I’m normally quite a fan of Tory blogger Iain Murray, but I couldn’t believe his most recent TechCentralStation column. Iain is attacking some proposal for restricting carbon emissions that is currently before the US Senate and is full of doom and gloom about the economic implications. He cites a report on the impact of the proposed legislation – the McCain-Lieberman “Climate Stewardship Act” – from the Energy Information Administration (a government agency of which he clearly approves). Here’s Iain’s take on their report:
When the system comes into operation, the economy would be severely affected resulting in job and output losses in the short-run. Because of this shock, real disposable income would drop by almost 1 percent per person by 2011, and would take fifteen years to return to 2000 levels. By 2025, the average person will have lost almost $2,500 as a result of McCain-Lieberman. The effect on GDP is even more startling, with the nation losing $507 billion in real terms over the next twenty-two years. By 2025, the country’s GDP will be $106 billion lower in real terms than it is today.
Whoah! That looks pretty bad. So bad, in fact that I just couldn’t believe it. So I went to the EIA’s website and looked at the report for myself (available via the following, wonderful, URL http://www.eia.doe.gov/oiaf/anal_emissions.html ) It turns out that far from the US economy being worse $106 billion worse off than it is today (what! you mean the US economy which grew by 60% over the past two decades wouldn’t grow for 22 years because of one piece of legislation!!), it would be $106 billion worse off in 2025 than they are currently projecting it to be (peanuts for a 10 trillion dollar economy). What we’re looking at here is the compound interest effect of a very slightly reduced growth rate over a very long period (the expected difference in GDP between the two cases is simply the difference between a 3.02% and a 3.04% average annual growth rate over 22 years).
And the impact in individuals? As Iain says a loss of $2500. But the loss is spread over 22 years (I work that out at around 30 cents a day). Since what you’ve never had you’ve never missed and GDP per capita is a pretty poor proxy for well-being, I’d put the importance of this loss at pretty close to … nothing.
And how do the costs and benefits stack up? Remember we’re talking about refraining from imposing significant environmental costs on others here, that is, refraining from free-riding and growing one economy by burdening others. A cost so small that it will hardly be noticed, compares to, possibly, the benefit to some destitute Bangladeshi peasant who doesn’t get flooded out or even drowned. As Norman Lamont once said: “A price well worth paying”.
{ 10 comments }
Scott Martens 07.10.03 at 10:08 pm
I also liked his utterly misleading final paragraph: Yet, if current trends persist, technological progress will have reduced emissions per unit of GDP by 55 percent from 1990 levels by 2025. That means that if the US economy grows at 2.5% annually, total emissions will remain constant. Since the US economy has been growing at an average of 3.2% for the last decade or so, either emissions have to rise (by 35% from 1990 levels by 2025 at 3.2% growth, assuming emissions per unit of GDP falls by 55% from 1990 levels), or else the growth rate of the US economy has to fall.
Iain Murray 07.10.03 at 10:44 pm
Guilty as charged on the $106 billion figure. I misread the report and have asked for the article to be corrected. Thanks for pointing this out, Chris.
Nevertheless, the total loss to the economy still adds up to $507 billion, which is only peanuts in a very weird view of the world.
As for the “you don’t miss what you’ve never had” argument, I’d be grateful, Chris, if you’d arrange with your University to divert 1 percent of your salary to my bank account in Oxford each month from now on. You’ll never miss it, and it will bring substantial benefits to one poor family (below median income) currently being flooded in Northern Virginia.
Nasi Lemak 07.10.03 at 10:55 pm
Huh, huhhuhuh, he said anal_emissions, huhhuhuhuh…
Kieran Healy 07.10.03 at 11:34 pm
Nevertheless, the total loss to the economy still adds up to $507 billion, which is only peanuts in a very weird view of the world
Much as the whale’s-eye view would look weird to a protozoon, taking the perspective of something as big as the American Economy over a 22 year period will look weird from our perspective. So yes, there aren’t many places where the phrase “$507 billion is peanuts” is a sensible statement, but one of them is when you’re talking about two decades worth of growth at 3% per annum from a starting point of ten trillion dollars. A bill that costs $507bn over 22 years is not going to have “far-reaching” effects on the US economy, cause any kind of “shock”, mean “the outlook for jobs for an expanding population will be poor,” and least of all “cripple our economy,” as the article claims.
