What's the cost of global warming?

Doing the maths

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The Stern Report also makes another curious omission.

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Looking at his damage assessment estimates, one can find no account made for poorer countries being better placed to mitigate the effects of warming as they develop. There is certainly account made of increased CO2 output as development occurs, but no consideration that increased wealth, in and of itself, might reduce vulnerability. Stern counts the negatives, but ignores the positives 8.

Stern also assumes storm frequency and severity (Accumulated Cyclone Energy, or ACE) has continually worsened as climates have warmed, and that the trend will continue. But ACE has actually decreased somewhat since the 1970s. Yet Stern projects that extreme weather alone will result in an increased loss of several percent of GDP. 9

Stern also assumes a low GDP growth of 1.3 per cent. Yet even the developed US has enjoyed an average of 3 per cent growth during the last 50 years. The less-developed nations of India and China (around a third of world population) show GDP growth of between 5 per cent and 10 per cent in recent years. 10

But most controversial of all is Stern's choice of a "discount rate". This is economist lingo for how much more money is worth in the future than now: At what interest one is realistically willing to borrow it or expect from savings, or even the rate one is willing to pay for insurance. Stern rates the value of that "future dollar" to be much higher than mainstream economists. His discount rate of choice, 1.4 per cent, is extremely low - only 0.1 per cent higher than his GDP growth estimate. He is, in effect, saying that a dollar a year from now is worth 98.6 per cent of what it is worth today.

This has the effect of both magnifying the damage estimates, and the effect of money spent early to solve the problem. If you increase Stern's discount rate by as little as 1 per cent the long-term damage projections decrease by half. 11

Stern does indicate that in the name of fairness, the bulk of the direct costs should be borne by the developed nations (which would increase their share from 1 per cent to 1.8 per cent of annual GDP).

Not surprisingly, Stern's low discount rate drew criticism from a range of economists. One, Hal Varian, wrote:

"These choices together imply that a one per cent reduction in consumption today is desirable if it leads to slightly more than one per cent increase in the consumption of some future generation, even though, in the model, future generations will be much wealthier than the current generation."

"So, is it really ethical to transfer wealth from someone making $7,000 a year to someone making $94,000 a year?" Varian asked12.

Finally, if Europe cannot or will not comply with the Kyoto Protocols, how may one realistically expect compliance with the far broader scale goals advocated by the Stern Review? This call the entire question of mitigation by direct response (i.e. "carbon cuts") into serious question.

Lawson and Lomberg

Now let us look at the strategy of adaptation. Former Chancellor of the Exchequer Nigel Lawson, in his book Appeal to Reason13, which looks at direct means of adaptation and Bjorn Lomborg, head of the Copenhagen Consensus, which looks at how the proposed costs of direct mitigation might be otherwise spent have both studied the costs and benefits.

Lawson rejects the "dumb farmer" thesis that crops and methods will not change as conditions change. He points out that in reality, climate change is gradual and therefore easy to adapt to, and argues that non-directed market-driven adaptation as crises occur is the by far the most logical and economical approach. He proposes building of sea walls, for example. Lawson argues that not only is it unjust to deny poor countries the benefits of modern development, but that development itself greatly improves the ability to adapt, QED.

Lawson agrees with Stern that the effects of climate change are uncertain, but also notes that "uncertainty cuts both ways". The effects of warming might not necessarily all be negative - agriculture benefits from warmer temperatures. Lomborg adds that a recent peer-reviewed health survey estimates that IPCC-projected global warming would cause "almost 400,000 heat-related deaths". This sounds terrible, to say the least. "But", the authors continue, "at the same time, 1.8 million fewer will die from the effects of cold."

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