The (Present) Costs of Global Warming

Robert Miller —  19 December 2007

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 Florida’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, let’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 naïve environmentalism is economics,” and I think that dictum applies here. According to this report from the Commerce Department’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 it’s a bargain to spend $6.1 billion to avoid a cost of $345 billion—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, let’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, we’re being told that it’s bargain to spend $6.1 billion today to avoid a cost with present value of well under a million dollars. I think not.

2 responses to The (Present) Costs of Global Warming


    “no one would rebuild in an area soon to be underwater.”

    In the same way people wouldn’t keep building in flood prone areas of New Orleans or moving to hurricane prone Florida?


    So, the implicit discount rate so that the present value of that $345b is $6.1b is around 4.5%. I suppose that’s better than Treasuries, but not so much better.