Reply to Davidson and Robson

Phillip Adams and Peter Dixon have prepared a reply (over the fold) to the opinion piece by Robson and Davidson in the Australian which offered a range of incoherent criticisms of proposals to reduce emissions of greenhouse gases. Disgracefully, but not at all surprisingly, the Oz has declined to print it, marking yet another step in its decline.

Admittedly, the debate is so one-sided that printing the reply would have made it obvious how ill-advised it was to publish the Davidson-Robson piece in the first place. Dixon is Australia’s pre-eminent economic modeller, and Adams is his successor as Director of the Centre of Policy Studies at Monash. They have published extensively in leading economic journals on modelling and climate change, and their expertise shows. Robson and Davidson have essentially zero professional expertise on these issues, and that shows too. Of course, they have exactly zero professional expertise in climate science, and that hasn’t stopped them claiming the entire profession is wrong, so we shouldn’t be surprised.

Tim Lambert cleans up what’s left

Insurance against catastrophic climate change: backing the Kyoto protocol

In an opinion piece (The Australian, 11/5), Alex Robson and Sinclair Davidson attempt to ridicule a petition currently being signed by university economists calling on the Australian Government to ratify the Kyoto Protocol.

We have signed the petition for three connected reasons: (1) compelling advice from the scientific community suggests that a sharp cut in world greenhouse gas (GHG) emissions would substantially reduce the risk of catastrophic climate change over the next century; (2) the Kyoto forum offers the best available possibility for Australia to play a constructive role in setting up world-wide arrangements for cutting GHG emissions; and (3) as part of a world-wide effort, Australia could achieve deep cuts in its own GHG emissions at only a moderate cost in terms of reduced economic welfare.

It is on point (3) that economists have particular expertise, justifying the presentation of an “economists� petition.

Cutting GHG emissions is like buying an insurance policy: we incur a cost (a loss in GDP) to reduce a risk (catastrophic climate change). In any insurance decision, the cost matters. If a worthwhile reduction in risk costs 50% of income, then living with the risk may be preferable. But if it costs 1% of income, then taking the insurance policy may be the best option. So what will it cost?

For the last 20 years, we have been undertaking economic modelling exercises for Australian and overseas organizations on the costs of GHG reductions. Our modelling, and that of other quantitative economists around the world, supports the claim in the petition that:
“Credible estimates suggest that a 50% emissions reduction is achievable for less than one year’s economic growth�.

Robson and Davidson have difficulty in figuring out what this means. Just to be clear, we will explain it in terms of the report by the Allen Consulting Group to the Business Roundtable on Climate Change (March, 2006).

Modelling we contributed to that report shows Australia’s real GDP growing between now and 2050 at an annual rate of 2.2% under the assumption of no new GHG policies. In this scenario, Australia’s GHG emissions by 2050 are 80% above their level in 2000.

In an alternative scenario, Australia undertakes policies to reduce its GHG emissions by 2050 to 60% below their level in 2000. Even with this very deep cut in emissions, Australia’s GDP grows between now and 2050 at an annual rate of 2.1 per cent. The implication is that a massive 60% cut in GHG emissions (relative to the 2000 level) costs about 20 months growth – the level of GDP that we would have reached on January 1, 2050 is not reached until September 1, 2051. A lesser cut would incur a lower cost. Taking account of non-linearities (the first 1% cut is much easier than the last 1% cut), a reasonable estimate for the cost of the 50% cut mentioned in the petition is 12 month’s growth.

Why do modelling results suggest that GHG emissions could be sharply reduced at seemingly moderate cost? Are these results plausible?

The main GHG-emitting activities are fossil-fuel-based provision of electricity and motor fuels. In Australia, these account for about 5.4% of GDP. Advice from scientists and engineers indicates that the adoption of current alternatives to fossil-fuel-based technologies would no more than double the costs of electricity and motor fuels. As a back-of-the envelope calculation, this suggests that Australia could make a 50% switch to alternative technologies at a cost of 2.7 per cent of GDP, a little over an average year’s growth.

But this is a pessimistic view of the costs of climate insurance. If the world embraced the need for deep cuts in GHG emissions, we would expect rapid technical progress in GHG-benign technologies which would reduce the costs of their adoption.

