The size of the costs of climate change is a matter of frequent dispute, but current methods seem to leave out some important variables. In particular, how we will choose to bear and distribute our adjustment costs will bring complications and distortions of its own.
Consider, for instance, some recent economic estimates of the costs of climate change from carbon emissions. I have seen serious estimates in the neighborhood of five per cent of global gdp by 2100.
Whether or not that is exactly the right range, there is another issue at stake: it will also cost us time, energy, attention, and resources to decide how to bear the burden of that five per cent, or whatever the number may be.
In a very simple economic model, the cost of five per cent of global gdp is overcome rather easily. The global economy typically grows several per cent a year, and in good times a global rate of economic growth of three to four per cent a year is not impossible. It then seems that a five per cent shortfall can be overcome in a year or two.
If someone told you “the world won’t attain the year 2100 standard of living until 2102,” that might not sound so tragic to you. Instead it seems very far off and abstract. Who really has a very concrete sense of what to expect in 2100 anyway? Flying cars? Very cheap energy? From today’s vantage point it is hard to say. Your expectations for both 2100 and 2102 were already an uncertain blur, so having to trade one expectation in for the other makes the costs seem nebulous.
I suggest a different approach. Forget about the climate, at least temporarily, let’s say we had to play a political game where five or ten per cent of U.S. gdp is going to be redistributed from one set of groups to another. How well do we expect the politics of that dilemma to play itself out? Will those burdens fall on capital or labor, the wealthy or the poor, cities or the countryside? Should taxes go up or should other budgetary expenditures go down? You can imagine all the choices that would face us, and all the different coalitions and political battles that would result.
We encounter precisely such battles when the two parties square off over debt ceiling crises, as happened in 2011 and also this year. And what was the outcome of those negotiations? Virtually everyone agrees that America faces major medium- to long-run fiscal problems, but we haven’t agreed on what to do about them. And thus the recent debt ceiling negotiations ended up with some cosmetic adjustments to the budget and a lot of can-kicking. Whether the proposed remedy was a major spending cut or a big tax increase, it was possible to find enough legislators who didn’t want to do it.
If we end up applying those can-kicking tendencies to climate change scenarios, suddenly matters look a lot worse. Let’s say that the city of New Orleans was endangered by climate volatility. We could either incur an irreversible urban and territorial loss, or we could agree on some method of financing a remedy for the problem, typically with an associated opportunity cost.
The traditional American remedy in such situations is to borrow more money and figure out some way of paying the bill later. But will that still be viable say ten to fifteen years from now, when both fiscal problems and climate volatility are likely to be bigger issues yet? At some point the actual fiscal burden of all these decisions, including climate neglect, will need to be borne.
When the time comes, we are likely to bicker about how to pay the bills, especially as some of the can-kicking opportunities become impossible. And I fear that the bargaining process for how to confront this ultimate reckoning will itself be very costly. Political hostages will be taken, bipartisan cooperation may break down, reaching agreement may distract us from solving other problems (check out the UK history with Brexit!), and national decisions will become all the more politicized.
There is a classic problem in economics known as the rent-seeking game. In this dilemma, if say $1 million is up for grabs in the political process, how much will individuals spend trying to capture that $1 million for themselves, or alternatively trying to avoid being the patsy who loses the $1 million to someone else? One theorem suggests that we will be, collectively, willing to spend up to $1 million to fight over the $1 million allocation. Full rent exhaustion probably isn’t the right answer here, but the point is that when the stakes are large and the key policies are up for grabs, the political infighting grows correspondingly large as well.
So often we Americans are our own worst enemy, and fixing climate change may become another example of that.
The post One worry I have about the costs of climate change appeared first on Marginal REVOLUTION.
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