Economic Effects of Climate Change

I don't pretend to be an expert on the subject, but there is a good summary of this topic by Richard S. J. Tol in the Journal of Economic Perspectives (available only to members of the American Economics Association).  Here are my notes:

What is the economic impact of climate change?  Estimates range from zero percent to -4.8 percent of world gross domestic product.  This cumulative impact is roughly the magnitude of annual economic growth, so it's as if we skipped a year of growth and never made up for it. (sounds kind of like a recession).  [my comment: this is a genuine loss, but it does not justify Al Gore's statement, "This is not a political issue so much as a moral issue."  Maybe it's just a nuts and bolts economic issue.]

Recent estimates of the economic impact of climate change have been smaller than earlier estimates, probably because they have been better at estimating adaptation.  (Example without adaptation: calculate change in production per acre of apples and oranges.  Example with adaptation: calculate how farmers will change the number of acres they plant of each crop, and apply that to the new output/acre estimates.)

Regional variation of economic impact is very large.  One example of an estimate (from Maddison) has a total impact on the world of -0.1 percent of GDP, but South America loses 14.6 percent, while Western Europe gains 2.5 percent.

The social cost of carbon may be around $50 per ton under (what I consider) reasonable assumptions.  The European Union's carbon permits are traded at $78/ton, meaning that they are forcing too much restriction of carbon.

Uncertainty of the economic estimates is large.  However, none of the reasonable estimates for the planet as a whole is nearly as high as I expected to see, given the current state of hysteria.

What do you do when the economic costs are uncertain?  Tol says to err on the side of stricter environmental controls.  I think he's wrong there.  Think of us as having two possible assets in which we can invest.  The returns from traditional capital spending (factories, roads, computers, education) are fairly well understood.  The returns from environmental capital spending (carbon reduction or mitigation) are highly uncertain.  Every finance professor will tell you that when the returns are comparable, you should invest less in the risky (environmental) asset and more in the safe (traditional) asset.