Thursday, June 1, 2017

The cost of Paris withdrawal

Lots of discussion today about the potential ramifications of the US withdrawing from the Paris Accords.  Folks have already done some nice calculations looking at the climate consequences of US withdrawal, but there's a lot of interest in the potential economic consequences and I hadn't seen anyone take a heroic stab at that yet.  So.....

The clearest picture I (read: google) could find on the climate implications was this nice website here from ClimateInteractive.org, where they find that a Paris-minus-US world and a Paris-including US world is the difference between +3.6C of warming and +3.3C of warming by 2100.  There are clearly a lot of assumptions that go into this calculation (e.g., what the hell happens after 2030 when the INDCs run out, what happens if Trump's successor (Kamala Harris?  Zuck?  Steph Curry?) re-signs us up, etc etc), but let's take this calculation as God's truth.  Withdrawal gives the world +0.3C of additional warming.

So I wanted to figure out: what is the cost to the US in terms of additional damages that are wrought by this extra warming that withdrawal would bring about?  A difference of +0.3C might not sound like much, but we've got this paper (cited by Obama, so it must be right) that suggests that changes in temperature can affect the growth rate of GDP in rich and poor countries alike.  So the current administration might be right that meeting the US's Paris commitments would have economic costs, but these need to be weight against the benefits of the reduced warming that we would get.  So what are those benefits?

So I took the basic setup we had in that paper, and ran the world forward to 2100 under +3.3C warming versus +3.6C warming, and I looked at what our results in that paper said would happen to US GDP in those different worlds.  See here for more info on how we do these sorts of calculations in this framework.  Basically, we have a function that tells us how growth rates change as temperatures change, derived from historical data.  Then we walk countries along this function as you crank up the temperature to your desired level. To get GDP in levels, you apply these changes in the growth rate to some baseline growth scenario, which we take off-the-shelf from the Shared Socioeconomic Pathways (SSPs, see here).  We also need population numbers, and take those from the SSPs as well.

Below is what I get when I run the US forward under +3.3C warming versus +3.6C warming.  Under SSP5 (the baseline scenario we use), the US clips along at an average per capita growth rate of above 2%/year.  Once you crank up the temperature by 3.5C or so, historical data tells us that we should shave between about 0.5-1 percentage point off of annual US growth.  So this means by 2100, instead of growing at 2%/year under a no warming scenario, the US would be growing at less than 1.5%/year in this much warmer world.  The effects earlier in the century are smaller, of course.

Our comparison is between +3.3C and +3.6C, and the effects on the growth rate are of course smaller.  But even small effects on the growth rate can add up to big cumulative effects on GDP over time.  The left plot below compares total US GDP in the "no withdrawal" world versus the "withdrawal" world, and the right plot gives you the amount of GDP that's lost in each year from withdrawing.  To be crystal clear, we're again only thinking about the differences brought about by the change in temperature between the two scenarios -- we're not thinking about what it would cost the US to meet its Paris commitments.

If my calculations are right, the numbers are large.  By 2100, withdrawing from Paris makes us (i.e. people in the US) about 5% poorer than we would have been otherwise.  The cumulative US GDP losses over time from withdrawal, discounted back to 2010 at 3%, are also impressive - I calculate them to be \$8.2 trillion dollars (right plot above).  That is, withdrawing from the Paris agreement costs the US economy \$8.2 trillion dollars in present discounted value.  That is a large pile of money.  Even if I'm off by a factor of 5, we're still talking low trillions.

And to be clear, my calculations do not take into account many other near-term benefits of reducing our own emissions, such as the 'co-benefits' of better health outcomes from cleaner air.  These could be quite big as well.

The key policy question for the Trump administration is:  do we think the costs of meeting our obligations under Paris are going to run more than \$8 trillion?  Put another way, are they going to amount to almost half of current US GDP?

To generate \$8 trillion in costs between now and 2030 (after discounting at 3%), annual costs would have to be somewhere around \$750 billion.  The compliance cost estimates for the Clean Power Plan that I've seen are about two orders of magnitude smaller than that, so even if the CPP only got us 10% of the way to our Paris commitment (which is very conservative), these costs do not come close to the overall benefits -- even if other reductions are many times as expensive as the CPP.  (Hopefully somebody can correct me if I'm way off on these cost numbers -- definitely not my specialty).

With benefits this big, withdrawal seems like bad policy.

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