Cost of Climate Change Damage Far Less Than Cost of Decarbonization!

By David Middleton – Re-Blogged From http://www.WattsUpWithThat.com

H/T to ivankinsman for bringing this to my attention.

Government report calls on Trump to act on climate change

160314165840-eli-watkins-profile-small-11

By Eli Watkins, CNN
Updated 1441 GMT (2241 HKT) October 24, 2017

Washington (CNN)A government report released Monday is sounding an alarm over the threat of climate change, and the government’s response.

The US government has spent more than $350 billion over the past decade in response to extreme weather and fire events, and the Government Accountability Office report estimated the US would incur far higher costs as the years progress if global emission rates don’t go down.

In the report, GAO called on President Donald Trump to use the information GAO compiled to help identify risks posed by climate change and “craft appropriate federal responses.”

The US has seen billions of dollars in damage from hurricanes and wildfires this year, which experts say climate change exacerbated. Congress is due this week to consider another multi-billion dollar aid package to help Puerto Rico after it was hit by back-to-back hurricanes.

The GAO provides nonpartisan information to members of Congress, including audits of government activities and reports about public policy. Its latest report was requested by Republican Sen. Susan Collins of Maine and Democratic Sen. Maria Cantwell of Washington.

[…]

Blah, blah, blah…

CNN

Firstly… Is it my imagination?  Or does the CNN “reporter” appear to be about 12 years old?

Secondly… The CNN article babbles about climate change and the US government spending $350 billion over the past decade in “response to extreme weather and fire events,” but never mentions any other actual numbers.

The LA Times did include some numbers:

The extreme weather events of the past decade that scientists believe were exacerbated by climate change added more than $350 billion in costs to taxpayers, according to the report, a huge drain on the budget as funds were diverted to cover more disaster relief, crop and flood insurance, firefighting costs, and infrastructure and public lands repairs. Those demands threaten to increase by $12 billion to $35 billion each year by the middle of the century, it said. By the end of the century they could go up each year by as much as $28 billion in today’s dollars, a crushing cost for taxpayers.

LA Times

The LAT numbers are useless… “Those demands threaten to increase by $12 billion to $35 billion each year by the middle of the century, it said. By the end of the century they could go up each year by as much as $28 billion in today’s dollars…”  They mix nominal dollars up to 2050 and then revert to current dollars over the second half of the century.

So, I went and downloaded the GAO report.  A few funny things first:

The methods and the studies that use them produce imprecise results because of modeling and other limitations…

Methods used to estimate the potential economic effects of climate change in the United States are based on developing research from a small but growing number of researchers. These methods are complex because they link different types of complicated climate and economic models to assess how projected changes in the climate could affect different sectors and regions. They produce imprecise results…

Methods used to estimate the potential economic effects of climate change in the United States are based on developing research being undertaken by a small but growing number of researchers, according to the literature we reviewed and several experts we interviewed.

Methods used to estimate the potential economic effects of climate change in the United States are complex because, according to literature we reviewed and many experts we interviewed, they use different types of complicated climate and economic models that are linked together in a sequential framework that uses the results of one model as input to another…

According to the literature we reviewed and many experts we interviewed, methods used to estimate the potential economic effects of climate change in the United States, and the national-scale methods that use the methods, produce imprecise estimates of economic effects because of data and modeling limitations…

According to a 2012 National Academies report, climate models have advanced over the decades to provide much information that can be used for decision making today, but there are and will continue to be large uncertainties associated with climate modeling.

According to literature we reviewed, another key source of uncertainty is how much global temperatures will rise in response to a change in carbon dioxide concentrations, a factor known as climate sensitivity.

Modeling the effects of climate change is challenging because, among other things, it often involves projections over long periods into the future, and these projections become more uncertain over time.

Several experts we interviewed noted that even though the methods produce imprecise results…

Anybody else notice a pattern here?

Here’s the rub: “economic effects of the six sectors could reach 0.7 to 2.4 percent of the U.S. gross domestic product per year by the end of this century.” 

They can’t forecast the GDP out to the end of the century within 0.7-2.4%… But they can accurately forecast a loss of “0.7 to 2.4 percent of the U.S. gross domestic product per year by the end of this century” based on a cascade of complex models which produce imprecise results, with the uncertainty increasing over time…

Oh… Here’s the real kicker:

The study did not estimate the potential costs of significant global action to reduce greenhouse gas emissions, noting that such costs were well-examined elsewhere in the literature.

Really?  Where?  In 2014, the IEA put the global cost of deep decarbonization at $44 trillion.  According to the BP’s 2017 Statistical Review of World Energy, in 2016, the world’s primary energy consumption was 13,276.3 million tonnes of oil equivalent (MTOE).  US consumption was 2,272.7 MTOE, 17% of the total.  That would make our share of decarbonization $7.5 trillion.

