The United Nations' Intergovernmental Panel on Climate Change (IPCC) has just issued the "Summary for Policymakers" for its new report, Climate Change 2014: Impacts, Adaptation, and Vulnerability. The report aims to sum up what is known about the likely impacts of future climate change, including more droughts, higher sea levels, greater risk of species extinction, and so forth. But what will these changes cost humanity in terms of economic output? Here is the relevant section from the Summary:
Global economic impacts from climate change are difficult to estimate.
Economic impact estimates completed over the past 20 years vary in their coverage of subsets of economic sectors and depend on a large number of assumptions, many of which are disputable, and many estimates do not account for catastrophic changes, tipping points, and many other factors. With these recognized limitations, the incomplete estimates of global annual economic losses for additional temperature increases of ~2°C are between 0.2 and 2.0% of income (emphasis added) (±1 standard deviation around the mean)(medium evidence, medium agreement). Losses are more likely than not to be greater, rather than smaller, than this range (limited evidence, high agreement). Additionally, there are large differences between and within countries. Losses accelerate with greater warming (limited evidence, high agreement), but few quantitative estimates have been completed for additional warming around 3°C or above. Estimates of the incremental economic impact of emitting carbon dioxide lie between a few dollars and several hundreds of dollars per tonne of carbon (robust evidence, medium agreement). Estimates vary strongly with the assumed damage function and discount rate.
Let's assume that the increase in future global average temperature is below 2°C. Gross world product (GWP) in 2012 was about $72 trillion. That divvied up between 7.2 billion people yields an average per capita income of around $10,000. Now assume that world economy grows at 2.5 percent annually over the next 85 years and world population reaches 10 billion. GWP in 2100 would be about $590 trillion and per capita GDP would $59,000. If climate change lowered income by 2 percent by 2100, that would mean GWP would be $578 trillion and per capita GWP would be $57,800. How much should people living now on $10,000 per year sacrifice so that people making six times more in 2100 have an extra $1,200 in income?
Now let's assume that the high climate change damage estimate promulgated in the Stern Review: The Economics of Climate Change (2006) reduces incomes in 2100 by as much as 20 percent below what they would otherwise have been. Average income in 2100 would then be just $47,500—still nearly five times more than current global per capita income.
Over at The Telegraph, economist Andrew Lilico provides this interesting analysis:
The new report will apparently tell us that the global GDP costs of an expected global average temperature increase of 2.5 degrees Celsius over the 21st century will be between 0.2 and 2 per cent. To place that in context, the well-known Stern Review of 2006 estimated the costs as 5-20 per cent of GDP. Stern estimates the costs of his recommended policies for mitigating climate change at 2 per cent of GDP – and his estimates are widely regarded as relatively optimistic (others estimate mitigation costs as high as 10 per cent of global GDP). Achieving material mitigation, at a cost of 2 per cent and more of global GDP, would require international co-ordination that we have known since the failure of the Copenhagen conference on climate change simply was not going to happen. Even if it did happen, and were conducted optimally, it would mitigate only a fraction of the total rise, and might create its own risks.
And to add to all this, now we are told that the cost might be as low as 0.2 per cent of GDP. At a 2.4 per cent annual GDP growth rate, the global economy increases 0.2 per cent every month.
So the mitigation deal has become this: Accept enormous inconvenience, placing authoritarian control into the hands of global agencies, at huge costs that in some cases exceed 17 times the benefits even on the Government's own evaluation criteria, with a global cost of 2 per cent of GDP at the low end and the risk that the cost will be vastly greater, and do all of this for an entire century, and then maybe – just maybe – we might save between one and ten months of global GDP growth.
The IPCC Summary does additionally warn that warming higher than 2°C might shove the climate system over tipping points that would produce substantially more losses. The Summary asserts that "low-probability outcomes with large consequences, is central to understanding the benefits and tradeoffs of alternative risk management actions." The chance of total catastrophe warrants some action be taken to avoid it, but how much and at what cost?
For a discussion of that issue, see my article, "Wagging the 'Fat Tail' of Climate Catastrophe."
Note: Ronald Bailey is on book leave and should not be blogging, but he couldn't resist this time.