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Looking for Cost-Effective Climate Change Solutions

In The Wall Street Journal's LiveMint today, Reason's Shikha Dalmia writes:

The longer we wait, the cheaper and less painful it might be to deal with global warming. That is the thinking of a growing number of economists – most prominent of whom is Gary Becker, a Nobel laureate at the University of Chicago.

Under most scenarios, global warming won't be a sudden and catastrophic event like, say, an asteroid hitting the earth that will wipe us all out in one fell swoop if we don't do whatever it takes – regardless of cost – to avert it. By the UN climate change panel's own reckoning, most of the effects of global warming won't be felt for another 50 years and then too, they'll unfold gradually and spottily – affecting some places more than others and even making some currently inhospitable tundras more livable.

Under such circumstances, it might well make more sense to postpone action on global warming. Becker explains why. Suppose we do nothing about global warming, then 50 years from now we suffer $2 trillion in damages. The question then becomes, how much would it be rational to spend now to avert that future damage? One way to answer that would be to apply a discount rate on $2 trillion. Assuming, very conservatively, a return on capital of 3%, then $500 billion today would equal $2 trillion after 50 years of compounded interest. Thus, if the cost to us of averting global warming today is significantly more than $500 billion, say $800 billion, it would be better to invest that money in physical capital rather than in steep emission cuts. In 50 years, that $800 billion would grow to $3.5 trillion – enough to offset the $2 trillion damages – and still leave future generations richer! (It is not for nothing that Albert Einstein reportedly called compound interest as "the most powerful force in the universe"!)

This argument has generated a lot of discussion in America and the West, but it is of even more relevance to the faster growing economies in the developing world. All estimates about the costs of dealing with climate change are pure speculation at this stage.

But let's just consider the UN's estimates: They put the cost of just stabilizing carbon dioxide emissions at 550 parts per million (ppm) at up to 3.2 % of the current global GDP or $1.7 trillion. Compounded at a 3 % interest rate over 50 years, this works out to about $7 trillion.

But, not all countries will lose this wealth at equal rates. Given that India and China are experiencing more rapid economic growth than the West right now, their returns on physical investments are likely to be closer to 4-5% and the West's 2%. This translates into two-and-a-half to four times greater future losses for India and China for every dollar they spend now.

What's more, while this lost growth will pose only quality of life issues for the West, it will pose existence of life issues for India and China. Indeed, the loss of investments in physical capital such as roads, sewerage, water-treatment plants, manufacturing, pharmaceuticals, won't just mean lower wages or smaller homes as in the West. It will mean more unemployment, poverty, hunger, disease and death. In short, if India and China succumb to Western pressure to divert precious resources to fight global warming now, many members of the generations for whom this war is being waged might not even come into existence.

Reason Foundation's Environment Research
Reason magazine's Climate Change Commentary

Chris Mitchell is Director of Communications/Media Contact

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