Monday, August 17, 2009

The Core Narrative of Climate Change - 10

Suppose the World proceeds through this century on a high growth trajectory albeit with a “balanced” energy portfolio. On the IPCC scenarios, we end up with the following:
Economic wealth is $528.5 trillion.
CO2 output is 60 gigatons of Carbon per year.
Temperature rise is 2.8 degrees Celsius.
While on the “green” scenario the equivalent figures are:
Economic wealth is $334 trillion.
CO2 output is 30 gigatons of Carbon per year.
Temperature rise is 1.8 degrees Celsius.
So, we gain almost 200 trillion in wealth for a 1 degree rise in temperature as the price. But these projections fail to take in to account the effects of the temperature gain on GNP. GNP is an external input in these calculations. In a very interesting paper, Melissa Dell , Benjamin F. Jones, and Benjamin A. Olken (“Climate Shocks and Economic Growth: Evidence from the Last Half Century”) look at the historical record to argue that a 1 degree centigrade rise in temperature reduces economic growth by an average of 1.1% but only in poor countries. Let’s see how this works for Asia. If we look to Asia’s projected figures in the IPPC scenarios, the difference between A1B and A2 by 2100 is about $100 trillion. (A1B is $207.3 trillion by 2100 while B1 is $105.9 trillion.) Both start the century at $2.7 trillion. Let’s focus on A1B – what is the implied growth rate? It is 4.4%. So what would it be less the “cost” of global warming of 1 degree more than the B1 scenario? 3.3%. So what the projected GNP of Asia on a 3.3% rate rather than a 4.4% rate? The result is $69 trillion. That is $35 trillion less than the B1 figure!
(Note: I could have calculated the 1 degree cost for B1 and a 2 degree cost for A1B to get the same resulting difference.)This is good news! The cost of climate change to output seems to outweigh the gain from more aggressive scenarios.

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