An essay on climate economics at National Review.
Climate policy is ultimately an economic question. How much does climate change hurt? How much do various policy ideas actually help, and what do they cost? You don’t have to argue with one line of the IPCC scientific reports to disagree with climate policy that doesn’t make economic sense.
Climate policy is usually framed in terms of economic costs and benefits. We should spend some money now, or accept reduced incomes by holding back on carbon emissions, in order to mitigate climate change and provide a better future economy.
But the best guesses of the economic impact of climate change are surprisingly small. The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP. Even extreme assumptions about climate and lack of mitigation or adaptation strain to find a cost greater than 5 percent of GDP by the year 2100.
Now, 5 percent of GDP is a lot of money — $1 trillion of our $20 trillion GDP today. But 5 percent of GDP in 80 years is couch change in the annals of economics. Even our sclerotic post-2000 real GDP grows at a 2 percent annual rate. At that rate, in 2100, the U.S. will have real GDP 400 percent greater than now, as even the IPCC readily admits. At 3 percent compound growth, the U.S. will produce, and people will earn, 1,000 percent more GDP than now. Yes, that can happen. From 1940 to 2000, U.S. GDP grew from $1,331 billion to $13,138 billion in 2012 dollars, a factor of ten in just 60 years, and a 3.8 percent compound annual growth rate.
Five percent of GDP is only two to three years of lost growth. Climate change means that in 2100, absent climate policy or much adaptation, we will live at what 2097 levels would be if climate change were to magically disappear. We will be only 380 percent better off. Or maybe only 950 percent better off.
Northern Europe has per capita GDP about 40 percent lower than that of the U.S., eight times or more the potential damage of climate change. Europe is a nice place to live. Many Europeans argue that their more extensive welfare states and greater economic regulation are worth the cost. But it is a cost, which makes climate change look rather less apocalyptic.
India’s $2,000 per-capita GDP is one-thirtieth of the U.S.’s $60,000. The cost of climate change to India is trivial compared with the benefits India could obtain by adopting economic institutions more like those of the U.S. — which themselves are far from perfect.
Growth is not an inexorable force. Each step of growth is hard won and fragile. Growth could be 3 percent or more. Growth could be 0 percent or less. We have seen countries move backwards for decades. Growth risk is an order of magnitude larger than climate risk.
If the question is, “What steps can we take, perhaps costly today, to improve GDP in the year 2100?” hurried decarbonization is not the answer. If the question is, “What steps can we take to improve the well-being of the world’s poor?” climate policy is not the answer, with many zeros before you get to the decimal point. Sturdy pro-growth policies, however unpopular to so many in today’s political class and incumbent businesses and labor organizations, are the answer.
Even 2–5 percent of GDP in economic cost estimates are wildly uncertain — more uncertain even than the meteorological parts of climate models. Imagine yourself in 1921, asked to estimate the impact of carbon emissions on GDP in the year 2000. Well, you would have taken out your slide rule, and looked at how much gas a Ford Model T consumes, how many people will want to travel on coal-fired steam railways, and so on. You would have looked at the statistical association between heat and output. The estimates might have looked pretty bad in an economy dependent on low-tech agriculture and without air conditioning.
And you would have been drastically wrong. Our economy looks nothing like anyone could have guessed in 1921. Your guess of how much our economy would be hurt by (or benefited from?) 20th-century carbon emissions would have been less likely to be even vaguely correct.
Most of all, you would have missed the main story: The 20th century produced the greatest gain in human well-being of all time, by orders of magnitude, despite warming, and despite its upheavals. You would have had no clue of the move to a service economy, far less dependent on weather, or adaptations including air conditioning, transport, high-tech agriculture, and how much cleaner and healthier the 2000 economy would be. If you had ordered a return to horses and buggies, you would have doomed billions to short lives of squalid poverty.
That is the unenviable task of today’s economists who measure the effects of climate change on the economy 80 or more years from now.
Looking under the hood of big models, it is not even obvious that climate change hurts the economy at all. People and companies are moving in droves from the cold Rust Belt and cool, coastal California to Texas, even though Texas is a lot hotter than anything climate change will bring to the former.
In technical terms, estimates of the economic cost of climate change rely in large part on the statistical association between weather and productivity in today’s economy. But all statistical associations offer questions. Yes, on average hotter countries are not as productive as colder ones. But sometimes they are productive — Singapore, for example. So you have to somehow take out the immense effects of government, culture, past investments, and so on. Then you have somehow to deal with the fact that the economy 100 years from now will be nothing like today’s. People will invent new technologies that will help them to adapt. Yes, recent heat waves in Oregon have been damaging. But similar heat in Texas is considered a cool day. How many people will buy air conditioners in Oregon in the next 80 years?
