Non-GDP Costs from Global Warming

So I’m trying to think through a simple question: I get that acting on global warming will not pass a cost-benefit analysis when it comes to GDP numbers. But what about everything else that matters in life? How will that be impacted? Let me tell you why I’m asking (do you need a reason!?), and tell you another set of answers I’ve found.

GDP, Markets, Religion

First off, we should just go ahead and say this: most things are going to fail most cost-benefit analysis when it comes to GDP. Look at Manzi’s cost-benefit analysis again. Assuming a GDP loss of 3%, Waxman-Markey fails 10:1. Which is to say, if the expected loss to the United States from global warming was 25% of GDP, Waxman-Markey would still fail a cost-benefit analysis when it comes to GDP. You would have to not vote for it. Perhaps that makes you dislike W-M even more, perhaps it makes you think something is screwy with using the rationality of the method.

Now on some level I don’t understand why we are doing a cost-benefit analysis at the level of the country at the level of 100 years; we have an externality, we tax/regulate it, and the relevant cost-benefit analysis is done at the contingent firm level. Where firms were previously indifferent between high and low carbon, now they make marginal choices, innovate and research which has spill-over effects, and these things lead to a virtuous cycle. Markets work.

Second, I don’t know why we are just looking at GDP. Actually I do – we do because technocrats can measure it. I’m not an anti-growth lefty, but I think GDP measurements are useful for somethings, but not necessarily useful for all things, especially quality of life in a post-industrial information technology society of the 22nd century. (I’m blogging for free, instead of working a second job, for instance.) There are people out there who buy insurance, who leave inheritances for their children. There are people out there who think that God gave us dominion over the Earth is a positive obligation to take considerations other than the Fortune 500 into account. As a lapsed white-ethnic Catholic there’s nothing quite like a good St. Peter at the Gate joke, and here’s one:

St. Peter: “So, this interview isn’t going well. Let me ask you about fighting Global Warming.”
Me, passed away: “Oh yeah, I was against all kinds of measures to fight it.”
St. Peter: “Yeah, what’s up with that? The Big Man was a fan of that Earth he gave you.”
Me: “Sure. But I was really worried doing something would upset computer models of how well the NASDAQ was projected to return in the mid-23rd century, and somethings are too important.”

In the future we’ll all think like Oil Lobbyists

And I think this the NASDAQ point is important. One thing I don’t like about the GDP models, and this is one reason I’ve avoid the modeling debates, is that it causes us to de facto argue from the position of oil lobbyists. Let’s look at GDP by country:

And use wealth as a proxy for GDP inside the United States there:

When you look at the second graph, of course the costs to GDP will outweigh the benefits. However realize that everyone in both those graphs needs an equal amount of water to survive the week. We take our ‘values-neutral’ toolbox of convex optimization under uncertainty out of the toolshed, and tell it go ahead and makes sure this distribution of GDP doesn’t get upset no matter how many people go thirsty. It causes us to reify a column in an excel spreadsheet, an indicator of how the investments of that top 10% are doing, as having more agency and claims as our actually lived lives.

Now of course you can saw that markets may have gotten us into this mess, but they’ll optimally lead us out. I hear that with arguments that globalization, water markets, transnational and continental migration, etc. will take care of any of the problems associated with global warming. To me, that requires a level of belief in how well End of History global markets will work that makes Francis Fukuyama look like a white girl with dreadlocks protesting the WTO, so it is not for me at this moment.

In the future, we’ll just camp more.

So what can we use? I’ve been flipping through Warming the World, the modeling overview of the Nordhaus RICE-99/DICE-99 models used for these debates, for clues as to how to rationalize that whole non-GDP portion of our lives under global warming. Now Nordhaus is an economist doing an economic analysis and shouldn’t necessarily be held accountable for these things, and he does support a carbon tax; however since the cost-benefit analysis from his models is leading the debate, I hoped he had an answer.

