How much is doing something about climate change going to cost us?

(Where “doing something about” means some form of pricing of carbon, whether through the ETS or not)

There’s ongoing arguments about this amongst NZ economists and modellers. Most of this depends upon the assumptions you make about policies in the rest of the world, about how rapidly higher prices change what people buy, and how farmers farm. Previous models have given a wide range of answers, from “it’ll be the doom of NZ” to “it might be just fine”. Some of the previous models have been pretty widely panned.

To cut through all this crap, MfE told two of the main modelling to sit down together, play nice, and agree on some numbers. These numbers are still predictions, but they’re more valid than any previous ones. And the conclusion is:

“The New Zealand economy will continue to grow under a carbon pricing scheme, albeit at a slightly lower rate. In the absence of any policy change, we estimate RGNDI will grow from around $38,500 per capita in 2009 to $56,000 per capita in 2025. Under a carbon pricing scheme with a world price of $100, this will fall by between $1,700 and $2,000 by 2025.”

So rather than being $17.5k richer in sixteen years time, yer average New Zealander may be $15k richer. Obviously, there should be error bars on this prediction, whether that’s the price of oil changing, or the exchange rate, or a few years of good weather for farming or bad, but it seems a passable conclusion that the effect will be small but negative. Is that acceptable?

(All this ignores the potential cost of extreme events, droughts, Katrinas and the rest, coz economic models have a hard time with that kind of thing. That’s a bugger, coz the financial damage from extreme events may make this kind of modelling a pointless waste of time, but I digress…)

6 thoughts on “How much is doing something about climate change going to cost us?

  1. How do national accounts treat ‘extreme events’? Say we were to get a huge earthquake in Wellington, for instance. Wouldn’t that cause a pick up in production as money was borrowed and withdrawn from the EQC’s funds to spend on rebuilding the city? I suppose against that you have to factor in the destroyed assets.

    Equally, would having to build a big dyke across the entrances to Port Nicholson and the Waitemata have a positive impact on the economy?

    (Also, what assumptions do the economists make on oil prices? Because if we are using less energy as a result of carbon pricing, our costs will be less than countries that still rely on fossil fuels. So NZ will have a competitive advantage over those countries).

    1. When we’re talking about modelling the economic impact of climate change, there are four kinds of costs:

      1) Current market impacts – e.g. the EU has already put a price on carbon
      2) Possible market impacts – e.g. NZ might put a price on carbon in the future

      These are relatively easy to deal with, and are included in most models.

      3) Insurance value of high impact events – e.g. another Katrina that pushes up the cost of insurance.

      These events are rare and so hard to predict. The economic impact of a storm will always depend upon fine details like it’s exact track. Katrina was a cat 3 storm but hit New Orleans dead one, cost was over $100 billion. Bertha was a cat three that missed Bermuda, causing flights to be delayed. So the cost is hard to pin down and very variable. These costs are potentially huge. If insured, then on average they might be trivial, but that’s like saying on average, russian roulette is safe. I mean, on average, you’ll be only one-sixth dead, and you can round that down to not dead, therefore it’s safe.

      4) Non-market impacts – e.g. a bunch of polar bears die. SFW?

      Here’s the potentially really big costs, coz this affects what people don’t pay for. It’s like with air pollution – you don’t pay for clean air, therefore clean air has no value, so there’s no economic cost to air pollution. Similarly, we don’t pay for an inhabitable planet, therefore it has no economic value, therefore we’re just screwed…

      It’s the type 3 & 4 costs that matter. Current modelling looks at type 1 & 2, coz it’s easy. Oops.

  2. So in other words, “We don’t know for certain but probably not as much as you’d think.”

    Makes a nice change from your usual climate change rhetoric of “We don’t know for sure but probably way more than you’d think, way sooner than you’d think.”

    1. That’s a valid conclusion to draw.

      I’d be tempted to say “we won’t know for certain and the effect will be small compared all the other factors that influence growth”.

      But yeah, this does mean that instead of Rodney ranting on about how the ETS will mean every household will be sending a $3000 cheque to Russia every year, he’ll be ranting on about every household sending a $2000 cheque. I think that counts as progress…

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