The central uncomfortable fact is that the output of an advanced industrial economy like the U.S., moving headlong into services, is just not that sensitive to climate or weather. The worst heat waves, floods, and storms just do not move national GDP.
GDP is not everything, of course. GDP measures income, how much people earn and how much they produce. It leaves out a lot — the tremendous value of free or nearly free goods, the value of clean air and water, good health, long life, a free and egalitarian society, and so forth. But all of these things are better when GDP is better, and far worse where GDP is worse. Only a productive people can afford them. The U.S. today is immeasurably better off than in 1940, or 1840 on all these measures too. Our air and water are cleaner than just about everywhere else in the world. Our welfare state is much more generous than those of poor countries or what it was in 1940. GDP is imperfect, but if anything it understates the benefits of economic progress.
What about floods and droughts, wildfires, heat waves, all the events you see on the news along with another scolding about climate change? Whether carbon emissions are leading to more weather extremes is actually scientifically contentious. Fortunately, once again, we do not need to get into this debate. Even if these claims are correct, they do not justify draconian climate policy.
I live among wildfires in California, which are very unpleasant. Suppose, for the sake of argument, that the increase in wildfires is entirely due to carbon-caused climate change. But even if the U.S. adopts all the recommendations of the IPCC, or the Green New Deal itself, we will only contain the further rise of temperature. The pre-industrial climate will still not return in our great-great-great-grandchildren’s lifetime.
Even if rising greenhouse-gas emissions are the ultimate cause of more frequent and severe wildfires, the only path to actually doing something about wildfires is to spend money on fire prevention and forest management — clearing out the accumulated brush. (Reforming zoning and planning laws so it’s easier to build in cities will help, too.) It will cost money, perhaps a lot of money compared with historical budgets, but a tiny amount of money compared with GDP or government stimulus programs, or, say, high-speed trains. CalFire’s budget is $2.9 billion, 1 percent of the state of California’s budget, and 0.1 percent of California’s GDP. The supposedly carbon-saving high-speed train is budgeted at $80 billion.
This example illustrates a larger point. If the question is how to blunt the economic impact of climate change, adaptation has to be a major part of the answer. There seems to be a great disdain for adaptation, clearing the brush, building dikes and dams, moving to higher land, installing air conditioners, moving or engineering crops and so forth. Spread over a hundred years, the costs of adaptation are not large. Perhaps climate-policy advocates dismiss talk of adaptation because, by reducing the damage that might be caused by greenhouse-gas emissions, it makes emissions less scary. Climate models are also short on adaptation and innovation, perhaps for the same reason.
Miami might be six feet underwater in 2100, but Amsterdam has been six feet underwater for centuries. They built dikes. By hand. Amsterdam is a very nice place, not a poster for dystopian end of civilization. Buildings decay and need to be rebuilt every 50 years or so. Just start building in drier places. At a minimum, the U.S. government could stop subsidizing construction and reconstruction in flood and fire zones!
What of “tipping points,” stories of unforeseen disasters that the IPCC charitably labels “low-probability low-confidence”? Isn’t it worth taking out insurance? The trouble is that if anvils might fall from the sky, pianos might fall from the sky, too. If this is not just an excuse to spend money on carbon, but instead an open-minded effort to identify all out-of-the-box dangers, we end up spending all of GDP on insurance. Insurance arguments must include some attention to the probability of events and the cost of those events.
Given how small and uncertain the economic costs are, climate-policy advocates really ought to give up the economic argument. Admit that economic losses are just not the issue. Make the standard environmental case, as they successfully did for clean water and clean air: This will cost money. It will reduce GDP, now and in the future. But, argue that it is a cost we must bear to save the environment.
But that argument too needs to be much clearer and better quantified. The media and too much of the scientific literature, such as IPCC reports, offer only hypotheticals and scare stories. For a small donation, pictures of cuddly animals might do. For trillion-dollar costs and regulations, they do not. To justify such costs, we need some dollar value on specific environmental damage of climate change. Yes, the numbers are uncertain. But those numbers are the only sensible framework to discuss spending trillions of dollars on climate now.
Naming costs and benefits is particularly useful to analyze whether some of those trillions are not better spent on other environmental issues. For example, species extinction is a real problem. We are in the middle of a mass extinction. But the elephants will die from lack of land and poaching long before they get too hot or dry. For a trillion dollars, how much land could we buy and turn over to complete wilderness? How many more species would we save that way, rather than spending similar amounts of money on high-speed trains and hurrying the adoption of electric cars? The oceans are in trouble. For a trillion dollars, how much over-fishing, chemical pollution, plastic garbage, or noise could we fix? Economics is about choice, and about budget constraints.
