Thursday, July 8, 2021

How much does climate change actually affect GDP? Part I: An illogical question.

How much does climate change* actually affect GDP? How much will currently-envisioned climate policies reduce that damage, and thereby raise GDP? As we prepare to spend trillions and trillions of dollars on climate change, this certainly seems like the important question that economists should have good answers for. I'm looking in to what anyone actually knows about these questions. The answer is surprisingly little, and it seems a ripe area for research. This post begins a series.  

I haven't gotten deep in this issue before, because of a set of overriding facts and logical problems. I don't see how these will change, but the question frames my investigation. 

An illogical question

The economic effects of climate change are dwarfed by growth

Take even worst-case estimates that climate change will lower GDP by 5-10% in the year 2100. Compared to growth, that's couch change. At our current tragically low 2% per year, without even compounding (or in logs), GDP in 2100 will be 160% greater than now. Climate change will make 2100 be as terrible as... 2095 would otherwise be.  If we could boost growth to 3% per year, GDP in 2100 will be 240% greater than now, an extra 80 percentage points.  8% in 80 years is one tenth of a percent per year growth. That's tiny.  

In the 72 years since 1947, US GDP per capita grew from $14,000 to $57,000 in real terms, a 400% increase, and real GDP itself grew from $2,027 T to $19,086 T, a 900% increase. Just returning to the 1945-2000 growth rate would dwarf the effects of climate change and the GDP-increasing effects of climate policy. 

Comparing the US and Europe, Europe is about 40% below the US in GDP Per Capita, and the the US is about 60% above Europe. So Europe's institutions do on the order of 5-10 times more damage to GDP than climate change.    

Residential zoning alone costs something like 10-20% of GDP, by keeping people away from high productivity jobs. Abandoning migration restrictions could as much as double world GDP (also here). 

It is often said that climate change will hit different countries differentially, and poor countries more, so it's an "equity" issue as much as a rich-country GDP issue. Yet just since 1990, China's GDP Per Capita has grown 1,100%, from $729 to $8405 (World bank). As the world got hotter. 1,100% is a lot more than 10%. We'll look at poor country GDP climate effects, but from what I've seen so far, reducing carbon doesn't get 1,100% gains. 

India's GDP Per Capita is $2,000. The US at $60,000 is 30 times greater, or 2,900% more. Adopting US institutions could raise India's GDP by 2,900% in a century, and that's the cost of not doing so. And US institutions are far from perfect. That's a lot more than 10%

The share of the world population in extreme poverty is plummeting. No plausible estimate of climate damage comes close to this kind of change.  And this change comes in part from increasing diffusion of fossil fuels. People who used to hoe by hand now use tractors.  

Logically, then, if the question is "how do we increase GDP or GDP Per Capita by 10% in 2100" the answer is, "get out of the way of economic growth and do everything possible to speed it up." And you'll get a lot more than 10% out of that. If the question is, "how do we reduce global poverty"  the answer is, "get out of the way of economic growth and do everything possible to speed it up." 

I suppose it would make sense to focus on climate if economic growth were going as fast as possible, all government policies were perfect, and climate policy were the last lever in hand to raise GDP 10% by 2100. But that's ludicrous. Economic growth is not going as fast as possible. Most government policy is devoted to slowing down economic growth, in order to change the distribution of income, and mostly not to flatten the distribution of income especially internationally.  If we want to spend a few trillion now to increase GDP in 2100, windmills and electric cars are, even at inflated estimates about the least efficient ways to do so. It's almost as ludicrous as California's governors' intimations that the way to solve the water and wildfire problems is to build a high speed train. 

"Once you start thinking about growth, it's hard to think about anything else," says Bob Lucas. He's right about economists, but wrong about everyone else. People, politicians, bureaucrats, lobbyists, media, activists, and governments seem devoted to thinking about just about anything but economic growth. Growth comes from innovation and displacement of old companies and industries and entrenched elites with new ones and everybody with any political power hates it. See Uber vs. Taxi companies. 

A logical conundrum

We have fallen victims to an amazing lapse of basic logic. We ask "what is the economic effect of climate change?" We then discount damages assess costs, and discuss cost benefit analysis of carbon policies. 

(Well, "we" economists do. Public policy on this issue has left  cost-benefit analysis in the rear-view mirror. Defunding fossil fuels, canceling Keystone but not Nord 3, building electric-car charging stations across North anyone doing any cost-benefit analysis? How much cost today vs. benefit in 2100 GDP is calculated to justify central bank's new climate dirigisme? But I digress. Let's pretend that cost today vs. benefit in 2100 will have some influence on policy.)

The logic is, climate change will (maybe) hurt the economy in 2100. By spending money, or suffering loss of income to do things in more costly but less carbon-intensive ways now, we can raise GDP in 2100. So, depending on the economic damage of carbon later, the cost of cleaning it up now, and the discount rate, we should do it. We should embark on carbon policy because it raises GDP in 2100. That is the inescapable logic of the economic approach. 