Professor Philip Adams and Professor Peter Dixon
Director and former Director of the Centre of Policy Studies
Monash University

90 thoughts on “Reply to Davidson and Robson

  1. Thank you for leaving my comment up. I really do appreciate it. Telling you my name is a pretty silly requirement as I could just make up a name. My desire is for anonymity is because my experience is that economics professors can be extremely vindictive, especially to those pointing out the Emperor has no clothes.

    So we now have resolved our dispute. I think the term ‘one year’s economic growth’ is 2 percent of GDP for one year. you think it means two percent of GDP every year for 43 years.

  2. #47 carbonsink, By imposing a global emissions cap you put a price on carbon for those countries that are currently emitters. It therefore encourages switching out of fossil fuel technologies, but enables those less able to switch quickly (e.g. China) to keep burning by buying emission entitlements in the market from those who don’t need them. As seen in Europe, where the Germans have reduced emissions quite a lot, the price of carbon has fallen, meaning that the emissions cap was set at too high a level. In the case of Australian coal, the industry would not collapse overnight, but coal would start to be phased out, provided the global cap was set at the right level. As I said, big if. Australian water markets have demonstrated the pitfallls already.

    Politically, it seems unlikely that anyone in this country will just ban coal exports. Without a carbon market, the alternatives are to tax them or to compensate the miners. A tax has the same effect of raising the price of carbon emission for end users, but it’s more likely that in the absence of a global agreement they’ll switch to alternative suppliers who don’t tax, thereby causing the collapse of the industry. Compensation would be paid out of government revenues, distributing the cost among the domestic population. With a global market, all coal users pay the costs of phasing out the industry.

    that’s my (non-expert) reading of the economic arguments anyway.

  3. Melanie, I agree with what you say, although it is not necessarily true that China will be a net buyer. This depends on the detail of the initial allocation, which will doubtless be the subject of tough bargaining.

  4. Melanie, I have nothing to add to GOEs comments on the confusion surrounding the estimates of costs.

  5. To all who consider growing parseley and other herbs in their backyards – or even on balconies or in kitchens – in an attempt to make a marginal contribution to the reduction of CO2 emmissions due to reduced transportation – may be creating confusions about the estimates of ‘costs’ in the eyes of Sinclair Davidson because GDP will decline, assuming all else constant. I don’t even dare talking about those rebels who are harvesting water from their roofs, using ‘primitive technology’ (ie no motorised pump) known as gravity feeding.

    GOE: You confused rows and columns in your earlier explanation of your arithmetic. Incidentally, Prof Quiggin’s first degree is in mathematics.


  6. The bottom line is that Adams and Dixon were correct. The loss of GDP is small relative to total GDP whether you look at GDP on a year-by-year basis or, alternatively, add up every year’s GDP and discount it by a “suitable” discount rate.

  7. #52 melanie, you misunderstand what I’m saying. My preferred option (of course) would be a globally enforced price on carbon emissions, that would be fantastic, but I just can’t see it happening … ever.

    Given that it won’t happen, the only way Australia as a coal exporter can reduce its emissions is by keeping the coal in the ground. If we reduce our domestic emissions, we’ll just export the surplus and someone else will burn it.

    Obviously its not possible to stop coal exports overnight, but a five year phase-out might be politically and economically feasible sooner than you think.

    BTW, most of Germany’s reduction in emissions since 1990 has been due to the closure of inefficient power stations in the former East Germany. CO2 per capita in France is close to half that of Germany because most French electricity is nuclear.

  8. Sorry, but I still disagree. The fundamental point (IMHO) is that growth in an underlying is being confused for the underlying itself.
    To go back to the food analogy, as I believe this works best – the difference is between an increase in the rate of food output and the actual quantity of food produced. The amount of food produced each and every year is what is available to be eaten.
    If I sacrifice .1% of growth each and every year then I am sacrificing .1% of food in the last year, but 0.1% of food every year – and even this understates it as it is a compounding amount.
    To say that the “cost” of the strategy is only a percentage of the growth is wrong – the cost is the production foregone.
    It is not the growth that is foregone – it is the production.
    My argument is that this line:

    As a back-of-the envelope calculation, this suggests that Australia could make a 50% switch to alternative technologies at a cost of 2.7 per cent of GDP, a little over an average year’s growth.

    is simply wrong. What is not foregone is growth – it is production. If it was put this way:
    As a back-of-the envelope calculation, this suggests that Australia could make a 50% switch to alternative technologies at a cost of 0.1% of GDP in 2008, increasing to 4.3 per cent of GDP in 2050. (I hope i have the numbers right – the spreadsheet is on another computer.)
    it would be right.
    It may well be worthwhile making the sacrifice – I am not expressing an opinion on this – but we should at least properly depict the true cost.

