Cost-Benefit, Non-GDP, Global Warming

I should have been a much better lefty quant geek when it came to following global warming tail-risk models. I apologize internets, but there are only so many hours in a day. I do want to point out a few quick things from vacation with everyone talking about Waxman-Markey these days.

Let’s assume the world temperature is raised somewhere between 2.8 and 3 degrees during the 21st century. Now thanks to an argument of a fantastic cost benefit analysis by Jim Manzi and The American Scene, the USA will experience no GDP loss during this period as a result of Global Warming. Our factories will make as many widgets as they would have before, the malls will buy and sell the same volume of goods. I agree that is what our current models tell us. Let’s talk about what will change non-GDP wise.

Water, Food, Biodiversity

Jim gets this analysis on GDP from page 802, Chapter 20, Chart A on the IPCC. Now that chapter – “Perspectives on climate change and sustainability” – is mostly about ecology, with some GDP thrown from other sources. Since Jim has opened the door to this chapter, let’s reproduce some other charts and data from that chapter of what a no GDP loss world looks like.

Note that under any scenario, no North American will go hungry as a result of global warming. Under the various scenarios (use A2 and B2) around 150 million Africans will go hungry. An additional 150million people in other parts of the world. Now maybe high C02 levels will cause a boom in crop yields, and we’ll have more food than before (the parenthesis numbers represents a tail lower bound on high positive impact on C02 on plants). So there’s a chance we’ll have little impact there. That’s a rough gamble to take. Note the high numbers for water risk. We may be able to visualize that better in the next graph, though note that it is everywhere.

Let’s check out how water and the rest of the planet does. Here’s a much more interesting chart from the same IPCC chapter (I encourage you to click through for a closer look):

This is impact across zones by degree. Look at the 3 degree mark (bottom axis). We experience no GDP loss at 3 degrees warming. Something like 1.2billion people have “increased water stress.” What a delightfully technocratic term – it means that hundreds of millions of desperate people will wake up wondering “how do I get enough water this week to survive?” (I’ve heard that’s a terrible way to go.) Mind you, this newfound daily stress won’t net impact negatively how efficiently our factories make widgets or how much is sold or bought at the mall. 25% of species will be at increased risk of extinction, but our GDP numbers won’t slip.

That said, is it in our financial interest to try and reduce it? I’d like to say we don’t really know the impact of what mass migration of desperate people seeking water, or very, very rapid changes in mass ecosystems will be on our lives, and even GDP. Like a nationwide housing crash, we simply have no data to extrapolate from. I would be very surprised if they biased upwards.

Planet Earth as Sunk Cost

That said, the thing that worries me about the Cost-Benefit Analysis (CBA) approach to this issue is that there is always an implicit “do-over” cost in CBA. If we start a marketing campaign, hire a new team, or build a factory we do a CBA. If it turns out wrong, we simply stop the campaign, lay off the new team, or dynamite the factory. We eat our sunk costs and are back at square one. Sometimes this is costless, sometimes you have to pay for the dynamite. Indeed estimating the cost of this metaphoric dynamite should be high on the list of the CBA.

Now if 100 years from now, we want to “do-over”, how much will it cost to ‘dynamite’ the previous 100 years of warming? How much of GDP will we have to spend to get back an additional 10-20% of biodiversity? I’m worried that we are looking at Planet Earth as the sunk costs in these CBAs, and that makes me very worried, and being very worried makes me more willing to spend. We can’t just jump to another Earth if we got it wrong, in the same way we can build a new factory if our projections were off. This isn’t even tail risk or ‘precautionary principle’ land – we, as managers of Firm Earth doing a CBA, want to know the costs of getting rid of that 3 degrees of warming. As far as I can tell, they will be very, very high. With that in mind, seeing Conor Clarke graph out a cost of an insurance policy to build against this doesn’t seem so bad, and that positioning the numbers from another direction (a fantastic argument through that link) makes it seem appealing as a firm manager.

Update: I continue my thoughts on this issue in the next entry.