But reducing carbon is thus, logically, just one item on the list of answers to "What can we do to raise GDP in 2100?," and especially "What can we do to raise GDP in currently-poor countries by 2100?" Asked that way, you can see that "lower carbon emissions" is about #100 on the list, even admitting the 5-10% of GDP thumb-on-the-scale estimates. It's like asking whether removing that "Go Bears" flag from your radio antenna will improve your gas mileage and lower your overall expenses. Well, yes, maybe, but it's hardly first on the list. 

There must be some behavioral name for the bias that focuses on a tiny insignificant little cause and effect, leaving much more important questions languishing, to focus on a pimple, ignoring a festering wound. Whatever it is, that's where we are.  

Moreover, viewed this way it's not even obvious that climate policy should do anything. To my uncomfortable truth that Europe lags 40% of GDP per capita behind the US, Europeans may say, well we're happy with that tradeoff; our welfare state and long vacations are worth it. The US political system has made the tradeoff that 10-20% of GDP is worth whatever the benefits of residential zoning are, and the whole word bars immigration. Fossil fuels have real benefits, especially to the world's poor. Cooking with propane rather than "renewable" cow chips has immense health benefits. Now. Waiting for solar cells + batteries + electric for cooking, air conditioning, basic transport, is a large cost. Maybe 10% of GDP in 2100 is worth it in the same way that we tolerate these far larger GDP costs now. 

If not "this is the best most cost-effective way to raise global GDP in the year 2100?" -- which it surely is not -- then what is the question to which current climate policy is the answer? 


Even if you are not a climate activist, you surely are frothing at the mouth with objections. Well, we don't want to stop climate change just because it's the most cost-efficient way to raise world GDP in 2100, I'm sure you're saying. Filthy lucre is not the only reason to stop the "climate emergency."  

OK, but why not? If not for a more prosperous future, why are we embarking on trillions of cost, many more trillions of foregone growth, especially in developing countries? 

Many arguments are raised. Maybe 5-10% is wrong, and we are on the edge of a "tipping point," a complete breakdown in which global GDP crashes. Indeed, 5-10% of GDP in 80 years hardly qualifies as an "emergency." Maybe a tipping point does? But that is nowhere in any science I have seen so far, though I will be looking for it. Is there a vaguely reasonable scenario in which GDP not just grows one tenth of a percent per year more slowly, but actually collapses? 

If so, then the 5-10% by 2100 calculations are  completely irrelevant -- only the chance of this collapse matters. We should, and I will, look for concrete climate and economic scenarios that lead to collapse. 

But the same logical problem arises with catastrophism. Suppose the answer is, we need to enact costly climate policy because we need to avert the small chance of a civilization-ending catastrophe in 100 years. Then I get to ask, Is a slow-moving, very predictable change in climate, in a race with adaptation and technology, really the greatest threat to civilization, and the one where 10 trillion dollars now has the greatest effect? What about nuclear war, civil war, pandemic, crop failure, antibiotic resistant bacteria, asteroid strike, and most of all the general decline and fall we see all around us?   

There is an argument that says, well, nobody knows but it could happen. So take out some insurance. But if we spend $10 trillion dollars on every possible unknown poorly understood low-probability event, we won't have anything left. You have to quantify damage, probability, and the cost-benefit channel. 

As we did not start with a list of ways to improve GDP in 80 years and, look, climate policy is the most cost-effective, so we did not start with a list of ways to avoid civilizational collapse and, look, climate policy is the most cost-effective. 


Maybe it's not about GDP at all. Something about natural stewardship, keeping the world as we found it, and so forth clearly motivates climate policy. 

I'm pretty much of an environmentalist too, it may surprise you to learn. The environment and natural world are worth preserving and restoring, even at substantial cost. We are living through a mass extinction, larger than the dinosaurs, though it started about 13,000 years ago not just when fossil fuels came along. Much of humanity lives with unsafe air and water, full of things much more directly damaging to health right now than carbon dioxide. 

But the same logical conundrum applies. 

Yes, climate change is not good for many endangered species. But elephants and rhinos will be dead from people shooting them and taking over habitat long before it gets too hot for them, just as thousands of megafauna species before them. A trillion dollars would buy one heck of a wilderness area. If the question is, "what's the most damaging human activity to species and the most cost-effective way to preserve species -- and especially not-so-photogenic but really biologically important species?"  climate change goes back to #100 on the list. If the question is "what are the greatest environmental dangers to human health, and the most cost effective steps to improving the human environment?" climate change goes back to #100 on the list. 

Moreover, if this is the question, then it's a mistake for advocates to even talk about GDP. Just say, "We're going to lower GDP in the year 2100, deliberately, to help the environment." Current climate policy is going to lower 2100 GDP. The cost of current climate policy is enormous, its effects on global temperature in 2100 small, and the GDP and anti-poverty benefits of energy use are large.  Advanced industrial economies are really not that dependent on weather. But I am as nervous as the next person about melting the polar ice cap, terraforming Greenland, the big unknowns of all this. An upfront we have to save the environment -- much more clearly spelled out -- and here is what it will cost would be, I think, a more honest and ultimately more persuasive argument. But we're talking about huge amounts of money -- tens of trillions at least of direct expenditure and more of foregone growth. As long as that is the policy agenda, we have to put some dollar figures to the benefits and the costs. (In here you see a plea for a much more sensible and scientifically oriented policy agenda) 

An answer in search of a question  

It's really not about GDP is it? Suppose when we end this investigation, we find that there are no   economic costs at all to climate change. Sure, the planet gets several degrees warmer, ice sheets melt, seas rise, costs of adaptation must be borne, but when you add it all up the overall effect on GDP is zero. Or (gasp) suppose warming is actually beneficial to GDP.  Would that end the urgent desire of those who want to do climate policy to do so? I don't think it would have much effect at all. Already pro-climate arguments mistake costs and benefits with three and four zeros in the wrong place. 

