Thursday, February 2, 2012

If Global Warming Deniers Are Proved Wrong, What is the Economic Fallout

Researchers have been warning about global warning for over 40 years. However, given the minimal temperature rise during any individual year over the past four decades, it has become commonplace to shrug off the scary forecasts of climate scientists. There has been a rancorous debate over whether the rise in the Earth's average temperature of about 1 degree Fahrenheit (0.8 degrees Celsius) over the last century (and about twice that in parts of the Arctic) is due to natural or man made causes. Scientists disagree over whether the the increase in global temperature is the result of: 1)  a natural recovery in temperature that has been ongoing at an erratic rate since the Little Ice Age; 2) man made pollution; or 3) a mix of both natural and man made causes.

The global warming debate's focus on temperature change may be misplaced, at least in understanding the ramifications upon the economy of climate change over the next few years. The increase in atmospheric moisture may be the change that is the more relevant metric leading to easily observable changes. Measurements show that global atmospheric water vapor has increased by about 4% since 1970. Increased water vapor in the atmosphere feeds heavier rain and snow storms, leading to more flash floods and disruptive snow e.  Also, global warming theorists claim that the drought in Texas and Florida is due to climate change. The drought is having an immediate economic impact and is a much more likely to convince skeptics that global climate change is occurring than are temperatures increases of a fraction of a degree per year.

If man made activity, particularly burning of fossil fuels, truly can be proved to be causing global climate change, then there will be two negative impacts on economic activity: 1) direct economic costs due to increased flooding and droughts, as well as the wild fires that will accompany the droughts; and 2) restrictions imposed by a reinvigorated environmental movement upon energy development, production, and consumption. 

If global warming is occurring it will make extreme weather even more destructive. Extreme weather led to record damage in the U.S during 2011 of over $46 billion according to the National Climatic Data  Center. Further, it also has led to increased food costs. As an example, the price of beef will be up again this year due to the drought in Texas, as cattleman in the state have reduced the number of the beef cows by 660,000. The price of beef has hit an all-time high in each of the last four months and is likely to. rise even more throughout 2012. 

If the drought gets worse, the costs to Texas residents will start adding up quickly. The drought is even having a "slight impact" on electricity generation, according to testimony from Trip Doggett, the chief executive of the Electric Reliability Council of Texas (ERCOT), which operates the state's electric grid. He anticipated that problems would remain slight through the summer, but if the drought continues into next year, "the consequences are likely to become more severe." Several towns in Texas have come close to running out of water during the drought, but until recently none had to truck in water. Most found solutions to hold them over, often paying tens of thousands of dollars to avoid hauling water. However, last week Spicewood became the first town in the state to run out of drinking water.

The impact on economic activity of a revitalized environmental movement could be far more negative than the cost of extreme weather. The greens will intensify their fight to reduce CO2 emissions.  The primary impact is likely to be an increase in energy costs. There will be:

1) increased pressure to shut down coal fired power plants;
2) continued challenges to obtaining permits for oil developments;
3) attempts to shut down fracking;

4) attempts to bar oil from tar sands from being imported
5) further legislation requiring utilities to increase usage of clean energy despite the high cost
6) a renewed effort to pass cap and trade legislation or impose a carbon tax
6) increased pressure on auto makers to increase fleet mileage 

I went into more detail on the above list in the post Prediction: A Revitalized Environmental Movement Will Impact The U.S Economy

If the global climate change deniers are wrong, it seemingly leaves us with a terrible choice of which do we put at risk - the economy or the environment, and what are the trade-offs that are acceptable. An all out effort to combat global climate change would entail enormous costs to the U.S economy. Given the negative impact this would have on household income, it is little wonder that there is tremendous push back against actions that would harm the economy while not having a measurable impact on the climate. The primary result of the actions in the U.S. to combat global climate change might be to push energy intensive manufacturing over to Asia, resulting in reduced U.S economic activity with no net benefit. Further, unilateral action by the U.S on global warming could be fruitless if not matched by concurrent action by the developing nations of Asia. Thus, global warming and the expense of responding to it will remain incredibly contentious even if the deniers throw in the towel.

The variety of opinions on global warming policy choices is shown by the results of a survey of economists    asked under what circumstances the USA should reduce its greenhouse gas emissions, conducted by New York University School of Law.  While this survey's 144 respondents may not be a representative group, the results are noteworthy.

Related Post
Extreme Weather Events - The Headwind Missing From Financial Predictions for 2012

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