  9. Andrew, your numbers are incorrect. The correct statement is that we could make a 50 per cent reduction in emissions, relative to BAU, at a cost of 0.1 per cent of GDP in 2008, rising to 2.7 per cent of GDP in 2050. (Reread the article to confirm this).

    Obviously, any PV number, expressed as an annual flow, will lie between 0.1 and 2.7. Bending over backwards to avoid understating the cost, Adams and Dixon report the 2.7 number. And still they get complaints and (ludicrous) accusations of incompetence from GOE-Davidson. Chalk it up as yet another example of tribalism/ideology trumping reason on the delusionist side of this debate.

  10. I’m sorry to quibble, John. I don’t think that GOE or I have referred to either profs Dixon or Adams as incompetent. I don’t recall doing so, nor can I find GOE doing so. A search of this thread finds no use of that word. While I disagree with their assessment of the costs, calling them incompetent would be wrong (if not rude and defamatory).

  11. To take the very first sentence posted by the mysterious GOE

    Adams and Dixon should be grateful that The Australian stopped themselves from publicly embarrassing themselves as, at best, being unable to do simple mathematics

    Given that Adams and Dixon do mathematical modelling for a living, I think it’s fair to read an imputation of incompetence here. As you say, wrong, rude and possibly defamatory (not to mention ungrammatical). Scroll down and you’ll see plenty more. You might want to make it explicit that you disagree with GOE on this assessment, given your apparent endorsement at #54.

  12. #57 carbonsink, interesting info. I see that if we cut our carbon emissions by 60% we sould still be emitting more per head than France, Switzerland and Sweden. Should we go nuclear?

    I don’t share your faith in the feasibility of shutting down coal exports in 5 years. Last year they were 11.1% of all our exports. In the December quarter the trade deficit increased to $3.5 bn (11.6 bn for the whole year) and the current account deficit was $15 bn, net foreign debt rose to $571 bn and the debt service ratio to 37.7% of foreign earnings. (the last figure is an estimate from the Economist Intelligence Unit, the actual ratio for 2005 was 33.8%). Put another way our foreign debt service last year was over $79 bn, of which coal paid almost 1/3. Coal is our single largest export commodity – over one and half times more than the next one, iron ore.

  13. That’s a very long bow you’re drawing there. I don’t think that follows at all. I have scrolled down. I can see a fairly robust, even passionate, debate debate about what it means to reduce growth by 0.1 over 43 years. You say this is small, GOE (and Andrew Reynolds) say this is big. I agree with them. (For the record, I don’t know either of them). The more important issue is that there is still debate over the appropriate policy and the costs of that policy; even after Dixon and Adams have emailled their clarification to every academic economist in the country (except Alex and I – although many forwarded it on to us) and you posted it here.

  14. Sinclair, how do you know you don’t know GOE?

    And, to be clear, do you agree or disagree with the claim that Adams and Dixon are unable to do simple mathematics?

  15. That is a good question. You’re quite right. I don’t know which of our economist collegues (academic or private sector – my perception is the latter) GOE is in real life. I don’t know his (her?) “secret” identity.

    I think my comment at #60 answers your other question.

  16. #62 melanie:
    I think the Swedes and Swiss have lots of hydro as well as nukes. We used to have some hydro, but then it stopped snowing in the Snowies. I think economists call than an “externality”.

    RE: phasing out coal exports. Yes I know its mad, but we do lots of mad things that no-one seems the slightest bit concerned about. For instance, of the $11.6 bn trade deficit more than $8 bn is oil. Why? Australia’s oil production has been declining for 7 years, and our oil consumption has been growing rapidly over the same period. Yet we give a tax break to imported SUVs, the fuel excise has been fixed at 38c/L for six years (hello? market distortion anyone?), the FBT system encourages people to maximise annual kilometres driven, and we subsidise the manufacture of big gas-guzzling family cars.