Climate policy at the current moment seems like an answer in search of a question. If we had noticed carbon, as we did freon, and set in motion a small research and development effort leading to a mildly costly transition -- say a few hundred billion a year, couch change for today's governments -- that would be a different matter. But with a "whole-of-government" whole of society project, with tens of trillions of costs involved, just what the question is starts to matter. 

This is like a husband who really wants to buy a new truck. "Honey, " he says, "we could use the truck to go get some new pavers for the yard at Home Depot." "They deliver," she answers. "We could take the bikes up to the mountains for a nice trip," he adds. "We could also buy a bike rack for the car," she answers. Yes, the truck would have a lot of nice benefits. But in each case, "what's the right way to answer this problem" is not to buy a truck. 

So we are with current climate policy. The current climate policy package -- shut down advanced-country fossil fuels (Keystone no, Nord stream yes, promises from China), subsidies to windmills, solar, electric cars; no nuclear, geoengineering, carbon capture, or heavy R&D to hydrogen, geothermal fracking etc. --  really does not have a question. Even if the costs of climate are 5-10% of GDP in 2100, the marginal improvement of these very expensive policies will not change that much. (Coming soon). If we find that climate has no effect on GDP, or if we find that there are far better ways to improve the lot of the world's poor and disadvantaged, that will not silence climate policy advocates. If we find that climate has no effect on species or human health, or that there are far better ways to advance these goals, that will not silence climate policy advocates. 

What is the question? I'm not sure. Stating one to which this policy set is the logical answer would surely help. 

Well, let's get back to the  question that economists can answer -- what are the effects of climate change on the economy? Stay tuned... 

*A note on language

Global warming climate change climate crisis climate justice climate emergency.

I will stick with last year's PC terminology "climate change." In the beginning there was "global warming," the rather uncontroversial statement that carbon dioxide emissions were warming the planet. This did not spur enough action, so it moved to "climate change." In part that reflects the reality that some places will be hit more than others, that some places benefit from hotter temperatures, and the much less scientifically established claim that there will be more extreme weather -- fires, droughts, hurricanes etc. That too was apparently not enough, so there was a brief foray to "climate justice," entwining climate change with all sorts of "social justice" issues that really have nothing to do with it. "Climate crisis" seemed good enough for a while, but even that has not scared enough people into supporting the current policy package. "Climate emergency" we are now to call it, or so baptizes the  (now profoundly un-) Scientific American.  Will "climate catastrophe" be next? Fast-evolving, virtue-signaling, political-affiliation labeling, increasingly hysterical language, and conscious efforts to choose language to push policy goals, are  also not a good sign of clear scientific thinking. The "truck emergency" didn't work either. 

Update. Yes, I know GDP is an imperfect measure, even of economic well being let alone other things. For economics, consumer surplus would be better. GDP doesn't count great stuff that is free. Health, clean environment, longevity, etc. count for a lot. They are all, however, surprisingly well correlated with GDP.    


  1. You know this, but you'll get the comment. The three trigger points people will bring up are oceans breaking pH of 7, India / Pakistan water based nuclear war, politically destabilizing migration. Doesn't change your overall hypothesis but I do think climate change policy should strongly conisider these 3 and the general environmentalism issues (habitat protection, clean air issues) your piece mentioned.

  2. It's very important to consider the consequences of the climate religion for growth. A great trick the climate warriors have is to implement their policies through regulation rather than government spending. That way, the costs do not get noticed so much.

    Ronald Coase wrote somewhere that when the lost welfare triangles [also invisible to the unaided eye] get big enough, policy will change. Well, climate policy destroys rectangles of value in addition to the triangles. Perhaps the idiocy will be seen sooner.

    It'll be hard though, for the religious quid pro quo is that the world is being saved. Hard to see that it's not, though.

  3. Jessie Ausibel makes a compelling point that the best remedy for climate change is growth itself.

    Of course, the cynic in me views this, inequality, wokeism and all the rest as political tools for redistribution. The job of a politician is to make the constituents happy and the constituents are happiest when the mailbox is filled with checks.

  4. Such a great post! The very great in sight that the climate folks are pulling a fast one by defining the problem solely in terms of climate and not in terms of all the policies that can improve the world over the next century is quite important and relevant.

    Of course the folks that have a religious attachment to climate would simply respond by saying - "we can do all other good things too". The notion of marginal value or the idea that there is a constraint of any kind on what we can do is foreign to most of them.

