According to a news story from Reuters, a recent Tufts University study (available here) says that “if nothing is done to combat global warming,” then by the year 2100, “two of Floridaâ€™s nuclear power plants, three of its prisons and 1,362 hotels, motels and inns will be under water” because of rising sea levels. This is a rather dubious proposition since all of those assets would, I assume, outlive their useful lives long before they get submerged, and no one would rebuild in an area soon to be underwater. Still, letâ€™s leave aside such objections. The study tells us that rising sea levels could cost Florida $345 billion a year and goes on to state that “the sort of mitigation efforts needed to restrict sea level rises to 7 inches or less would cost a U.S. state like Florida between 1 percent and 2 percent of GDP.” Hence, “doing something may seem expensive, but doing nothing will be more expensive.”
Steven Landsburg has written that “the antidote to naÃ¯ve environmentalism is economics,” and I think that dictum applies here. According to this report from the Commerce Departmentâ€™s Bureau of Economic Analysis, the GDP of Florida in 2006 (in chained 2000 dollars) was about $610 billion. One percent of that figure is $6.1 billion. The authors of the study thus argue that itâ€™s a bargain to spend $6.1 billion to avoid a cost of $345 billionâ€”which it would be, if we were talking about spending $6.1 billion today to avoid spending $345 billion today. The question, however, is whether we should spend $6.1 billion today to avoid spending $345 billion ninety-three years from now in 2100.
The Tufts study purports to take account of inflation, so we need be concerned only with the pure time-value of money and a risk premium. For the former, letâ€™s say 1.7%, which is a commonly used estimate. The latter is harder to calculate, but I venture to say that predictions of costs almost a century in the future are at least as risky as small-cap stocks, and Ibbotson Associates has calculated the historical risk premium on such stocks to be 13.4%. So what happens if we discount $345 billion in 2100 back to present value using a 15.1% discount rate? Answer: that $345 billion becomes a mere $720,799. In other words, weâ€™re being told that itâ€™s bargain to spend $6.1 billion today to avoid a cost with present value of well under a million dollars. IÂ think not.