Monday, October 29, 2018

Business As Usual: Running on Empty

A little over a year ago, Robert Watson, former chair of the IPCC, and two co-authors published a report titled "The Economic Case for Climate Action in the United States." Based on trends over the past few decades, the authors estimated the current total annual cost in the U.S. of losses from weather events intensified by climate change and health damage from fossil fuel pollution to be $240 billion, which they described as "about 40 percent of current economic growth of the United States economy."

At around the same time, Mark Jacobson, Mark Delucchi and a carload of co-authors published an article in which they projected damages to health and property in the U.S. from climate change and pollution under "business as usual" to be around eight trillion dollars in 2050. A simple linear extrapolation between the two estimates suggests that the annual cost of climate change is increasing at around an 11 percent annual rate. Based on that extrapolation, the health and property damage cost of climate change can be projected to exceed annual GDP growth by 2026.

But wait. Watson's 40 percent figure compares average annual damage with some of the better recent years of growth. Even excluding years of recession and stagnation, in which growth was less than $240 billion, the remaining eight of the last 12 years averaged only around $430 billion a year in real GDP growth. Counting the recession and stagnation years, it's virtually break even.

But there's more. Part of that economic growth simply reflects expansion of the population. Real economic growth per capita in the U.S. has been even more anemic in the 21st century. Of course this means the cost of damage can be spread more thinly as well but the crucial point is still what happens to per capita income relative to the damage.

The future is hard to predict, so I tried a number of scenarios. First, if per capita growth continues at the rate it has since 2009, the U.S. has already entered the red zone where the cost of climate change exceeds growth by an increasing amount each year. If real per capita growth accelerates to 1.5 percent per annum that fateful point won't be reached until the year after next. A growth rate of 2 percent would postpone the day of reckoning until 2024, six years before the IPCC deadline for achieving net zero carbon emissions. To make it to 2030 without crossing permanently into the red would require a sustained rate of real per capita growth that hasn't been achieved since 1960-1970.

One more thing. As Andreas Malm wrote, the global warming effects of fossil fuel consumption are "seriously backloaded" and "substantially deferred." This year's climate damage is a consequence of actions taken decades ago and the greenhouse gases emitted today will not have their full impact until decades from now. How does one estimate, then, the contribution to intermediate consumption of the deferred cost of current emissions? How much should GDP be deflated to account for the artificial inflation of nominal value added by waste gases whose cost is off the balance sheet?

Let's assume that emissions in a given year contribute to 4 percent of climate change costs each year for the next 25 years. Why 25 years and why a constant percentage? Because it is better than attributing all of this year's cost to this year's emissions. Who knows? It probably makes more sense that choosing a "market-based" consumption discount rate of 4.3 percent. At any rate, considering the deferred nature of the climate costs moves the year in which GDP growth vanishes back. The 4 percent for 25 years scenario moves it back to 2007. The economy has literally been running on fumes for over a decade. Talk about "degrowth"!

It/s here. It's not going away. It only gets worse. The question isn't whether or not one "advocates" degrowth but whether or not one faces the stark reality and acknowledges the expiry of GDP growth and consequently the irrelevance -- and, frankly, mischief -- of the growth paradigm.


2slugbaits said...


I think this is a good example of why we should start emphasizing NET Domestic Product rather than GROSS Domestic Product. One of the perversities of emphasizing GDP is that it counts the costs to replace the damages down by climate change as economic growth. That's just bizarre. A more sensible approach is to remind ourselves that the component of GDP that goes to replacing the capital stock needed to maintain a flow of goods and services is actually depreciation. If depreciation rises faster than GDP, then we are worse off. But people don't see that as long as we continue to talk about GDP rather than NDP. So we need to do two things. First, recognize that replacing capital destroyed by climate change is a special kind of depreciation not currently captured in our NIPA tables. Second, economists need to talk more about NDP and less about GDP.

Anonymous said...

Terrific essay, but the problem immediately occurs to me that who bears the costs of climate change who not be random but will surely be relatively lower income or wealth households. So the wealthy can find an interest in growth of GDP no matter the costs borne by others.

Sandwichman said...

Good catch, 2slug. Seventy percent of net growth since 2000 is wiped out by the estimated climate change costs. Back dating those costs gives an aggregate six and a half TRILLION dollar hole so far this century, nine and a half trillion of which is lurking in the atmosphere and the oceans. And we're still digging!

Yes, anonymous, it will be the lower income people who initially bear the costs of climate change. The wealthy will rewrite the rules to give them nominal returns on their investments. The problem is that social collapse will make those rules moot. A lot of the currently wealthy on paper will be jumping out of windows.

Anonymous said...

Egmont Kakarot-Handtke, all that makes sense is the meanness. What is the point of being incomprehensibly mean?

Barkley Rosser said...

Wow, S-man, how did you so completely miss the scientific boat? What is important here is what happens to retained earnings. If you cannot say global warming affects that, well, you are just indulging in unscientific political ecological economics, for shame.

Furthermore, we now have a new mathematical revelation: the existence of "greater zero." This may even be more important than focusing on retained earnings, the end all and be all of scientific economics. However, now that I have learned about the "greater zero," I want to learn about the "lesser zero." Will global warming lead to lesser zero retained earnings???? Surely we must fret greatly over this astounding and important issue.

Anonymous said...

Obviously, you lack basic knowledge of the history of economic thought: “Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists if listened to, would suffice to reduce it to dust.” (Viner, 1963)

Nothing has changed since Napoleon. The stupidity of economists is as destructive as it ever was.#1, #2

Egmont Kakarot-Handtke

[ The problem is that I can learn nothing from such complaints or insults. Tell me something concrete about, say, the German economy and analyze what you tell me and I can learn something. As for Napoleon and economics, this is nonsense. ]

Barkley Rosser said...

Since Wellington defeated Napoleon, does this mean that Wellington was a "greater zero" while Napoleon was a "lesser zero"? Wannabe scientific economists can hardly wait to find out, :-).

Sandwichman said...

Oh, Barkley, you are so cruel. Eggy no doubt meant to write "greater THAN zero." It isn't possible to be both axiomatically correct and typographically infallible all of the time.

2slugbaits said...

Barkley Rosser,

Now, now. I'm quite sure that Eggy would insist that it was von Blucher who defeated Napoleon.

Barkley Rosser said...

Darn. And here I thought that Eggy had actually invented a new mathematical concept, thereby actually doing something of poetential use. But, sadly, no. In any case, it is good to know that we do not need to worry about global warming because the economy is going to collapse anyway before it gets too bad. What a relief!