Global Warming, Cost-Benefit Analysis, and The End of Doom
I learned Austrian economics over a year before I started learning regular economics. The Austrians taught me to stonewall all cost-benefit analysis with methodological objections. It took me years to see the emptiness of their approach. Cost-benefit analysis is imperfect, but so is every performance measure. We learn a lot more about policy effectiveness if we carefully measure costs and benefits, then reflect on potentially serious flaws, than if we refuse to play the cost-benefit game.
Partly as a result of this experience, I am deeply suspicious when the proponents of any policy dodge requests for cost-benefit analysis. I know cost-benefit analysis isn’t everything. But if I request estimates of net benefits, and you respond with methodological scolding, I hold it against you. Indeed, I summarily reduce my estimate of the net benefits of your policy proposal. After all, if cost-benefit analysis were on your side, you’d probably answer my question instead of questioning my question. Case in point: I asked Yoram Bauman, author of The Cartoon Introduction to Climate Change, to “review the point estimates and confidence intervals” for cost-benefit studies of global warming. Instead of satisfying my curiosity, he alluded to four methodological problems with cost-benefit analysis. This heightened my suspicion that cost-benefit analysis views climate inaction much more favorably than mainstream thinkers allow.
In sharp contrast, Ron Bailey’s new The End of Doom: Environmental Renewal in the Twenty-first Century, gave me just what I wanted: A readable summary of cost-benefit estimates. Highlights from the section on “How Much Will Global Warming Cost?”:
The IPCC reports offer cost estimates for both adaptation and mitigation. The 2014 Adaptation report reckons, assuming that the world takes no steps to deal with climate change, that “global annual economic losses for additional temperature increases of around 2°C are between 0.2 and 2.0 percent of income.” The report adds, “Losses are more likely than not to be greater, rather than smaller, than this range.”
In a 2010 Proceedings of the National Academy of Sciences article, Yale economist William Nordhaus assumed that humanity does nothing to cut greenhouse gas emissions. Nordhaus uses an integrated assessment model that combines the scientific and socioeconomic aspects of climate change to assess policy options for climate change control. His RICE-2010 integrated assessment model found that “of the estimated damages in the uncontrolled (baseline) case, those damages in 2095 are $12 trillion, or 2.8% of global output, for a global temperature increase of 3.4° above 1900 levels.”
In his 2013 book The Climate Casino… Nordhaus notes that a survey of studies that try to estimate the aggregated damages that climate change might inflict at 2.5° comes in at an average of about 1.5 percent of global output. The highest climate damage estimate Nordhaus cites is a 5 percent reduction in income. The much criticized 2006 Stern Review: The Economics of Climate Change suggested that the business-as-usual path of economic growth and greenhouse gas emissions could even reduce future incomes by as a much as 20 percent.
The IPCC Mitigation report notes that the optimal scenario that it sketches out for keeping greenhouse gas concentrations below 450 ppm would cut future incomes by 2100 by between 3 and 11 percent… [P]rojected IPCC income losses that would result from doing nothing to adapt to climate change appear to be roughly comparable to the losses in income that would occur following efforts to slow climate change. In other words, it appears that doing nothing about climate change now will cost future generations about the same as doing something now.
Is Bailey’s literature review accurate? If not, please name an equally responsive but higher-quality review.