dopting carbon restrictions of the magnitude mandated by the Lieberman–Warner and Waxman–Markey cap-and-trade bills or the Boxer–Sanders carbon-tax bill would harm the U.S. and global economies. By 2100, the global economy would lose more than $100 trillion. Analysis suggests that countries with stronger economies can overcome the challenges posed by warming. Indeed, faster growth would insulate the economy from the negative impacts of global warming.
How would adopting a global-warming policy affect world income?
Adopting carbon restrictions of the magnitude found in the Lieberman–Warner cap-and-trade bill[1] would actually reduce worldwide income, even after accounting for the economic benefits of moderated warming. The costs would exceed the benefits by more than $100 trillion over the remainder of the 21st century. The perverse impact of climate policy would be even worse if the major developed countries join the U.S. in implementing an equivalent policy to restrict carbon emissions. Further, the net negative impact would grow exponentially, causing those working in the last two decades of this century to suffer annual income losses that would be hundreds of times greater than those suffered in the early years of the climate policy.
Warming and National Income
There is some debate about the magnitude of warming experienced worldwide over the past century. However, there is more debate about how much manmade carbon dioxide (CO2) emissions have contributed to this increase in temperature, and there is even greater uncertainty about how rapidly the Earth will warm over the next century and beyond.[2]
If there will be little warming, then there is little need to address carbon emissions. However, regardless of the amount of projected warming, policies should be evaluated by comparing their impact relative to their costs. We find that carbon policies flunk the cost-benefit test by wide margins.
When considering both costs and benefits, a carbon policy with restrictions similar in size and scope to those in the Waxman–Markey legislation (an 80 percent cut in CO2 emissions by 2050),[3] which the House of Representatives passed in 2009, would lead to:
An aggregate income loss to the U.S. of $207.8 trillion by 2100;
An aggregate income loss worldwide of $109.6 trillion by 2100;
A one-year worldwide loss of $3.5 trillion in 2100, equivalent to 4.75 percent of U.S. gross domestic product (GDP); and
Adverse impacts, on net, in every year of implementation.
These same results would hold for a carbon tax, and the results are even worse if more countries adopt the carbon-restricting policies.
Economics of Warming
For the purpose of this analysis, we assumed warming of 4.5 degrees Celsius by 2100, a high-end estimate by the Intergovernmental Panel on Climate Change (IPCC).[4] This estimate also assigns the greatest change in warming for a given change in carbon emissions. In short, it is a best-case scenario for supporting a carbon policy, because it has the highest estimated temperature and the greatest reduction in warming for given policy interventions.
Estimating the economic impact from warming has traditionally followed one of two paths. The first compares the per capita income of different countries to their average temperatures. Those who are uncomfortable with blaming the weather for weak democratic institutions believe this method exaggerates warming’s negative effect because of the preponderance of dysfunctional governments found at low latitudes.
The second path creates models of economic activity built with equations that estimate the impacts of warming on various sub-sectors of the economy. The complexity of an economy and the complexity of responses by various sectors to warming make this method extremely difficult. Further, biases, which may be subconscious, will be introduced by the researchers’ choices of which impacts to include.
A recent paper by Melissa Dell and her coauthors offers an alternative calculation that avoids the complexity of the second method and the problems of the geographic distribution of civic quality.[5] They analyzed 125 countries over 55 years to estimate the impact of warming on each country’s GDP. By focusing on the impact on overall economic activity, they include all the negative and positive impacts of warming on income. Their statistical technique uses annual changes in temperature and avoids the problems of a simple cross-country comparison.
They found that countries with above-average income for the sample period suffered no impact from warming. On the other hand, countries with below-average income suffered a significant 1.3 percentage point decrease in their growth rate for each degree (Celsius) increase in temperature.