As much as media bleat that climate change is a current emergency with “disparate impact,” the world’s poor face much worse environmental problems: smoky air, chemicals, fetid water, easily preventable diseases. For a trillion dollars a year, we could radically improve their human environment.
Still, climate change is real and undesirable. What should we do about it?
Economics offers a few guidelines. The first is explicit cost–benefit analysis. For every step one wishes to take, figure out how much it costs, and how much it will reduce carbon.
Even though we don’t really know the economic or environmental cost of carbon, cost–benefit analysis is vital so that we do whatever we do efficiently. Avoid doing incredibly expensive things that save little carbon, and don’t ignore unfashionable things that might save a lot of carbon at lesser cost.
Without numbers, we will follow fashion. Today it’s windmills, solar panels, and electric cars. Yesterday it was high-speed trains. The day before it was corn ethanol and switchgrass. Actually addressing climate change in a sensible and effective way is likely to involve unfashionable technologies, and new technologies without political backers. A focus on cost–benefit, carbon per dollar, is vital to allow different technologies to compete, and new technologies to emerge. The alternative — and current predilection — is for different technologies to compete for political favor, a mechanism we all know well, along with its disastrous results, especially regarding innovation and cost reduction.
Nuclear energy is very safe and emits no carbon. Many climate-policy institutions cut their teeth on the anti-nuclear movement of the 1980s. The carbon advantages of nuclear are a bitter pill for them to swallow. Carbon capture and storage removes carbon from the atmosphere. Since it would allow us to burn fossil fuels for a few decades while ramping up alternative technologies, it is disparaged by climate activists. [In California, hydro does not count toward "renewable" goals, given historic antipathy to dams, or perhaps a preference for fish over birds. Nuclear of course does not count.] If warming and the climate change it induces really have apocalyptic effects, then geoengineering to reduce temperatures ought to be at least considered. Are these technologies part of the solution? I don’t know. Only dollars per ton of carbon, or dollars per degree of future temperature, can tell us.
From an economic perspective, the ideal policy combines a carbon tax, whose revenues reduce other marginal tax rates, with strong support for basic R&D.
A carbon tax is a win-win. Many climate advocates disparage the carbon tax, on the view that people will not reduce energy consumption and carbon emissions when the price goes up. If so, great! A bankrupt government can raise a lot of money, and reduce other heavily damaging taxes. If people drastically reduce carbon emissions to avoid a small tax, the government doesn’t earn much money. Great! We save the planet at low cost.
A visible price incentivizes behavior that regulation cannot touch. Maybe rather than buying a Tesla, you should move closer to work — or carpool. Maybe cutting out one international trip does more than buying the Tesla. Maybe zoning and permitting reform will allow building houses so people don’t commute in the first place. Is it easier to decarbonize transport, home heating, cement, steel, or agriculture? Only by setting a price can we know the answers, and incent the millions of little daily decisions that go in to reducing carbon emissions efficiently.
A carbon tax bakes in cost–benefit analysis, and otherwise incalculable carbon-reduction pledges. Just buy the cheapest option and you’re doing your bit.
But the main point of a carbon tax will be to make new technologies cost-effective, and get them going and going more cheaply in the brutally competitive private market, not the cost-plus market of political subsidies.
Thus, if the question is how to reduce carbon as much as possible while damaging the economy as little as possible, an evenly applied carbon tax — even to the coal emissions used to create solar panels and car batteries — is the answer, in place of regulation and subsidies.
Like many economists, I used to start and stop at a carbon tax, for just these reasons and in return for getting rid of all the extensive and ineffective energy regulations and subsidies. But two recent developments have tempered my enthusiasm.
First, across all the various scenarios considered by the IPCC, total warming is robustly related to total carbon. Alternative scenarios, including carbon taxes, simply delay warming and its consequences. Even with alternatives, the coal and oil get burned eventually and the climate warms.
Second, carbon taxes are right now a political nonstarter. You can see this most clearly in the hilarious plea from the White House for OPEC to increase production in order to keep gas prices down. This from the same administration that canceled Keystone, “suspended” the issue of new oil and gas leases on federal lands, and is spearheading a “whole of government” move to rapid elimination of fossil fuels before alternatives are in place, all of which must raise the price of gas. What’s going on? Well, clearly, governments find they must take underhanded, obscure regulatory steps to drive up the price of gas, with plausible deniability, rather than enact simple, transparent, much more effective and much less costly carbon taxes, which voters will notice.