We get a few. Migration and the movement of cities and people get a GDP cost. Health issues are examined using projections of what we know of previous temperatures (and not diseases from the mass ecology destruction and migration and conflict); an average American will lose .5 years off his life, an average sub-Saharan African will lose 11 years (!!!) off his life. But here’s my favorite: All non-GDP time is leisure time, right? So (assume) anything that isn’t GDP can be accounted for by leisure. So why not just ask people what they do for fun, in the form of time-diaries, and see if global warming will impact it? That’s what they do here, in what is the major non-GDP portion of their modeling and estimates:

I kind of want to bury this answer for my great-grandchildren, so when they wonder why we stood by and let the Earth heat up they can know it was the result of us thinking camping is more fun than skiing, and we’d get to camp more on average if the Earth heated up a few degrees. So 22nd century, feel free to thank us.

I’m probably more with Manzi’s camp than I’d like to admit, though I seriously don’t know how to hurdle these objections. I really like this entry by Matt Steinglass listing some thing not covered by GDP measurements.

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12 Responses to Non-GDP Costs from Global Warming

  1. Matt Frost says:

    Look at it this way: sticking it to skiers helps balance out the distributional inequities.

  2. a says:

    Two things. The first is that I was under the impression this is untrue:

    “I get that acting on global warming will not pass a cost-benefit analysis when it comes to GDP numbers.”

    I believe that Manzi hinges most of his argument — and here I confess that I stopped paying attention a while ago — on Nordhaus’ work, and Nordhaus acutally calculates a trillion-dollar (give or take) GDP benefit to a global carbon tax. Nordhaus finds that a suboptimal carbon tax won’t yield the benefit, and this is the thing that makes Manzi jump up and down. Which is fair enough, I guess, if you think that Nordhaus model is exquisitely accurate, or you view politics and international relations as a single-round game in which past decisions are unalterable.

    On the other hand, you can view Nordhaus’ work as an aid to common sense, demonstrating that a carbon tax seems not to have devastating GDP impacts — beneficial in the best case, somewhat neutral otherwise — and that therefore we’d be fools to pass up on the risk mitigation benefits and non-GDP benefits.

    Second thing: although I’m all in favor of cost-benefit analysis, it doesn’t make any sense to ignore the path dependencies in major infrastructural decisions. Climate change at root isn’t a financial problem, it’s an engineering problem, and fixing it in the future is going to be vastly more expensive than starting to address it now. I don’t have the chops to do the financial analysis on this, but basically there’s a massive embedded real option in, say, improving our electrical grid, building more energy-efficient buildings, upgrading our auto fleet, etc. The simplistic CBA seems to miss this entirely.

  3. Mike says:

    a, thank you for that comment, especially the “Climate change at root isn’t a financial problem, it’s an engineering problem” part. And I can do embedded real options! I’m worried on getting up to speed.

    Matt, you strike me as more of a camper than skier, so you have this global warming thing now going for you.

  4. Obama claimed that the average American would not bear the brunt of this historic tax-increase: he stated that instead ““It is paid for by the polluters who currently emit dangerous carbon emissions.”

    Just compare this outrageous falsehood to Ronald Reagans’ timeless quote:

    “The most dangerous myth is the demagoguery that business can be made to pay a larger share, thus relieving the individual. Politicians preaching this are either deliberately dishonest, or economically illiterate, and either one should scare us.

    …Only people pay taxes, and people pay as consumers every tax that is assessed against a business.”

    And after the way the rammed this through the House with little debate, without legislators even reading it… and while quarantining the GOP from any meaningful input whatsoever, any foolhardy individuals who still believe Obama’s threadbare “bipartisanship” spiel ought to have their head examined.

    • Another Mike says:

      People are already paying for pollution with diminished air quality, health, etc. The tax just makes it explicit. You can’t have a free market until all of the costs and benefits are priced.

    • Greg M says:

      Really? Are we still recycling this Reaganite nonsense that business cannot pay a tax? Look, if you raise the tax on a widget by 10 cents, the widget maker cannot and will not raise the price of widgets 10 cents. This is because supply and demands dictates that if the price of widgets goes up 10 cents, you’ll sell less widgets. Of course, the company’s cost has gone up by 10 cents, so the price WILL go up, but it won’t go up by 10 cents. It will go up by, say, 6 cents, and the consumer will pay this portion of the tax. But the company will have to “eat” 4 cents of the tax out of their per-unit profit. Ultimately, this may come out of the pocket of an individual stockholder, or the owner of the company if it is privately held. But in the end, it is still the company paying the tax.