  5. Excellent piece. It's almost like you talk to Bjorn Lomborg sometimes!

    The people I know who work on climate really hate Lomborg and your post shows why.

    It's also interesting to note that Left Wing economists who are normally very wonkish get upset with climate economics. Noah Smith recently wrote about how economists "Don't do enough" on climate change :

    Smith and others like him are generally pretty strong on getting expert opinion, but with Climate he seems to say 'fire the experts - they way what I don't like'.

    His attacks on the former IPCC Chapter Lead Richard Tol are sad.

    Also, at the end of the second paragraph after 'Environment?' you have written 'carbond' instead of carbon.

  6. Can't remember where I read that a climate activist, when asked why they don't support nuclear as a way to reduce carbon emissions, replied that the objective is to "dismantle systems of oppression", not simply reduce emissions. I think that gives the game away, at least in connection with some climate activists.

  7. I agree with you that if we can get 2-3% real GDP growth for the next 100 years, that trumps almost everything.

    The difference is that I don't see that level of growth as a plausible baseline, especially if we don't tackle climate change. So far, humanity has more or less been able to treat the world as an infinite reservoir of resources. But exponential growth pretty quickly catches up with anything finite. Climate change shows us that we can't think of the world as infinite anymore -- our activity is starting to have a big effect on the world.

    For a different perspective on what happens if you keep extrapolating out exponential growth, try:

    1. GDP growth in the US may be less than 2-3%, but globally it seems much more likely.

  8. Oh, hell, anybody remember the Club of Rome stuff in the early '70s? Everything repeats after a generation or two.

    Exponential anything, like economic growth, and there's this 2nd Law of Thermodynamics which says we are doomed.

    At least Christianity says things will be OK in the afterlife if one confesses. I hope the climatistas are big enough in heart to let me enter heaven if I confess to having had a liking for CO2.

  9. "Climate policy at the current moment seems like an answer in search of a question." I think this is exactly right.

    Often it is an attempt justify (i) a pre-existing desire for less technology, (ii) changes in the world, or (iii) frustration with current bad weather. None really have much to do with climate change, but that is a convenient tool to use.

  10. "There must be some behavioral name for the bias that focuses on a tiny insignificant little cause and effect, leaving much more important questions languishing. Whatever it is, that's where we are."

    Norman Augustine described a similar phenomenon in his book Augustine's Laws, which he called "inversion." The example he chose was a high-level corporate budget discussion. Item one was to allocate a billion dollars (this is an old story, obviously) to build a nuclear power plant, which is voted almost without discussion.

    Item two is to build a toolshed next to the power plant for ten thousand dollars. This generates many minutes of vigorous discussion, since--unlike with the power plant--everyone in the room has some idea of how much a toolshed costs.

    1. Good points but it was actually a bike shed, leading to the term "bike-shedding" to describe this phenomenon. The "Law of Triviality" also captures the concept.

  11. The earth's climate has been changing since the earth came into existence. The earth has much hotter and much colder than it is today. The glaciers have been in retreat, though every once in a while they start to go the other way, for over 10,000 years. The climate will continue to change no matter what we do and man's effect on the climate will continue to be minimal. Most of those advocating for reduction of human's effect on the climate are more interested in their political agenda than changing the climate.

    1. While the climate has been different in the past, the rate of change now is more consistent with previous mass extinction events than the baseline gradual change. Also, our society wasn't around in those previous climatic conditions, so although the Earth and life in general will continue, this doesn't mean that we and the organisms we depend on can survive at suitable levels if we keep driving net warming by intensifying the greenhouse effect.

    2. In the Earth and life in general will continue, then why does it matter if humans are here in 200 years? Once we are gone the planet can 'heal' or do whatever it needs to do easily.

    3. Exactly right.

      While we can make a big difference in the quality of our environment with pollution control measures and more sustainable land-use practices, we cannot hope to make any difference when it comes to the temperature or the climate as a whole. But give people enough money and they will certainly try !

  12. You assume GDP is the whole indicator of human happiness and planetary well being You ignore resource and energy constraints and externalities. You gloss over or severely discount the GDP impacts of climate change. Or maybe you think that drowning many of the highly populated and industrialized coastlines in the world will help GDP. Just think of the trillions of GDP that will be created fixing those problems. You clearly would think that Nicholas Stern is logically flawed in his writings Try Tim Morgan for a different perspective.

  13. I think one category of issues that you overlooked (at least in this initial piece) is the impacts on critical systems, namely food production and disease prevention. Crop yields (1) and marine fisheries (2) in particular will be hit hard by climate change but are vital to our survival and wellbeing. Focusing on GDP seems to obscure the effects on aspects of the society that are more important to our well being than all goods and services as a whole.

    Similarly, the geographical range of many diseases (especially tropical diseases) will increase as warmer temperatures allow diseases that humans (and our food) are susceptible to the ability to spread. This seems to point to the characteristic of climate change that makes it uniquely problematic: it is not a single issue, but rather a wide-ranging set of different issues that will be difficult to solve individually, but simpler if we can stop the root cause of climate change (though that will still be a difficult problem).

