20% of global gross domestic product each year. ... Report author Sir Nicholas Stern, a senior government economist, said that acting now to cut greenhouse gas emissions would cost about 1% of global GDP each year. "That is manageable," he said. "We can grow and be green." ... Sir Nicholas said the world must shift to a "low-carbon global economy" through measures including taxation, regulation of greenhouse-gas emissions and carbon trading. ... The British government is considering new "green taxes" on cheap airline flights, fuel and high-emission vehicles.
The subtitle over at the Daily Grist, "Ignoring climate change far more expensive than fighting it, says British report," got me wondering (the guesses below aren't from the UK report, which I haven't even glanced at yet ... it's more fun to speculate than to actually inform oneself):
That 20% of global GDP cost estimate sounds on the high side. Let's go with the low-end number given uncertainties (and no, I'm not a AGW-hater) and then we'll work our way to an increasing cost scenario:
- Benefits of avoiding climate change = 5% of GDP
- Costs of avoiding climate change = 1% of GDP
To keep the numbers simple, let's assume that GDP is $100 million so the costs are $1 million and the benefits are $5 million. Suppose we incur the costs each year for 100 years and we don't enjoy the benefits until the 25th year. With a discount rate of 2% the benefit-cost ratio (BCR) of climate change mitigation policies is 2.74. Climate change mitigation is a good idea (i.e., efficient). If the discount rate is 7%, the BCR is 0.92. Climate change mitigation is a bad idea (i.e., inefficient).
If the benefits are zero for 25 years, rise linearly to 5% in the next 25 years, and then rise linearly to 20% for the next 50 years the benefit-cost ratio is 3.76 (2% rate). Mitigation is a good idea. If the discount rate is 7%, the BCR is 0.59. Bad idea.
Given these simple comparisons, I wouldn't say ignoring climate change is "far more expensive" ... as always, the choice of the discount rate (and the time path of costs and benefits) matters. My feeling is that the 2% rate is most appropriate, especially for this long-lived issue (some economists would say don't discount at all), reflecting the long-term social rate of time preference.
And I might actually read the executive summary of the report later today!
Note: the NYTimes article on the Stern report mentions one number: 20%! I'm so upset I'm not even providing a link.
