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A Cool Trillion

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Scientists estimate that it would cost in excess of one trillion dollars per year to reduce atmospheric carbon concentrations to levels which would avoid “dangerous climate change” by the year 2050. If the goal of climate change policy is to reduce the earth’s average temperature, then this might be money well spent. Alas, climate mitigation is not costless. If the goal is to leave future generations with the highest quality of life possible, such sacrifice is imprudent.

The release of a summary of the Fourth Assessment Report by the Intergovernmental Panel on Climate Change (IPCC) in February appears to have congealed political and public opinion that “something needs to be done” to cool the planet. Climate scientists estimate that the earth’s average temperature may increase by an additional one to six degrees Celsius by 2100 if no action is taken to reduce the accumulation of carbon dioxide (CO 2 ) and other greenhouse gases in the atmosphere. Reducing global annual CO2 emissions by 80 percent below today’s levels by 2050 is needed to avoid serious changes, they say, and would result in a global temperature increase of only 2.3 degrees by the end of the century. Even the U.S. Supreme Court has joined the scientific consensus by essentially compelling the U.S. Environmental Protection Agency to regulate “polluting” CO 2 emissions in its landmark decision in Massachusetts v. Environmental Protection Agency on April 2.

Despite the din, doing something to reverse this warming does not logically follow, even assuming the science is conclusive that humans have caused the warming. Nearly all human activity releases CO 2 into the atmosphere – producing electricity, driving, farming, and breathing – largely because 80 percent of the world’s fuel is carbon based. Therefore, reducing carbon emissions requires either a substantial reduction in human activity, or a substantial change in the way in which that activity is conducted. Since global fuel sources are projected to continue to be dominated by carbon for a long time due to the relative high cost and limited existence of clean alternatives, any stringent cap or tax on carbon emissions (the two likely candidates to mitigate warming) will impose extraordinary economic costs worldwide.

The Money Costs of Doing Something …

Meaningful climate mitigation is expected to cost 1.7 percent of total world output according to the IPCC. With world GDP estimated at $65 trillion, this amounts to spending $1.1 trillion each year – larger than all but 15 of the world’s economies – to possibly prevent an increase in global temperatures of up to 3.7 degrees. The Carbon Tax Center estimates that the direct per capita costs in America would range from $2,400 per year for the poorest 20 percent of individuals to $8,700 per year for the wealthiest 20 percent. To compare, per capita federal income taxes in 2006 were “only” $4,000.

Even if Americans could be convinced to make a sacrifice of this magnitude, success in preventing warming is far from guaranteed. Success first requires that the experts have the requisite knowledge to assess proper penalties on carbon emissions – the same experts who have unwisely subsidized ethanol production. A bigger obstacle however is that even fully informed mitigation programs suffer from a crippling cooperation problem. To work, policy toward global climate change requires all nations to restrict carbon emissions – which is particularly challenging given that 75 percent of carbon emissions in the next quarter-century will be from poor countries hungering to get rich. To wit, China agreed to cut sulfur dioxide emissions by 10 percent in 2002 and today their sulfur-dioxide emissions are 27 percent higher despite sulfur-dioxide being a more severe health and environmental hazard than CO 2 .

Neither are rich countries saintly. The comparatively tepid Kyoto Protocol agreement, the first global effort to curb emissions which was intended to lay the framework for more serious efforts, has fallen apart in Europe . Participating countries have issued so many emissions permits that carbon is trading at one Euro per ton, when its economic damage is supposedly closer to 50 Euro. Orders to scale back the number of permits for sale have been rejected by the German government. Even in America , there is little evidence that people are willing to pay to address self-induced climate risks. Angered by high home insurance rates, Florida’s governor is threatening insurance companies that are “profiteering” by setting actuarially fair, but high, rates to deal with increased hurricane exposure due to populations expanding into especially prone areas.

Given these complications, and the miserable record of past global development initiatives, it is naïve to believe that the world’s 192 nations can flawlessly implement a multi-trillion dollar century-long policy, particularly when the doomsday scenarios project economic costs of inaction at a one time loss of global output at 20 percent by 2100 – and when more likely losses are in the three percent range.