    I would also like to say a word about the social and linguistic trends you take issue with. So far as the name given to climate change goes, your implicit argument seems as valid as someone writing “capitalism, supply-side economics, Reaganomics, neoliberalism, free market” (with all but the last crossed out) to refute Hayek or Friedman. Multiple phrases can describe similar or the same concept, and they can change over time. Also, as an interesting historical note, one of the original terms was “change in climate”, used at least by 1861, (3) though Eunice Foote had discovered the concept of the greenhouse effect three years earlier. (4) Incidentally, this phrase is much closer to “climate change” than it is to “global warming”.

    With regards to the social justice aspect to stopping climate change, I don’t see the blending of the two as an issue, but rather a rational conclusion drawn from the history of environmental degradation. Two examples stand out to me. First, the placement of polluting infrastructure has historically been nearest to Black and indigenous communities, so activism against pollution has been strongest in these frontline communities. Secondly, indigenous communities in particular have traditional knowledge of environmental management practices that are needed to remedy the causes and/or impacts of climate change. An especially notable example in California is the practice of intentionally burnings, which local people did well before colonizers arrived. This is what we should have been doing for decades to prevent the buildup of tinder that now contributes to the infernos we get yearly, but the initial colonizers forced the indigenous communities to give up the practice. Thus, addressing climate change through a social justice lens makes sense.

    Lastly, I am curious where the 5-10% growth figure comes from. I’ve heard Bjorn Lomborg cite it, and I recall him attributing it to William Nordhaus on one occasion. However, in trying to locate it, I found Nordhaus’s acceptance speech for the 2018 Nobel Prize, in which he states, “Technological change raised humans out of Stone Age living standards. Climate change threatens, in the most extreme scenarios, to return us economically whence we came.” This seems to be a much different conclusion from the one you and Lomborg draw, so perhaps I was mistaken in who the figure comes from.

    Thank you for the thought-provoking article, and I hope this comment at least gives you something to consider in turn as your series continues.



    1. (3) should be

  14. Odd - this seems to pretend that we have a choice. If doctors say I have brain cancer, I should choose whether to fight for survival only if it doesn't cost too much?

    I won't need a second opinion, that's sure/.

  15. It sounds like we have a choice. If I'm diagnosed with brain cancer or heart disease, I should calculate costs of treatment before I decide if I want to survive.

    ...and were this kind of reasoning is concerned, I don't need a second opinion.

  16. It's also pretty interesting that the "progressives" are so in favor of "doing something about climate change NOW!!!" despite how REGRESSIVE the sacrifices would be. Just how much do I feel like sacrificing my standard of living so that my great-grandchildren can have a standard of living 3x mine, instead of 2.85x? Uh, can I give a negative number?

    The idea that poor nations may suffer more and there may be a regressive international effect of climate change is a red herring. If progressives actually cared about the welfare of the 3rd world poor they'd want open borders and/or massive transfers to them right now. They'd be far better off now, and therefore in the future, if we send them the money we save by emitting greenhouse gases rather than using more expensive greener alternatives.

    The potential for a tipping-point/catastrophe is actually concerning, but it's hard to quantify, or put much faith in the alarmist claims when you notice they resort to "end of the world" claims when the cost-benefit analysis argument fails (but they typically never even bother with that).

    Anyway, it won't be too long before wind is by far the cheapest power source we have, the only big problem is figuring out how to store large amounts of it.

    1. AMT,

      "Anyway, it won't be too long before wind is by far the cheapest power source we have, the only big problem is figuring out how to store large amounts of it."

      "IHA estimates that pumped storage hydropower (PSH) projects now store up to 9,000 gigawatt hours (GWh) of electricity globally."

  17. John,

    I think you are missing the bigger picture here (thousands of years ahead):

    Also, there is a lot to be said for the US to diversify it's energy portfolio in geopolitical terms.

    "...subsidies to windmills, solar, electric cars"

    Please stop complaining about subsidies. Fossil fuels are one of the most heavily subsidized industries in the US. The entire public highway and road system is one giant subsidy to gasoline and the automobile industry. Not to mention the US Navy and Coast Guard protections of ocean drilling and transportation.

    1. So, because some things were foolishly subsidized in the past, nobody can note the inefficiency of subsidizing wind/solar? Makes perfect sense. Diversification is good; let's build some nuclear plants.

    2. Public works (creation of public goods) can always be characterised as subsidizing some industry or another. Eisenhouwer it was who created the interstate highway system, based on the German autobahn highways he saw in the aftermath of WWII. And, certainly, the interstate highway system created the continental transport trucking industry, taking traffic from the railroads and reducing product costs. From your stance, you would rather not partake in reduced costs of goods and services that public works provides the avenue for?

      In the case of the coast guard and off-shore oil exploration and drilling, you'd rather not exploit the reservoirs in the Gulf of Mexico in favor of importing more oil from Saudi Arabia and Venezuala? Certainly it can be done, but why would you want to?

    3. Old Eagle Eye,

      "Public works (creation of public goods) can always be characterized as subsidizing some industry or another."

      Agreed. And the same can be said for electric transmission lines, power plants, wind mills, solar arrays, and the rest of the electrical generation and distribution system.