But our current climate policies are not an answer either. Notice how our policy-makers never tell us how much they think each new policy will reduce year 2100 global temperature or raise year 2100 GDP. The reason is that the numbers are tiny. If the question is how to funnel billions of pork to constituencies by painting it green, however, these policies are a natural answer.
The bottom line: A policy focused entirely on making what we do now more expensive, either by regulation or by taxation, will not work. Massive subsidies for alternatives will not work. Innovation, aimed at lowering the cost of noncarbon-energy production, really is the only answer that is going to work. Just as innovation is what made us so much better off than our great-grandparents.
Carbon policy is full of economic fallacies. Mother Earth does not care if solar panels are made in the U.S. or China. She just wants them to be cheap. “Millions of green jobs” are a cost, not a benefit. Our businesses cannot find enough workers already, and taking millions of people away from other activities hurts the economy. Financial regulators are now taking on climate change, justifying this dramatic expansion beyond their legal authority by endlessly repeating a fantasy that “climate risk” imperils the financial system in the near future.
Climate advocates have done themselves and the planet a great disservice by wrapping climate policy in increasingly shrill, apocalyptic, partisan, and unscientific rhetoric. “Global warming” became “climate change,” reflecting in part effects on rainfall or different geographies, but also inviting media commentary on every weather event to become a sermon. In the Green New Deal and comparable movements, it became “climate justice,” wrapping climate inexorably in a far-left-wing politics of anti-capitalism. The required vocabulary moved on to “climate crisis.” Still not enough: In April the (formerly) Scientific American proclaimed that, in coordination “with major news outlets worldwide,” it would start using the term “climate emergency.” Will “climate catastrophe” be next?
There is nothing in climate science to justify apocalyptic rhetoric. If the question is, “What threatens the collapse of civilization,” war, nuclear war, civil war, pandemic, crop pandemic, and social and political disintegration are far higher on the list. No healthy society fell apart over a slow and predictable change that came over a hundred years. There is nothing in climate science to say life on earth is threatened. Climate has varied far more in the past. The retreat of ice 10,000 years ago came from a much larger and more natural warming, and was a boon to humans, producing agriculture and civilization.
There is nothing in the science that justifies uniting “climate” with a left-wing political agenda. Yet even the IPCC mixes climate change with “sustainable development, poverty eradication and reducing inequalities.” Mixing anti-capitalist politics with climate change makes those skeptical of the rest of the agenda wonder about the objectivity of climate science, and whether the planet really is in such danger.
People are smart, and when they suspect facts are bent to a political cause they stop listening. Actually doing something about the climate will require decades of consistent policy. That will not happen by today’s elites crying wolf and cramming regulations down the throats of a disdained and temporarily distracted electorate.
Too many people, rightly critical of climate policies, attack the science. Though that science is full of uncertainties, the policies that follow from the science are much less certain. Two degrees of warming does not call for the Green New Deal. Economics is the key element in designing a workable climate policy.
Acknowledgement: This is in many ways a summary of lots of climate economics articles I've read. I didn't festoon it with links and footnotes, but I want to acknowledge once that most is not original but rather a collection of lots of other people's ideas
Climate policy tends to jump to "what shall we subsidize and force," as if we live today in free market paradise subject only to externalities. In many cases, getting out of the way is the first answer, not adding counter-subsidies and regulations to the current subsidies and regulations that cause us to emit too much carbon.
Nuclear power is a great example. We do not need lots of funding for nuclear power. We need the current regulatory regime that strangles nuclear to be reformed. More here.
Likewise, @MerijnKnibbe added
With numbers, ...we push for insulation, working at home, solar panels, more people per home, less use of concrete etc etc. ...
Before we "push for" we might think about "allow." Before we subsidize electric cars, trains, hyperloops etc. to move people around with less carbon, we could remove all the barriers to simply letting people live nearer where they want to go in the first place.
And the climate effects of residential zoning, which force low density, lots of house per person, long commutes, etc. are a good example of "allow," as well as things that a price on carbon will naturally enlighten, but since nobody makes a lot of money off of it do not naturally rise to the top of a control and subsidize agenda.
Fracking and natural gas are good cases. The US has led the world in carbon emission reductions for the last 10 years. Why? Windimills? Teslas? Switchgrass? No, fracking and the switch to natural gas. Fracking not on public lands, and actively opposed or even illegal in blue states and by our current Administration. We led the world in carbon emission reduction because fracking was allowed, not because it was mandated or planned! Yes it's a "transition fuel," but that's the whole point.
See the pattern? An innovation made a cleaner fuel cheaper, people switched quickly to it, and emissions went down. That this innovation was privately funded, refined in a brutally competitive market place, and both unexpected and resisted by government at every stage only adds salt to the climate planner's wounds.