Brian Weatherson 07.10.03 at 11:46 pm
I’d tend to agree with Chris – this really is peanuts over the scale we’re talking about here. My back-of-envelope calculation was closer to 20 cents a day than 30 cents, but that’s including children as well. Still, worst case scenario: 20 cents a day. Over 300 million people over 8000 days that can add up a bit, but it’s still 20 cents a day. The authors of the report seem to agree:
Since the other factors could include retaliatory measures taken by other govts or peoples against the US for polluting the planet, it isn’t obvious that the act will have any net negative costs at all. A relatively small consumer boycott of American goods in retaliation for polluting behaviour could easily produce losses of 0.02% of GDP. A govt led boycott would have much larger consequences. Might these things happen? Who knows. To misquote Keynes, the position of polluters in the community of nations 25 years hence is one of those things about which we have no scientific basis to form any calculable probability whatsoever. The potential downsides (political and economic as well as natural) of not acting on emissions control are unknown, and potentially vast. It seems to me like conservative commone-sense would be to not run those risks, and instead try and put some cap on the damage we might be suffering/causing.
Kieran Healy 07.10.03 at 11:54 pm
By the way, although that one number is now corrected, the whole article is really completely undermined. To begin with, there’s still a basic error about the bill’s effect on incomes. It’s the same mistake as with the GDP estimate:
Because of this shock, real disposable income would drop by almost 1 percent per person by 2011, and would take fifteen years to return to 2000 levels.
In fact, the report estimates the gap in real income between the reference model (no bill) and the “treatment” model (McCain-Lieberman in effect) each year from 2003 to 2025. (A graph of this is on p23 of the report summary.) The gap opens up to about 0.8% by 2011 and then narrows again by the end of the period. This is not at all the same as saying the bill will cause real income to drop 1% from 2000 levels by 2011 and then take 15 years to recover to those levels. (I’d like to see the political reaction to any House bill that would have that kind of effect on real incomes.)
Iain would probably be better served by just having TCS redact the whole column. All of its claims about the bill’s negative economic effects (crippling the economy, real incomes flat for 20 years, thousands out of work, etc) depend on a misunderstanding about the reference point of the models in the report. So just correcting that one number won’t do — none of the claims can stand once the data are interpreted properly, so the whole thing’s in error.
a different chris 07.11.03 at 12:10 am
Gee, what a fresh insight: the idea that bettering environmental standards is going to trash up the economy.
Problem is, the Clean Air Act doomsayers of the 70s were proven wrong, the Reagan-era doomsayers were proved wrong, the Bush Clean Water act doomsayers were proved wrong (in fact, I remember a time not too long afterward when somebody named Greenspan panicked because the American economy seemed to be growing too fast)…I could go on.
Economists are talking out of their asses whenever they try to put a price on this stuff. $507 billion? Not $506 or $508? Give me a break.
Food for thought: Ye non-tech types may not be aware of this, but Motorola & Intel make boatloads of money and keep huge staffs of bright technical people busy creating and selling computer chips to the automotive industry.
Do you think that if the carburetor hadn’t been effectively outlawed by emissions laws we would have seen the massive computer industry growth of the 80’s???
If you do, you are way too personal-computer centric. Look harder.
Technological innovation is a strange plant- it seems to grow best when most constrained. Engineers love challenges- don’t fear giving them one.
John Yuda 07.11.03 at 6:02 am
What’s lost in this discussion is the fact that “Clear Skies” is going to cost us money as well.
The cost analysis on all of the varied legislations put up as alternatives to CS shows that they’ll all cost negligably more and have considerable better pollution-curbing results.
Of course, the Bush administration doesn’t want people to know that. There’s a post on this over at Skeptical Notion that goes into this in depth. (Blogspot, link may be busted, in which case scroll down for “EPA and Clear Skies”)
dsquared 07.11.03 at 7:04 am
I love the way that people spend ages and ages picking over every possible flaw in long range projections of climate change and then swallow whole a back-of-the-envelope estimate of “economic costs”. Lomborg has a particularly bad case of this syndrome, but it’s prevalent and this is another example.
In general, any sentence which contains the phrase “if current trends persist” is a pretty good indicator that something has gone badly wrong.
JoeF 07.11.03 at 11:49 am
Real incomes have remained relatively flat over the last 20+ years, if I’m not mistaken. if they remained flat over the next 20, that wouldn’t exactly be a downturn. It wouldn’t be a good thing by any means. But it wouldn’t be specatcularly worse, either..
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