      • Jesse says:

        Greg M –
        The point is that taxes are paid by humans and a business is just a fake entity created by the legal code. Remove the legal facade of a CORP or LLC, etc. and you have groups of people working together to take inputs and produce outputs. If you tax that group of people, you are still taxing people, not the legal entity.

        Business taxes are ultimately paid by consumers, owners (debt, equity, etc.) or employees – the humans involved. You are correct that consumers do not bear the full amount of a tax on a business. I think the last study I saw (can’t find the link right now) said something like 60% was passed on to consumers, 30% paid by employees (in the form of lower wages, either now or reduced future increases) and 10% borne by owners (lower profits and the like).

        The reason why consumers bear the brunt of it is that you can’t tax, say, Wal-mart and Target, but not tax the other retailers, thus the competitive pressure is less. It’s not like I can go down the street to buy the widget from the untaxed retailer. Competition has less of an effect because all widgets across the board are more expensive no matter where consumers go to buy them. As aggregate price goes up, there will be less demand, as you note, then the competitive pressure comes which is where these firms have to cut costs (say, labor costs) and now we have employees bearing some of the tax.

        But let’s be clear: The *whole point* of this is to increase the price of energy for consumers anyway! If end consumers can continue to purchase energy at the same price as they do now, then there is no incentive for them to cut back and less incentive for businesses to innovate. Let’s stop pretending that we implement cap-and-trade and somehow without prices going up for consumers we’ll start consuming less energy.

      • Greg M says:

        Jesse- of course you are right and I pointed this out in my original post. However, the point of the previous poster (and the direct Reagan quote he used) is the CONSUMERS ALONE will pay all of the increase. This is simply ridiculous.

        The reason Republicans put forth this trope is to imply that any attempt to shift the tax burden to the rich and away from everyone else is pointless- business owners (the rich) will simply make consumers (everyone else) pay 100% of any tax increase. But if you place a tax on widgets and raise $1 billion, and then cut, say, payroll taxes by $1 billion, then even if 60% of the cost is passed back to consumers, the tax burden is STILL shifted towards the rich and away from everyone else.

        My point is, it is NOT pointless to attempt to directly tax business.

  5. Eduardo Montez says:

    You have to understand that no amount of scientific evidence or economic argument could ever persuade most conservatives that something should be done to prevent global warming. That is because it is for them basically a religious or metaphysical matter. They believe, deep in their hearts, that the universe was designed so that the free market could proceed in an unregulated manner and produce nothing but benefits to the human race.

  6. Jesse says:

    Mike –
    I love the analysis and the blog – long time reader, first time commenter.

    I’ve not seen yet an analysis of the Type I/II error sort. In other words, what is the cost of being wrong? As good as the analysis is, I don’t think anyone would say that the possibility of catastrophic global climate change is 100%. So, what is the probability and confidence interval?

    In other words, is it worth spending $100 trillion dollars or some other huge number that would cause GDP to contract? We can equally say that our grandchildren could also be significantly worse off if we spend gargantuan sums preventing something that wouldn’t have happened in the first place.

    I would say I’m cautiously in support of acting to counteract climate change and wish more people would take it seriously as you do – it has a cost but it’s worth it and we should pay it. In my view, even a small probability of the occurrence is worth acting since the dollar cost and live cost (worldwide) is very, very big.

  7. The fallacy lies in measuring consumption as a goal. In reality all of us at all times trim some of our consumption to do what we prefer to do. You want to go to college, you pull your belt in tight and take sack lunches. Not real complicated.

    And god knows America is a country that could trim consumption.

    Reducing waste does not mean the economy is failing. For example, by adopting a universal-coverage single-payer health care model, we could save 5% of our GDP- way more than enough to deal with AGW.

    Can’t be done? The British did it in WW II- they formed an ‘all-in’ government and all pulled together- because they wanted to save their nation.

  8. Pingback: In Defense of Money «  Modeled Behavior

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