Costs and benefits of Kyoto

Warwick McKibbin has kindly supplied me with the present value calculations to permit an assessment of his model results. The idea of a present value is to reduce a series of future gains and losses to a single present day value, the amount that would have to be invested (or borrowed) at a given rate of interest to yield an equivalent flow. The rate of interest in Warwick ‘s model is 5 per cent. There are four main scenarios in the model.
The first is the Business As Usual case in which no countries ratify Kyoto or do anything about global warming. This provides a baseline, but is of no real interest since most countries have already ratified.
n the other scenarios, it is assumed that everyone except the US ratifies. The second is one in which Australia ratifies, but where no account is taken of measures the government has already taken to reduce emissions at low economic cost. The third is one in which Australia ratifies, and account is taken of existing measures. The fourth is one in which Australia does not ratify.

The crucial issue is the difference between ratifying and not ratifying

Warwick supplied me with estimates expressed in terms of US dollars of present value, but it’s more useful to convert these to percentage losses. Warwick estimates that (not taking existing measures into account), ratification will reduce the present value of income for the period 2000-2050 by 0.34 per cent, from $US14401 billion to $US14352 billion. If existing measures are taken into account, the loss from ratification falls to 0.16 per cent. I think the estimate with measures is more appropriate since the policies are already in place, but Warwick has argued that the ‘without measures’ estimate is more robust.

All of the net loss is incurred after 2020. For the period 2000-2020, the present value of income is almost identical in all three scenarios (ratification without measures comes out slightly ahead, but the difference is negligible).

To get a feel for the magnitudes, it’s useful to observe that 0.16 per cent of GDP is equal to two weeks’ economic growth. In other words, suppose that we all took two weeks off to watch the Olympics. During those two weeks the economy kept producing the same level of output but there was no growth in productivity. Suppose that after the two weeks were finished the economy returned to the previous rate of growth, but that the growth missed in those two weeks was not regained. This would be roughly the impact that Warwick is modelling. Actually, since there’s no net impact before 2020, a closer parallel would be that nothing happened until 2020 and that we missed four weeks growth then.

In current monetary terms, 0.34 per cent of GDP is around $2 billion per year, 0.16 per cent is around $1 billion per year. By contrast the Great Barrier Reef, which will almost certainly be severely damaged if global warming is not controlled, is estimated to contribute around $2 billion a year in economic benefits alone. Of course, Kyoto alone will not solve global warming, but equally the Reef represents only a fraction of the ecosystems that will be damaged or destroyed if warming is allowed to proceed, without even considering coastline shifts, increased cyclone intensity, and the huge impact on poorer countries.