      "From your stance, you would rather not partake in reduced costs of goods and services that public works provides the avenue for?"

      I am not the one complaining about subsidies - that is J. Cochrane's turf.

      What I am saying is that if you are going to complain about subsidies or do a cost / benefit analysis of subsidies, then look at all of them rather than cherry picking which ones you want to acknowledge (windmills, solar panels, electric vehicles) and which ones you want to ignore (US Navy, Coast Guard, interstate and public highway system, etc.).

      The subsidies I would be most concerned about are those subsidies paid in blood and lives rather than FRN's.

    4. Also,

      The reason that diversification is important is that it acts like an insurance policy.

      Obviously, doing a cost / benefit analysis on any insurance policy is difficult because the policy only pays off when something bad happens.

      If I buy car insurance and never have an auto accident, then the costs of that policy far exceed the benefits.

      Same thing with energy diversity. If the US uses a mix of solar, wind, nuclear, hydro electric, and fossil fuels and all those energy sources remain uninterrupted, then the payoff from using a mix including more expensive solar and wind is going to suck.

      That doesn't make the insurance policy any less important.

    5. Most of us are familiar with insurance policies and premiums. Fewer are familiar with portfolio diversification, its application and purpose.

      I have been accident-free through the whole period that I have been driving, from first obtaining a DL up to the present time. The premium cost has been simply one of the costs of ownership and little different from routine maintenance expenditures--it allows the vehicle onto the roadways and if a mishap should occur it covers a portion of the subsequent exenditures resulting from the mishap.

      In energy production, distribution and use, the case is different. There, you have competing merchantile interests contending to serve different and varied end-use consumers that have wants and needs that are not homogeneous. Government policy encourages competition but recognizes that monopoly industries can in certain circumstances prove to be more advantageous for limited periods of time if not indefinitely (government monopolies being of the latter sort).

      'Diversification' of energy sources is of two varieties: (1) transitional (i.e., moving from a state of unimodal source A to a state of unimodal source B), and (2) constrained resource availability (i.e., demand exceeds the supply from any one type of energy sourcce--e.g., insufficient hydro-electric potential, or regulatory requirements that limit nuclear energy plant siting or size, to weather-related or climate-zone relates such as insufficient clear sky days for solar energy sources, or lack of wind energy potential--states east of the Missouri and Mississippi rivers).

      Increasing economies of scale to one technology favors natural monopoly in an advantageous central location with distribution radiating outward to points of use (hydroelectric, nuclear, solar thermal, etc.). Decreasing economies of scale favors multiple facilities serving single local markets (e.g., peaking gas-turbine generators, diesel-electric generators, solar PV, biomass, wind energy, waste-heat facilities, etc.) The latter might be characterised as a "diversified" and the former as "non-diversified".

      As was seen this past winter, "insurance" in the form of multiple sources of electrical energy in Texas failed to provide the insurance capacity when multiple failures cascaded and systems management proved to be incapable of stemming the tide. With the source of failure identified as absent or poorly executed "winterization" practices, one could characterise "diversification" as a poor substitute for proper facility and distribution system design and maintenance. Not to put to fine a point on it, multiple benefit-cost analyses that led to insufficient investment in plant, property and equipment on the basis that unforeseen or unanticipated weather events were excluded from the analyses or considered the consequences to be of infinitessimal probability as to be dismissed out of hand by management and engineering personnel. Wagers against 'Nature' are rarely, if ever, paying propositions. Insurance, in the form of preparation and investment in cold-weather-capable equipment, in this instance might well have been the lesser of the two 'weevels'.

    6. Old Eagle Eye,

      "As was seen this past winter, insurance in the form of multiple sources of electrical energy in Texas failed to provide the insurance capacity when multiple failures cascaded and systems management proved to be incapable of stemming the tide."

      One of those potential multiple sources of electrical power was NOT being tied into the national electrical grid (a holdover from the Enron days).

      "With the source of failure identified as absent or poorly executed winterization practices, one could characterize diversification as a poor substitute for proper facility and distribution system design and maintenance."

      That is certainly one aspect of the problem. Another is to recognize that diversification only works when it eliminates single points of failure. If my heating demand and my electrical demand may both pull heavily from my natural gas supply under certain conditions, then a single failure in the supply and/or distribution of natural gas is going to cause big problems.

    7. Old Eagle Eye,

      "I have been accident-free through the whole period that I have been driving, from first obtaining a DL up to the present time. The premium cost has been simply one of the costs of ownership and little different from routine maintenance expenditures..."

      Really? If the state (government) that you live in didn't require auto insurance to operate a motor vehicle, would you purchase it? I am not talking about coverage on your own vehicle, I am talking about liability insurance - the insurance that you purchase to cover damages you inflict from your own at fault accidents.

      There is a world of difference between maintenance costs to keep the motor vehicle operating and state mandated vehicle insurance coverage.

  18. The silver bullet would of course be a sufficiently high carbon tax. Until and unless climatistas advocate such, I call BS. It's really about something else.

