Understanding costs of emission reduction

Ross Gittins, the Sydney Morning Herald’s economics editor, provides one of the best explanations of the economic modelling in a 60% or 80% emissions reduction scenario.

If you wanted to mislead, you could say the modelling shows that reducing emissions by 60 per cent would lead to a loss in real gross domestic product of 5.1 per cent – or $118 billion – by 2050. But modellers almost always assess the likely effects of reducing emissions by first establishing a “baseline” or “reference case” of what would happen if no changes were made, then model what would happen if you did adopt a different policy and compare the two projections.

So, in the modelling based on the Allen group’s work, the reference case says real GDP would grow by 184 per cent between 2005 and 2050, whereas a 60 per cent cut in emissions would cause real GDP to grow by only 169 per cent. Oh.

So that’s how you get the “loss” of 5.1 per cent or $118 billion. It’s only a loss relative to what might have been. An opportunity cost, in other words.

Still think an opportunity cost of $118 billion sounds a lot? That’s because another trick the misleaders use is to give us the cumulative cost, glossing over the fact that the cost will be spread over, in this case, 45 years.

Get this: when you look at economic growth the way we’re used to looking at it – in terms of annual rates – you discover that whereas the reference case has the economy growing at an average rate of 2.3 per cent a year, cutting emissions so heavily would reduce the growth rate to 2.2 per cent a year.

Finally, remember that none of these modelling exercises is a cost-benefit analysis. They merely assess the costs of reducing emissions, ignoring the benefits that would flow – in the form of economic disruption averted – from successful global cooperation to prevent further climate change.

Go and read the entire article. It is worth it.

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