    But I digress. An economist would probably tell you this is all the more reason to keep exporting coal, so we can pay for the oil to feed our big-ass cars.

    I’m sorry but its mad, and I’m convinced this quibbling over the costs of action on climate change will be seen as mad within the decade. Frankly, we really need a kick up the bum like a capital city running out of water. You’ll be amazed how quick the pollies can shut down the coal mines once the voters figure out that coal and climate change are connected.

  17. I have attached the numbers below. Looking at these numbers, can Sinclair, GOE or Andrew answer me this:
    (1)Is the level of GDP achieved in 2049 under the 2.2% scenario the same as that achieved in 2051 under the 2.1% scenario? (This is what Adams and Dixon said)
    (2)How can GOE get a figue of 67.5% of GDP out of this (see #2)?
    (3)Isn’t the sum of the loss of output over this period 198 (equal to 2 years of current GDP) and less than one years GDP in 2051)? Or 2.5% on average?
    (4)If future losses are discounted at, say 6%, won’t this make the proprotionate losses even smaller in discounted present value terms?
    (5)How can you say (as at #58 and #63)that any of these impacts is big in a relative sense?
    (6)If you still claim these losses are big, what is it that I am misinterpreting?

    Growth Status Quo Emissions Reduction Difference % Difference
    2.20% 2.10%
    2006 100 100 0.0 0.0%
    2007 102.2 102.1 -0.1 -0.1%
    2008 104.4 104.2 -0.2 -0.2%
    2009 106.7 106.4 -0.3 -0.3%
    2010 109.1 108.7 -0.4 -0.4%
    2011 111.5 111.0 -0.5 -0.5%
    2012 113.9 113.3 -0.7 -0.6%
    2013 116.5 115.7 -0.8 -0.7%
    2014 119.0 118.1 -0.9 -0.8%
    2015 121.6 120.6 -1.1 -0.9%
    2016 124.3 123.1 -1.2 -1.0%
    2017 127.0 125.7 -1.4 -1.1%
    2018 129.8 128.3 -1.5 -1.2%
    2019 132.7 131.0 -1.7 -1.3%
    2020 135.6 133.8 -1.8 -1.4%
    2021 138.6 136.6 -2.0 -1.5%
    2022 141.6 139.4 -2.2 -1.6%
    2023 144.8 142.4 -2.4 -1.7%
    2024 148.0 145.4 -2.6 -1.7%
    2025 151.2 148.4 -2.8 -1.8%
    2026 154.5 151.5 -3.0 -1.9%
    2027 157.9 154.7 -3.2 -2.0%
    2028 161.4 158.0 -3.4 -2.1%
    2029 165.0 161.3 -3.7 -2.2%
    2030 168.6 164.7 -3.9 -2.3%
    2031 172.3 168.1 -4.2 -2.4%
    2032 176.1 171.7 -4.4 -2.5%
    2033 180.0 175.3 -4.7 -2.6%
    2034 183.9 178.9 -5.0 -2.7%
    2035 188.0 182.7 -5.3 -2.8%
    2036 192.1 186.5 -5.6 -2.9%
    2037 196.3 190.5 -5.9 -3.0%
    2038 200.6 194.5 -6.2 -3.1%
    2039 205.1 198.5 -6.5 -3.2%
    2040 209.6 202.7 -6.9 -3.3%
    2041 214.2 207.0 -7.2 -3.4%
    2042 218.9 211.3 -7.6 -3.5%
    2043 223.7 215.8 -8.0 -3.6%
    2044 228.6 220.3 -8.3 -3.7%
    2045 233.7 224.9 -8.8 -3.7%
    2046 238.8 229.6 -9.2 -3.8%
    2047 244.1 234.5 -9.6 -3.9%
    2048 249.4 239.4 -10.0 -4.0%
    2049 254.9 244.4 -10.5 -4.1%
    2050 260.5 249.5 -11.0 -4.2%
    2051 266.3 254.8 -11.5 -4.3%
    Sum* 7823.1 7625.1 -198.0 -2.5%

    * (zero discount rate)

  18. The answers to question (1) through (4) are approximately as you suggest. Lets get to question (5). One way of stating that cost to say climate change abatement is going to cost 34% of current GDP over 34 years. [On my spreadsheet I get 34.19%]. So on budget night we might hear the Treasurer say “This program is going to cost $10 billion over five years”. In this instance, assuming a one trillion dollar GDP, we could say “This policy is going to cost $340 Billion over 34 years”. I think that is a big number (even before debating the assumptions that underlie GE modelling etc). I can only speculate why you may think this is a small number. For a start you’re probably more concerned about AGW than I am, and think its money well spent. That is a value judgement that in a pure market situation wouldn’t matter. In a political environment it does.

