Monday, August 31, 2009

Second Thoughts

Two weeks ago ( on August 10), I ended the long slog through a 10 part argument (The Core Narrative of Climate Change) by arguing that in the end, my worries about divergent interests between the Developing World and the Developed World might be misplaced. I argued that high growth trajectories failed to take in to account the effects of the temperature gain on GNP. GNP is an external input in these calculations. I then relied on a paper by 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”) that looks 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. I argued that using Asian 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. For A1B the implied growth rate is 4.4%. So it be 3.3% less the “cost” of global warming of 1 degree more than the B1 scenario. So the projected GNP of Asia would be $69 trillion which is $35 trillion less than the B1 figure. So it seemed that the cost of climate change to output seems to outweigh the gain from more aggressive scenarios. Not so fast!! All of this only applies to poor countries. GDP growth rates for rich countries are not really affected by such changes according to the M.I.T. research – they are less agricultural and more flexible economically. But here is the rub: on the projected growth trajectory for Asia both China and India will move from “poor” to “rich” long before 2050. If and when that happens, at least on the basis of this research, they won’t have offsetting losses to GDP from climate change that would undermine their gains from an aggressive growth trajectory. So, at least on the basis of self-interest, the conclusion I drew two weeks ago is wrong for them. And they are the ones whose output matters most in the Developing World!

Monday, August 24, 2009

China's Plan

Chris Buckley reported (in Reuters last week) that top policy advisers in China have recommended “firm targets to limit greenhouse gas emissions so they peak around 2030” in their “2050 China Energy and C02 Emissions Report”. It would be a big step forward if China’s political leadership were to accept the principle of firm targets over the current commitment to simply improve energy intensity without reference to the growth of GDP. They will only do so, if the authors of this report can convince them that low carbon pathways are compatible with China’s growth targets. Be that as it may, a look at the recommended targets themselves is sobering when you translate them into stabilization levels of atmospheric CO2. The report projects Chinese output of CO2 in 2050 as 3.47 gigatons of Carbon on a business as usual model. The alternative low carbon path puts output at 2.41 GtC. Finally the authors pose an “enhanced” low carbon path that generates 1.4 GtC. So far so good. But now consider the following calculus: it has been generally thought that to stabilize at 450ppm, world CO2 output needs to be reduced from current levels to 18 GtCO2 or 4.9 GtC. Assume we were to do that on the basis of an equal per capita share based on the projected world population in 2050 – roughly 9 billion people. China has declared a goal of a stable population of 1.6 billion which is 17.7% of 9 billion. On an equal share per capita, its allocation would thus be .87 GtC – far below its enhanced low carbon path. What happens if you run the argument in reverse? If you start with the enhanced low carbon path of 1.4 GtC as an equal per capita allocation of 17.7% of the population, that gives you an equivalent world output of 9 GtC (33 GTCo2) – which is more than our current output which we know to be unsustainable! Are U.S. plans much better? Assume the U.S. stabilizes at 350 million in 2050 or 3.89% of the world population. Then its allocation will be .186 GtC which would be roughly equivalent to a 90% reduction over 2006 output levels.

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.

Monday, August 10, 2009

The Core Narrative of Climate Change – 9

How much GNP does a country sacrifice for avoiding climate change? We saw a partial answer by using the IPCC scenarios discussed a few weeks ago. (See “The Core Narrative … - 5” below.) The choice becomes A1 versus a low growth family of scenarios (the B family). The contrast now becomes striking when you ask how much economic growth would the Developing World have to sacrifice. Here are the IPCC figures for projected World GNP: A1B: $528.5 trillion, B1: $334 trillion. But that is not the end of the story. This figure does not take into account the costs of climate change itself. But can we arrive at an overall calculus? Through the IPCC, we have a rough accounting of the number of people living in low-lying coastal zone as a proportion of total population. Through Oxfam, we have the same for those more generally vulnerable to the effects of climate change. But that does not really help. Before we consider these populations, we need to ask this: is there some general way to calculate the costs of climate change that we can deduct from the GNP figures above. That is to say, if A1B yields a $194.5 trillion dollar advantage over B1, what is the associated climate cost?

Monday, August 3, 2009

The Core Narrative of Climate Change – 8

Why might the hypothetical I raised last week turn out to be real? That is, that I am in fact better off @ $2000 relative to other more prevalent “stressors” in my environment (level of nutrition, health care I can afford, education I can afford etc) AND that improvement is greater than the net negative climate effect. It depends. The effects of climate change depend very much on where you live as well as how you live. Obviously, if you live in low-lying coastal regions, rising sea levels may affect you directly. Otherwise the effects will be indirect. Climate’s effects will be primarily experienced by way of existing stressors that are exacerbated. Can we get a handle on how to quantify this? In doing so, we can pose this as a national rather than individual issue. Here is what we need to answer:
How much GNP does a country sacrifice for avoiding climate change?
But in answering that we need to know how much does climate change costs in terms of welfare?