You, Too, Can Spot Bogus Catastrophes

COMMENTARY Energy Economics

You, Too, Can Spot Bogus Catastrophes

Jun 26th, 2008 3 min read
David W. Kreutzer, Ph.D.

Senior Research Fellow, Labor Markets and Trade

David Kreutzer researches and writes about labor markets and trade.

Here’s a quiz to see if you qualify to be a catastrophe-spotting climate economist:

Part I: The cheapest way for John Doe to get to work is to take the Metro. The commute costs him $6 per day. He works 20 days per month. John would be richer by $120 each month if he stopped going to work. True or False?

Part II: John Doe can buy a bond for $5,600 today that will pay interest of $130 per year for ever. However, the $130 interest payments don’t start for 200 years. This bad investment (net present value of 2 cents for the $5,600 investment) can be justified on grounds of fairness once we recognize that John has an annual income of $10,000 while the recipient of the interest payments has an income of $130,000? Yes or No?

If you answered “True” and “Yes,” you’re ready to spot catastrophes.

Faced with the embarrassing lack of cost-benefit analysis for proposed “cap and trade” laws, environmentalists did a bait-and-switch. Pointing to the various estimates of costs of legislation, they countered with The Natural Resources Defense Council’s “cost of doing nothing.

To paraphrase Seinfeld, it’s a report about nothing. The argument goes like this: Given exaggerated estimates of warming and sea-level rise and given exaggerated estimates of damage from these rises, how much more could we have produced if the temperature didn’t go up when we produced all that stuff that caused the temperature to go up?

That is, it’s assumed all of the output created by all the energy used in the economy could be produced without using all the energy or, at least, without emitting the CO2 that 85 percent of our energy emits.

What the NRDC report does not say, is how much more would GDP be if we cut CO2 as recommended by any of the proposed legislation. They don’t try to say it, because GDP would go down. What does “cost” in “the cost of doing nothing” reflect? Nothing. It has no meaning whatsoever even on a theoretical basis.

The much trumpeted Stern Review also doesn’t do an actual cost-benefit analysis. Instead, they offer 550 parts per million of atmospheric CO2 as a magical threshold. Beyond 550 ppm, there is climate catastrophe. Below 550 ppm, we just might survive. The costs of exceeding 550 ppm are calculated in the same fashion as is done in the NRDC report, and all these costs are assumed to go away when we hold emissions below 550 ppm.

But the bigger problem is how the costs are calculated. The Stern analysis purports to see the impact of today’s CO2 emissions 200 years into the future. Further, the impact on the much, much higher expected GDP of the future is presented as having an equal impact today. In other words, getting a dollar in 200 years is just as satisfying as getting a dollar today. Therefore, spending $.99 to get a dollar is a good idea independent of whether you get the dollar today or a thousand years from now. For most people who are not Nicholas Stern, Baron of Brentford, it would make a difference.

Well-known environmental economist Professor William D. Nordhaus of Yale University employed the methodology of the Stern Review and calculated that Stern’s twisted assumptions would recommend cutting the World’s income from its average today of $10,000 to $4,400 in order to prevent an annual drop of income from $130,000 to $129,870 starting in 200 years. Further he points out that half of the environmental costs that Stern says occur “now and forever” don’t actually occur until after 2800. As a reminder, that’s 800 years from now.

Thank goodness our ancestors of one thousand years ago focused mostly on creating wealth. This had the side benefit of increasing the standard of living for subsequent generations. When they did focus on making the world better a thousand years ago, they did things like burn witches and go on crusades. We need to be sure we aren’t doing the same.

This piece originally appeared in The Daily Signal