  19. It's funny and a bit ironic watching people pick nits with the points raised here. The leading political voices advocating for massive spending to prevent climate change are arguing we should spend MANY multiples more to prevent climate change than the best estimates suggest the cost of climate change is. And we don't even know if any of the money will actually help. And we can't do anything unless the autocratic and developing nations of the world sign on (which they won't). I know many people who care deeply about the environment and climate change, but they seem to fail to notice that the politicians and the rich never seem to sacrifice anything in these proposals, and every solution they advocate just tells people to accept having less.

  20. There is the implicit assumption in this article that climate change policies are extremely costly for economic growth. This would deserve more scientific backing. How much they reduce (or increase) economic growth is as important to know as the economic cost of climate change.

  21. Taking you on your word that "Maybe a tipping point does? But that is nowhere in any science I have seen so far, though I will be looking for it", here are some references to get you started:

    (1) Lenton, T. M., H. Held, E. Kriegler, J. W. Hall, W. Lucht, S. Rahmstorf and H. J. Schellnhuber (2008). "Tipping elements in the Earth's climate system." Proceedings of the National Academy of Sciences 105(6): 1786-1793.
    (2) Steffen, W., J. Rockström, K. Richardson, T. M. Lenton, C. Folke, D. Liverman, C. P. Summerhayes, A. D. Barnosky, S. E. Cornell, M. Crucifix, J. F. Donges, I. Fetzer, S. J. Lade, M. Scheffer, R. Winkelmann and H. J. Schellnhuber (2018). "Trajectories of the Earth System in the Anthropocene." Proceedings of the National Academy of Sciences 115(33): 8252-8259.
    (3) Lenton, T., J. Rockström, O. Gaffney, S. Rahmstorf, K. Richardson, W. Steffen and H. Schellnhuber (2019). "Climate tipping points - too risky to bet against." Nature 575(7784): 592-595.
    (4) Kypke, K. L., W. F. Langford and A. R. Willms (2020). "Anthropocene climate bifurcation." Nonlinear processes in geophysics 27(3): 391-409.

    You also start with "Take even worst-case estimates that climate change will lower GDP by 5-10% in the year 2100". Those estimates come from economists who have assumed that only economic activities exposed to the weather will be affected by climate change. See (5), p. 688:

    "FAQ 10.3 | Are other economic sectors vulnerable to climate change too?

    Economic activities such as agriculture, forestry, fisheries, and mining are exposed to the weather and thus vulnerable
    to climate change. Other economic activities, such as manufacturing and services, largely take place in controlled
    environments and are not really exposed to climate change. However, markets connect sectors so that the impacts
    of climate change spill over from one activity to all others. The impact of climate change on economic development
    and growth also affects all sectors."

    (5) Arent, D. J., R. S. J. Tol, E. Faust, J. P. Hella, S. Kumar, K. M. Strzepek, F. L. Tóth and D. Yan (2014). Key economic sectors and services. Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. C. B. Field, V. R. Barros, D. J. Dokken et al. Cambridge, United Kingdom, Cambridge University Press: 659-708.

    If it isn't immediately apparent to you that it is invalid to assume that exposure to the weather is necessary for economic activity to be affected by climate change, then I suggest you read (6)

    (6) Keen, S. (2020). "The appallingly bad neoclassical economics of climate change." Globalizations: 1-29.

  22. This post is a real eye-opener to me.

    When it comes to the motivation of climate policies, I find the following thought experiment helpful. Suppose the increase in carbon dioxide in the atmosphere was due to natural causes, would we see the same effort to reduce our carbon emission to stop global warming as we see today? I am absolutely certain that this would not be the case. We would focus entirely on how to adapt to climate change. This would suggest that current climate policies are not the result of rational cost-benefit analyses.

    1. Anonymous,

      "Suppose the increase in carbon dioxide in the atmosphere was due to natural causes, would we see the same effort to reduce our carbon emission to stop global warming as we see today?"

      That pre-supposes that human activity is unnatural or alien. Using that logic, efforts to reduce human carbon emissions are just as unnatural and alien (damned if we do, damned if we don't).

    2. I think this misses my point. I was just speculating that if the increase in CO2 was not caused by human kind, we wouldn't aim at reducing our CO2 emissions. Which would be strange given that the source of CO2 does not matter for its climate effects.

  23. I feel that "lower GDP by 5-10% in the year 2100" also means for several years (or decades, but not only one year) before and after 2100, the GDP will be lower. If this is the case and the magnitude of GDP loss is right, it is still justifiable to consider climate actions -- after all, Business-As-Usual (no climate action) GDP growth does not reach 5-10% a year.

  24. An article in National Affairs, "The Case for Climate-Change Realism", written by Benjamin Zycher (resident scholar at the American Enterprise Institute), makes several important points concerning the present state of knowledge and evidence pro/con 'climate change' and the economic effect of the several proposed contra 'climate change' policies being floated here and elsewhere (e.g., EU Commission's recent policy proposition, and government of Canada's 'backstop carbon tax').

    On-line article available here:

    Zycher, B., "The Case for Climate-Change Realism", 2021, National Affairs, No. 48, Summer 2021.

    Access may require a subscription to the magazine, National Affairs.