Poverty and Climate Impacts
Although most poverty policies address relative poverty, absolute poverty is a greater concern when assessing the impact of climate on income. As countries become richer, they can afford to air-condition larger fractions of their homes, businesses, and factories. In addition, the climate-sensitive agricultural sector typically becomes a smaller fraction of GDP. At the same time, richer countries can afford to plant the more expensive, climate-tolerant hybrid seeds and spend more on irrigation and other yield-enhancing agricultural capital.
As with virtually all adversity, a stronger economy helps to overcome the challenges posed by warming—although not all effects of warming on income are negative.[6] By the same logic, as weak economies grow stronger, the impact of global warming becomes less problematic.
Expected economic growth of the developing countries will move more and more countries above the income threshold at which Dell et al. found a negative impact on economic growth. However, rising temperatures will retard the progress toward this climate insulation. Policies to moderate warming could, therefore, help poorer countries reach this income threshold sooner and reduce the economic losses caused by warming until they do so.
The authors divided their database into high-income and low-income groups by comparing each country’s per capita GDP to the world average for the year in which the country entered the database. Those above the cutoff are high income. One of the authors suggested that the average income for the middle year (1976) of their database would be a proxy for the threshold of income. This threshold is $6,574 in 2011 dollars. A single threshold makes an admittedly crude variable, but we use it in our analysis because Dell and her coauthors used it.
Costs of Carbon Cuts
On the other side of the equation is the cost to economic growth from cutting carbon emissions through policies that increase costs. Carbon caps and carbon taxes will have roughly the same economic impact if they reduce carbon emissions to the same degree. Estimates of the economic impacts vary depending on the assumptions about the availability of alternatives to cutting carbon. Notable alternatives include building additional nuclear capacity; capturing and sequestering carbon, especially from coal-fired power plants; and offsetting emissions with verifiable and permanent carbon reductions elsewhere.[7]
Although more generous toward nuclear capacity, carbon capture, and offsets than our analysis at The Heritage Foundation, the Environmental Protection Agency (EPA) analysis of the Lieberman–Warner bill did not use the much higher—therefore the less believable—target for offsets found in later bills, such as Waxman–Markey. In its analysis of Lieberman–Warner, the EPA estimated that the carbon cuts would reduce the annual U.S. economic growth rate by 0.11 percentage point.[8]
The third factor needed for the calculation is the impact that the climate policy would have on average world temperature. Chip Knappenberger estimated that the carbon cuts from Waxman–Markey (slightly larger than the cuts from Lieberman–Warner) would moderate world temperatures 0.19 degree Celsius by the year 2100.[9] He assumed the same IPCC high-end sensitivity of temperature to carbon levels: 4.5 degrees Celsius for a doubling of carbon dioxide. Therefore, this gives a high-end estimate of the temperature impact of any carbon reductions.
Knappenberger estimated that the temperature could be moderated by up to 0.4 degree by 2100 if all Kyoto Annex I countries participated in a similar carbon policy.
The Calculations
We projected per capita and aggregate income for each of 179 countries using 2011 income data from the International Monetary Fund (IMF), population and population growth projections from the IMF and the World Bank, and income growth projections from PricewaterhouseCoopers. (For more information on this calculation, see the Appendix.)
To generate the baseline case, the economic growth rate for countries with per capita GDP below $6,574 in real 2011 dollars was reduced by 1.3 percentage points times the increase in temperature since 2011. Over time, more and more countries pass the Dell threshold and are no longer subject to the GDP reductions of increased warming. On the other hand, those that have yet to pass the threshold find the increasing temperature continuously reduces their economic growth.
For the policy case, those countries implementing carbon policies—just the U.S. in the first scenario and all of the Kyoto Annex I countries in the second scenario—find that their annual economic growth rate is reduced by 0.11 percentage point per the EPA estimate for the entire period. At the same time, the economic growth rates for countries still below the $6,574 threshold increased as temperatures rise more slowly. This better growth results from a lower temperature penalty. However, this moderation of the temperature penalty is small, especially in the early years.
The Results
For the scenario in which only the U.S. enacts the carbon policy, the impact is a significant net loss to world GDP. The calculations show gains in the poorer coun