… and the Real Costs

But this all misses a crucial point. Because it is technically possible to spend $1.1 trillion to mitigate global warming each year does not mean it is worth it. The relevant question is what does society give up by dedicating resources to climate change policy? Putting a chicken in every pot costs us a car in every garage today or a turkey in every oven tomorrow.

Each dollar dedicated to action on climate change is one dollar less that can be spent on schools, roads, hospitals, etc. Bureaucratic emphasis on climate intervention will also lead to research and development efforts being excessively directed to energy related projects rather than the discipline of markets directing entrepreneurs into microprocessor, biotechnology, consumer safety and other important areas of research and development.

Further, dollars today are worth more than dollars tomorrow – in part because today’s dollars can be invested. Given that future generations are likely to be much wealthier than existing generations, it is not clear that it is worth giving up a dollar today to avoid a dollar’s worth of economic damage in 2100.

Throwing a Wet Blanket on Growth

And just what would we be giving up? A remarkable amount of economic growth, which is why “end of the world as we know it” scenarios are required just to get a conversation started. To appreciate the significance of these proposed tradeoffs, consider if similar sacrifices were made by our forbears 100 years ago. Chart one depicts real actual GDP in the United States between 1907 and 2006, and what GDP would be today under different growth scenarios. GDP currently stands at $13.2 trillion, or roughly $44,000 per person. Had growth been slowed by the 1.7 percent per year IPCC midrange estimate, GDP would be only 17 percent of today’s output. At $2.3 trillion overall, per capita GDP would be merely $7,600 – well below the poverty line by today’s standards, slightly above the $6,500 which actually prevailed in 1907, and roughly equivalent to the current living standards in countries like Botswana , Tunisia and Colombia . Even under an optimistic half-percent slowing scenario, living standards would be over 40 percent below current levels – placing the average American squarely in today’s bottom quintile.

Would you rather have $44,000 per person and live on a warm planet or $7,600 and live on a cooler planet? For many, sadly, this question is not rhetorical. But these are not just numbers. It is astonishing how readily so many people would dismiss the important and significant social and other benefits of economic growth. Prosperity saves lives and substantially improves the human condition. Since 1900 life expectancy has increased by 30 years, from 47 to 77; the time required for an average worker to purchase a gallon of milk has fallen from an hour to less than 10 minutes. In 1900, 48 percent of families had one or fewer persons per room in the house; 15 percent of families had a flush toilet; three percent had electricity; five percent had a telephone; one percent had a car. Today these are all well over 90 percent. Even the wealthiest “robber barons” could not instantly grab a cold drink– there were no refrigerators; they could not escape summer heat in air-conditioned comfort; they could not get a shot of penicillin to ward off infection, or even take an aspirin to relieve a headache. The economic value of health improvements alone since 1970 has been placed at $10 trillion in America according to Kevin Murphy, a University of Chicago economist.

Would anyone have been willing to give up these advances in exchange for a reduction in global temperatures of 0.7 degrees (the actual increase in twentieth century temperatures)? Would anyone make a similar exchange going forward, particularly when billions of the world’s poorest stand to benefit the most in terms of improvements to health and life expectancy from future economic growth? Economic growth since 1970 has reduced the number of people living on two dollars per day (a standard World Bank definition of poverty) by a half-billion at a time when world population increased by 2.5 billion.

Economic Triage

Is the goal of policy-makers simply to reduce the temperature of the planet or is it in ensuring the health, safety and prosperity of its inhabitants? Presumably, the reason to prevent additional warming is to protect people from the problems posed by a warmer planet. If a warmer planet did not harm people, climate change would be no more problematic than purple lettuce is a problem for lovers of traditional green salads. Therefore it is essential to understand and prioritize the problems a warmer planet is expected to cause. And just what are these problems?

Climate models cannot provide a clear understanding, nor place precise probabilities on truly calamitous consequences – the ones which we would rightly be concerned. The scientific consensus believes that unmitigated warming is most likely, on net, to adversely affect human health outcomes due to malnutrition, the increased burden of water-borne illnesses and expanded exposure to certain infectious diseases. Sea levels might rise between 0.4 to 2.5 feet – causing more frequent floods at low latitudes and densely populated coastal areas. There are also myriad smaller problems.