  25. This is pure gold: "A trillion dollars would buy one heck of a wilderness area." Likewise regarding water storage and transport (novel idea--move water from where it's found in excess to where there are deficits ;-) ); seawalls; nuclear plants; trees for urban/suburban landscapes; forest management; and so on. A trillion dollars run through a gov't 'green scheme' will buy, well, votes and corruption, if history is any example.

  26. This will be an interesting investigation. What we want, in economic terms, is a set of climate policies such that the marginal benefits are about equal to the marginal costs. Since we seem to agree that there are costs, of one form or another, some resources evidently should be devoted to reducing them, whether through adaptation or mitigation. Surely the economic approach teaches that.

    But now we are forced to accept that there is a collective element to all this. There are externalities involved. That implies the use of a collective mechanism, at least in part, and the ones we have do not easily lend themselves to direct cost benefit calculation. Instead, they involve voting, political popularity, side payoffs, etc., etc. This implies, I think, that the resources that will have to be collectively thrown at the problem of climate change MUST be higher than implied by a direct cost benefit analysis. How much higher is the question, and while economists will do great service by pointing out the foolishness of excess, they'll do well to consider the political economy too. How can this excess be kept to a minimum? This involves choices too - e.g., back a carbon tax, demand upfront payment for green subsidies, whatever might reduce the policy maker urge to reward key constituencies with climate policies that accomplish little substantively but much politically. This is a mighty challenge, and one that will continue for decades to come.

  27. Rather than a question of systemic climate and financial stability, we should ask what the tradeoff between economic growth and environmental conservation is. Are we willing to marginally pollute x% GHG emissions more to get x% (for illustrative purposes assuming some kind of law of conservation holds)? Yet, while we can get infinitely rich, the ecosystem cannot grasp a few C degrees more.

    Hopefully, there are no counterfactuals, to prove this wrong. However, I would not want to test the limits of the climate sphere, on how many degrees it can handle, how many fires burning, or how many species are essential for life by letting the most endangered disappear.

    We are facing a problem of scale and climate externalities. At the microeconomic level, if every economic agent is willing to maximize its profit, the climate plays no role. Individually thinking, what wrong can we do if we pollute a bit more, at the end the world is already burning, right? By individuals, I refer to households, firms, or even countries.

    We need to scale up the level, to get macroeconomic incentives that will shift the balance, or at least adjust the metrics to take into consideration environmental deterioration. I am not saying that the current climate policies are ad hoc to deal with all the environmental problems, just that they are putting climate (finally) at the same table as finance.

    Two additional questions come to my mind.

    1. What are the environmental priorities? Yes, there is a list with 17 sustainable development goals (SDGs), and many subdivisions (170 or so). With so much ambition, it comes to a great weakness: there is no clear order. The incentives of every (sustainable and development) agent remain heterogeneous, and the progress towards the SDGs remains marginal. Policymakers should concentrate their forces to direct the efforts to a single goal at the time, to create environmental priorities.

    2. To attribute the importance of climate to economic growth. In the last century, the efficient use of environmental resources has been the main driver of growth. Where the inputs are fossil fuels, deforestation, and the outputs are the profits. Without them, we will still travel by horse. We have developed efficient ways to use them, and we will continue to do so. As you said, GDP is an imperfect measure because it doesn’t include “great stuff that is free”. Sadly, there is no environmental free lunch.

  28. The problem with this take on the problem is that economists are actually arguing about something significantly less important. The economic argument for against transition/inaction is the net trade off in costs between physical damages and abatement spending. This is percentage points on the gross costs of climate change or transition in the economy. Taking your principal point, if climate costs are peanuts at the end of the century, are literally arguing over the the distribution of the last nut.
    In the wider, real world, people are concerned about the physical and ecological impacts of ongoing climate change. That would be several degrees of further warming, widespread ecosystems destruction (of which the loss of the great barrier reef is just a precursor), and a legacy of global deglaciation which will take millennia to manifest but will leave the world with sea levels several tens of meters higher than they are now.
    The question the general population then has for economists is 'why not transition; why are you arguing over the optimal distribution of a peanut at the end of the century? Keynes, said economists should act more like dentists. If somebody comes in with tooth ache, a dentist would find a cost effective solution for dealing with it, rather than arguing that it might be marginally more/less cost effective to live with it in the long run on the basis that your teeth will probably fall out in the long run and we are all dead anyway.

  29. You don't really cover the possibility that maybe climate adaptation/carbon prevention will be a boost to GDP. If we spend a several trillion and get to nuclear fusion, it may well pay back 10s of trillions. The solar + storage system on my house supposedly pays itself back in 15 years. Since I have the capital, why not? ... and the solar panels keep getting cheaper. I'm a fan of modular nuclear reactors too, those might be a large GDP boost even as they lower the carbon footprint.

  30. The question is "how do we justify a vast increase in government control over the economy, with all the opportunities for corruption, enjoyment of power, and inevitable decline in living standards that implies, in democratic countries". They can't promise prosperity for society as a whole or for the poor - that's why Communism was rejected. But they can promise declining living standards in order to avert a hypothetical problem a century from now.


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