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Chris M. sent me the following article reference the other day:

New Report Shows Arctic Melt Could Cause $24 Trillion in Damages by 2050 | Inhabitat
“If the threat of rising seas and altered ecosystems isn’t enough to convince lawmakers we need some serious climate legislation, maybe the financial bottom line will. A report released today indicates that Arctic melting could cost global agriculture, real estate and insurance anywhere from $2.4 trillion to $24 trillion by 2050!”

Let’s take off our evil global warming denier goggles for now and accept all of this as perfect certainties. Why do I make such an assumption to start my comments? Well, because it prevents me from asking questions like:

  • I thought ARCTIC ice melt had little effect on sea levels. All of that ice is in the water already. If the artic melt leads to methane release which leads to warming which leads to ANTarctice melt and other glacier melt (i.e ice that is not already in the water), then these costs will be imposed.
  • Why are these estimates not already IN things like the IPCC report? My reading of the IPCC reports is that they are already being accounted for. If not, that should raise enormous questions about the validity of the models and the science.
  • Why aren’t insurance prices and real estate prices reflecting this … now?

But let’s not bother ourselves with these inane questions. Let’s take these new findings at their face value, and then let’s double the most scary estimates. In other words, let’s assume that artic melting WILL cause $50 trillion of damages by the year 2050. Let’s think a little harder about what that means.

  • Even if “we” lose a combined $50 trillion over the next 40 years, that sounds like $1.25 trillion per year across the entire globe.
  • Current world GDP is $65 trillion. If we make the extremely dubious assumption that world GDP will not grow at all for the next 40 years, this represents a 1.9 percent annual loss of GDP per year.  Real World GDP has actually grown at about a 3% rate over the last 40 years, and there are no reasons to think this will not continue. If we assume World GDP will continue to grow at a 3% rate until 2050, what will world GDP be then? Ummm, about $212 trillion. In other words, by 2050, the annual “loss” due to the most severe melting and warming will amount to 0.59% of global GDP. My bet is we lose that amount of GDP in our couch cushions each year. But let’s ignore any possibilities for growth and put the former numbers into perspective. After all, our leaders are doing everything they can to do just that.
  • If we assume average global tax burdens of only 20% (I’d venture a professional guess that they are closer to 30% or even higher), then each and every year the citizens of the world steal $12 TRILLION from each other. You might argue that this is a transfer, and in a perfect world where the funds were spent honestly perhaps this is correct. But remember, taxes are distortionary. The best economic estimates of how distortionary taxes are indicate that for every dollar of taxes extracted from the private sector, we lose 30 cents of economic production. Thus, if around the globe we extract $12 trillion in taxes each year, that means we are knowingly destroy about $3.6 trillion of economic output every single year. And remember, this is a lowball estimate. Assuming no GDP growth, this means that by the year 2050, we will have destroyed $144 trillion of GDP just because we feel the need to finance large government. And this $144 trillion destroyed is easy to do something about – far easier than doing something about melting glaciers. In fact, taking efforts to stop destroying our own wealth will not only save us dollar for dollar on the amount we save, but this is truly a free lunch – it will cause GDP to grow even more than it would have in the presence of taxes. But why would we want to do something like that? Oh, yeah, I know, we hate markets and freedom, so we can’t allow ourselves to prosper that way.
  • Thus, doubling the worst case climate scenarios say we will lose $1.25 trillion with a high degree of uncertainty each year, while we voluntarily destroy through taxes alone (think about all of the other ways we destroy wealth) more than three times this amount. Where is the global crisis about this?
  • The aforementioned ignores, of course, what it would cost us to prevent those damages. The estimated ANNUAL global costs of “doing something” per the IPCC is about $1 trillion per year. Would you spend $1 trillion per year to prevent $600B in damages? No, that is why I doubled the annual estimate – because that is what we would need to see before it even starts to pass a cost-benefit test. And again, raise your hand if you honestly believe that global carbon cap/tax/regulatory policies will “only” cost $1 trillion per year around the entire globe?

Just two comments on language.

  1. Don’t you just love the alarmist use of the word “damages” instead of costs. It’s as if suddenly all this stuff would disappear, or that a massive earthquake will hit us … or that there is nothing, NOTHING we can do to ameliorate the damages before they hit. What we are really talking about are costs – using up resources to prevent bad things from happening that could have been put to more productive use. But if you already hold a view of the world that we are producing too much, then why are we so upset about putting barriers in the way of production.
  2. Don’t you also love this language hypocrisy. When stubborn anti-government types like myself argue that a $1.5 TRILLION annual budget deficit is absurd, or that the federal governments total debt obligations are in the $50 TRILLION range, we are laughed off as being reactionary, and we are shrugged off as overstating the problem. After all, even $50 trillion of debt is only 3 times the size of our economy. Many families can manage that level of debt, so it is not problem for a country as big and prosperous as the United States. However, when I argue that $50 trillion of damages over a 40 year period and spread across the entire globe is not as huge a dollar loss as it sounds, well, then, I am also told I am a reactionary, dangerous skeptic. But if a $1.25 trillion annual loss across the entire globe due to climate change spells doom for civilization as we know it, then why don’t annual losses in the range of a trillion dollars for one particular country even allow one to raise an eyebrow?

5 Responses to “Artic Ice Melt CAN Cause $24 TRILLION of Damages”

  1. Speedmaster says:

    It’s top-notch analysis like this that makes you the professional, and me the crank. 😉

  2. Michael says:

    I’ve argued that a lot of the environemntal economics courses I’ve taken did not include economics. Most of them say global warming is a man-made problem and we must do something about it, so here are policy options X, Y, and Z. But this misses the most interesting questions, as you point out. I’ll even assume that global warming is real and is man-made for the sake of arguement, but hardly anyone ever talks about present value discounting of the damage. Nor does anyone talk about what else we could be doing with that money, such as other liberal causes like poverty reduction, health, or my conservative version of me keeping the money and giving it to the charitable things as I see fit.

  3. Neil says:

    Making the assumption that the estimate of total economic loss is correct still leaves problems with your analysis. First you assume that the losses will be distributed uniformaly through time and equally distributed across the entire world. Neither of these assumptions are proven or necessarily reasonable.

    The world wide loss of $24 Trillion will be relatively small if it occures, as you assume, across the next 35 years the world economy can absorb such a shock. However, if the majority of the loss is felt in the last five years of the projected time frame the impact on the world economy will be far less benign. The same is true of the location of the loss. If the locations suffering the loss are spread out over the entire world individual nations and economies can absorb the loss. However, if the loss is concentrated in primary food growing locations the loss will have very dire consequences.

    Another problem with your analysis is the assumption that the losses will stop in the year 2050. Considering that the loss of a growing areas is likely to be more or less permanent due to salt warer intrusion or tidal inundation the losses will continue indefinitely. Basing a decision about what actions should or should not be taken on a relatively near term cost benifit analysis may have more or less fatal consequences.

  4. […] Not only does government spending have to come from somewhere, but we need to raise taxes to do it. The taxes are highly distortionary. See here for an illustration. […]

  5. Truden says:

    Super post, tienen que marcarlo en Digg


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