How much damage are these expected to cause? The IPCC reports that cumulatively one million people could die by 2100 – roughly 10,000 deaths per year. In comparison each year 272,000 Chinese commit suicide, 95,000 Bangladeshis die from tuberculosis and measles, 86,000 Malawi citizens die from AIDS and 45,000 Americans perish in road traffic accidents. Warming contributes nothing to these tragedies – and addressing them could alleviate measurably more suffering for dramatically lower expense.

Malaria incidence is one area where a warmer planet is expected to exact its most serious toll. But, the contribution of warming to malaria is dwarfed by the contribution of poverty and institutional failures. For example, absent global warming the global population at risk for malaria is expected to double by 2080, killing two million people per year. Spending trillions to mitigate global warming each year is expected to reduce malaria incidence by seven percent, saving perhaps 140,000 lives per year. However, investing an additional $1.5 billion annually on malaria prevention and treatment today would cut the current annual world death toll by malaria in half – from one million to 500,000 per year according to economist Jeffrey Sachs, author of The End of Poverty. Saving nearly four times more lives for seven hundred times lower cost is a good deal, particularly when economists believe that malaria alone is responsible for a “growth penalty” of up to 1.3 percent per year in many African countries.

This is not an isolated example. The UN estimates that $75 billion per year could prevent nearly 1.5 million deaths annually by providing safe drinking water and improving sanitation and hygiene worldwide, and also provide all the world’s children with basic healthcare and education. And a group of leading economists assembled in Copenhagen in 2004 established AIDS treatment and prevention, malnutrition and hunger and trade liberalization among the highest priorities for enhancing global welfare – well ahead of climate change.

Motivation

Added prosperity from less-fettered economic activity would substantially reduce the vulnerability of people to the problems caused by a warming planet. Wealthier societies are more likely to find effective technologies for mitigating the negative effects of climate change.

Geo-engineering techniques could possibly solve the warming problem for one-thousandth of the cost of economic mitigation. With growth, emissions and energy intensity have already both fallen sharply. The Energy Information Agency reports that CO 2 released per million dollars of GDP generated has fallen by over 22 percent since 1990. If energy intensity improves by an average of 3.5 percent per year, gross CO 2 emissions would be below 1990 levels by 2020 (eight of the previous 25 years saw improvements of over three percent). Similarly, total energy consumption per dollar of GDP has fallen sharply and steadily since World War II (see AIER Chart Book). Thus, even a “business as usual” approach to climate change is likely to bring dramatic improvements.

In addition, focused adaptive measures to reduce or eliminate the potential damages posed by warming can be implemented relatively inexpensively and immediately through a variety of technological, managerial, behavioral and policy responses. If the problems of a warmer planet turn out not to be caused by humans, steps will already have been taken to adapt to the climate, and our increased wealth will increase our ability to continue adapting.

Everyone agrees that the “right” amount of pollution is not zero because the activities which generate this pollution generate significant benefits. Otherwise, cars, televisions, batteries, shopping, fertilizers, etc. would already be banned. In a world where zero pollution was the only acceptable level, humans would be virtually wiped off the face of the planet. Thus, the tradeoffs we face when it comes to dealing with global warming need to be made explicit. No one would argue that the polio vaccine should be banned for causing illness in two cases per million, precisely because the vaccine prevents the outbreak of the disease in 1500 times as many individuals. Similarly, preventing the possible death of a million people in the name of a cooler planet, only to allow hundreds of millions to die from continued poverty is a seriously bad deal.

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5 Responses to “A Cool Trillion”

  1. jb says:

    Great post. It seems to me that quantifying cost/benefit on a global scale is virtually impossible, and allowing central planners to restrict or reorganize prodution and resource utilization based on the result is absurd. If indeed manmade warming is occurring, (and I am far from convinced it is), wouldn’t it be a better to focus on risk managment? For example, perhaps there should be incentives for people to move out of coastal areas (Bangladesh, New Orleans) and into Siberia, where there will be more arable land.

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  4. […] and reason. Here is the latest illustration. One of the most serious potential climate threats is the expansion of malaria around the globe. Already a horrific threat (after a conference we held, which included several […]

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