Art Carden  

Economics Never Stops: On the Costs and Benefits of Climate Change

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Last Spring, a student came to my class wearing a shirt reading "Basketball Never Stops." I need to get a shirt that says "Economics Never Stops." David's recent post on uncertainty and global warming was a good reminder. Public policy should account for the possibility of extreme negative effects, but it should also account for the possibility of extreme positive effects. My impression from discussions of climate change is that to suggest the possibility that climate change might have positive effects on net is to invite charges of heresy.

This 2011 post by David Friedman remains one of my favorite pieces on the subject. He asks us to consider Bangladesh, asking whether we should "assume that Bangladesh will still be a poor country a century hence, or that it will by then have followed the path blazed by South Korea, Taiwan, Singapore, and Hong Kong--and so be in a position to dike its coast, as Holland did several centuries ago."

The CIA World Fact Book estimates purchasing power parity-adjusted Bangladeshi GDP per capita at $2100 for 2013. Growing at 2% per year, Bangladeshi per-capita GDP would double about every 35 years and, in just over a century increase by a factor of eight. The resulting per-capita GDP of $16,800 would put them today at about the level of Uruguay ($16,600): not fantastic riches, but nothing to sneeze at, either.

Growing at a real rate of 3% per year, Bangladeshi GDP per capita will double roughly every 24 years. This means it will increase sixteen-fold in about a century (lesson: small differences in growth rates matter). That would give them PPP-adjusted per-capita income of $33,600, which would put them right around the PPP-adjusted per-capita income of today's European Union ($34,500). Should we not think that a country obtaining the resources of today's high-income regions would not be able to "dike its coast, as Holland did several centuries ago"?

As Friedman notes, "the global warming controversy involves changes over not a year or a decade but a century." I too am concerned about what will happen to the coasts as sea levels rise, but several decades is a lot of time to adjust to the threat of the encroaching seas. Again, there is a lot of uncertainty here, but we can convert at least some of this uncertainty into risk by developing long-term futures markets in coastal real estate. Contracts and prices turn a lot of speculation and hypotheticals into extremely useful information, namely, prices.

Even if the planet is getting hotter (I'm pretty sure it is) and even if people are contributing to it (I'm pretty sure we are), it's still not clear where climate change ranks on the scale of existential threats to life on Earth or whether it would be wise to sacrifice a lot of production in order to mitigate it. Asteroids might pose a larger and more immediate existential threat than climate change*, and dealing with asteroids on a collision course with Earth will likely require a much more sophisticated solution than "burn fewer fossil fuels, plant more trees, and develop cleaner energy sources." Diminished ability to address a threat like impact from a large asteroid is the price would pay by sacrificing production in order to combat climate change.

*-If you think asteroids aren't cause for concern, I'd like to introduce you to 99942 Apophis. According to Neil DeGrasse Tyson, Apophis hitting in the Pacific Ocean would "sandblast the western seaboard" with tsunamis.

Edit, 12:33 PM Eastern: In a comment below, David corrects me and notes that the warming might offset negative effects of cooling:

Actually, my point about uncertainty was different. It's not that there can be "extreme positive effects," although there can be. It's that there can be extreme negative effects from global cooling that global warming can offset.

In other words, if you embrace uncertainty, you really have to embrace uncertainty and not disguise certainty in one direction as uncertainty.


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COMMENTS (14 to date)
ThomasH writes:

No doubt Bangladesh will be a much richer country in 100 years than it is today. That does not affect the calculation of whether it is more cost effective to reduce CO2 emissions or build dikes around the low-lying areas (as one example of the costs imposed on others by CO2 emissions).

Jim writes:

Here you go: http://www.cafepress.com/economicsneverstops

Jardinero1 writes:

The average Bangladeshi earns about six dollars a day, owns no property and has little access to education or capital. In other words, the average Bangladeshi, today, has nothing to lose from rising sea levels.

The common sense solution for rising sea levels in Bangladesh is to allow the affected population to immigrate to the USA, Europe and East Asia. These regions could easily accommodate the entire 147 million Bangladeshis alive today. These new immigrants could earn minimum wage, and have access to western education and healthcare. The cost would be a plane ticket per person. The average Bangladeshi and his descendants would be better off.

David R. Henderson writes:

@Art,
Actually, my point about uncertainty was different. It’s not that there can be “extreme positive effects,” although there can be. It’s that there can be extreme negative effects from global cooling that global warming can offset.
In other words, if you embrace uncertainty, you really have to embrace uncertainty and not disguise certainty in one direction as uncertainty.

