October 13, 2006

Global Warming Financial Illiteracy

Some cases for global warming are reasonably plausible. This case for global warming is embarrasingly stupid. Putting aside whether $1.6T in 2006 spending will actually save us $11T in foregone growth in 2100 there's the whole question of whether the expenditure is worth it. Spending $1.6T now to avoid $11T in expenses in 2100 means that the Present Value of $1.6T has to be less than $11T in 2100 and we have to assume that science will not produce any surprises that lower the future expenditure, the economic cost of not preventing warming incurred in 2100. If we gain sufficient economic growth in the meantime, it would not be worth spending the money even if (and this is disputed) the study is correct about the financial consequences.

One of the key factors is economic growth. If worldwide economic growth is high enough, $1.6T turns into $11T by 2100. The economic growth rate to achieve that turns out to be 2.07213%. Current economic growth is 4%. Economic growth from 1950-2003 is 2.1%.

If you assume that we're headed for more of the same, spending the money now means over the next century, you've lost $40.5B or $431.3M annualized. If you think that we're entering a new era where 4% worldwide economic growth is going to be the norm, the losses are $1.3T or an annual loss of $14B. In other words, the financial numbers don't make any sense even if you take the most pessimistic assumption that the lab boys aren't going to figure out how to make cleaner energy over the course of the 21st century. It also assumes that present trends towards freedom and higher economic growth won't continue upward so these damning numbers are really quite conservative.

Ah but what about biodiversity? We could be losing species! While this is true, we could also be gaining them. Historically biodiversity is much greater in warmer climes than in cold ones. Life is tough in the cold and few species (relative to warmer climes) can adapt to harsh conditions. Warming is going to be tough for cold weather specialists but it will be a boon for warm weather ones.
Update: (just a note, I calculated it all in Excel using the PV formula)

Posted by TMLutas at October 13, 2006 01:18 PM