How much should we spend to combat global warming? That's the great question put forward by economist Steven E. Landsburg in Slate. He walks his readers through a whole host of assumptions that underlie a calculation of how much is enough.

The answer? It depends.

First, I'll make the extreme assumption that our environmental recklessness threatens to shave 1 percentage point off economic growth forever. Because of compounding, our disposable incomes will be reduced by 9.5 percent a decade from now and by 63 percent a century from now—perhaps because we'll spend 63 percent of our incomes relocating coastal cities. Now toss in some standard (but arguable) assumptions about risk aversion and discounting. (Note to econogeeks: I assumed a risk-aversion coefficient of 1, and I discounted future generations' welfare at an annual rate of 5 percent, partly because we might care less about them and partly because we're not sure they'll exist.) Run this through your calculator, and you'll find we should spend up to about 17 percent of our incomes on climate control—provided that our investment is effective. That's an expenditure level that I expect would satisfy Al Gore.

Change the numerical assumptions, and you'll change the numerical conclusion. Make the discount rate 1 percent instead of 5 percent, and you can justify spending up to a whopping 62 percent of our incomes on climate control; lower the discount rate to 10 percent, and you can't justify spending more than 8 percent of our incomes.

And that is based upon what Landsburg describes as an extreme view of the crisis. My read of the article? Even the most alarmist view of the level of crisis cannot justify the huge expenditures and changes proposed by Gore and the man-made global warming crowd -- especially when one looks at the historical record and sees the many beneficial impacts of the (oft discounted) natural cycle of global warming. After all, Landsburg is making extreme assumptions in his calculations, so more reasonable ones would reduce the percentage of our incomes needed to reduce climate change.

Posted by: Greg at 10:02 PM | No Comments | Add Comment
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