ThomasH writes:

The risks of global cooling is just another factor to consider in working out the optimal carbon tax, which in principle might be negative, though I doubt it.

Art Carden writes:

@David: Thanks for the clarification. I'll add an edit.

Art Carden writes:

@Jim: wicked. Just ordered one!

charlie writes:

There is an obvious problem with the "beware of the long tail of climate change outcomes" argument: it would produce crazy results if applied generally to all environmental or public policy problems.

What is the tail risk--over the next 100 years--of a catastrophic asteroid impact? Nuclear war? Biological warfare? An influenza pandemic? A 9.0 earthquake in California?

Certainly, if we assume the extreme negative scenario of everything over a century-long time horizon, it follows that we should waste all our resources now on prevention, no matter how detrimental to present welfare. But that approach is rightly rejected in non-climate change areas.

Pajser writes:

Raising level of see is not just accident, it is aggression. It is like launching rocket for your own purpose, with knowledge that it can, and likely will destroy Bangladesh.

As libertarians, you should advocate immediate (or at least "as soon /much as possible") unilateral termination of CO2 emission and negotiation with Bangladesh (and other affected countries.) Pollution should be resumed only if agreement is met. Other countries should keep the right to veto your emission. Is it reasonable or not, it should be up to them to decide. If you believe that state has no right to interfere with private property, then negotiation should be done on individual basis - and it is even harder to reach any consent.

AbsoluteZero writes:

@charlie,
Exactly. And I think this applies not only to environmental or public policy issues. Imagine what can happen to you and your family in the next 1, 5, 10, 20, 40 years. Most people don't take the extreme negative scenarios that seriously. How many people even have wills drawn up when they're still young? If one were to be serious, one needs to have not just a will, but trusts, in multiple jurisdictions, with both financial and real assets, both high growth and defensive, both appreciation and income, both liquid and long-term, at least one backup citizenship, with another permanent residency in a third jurisdiction, and make sure one's spouse and children either have them already, or can inherit them passively, in case one passes away suddenly. I can go on. And all this is just for financial calamity. Most people don't go nearly that far, and they definitely don't do so by severely curtailing their current spending.

Charles writes:

This incomplete look at the picture ignores the relevant moral moral arguments on climate change.

Your statement about risks is about the same as saying the police shouldn't arrest rapists because it doesn't prevent asteroid impacts. Police departments could shut down all efforts to arrest rapists, because this would have minimal effect on GDP. Resources could then be redirected towards asteroid research or whatever.

I don't expect any of the blog hosts to go on talk shows and debate in favor of that point anytime soon, but if you can explain why that is so, you'll see what you are overlooking on the climate change debate.

Tim Worstall writes:

Re estimates of future wealth etc. This is already included in the IPCC models. Which are here:

http://www.ipcc.ch/ipccreports/sres/emission/index.php?idp=0

Roughly speaking, that 2-3% growth in Bangladesh that Art is talking about is in the A1 family.

There are then scenarios within that family. A1FI is, very roughly, as if everywhere burns coal like China does today. A1T is (again, very roughly) like we think CA will be in a decade.

And the A1FI result is terrible, the A1T result means no problems at all. All of these models are, by definition, "business as usual" ones. No taxes, subsidies, regulations, to force matters. Only possible pathways of how technology might develop.

Given the speed with which solar PV is falling in price I tend to think that A1T is not only feasible but likely. But then I admit that I'm a techno-optimist.

Bostonian writes:

According to Lynn and Vanhanen, the following countries have average IQ of 82: Bangladesh, Dominican Republic, India, Lebanon, Madagascar, and Zimbabwe. The average IQs of Uruguay and South Korea are 96 and 106. I don't expect the low-IQ countries to catch up to the high-IQ ones, although free market policies will enable them to grow.

Charles Bogle writes:

Asteroid impacts great enough to destroy civilization as we know it, or even to destroy a large proportion of life on earth, have happened before and will happen again. This is a one hundred percent certainty. However rare they may be, it makes sense to put a higher priority on dealing with these events than on dealing with climate change. If we are unable to deflect or explode a killer asteroid before it hits us, we won't be here to worry about climate change, even though such an extinction level event would instantly change the climate far more catastrophically than humans have been able to. It would be very ironic if we fail to defend our planet against this much greater existential threat because we focused all of our apocalyptic attention on climate change. Never before has earth had an intelligent life form with the ability to stop asteroids from disrupting the entire biosphere. What a shame if we don't seize this unique moment in history to protect our only home as we should.

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