Carbon emissions – social benefits from enhanced growth

Key Points

  1. Cheap fossil fuels were undoubtedly a major element in China’s very high levels of economic growth.
  2. If Canada were to unilaterally cut its emissions, the impact on global emissions would be tiny.
  3. A reduction in economic growth of 0.01% from now to 2100 would have a larger value in 2100 than the projected  monetary costs of catastrophic climate change in 2100.
  4. Developing nations with up to two-thirds of global emissions, are excluded from any obligation to constrain emissions under the Rio Declaration.
  5. Climate mitigation increases unit energy costs, creating a comparative disadvantage for policy countries.
  6. If non-policy developing countries were later to adopt mitigation policies, they would not only have higher energy costs, but would lose the comparative advantage of being a non-policy country. A few countries pursuing climate mitigation policies increases the marginal cost of other countries adopting similar policies.

Introduction

Ron Clutz has yet another excellent article, this time on SBC: Social Benefits of Carbon

Ron points to the benefits of increased CO2 levels, such as from increased plant growth. But, by far the biggest benefit is the from the use of fossil fuels as an engine of economic growth. I made two comments, which are slightly amended here.

How much did fossilized carbon fuel China’s economic growth?

By far the most important point made in Ron’s article is the impact of fossil fuels on economic growth rates. Take China – the most extreme example in history, at least for major economies, According to the UNFCCC country brief produced for COP21 Paris, economic growth in China averaged 10.3% pa from 1990-2012. In the same period CO2 emissions increased by 6.1% pa. It meant GDP per capita (with 19% population growth) was 7.25 times higher in 2012 than 1990, and emissions per capita were over 3 times higher.

country-brief-2014_-china

How much of the economic growth would have happened without the huge investment in cheap energy sources – principally coal? If economic growth would have averaged a mere 7%, GDP per capita would have 3.7 times higher in 2012 than 1990. This is why people in China are willing to suffer the terrible, acrid, pollution that engulfs many major cities.

Unilateralist Canada reducing emissions by 90%

A hypothetical example with growth impacts

Whilst unable to estimate the effects of cheap energy on China’s phenomenal growth, I would still contend that the compound effect on economic growth of cheap fossil fuels is far greater than the estimates of the projected harms of climate catastrophe. At the start of December Ron Clutz had a post Climate Costs in Context. This referred to a Manhattan Institute Report which estimated the costs of global warming could reach $15trn by 2100 – or 2.5% of global output of $600trn. Reducing economic growth by 0.03% would have the same effect on output, though people would accept a much bigger reduction in growth to avoid 2.5% costs of catastrophes.

This leads to a bigger issue, that it not discussed. Suppose an economy like Canada with 1.5% of global emissions, unilaterally imposed a policy from January 1st 2017 that was guaranteed to reduce emissions by 90% by 2100. Without the policy, global emissions would be double 2016 levels in 2100. With the policy they will be 1.9865 times higher.
Let us also assume that

(1) 2100 costs of climate change are 2.50% of GDP globally and for Canada, without Canada’s policy.
(2) 2100 costs of climate change are 2.45% of GDP globally and for Canada, with Canada’s policy.
(3) The only cost of this policy is to reduce long-term growth rates from 2.00% to 1.99%
(4) All outcomes and calculations are certain.

Even then, the the descendants in 2100 Canada would still not thank the current generation, as output would be 8% lower, to save costs of just 0.05% of GDP. If current GDP is C$1600bn, with 2% growth GDP in 2100 will be C$8443bn. At 2.5% costs of climate change will be $211bn. Reduce that to 2.45% reduces costs by just over $4.2bn. But GDP with 1.99% growth GDP will be 8% or $668bn lower.
Even if all countries reduced emissions by 90% (and thus reduced costs of climate change to effectively zero) mitigation policy would may not make sense on these “heroic” assumptions. Canada would exchange $210bn of random catastrophic costs for $668bn of certain costs. But that would be only if the costs were totally random. If costs were in part predictable, then, without the economic growth impact of climate mitigation policies, additional economic could be used to counteract the direct effects of the warming through adaptation.
But the reality is much closer to Canada acting unilaterally; there are significant policy costs; and the impact on growth is far greater. Worst of all, is the competitive impact.

The Comparative Disadvantage of Climate Mitigation

Assume

(a) Cheap energy is a key driver of economic growth

(b) A country, like Canada, with aggressive climate mitigation policies,  is competing on world markets with less developed countries with little or no mitigation policies.

(c) Climate Mitigation policies, like renewables or a carbon tax, increase unit energy costs.

(d) Some industries with globalized market, like steel, aluminium, shipbuilding or chemicals, energy costs form a significant part of the costs of production.

I would suggest that the imposition of climate mitigation policies increases the unit cost of production, creating a comparative disadvantage compared to countries with little or no mitigation policies. 2017 marks the 200th anniversary of David Ricardo’s theory of comparative advantage. Ably explained by Prof Donald J. Boudreaux, it is perhaps the only principle in economics that it universally true. Climate mitigation is only being pursued, in varying degrees, by a limited number of countries. Developing nations with up to two-thirds of global emissions, are excluded from any obligation to constrain emissions under the Rio Declaration. Developed countries, by imposing mitigation policies, create comparative advantages to the non-policy developing countries that they trade with. Therefore, the marginal cost of those developing countries adopting mitigation policies is greater if developed countries have already mitigation policies in place, than if all countries had adopted them together in equal measure. This implies that those economies like Russia, South Korea and China, who might be able to afford to adopt climate mitigation on the increased energy costs alone, will not do so due to competitor countries having established costly mitigation policies.

Kevin Marshall

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