  19. I understand Sinclair Davidson now agrees with Mark U, namely: “The bottom line is that Adams and Dixon were correct. The loss of GDP is small relative to total GDP whether you look at GDP on a year-by-year basis or, alternatively, add up every year’s GDP and discount it by a “suitable� discount rate�

    However, Sinclair Davidson would call a fraction of about 2/100 ‘large’ while Mark U would call it ‘small’. Nothing is lost if one gets rid off the adjectives, ‘large’ and ‘small’. This leaves the conclusion that Sinclair Davidson now agrees with Mark U, namely: “The bottom line is that Adams and Dixon’s work is correct.�

  20. As regards the $x billion over 4 years, it’s a remarkably unhelpful way of presenting things, being neither an annual flow nor (except for a specifically time-limited program) a PV cost (even disregarding the absence of discounting).

    The supposed justification for doing it this way is that 4 years is the span of the forward estimates. But the real reason for doing it, just as in the case we are debating here, is that it is a way of making small numbers look bigger.

  21. No. I am not calling the fraction 2/100 big. I’m calling the fraction 34/100 big. In any event if you look at the figures, the average 2.5% pa starts to look very big as we approach 2050, even without discounting.

    Turning John’s last point around, the 2 years growth (or one year) cost is a way of making a big number look small.

  22. “One way of stating that cost to say climate change abatement is going to cost 34% of current GDP over 34 years.”

    SD, how is that a big number? There are a number of countries around the world that invest that percentage of their GDP in the future of their economy every year, year after year.

  23. Now Sinclair Davidson agrees with Mark U that an appropriate verbal description of the fraction 2/100 is ‘small’.

    I conclude that total agreement has been achieved. That is, Sinclar Davidson agrees with Mark U, namely: “The bottom line is that Adams and Dixon were correct. The loss of GDP is small relative to total GDP whether you look at GDP on a year-by-year basis or, alternatively, add up every year’s GDP and discount it by a “suitableâ€? discount rateâ€?

  24. Where are you taking the “The bottom line is that …” quote from? I can’t see it before #69.

    Melanie, I don’t even understand what “There are a number of countries around the world that invest that percentage of their GDP in the future of their economy every year, year after year” means. Countries don’t invest. They are not conscious monoliths. Individuals, firms (and sometimes governments) invest. Countries cannot. Having said that, I’d be surprised if any economy had an aggregate savings (or investment) rate of 34% “every year, year after year”. From memory some of the east-Asian tigers got into the 20% range (Paul Krugman wrote of this as the perspiation theory).

    Ernestine – I think you’re trying to place words in my mouth (words in my comments box actually). Nice try. But no. Until I see the contet of 2/100 I’m not saying anything about it. As I said above, I’m calling the 34/100 number big, not the 2/100 number. I’m not even sure how you got the 2/100 number.

  25. SD #74, would you be Ok if I said ‘the people of a number of countries’? But it can be aggregated and shown as a percentage of national income. I can also assure you that between 30 and 40% is not uncommon in East Asia. You could fairly easily do the research.

  26. Sinclair – I am definitely not trying to put words in your mouth. I wrote what I concluded from the discussion. I can refine the “2/100” by saying ‘approximately 2/100’. See Mark U’s calculations and statements.

    I also don’t know where 34/100 comes from.

  27. In #67 Mark shows some calculations. I did the same in excel. If we start with GDP = 100 in 2007. The PV of the difference between 2.2% growth pa and 2.1% growth pa discounted at 6% pa is 34. So the pv cost is 34/100.

    Melanie, in a previous life I used to teach a subject called Asian Capital Markets. I don’t recall national aggregate investment rates at that level year in and year out.

  28. I found this list. A lot of low-income economies do have high gross fixed investment (this is for business only amd 2006 only).

