The Economist doesn't understand PPPs

The Economist magazine has been an enthusiastic backer of the Castles critique (now joint with David Henderson) of the economic projections used by the IPCC in modelling the impact of Kyoto. It’s also been an enthusiastic backer of the use of purchasing power parity measures, notably through its Big Mac index.

Its surprising then that they endorse an argument by Castles which gets the crucial issues precisely backwards. The crucial para

The IPCC’s procedure relied, first, on measuring gaps between incomes in poor countries and incomes in rich countries, and, second, on supposing that those gaps would be substantially narrowed, or entirely closed, by the end of this century. Contrary to standard practice, the IPCC measured the initial gaps using market-based exchange rates rather than rates adjusted for differences in purchasing power. This error makes the initial income gaps seem far larger than they really are, so the subsequent catching-up is correspondingly faster. The developing-country growth rates yielded by this method are historically implausible, to put it mildly. The emissions forecasts based on those implausibly high growth rates are accordingly unsound.

To see what’s wrong here, suppose you use the PPP-adjusted estimates of income in poor countries. Then the growth required for convergence is lower, and the estimates become more plausible not less.

What is the impact on projections of energy consumption. None whatsoever, as far as I can see. The projections assume that energy use in the poor countries will converge to that in the rich countries as income converges.

The only potentially valid criticism Castles has is that the assumption of convergence is overoptimistic. I don’t think there’s a lot of weight in this, as I argue here/