  29. The following data are from a dataset downloadable from the World Bank. I just picked the 5 most successful economies in East Asia. Hope the time series are long enough for you. The high numbers are often to be found in the 1980-90s rather than in the earlier stages of growth.

    Investment as a percentage of GDP (unweighted averages)
    Japan 1960-97: 32.3 (low 27.7, high 39.0)
    Korea 1970-99: 31.0 (low 21.3, high 39.9)
    China 1978-99: 37.1 (low 32.5, high 43.3)
    Singapore 1970-99: 39.5 (low 32.8, high 48.5)
    Hong Kong 1970-99: 27.7 (low 20.5, high 35.3)

    Australia 1960-97: 24.6 (I gather it has dropped rather dramatically since 1997)

  30. SD, possibly you didn’t see such large numbers when you were teaching because most of the investment was not via capital markets, but via state-owned entities such as banks or, in Singapore, the CPF and SGIC (except in Hong Kong). In that sense it was the ‘countries’ that did the investment.

  31. Sinclair,

    If I do what you have said I get the calculations below. The 35.9 (which I assume matches up with your 34) should be looked at as a proportion of 2269.2. That is, we calculate the PV of the loss of output over the 43 year period as a percentage of the PV of total output over the 43 year period. This loss is 1.6%, which is even less than the 2.5% we get with a zero discount rate.

    Discount Rate 6%
    Growth Status Quo Emissions Reduction Difference % Difference
    2.2% 2.1%
    2006 100.0 100.0 0.0 0.0%
    2007 96.4 96.3 -0.1 -0.1%
    2008 93.0 92.8 -0.2 -0.2%
    2009 89.6 89.4 -0.3 -0.3%
    2010 86.4 86.1 -0.3 -0.4%
    2011 83.3 82.9 -0.4 -0.5%
    2012 80.3 79.9 -0.5 -0.6%
    2013 77.4 76.9 -0.5 -0.7%
    2014 74.7 74.1 -0.6 -0.8%
    2015 72.0 71.4 -0.6 -0.9%
    2016 69.4 68.7 -0.7 -1.0%
    2017 66.9 66.2 -0.7 -1.1%
    2018 64.5 63.8 -0.8 -1.2%
    2019 62.2 61.4 -0.8 -1.3%
    2020 60.0 59.2 -0.8 -1.4%
    2021 57.8 57.0 -0.8 -1.5%
    2022 55.8 54.9 -0.9 -1.6%
    2023 53.8 52.9 -0.9 -1.7%
    2024 51.8 50.9 -0.9 -1.7%
    2025 50.0 49.1 -0.9 -1.8%
    2026 48.2 47.2 -0.9 -1.9%
    2027 46.5 45.5 -0.9 -2.0%
    2028 44.8 43.8 -1.0 -2.1%
    2029 43.2 42.2 -1.0 -2.2%
    2030 41.6 40.7 -1.0 -2.3%
    2031 40.1 39.2 -1.0 -2.4%
    2032 38.7 37.7 -1.0 -2.5%
    2033 37.3 36.3 -1.0 -2.6%
    2034 36.0 35.0 -1.0 -2.7%
    2035 34.7 33.7 -1.0 -2.8%
    2036 33.4 32.5 -1.0 -2.9%
    2037 32.2 31.3 -1.0 -3.0%
    2038 31.1 30.1 -1.0 -3.1%
    2039 30.0 29.0 -1.0 -3.2%
    2040 28.9 28.0 -0.9 -3.3%
    2041 27.9 26.9 -0.9 -3.4%
    2042 26.9 25.9 -0.9 -3.5%
    2043 25.9 25.0 -0.9 -3.6%
    2044 25.0 24.1 -0.9 -3.7%
    2045 24.1 23.2 -0.9 -3.7%
    2046 23.2 22.3 -0.9 -3.8%
    2047 22.4 21.5 -0.9 -3.9%
    2048 21.6 20.7 -0.9 -4.0%
    2049 20.8 20.0 -0.9 -4.1%
    2050 20.1 19.2 -0.8 -4.2%
    2051 19.3 18.5 -0.8 -4.3%
    Sum (zero discount rate) 2269.2 2233.4 -35.9 -1.6%

  32. Sinclair, your numbers don’t make sense even if one were to treat GDP as ‘future cash flows’ as understood in Finance.

    You refer to Mark U’s numbers. Using these numbers, the difference in the GDP index over 44 years (2006 = 100 to 2050)is 11 in 2050. The PV of 11 at 2006, using your 6% compound, is 0.897926. As a percentage of the GDP index at 2006, the number is 0.8% and NOT 34%.

    I don’t know why anybody would want to do such calculations though. Obviously, if the maximum projected growth rate of GDP is 2.2% then, applying a discount rate of 6% results in something less than 2.2% and not something bigger.

  33. Sorry, Mark. I’m not following what you’ve done.

    Ernestine – there is a GDP diferential every year, the sum of the PVs of that differential is 34 (not just the last year). Why would the discount rate be less than a growth rate?

    Melanie, I’ll check my notes from the time. I used to make the students read the World Bank ‘East Asain Miricle’ publication. So I am aware the growth rates were high and capital markets played a very small role. Those numbers are a bit higher than I recall, but you’re probably right.

  34. Sinclair Davidson,

    Yes, there is a projected GDP differential every year and I believe you that the sum of the PV at 6% compound over 44 years is 34, on the GDP index.

    But where does the 34/100 (the ‘big number’) come from?

    I gather you relate 34 to the ‘current GDP'(index = 100). But, surely you would have to relate “34” to the discounted sum of GDPs for 44 years.

    How big is the number when you compare apples with apples? Would you still call it ‘big’?

  35. That’s exactly were I got the 34/100 from. That is apples with apples. How big is the cost compared to our current GDP is a standard yardstick that everyone understands.

  36. It’s been a long thread, but two points are clear. * If you compare stocks to stocks, or flows to flows, you’ll get a ratio close to 2 per cent.
    * If you compare stocks to flows, you can get any number you like

  37. Sinclair,

    You say you didn’t follow what I have done at #82. All I have done in the second set of numbers at #82 is discount each year’s GDP in #67 by 6% back to 2007 for each growth scenario. The final row is incorrectly labelled – it should say 6% discount rate. This last row shows the sum of discounted GDP in each year over the entire period. This brings out the key point that the sum of the losses in PV terms is 35.9 and this must be compared with the 2269.2, giving 1.6%.

    I can understand using current annual GDP as a yarstick but only to look at annual losses of GDP, not the sum of all annual losses over a 43 year period.

  38. carbonsink

    You need to differentiate between *metallurgical coal* and *steam coal*.

    according to these numbers, 2/3rds of Australian coal exports are metallurgical coal. $16.8bn v. $7.8bn.

    The latter Australia could give up exporting. But if this led to the burning of less efficient brown coal in the export countries, then it would be a net loss to CO2 reduction. AFAIK Australian steam coal is primarily bituminous ie relatively high grade (which also happens to be the best coal for the IGCC carbon sequestration technology, if it is ever implemented).

    Metallurgical coal is high value anthracite (hard coal with a high carbon content). It is the basis of the primary steel industry (secondary steel, produced by remelting scrap, is big in the US and other developed countries).

    You can’t actually abolish primary steel making nor is there any substitute for metallurgical coal in it. The secondary steel industry (naturally) can’t produce any more steel than is available in scrap from the primary industry, and also secondary steel doesn’t, I don’t think, have quite the structural properties of primary steel (the same problem occurs recycled v. primary aluminium – you don’t use the former in aircraft wings for example).

    Most of those exports go to Japan and Korea, but the steel is then shipped to China. Note also India is a relatively important customer.

    Metallurgical coal is actually in short supply. The original metallurgical coal fields in the UK and many in the US Appalachians are nearly exhausted.

    Cut that supply and the price of steel goes up (potentially a lot). This has all kinds of negative impacts:

    – countries use more concrete/cement (cement is the world’s leading greenhouse gas source, after cars)

    – price of wind power and other alternative energies goes up (they use a lot of steel)

    – more marginal deposits in other countries are extracted at a higher energy, CO2 cost, and at the cost of more workers’ lives

    What the developed world can do is mandate the best coal burning technologies in the recipient countries.

    But I can’t see Oz giving up exporting metallurgical coal. At the very least it would also significantly hurt the *iron* mining industry (since Australia’s other great export to the steel industry, is iron ore).

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