If we accept that climate change is currently costing us $35 billion per year ($350 billion over past decade) and accept the GAO’s estimate of future costs:

A November 2016 assessment by the Office of Management and Budget (OMB) and the Council of Economic Advisers found that recurring costs that the federal government incurred as a result of climate change could increase by $12 billion to $35 billion per year by mid-century and by $34 billion to $112 billion per year by late-century, the equivalent of $9 billion to $28 billion per year in today’s economy.

The total cost of climate damages to the US by 2100 would be $161 trillion.  Would it make sense to spend $7.5 trillion now (or in the near future) if it averted $161 trillion worth of damages over the next 83 years?

What is ‘Net Present Value – NPV’

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.

The following is the formula for calculating NPV:

Net Present Value (NPV)

where

Ct = net cash inflow during the period t

C= total initial investment costs

r = discount rate, and

t = number of time periods

A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

Read more: Net Present Value (NPV)http://www.investopedia.com/terms/n/npv.asp#ixzz4wRejUYxq
Follow us: Investopedia on Facebook

In the real world, all investments have pass an NPV analysis.  The GAO tangentially addresses this in their report:

Challenges also arise with discounting future benefits and costs, particularly when modeling over long time frames. According to OMB, benefits or costs that occur sooner are generally more valuable than those that occur later. However, according to the literature reviewed and some experts interviewed, the appropriate discount rate to apply when considering benefits and costs across generations, such as those associated with climate change, is subject to much debate.35 According to one of its authors, this debate was one reason why the American Climate Prospectus study did not present its estimates in discounted terms.

100% unmitigated bull schist!

In the real world a 7% discount rate is the standard.

As a default position, OMB Circular A-94 states that a real discount rate of 7 percent should be used as a base-case for regulatory analysis. The 7 percent rate is an estimate of the average before-tax rate of return to private capital in the U.S. economy…

https://www.transportation.gov/sites/dot.gov/files/docs/OMB%20Circular%20No.%20A-4.pdf

Discounting Away the Social Cost of Carbon

A 7% discount rate essentially makes the NPV of the Social Cost of Carbon $0 or negative.

A 7 percent discount rate, which has been used by the EPA for other regulatory analysis, could actually lead to a negative carbon cost, which would seem to imply that carbon emissions are beneficial.

Bloomberg

Getting back to the GAO’s epic failure… Here’s what happens when I apply a 7% discount rate to their assessment of climate damages:

where

Ct = net cash inflow during the period t (climate damage to be averted)

Co = total initial investment costs (decarbonization)

r = discount rate, and

t = number of time periods

Ct = net cash inflow during the period t  $      160,972,000,000,000
Co = total initial investment costs  $           7,480,000,000,000
r = discount rate, and 7%
t = number of time periods 83
 Ct/(1+r)^t  $               585,998,888,297
NPV  $         (6,894,001,111,703)

Discounted_GAO_Report Excel Spreadsheet (updated)

The NPV of the $7.5 trillion decarbonization “investment” is -$6.9 trillion.  That’s a VERY negative NPV.

A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

If we took $7.5 trillion today and put it in 30-yr Treasuries at 2.89% (assuming a constant interest rate), we’d have nearly $80 trillion in 2100.  If we employed that capital at a 7% return, we would have nearly $2.1 quadrillion by the turn of  22nd Century… enough to pay for the cumulative climate damages 13 times over.

Now… My approach to this has been very simplistic and probably isn’t correct.  I have no doubt that an accountant would tell me that my approach was totally wrong… However, the GAO inputs were little more than SWAG’s pulled out of the place SWAG’s are pulled out of.  It really is the epitome of mental [Censored]ation for the US General Accounting Office to prepare this sort of report with SWAG’s based on models that have never demonstrated predictive skill… And to not factor in costs, much less discount them.  It is abominable.  President Trump should hit that part of the swamp with a neutron bomb.

Note 1:  The fact the I accepted the GAO’s estimates of the costs of climate-related damages and used them in my calculations, does not mean that I agree with them.  There is absolutely no basis to support the claim that the $350 billion spent over the past decade in response to extreme weather and fire events was even remotely related to climate change or greenhouse gas emissions.  Nor is there any evidence that decarbonization of our energy infrastructure will avert any future expenditures in response to extreme weather and fire events.

Note 2: Yes.  I know that the GAO report doesn’t literally say that the cost of climate damage will be far less than the cost of decarbonization.  It didn’t even address the costs.  It just regurgitated Obama maladministration talking points.

Addendum

A comment by Steve Zell leads me to think the I overestimated the GAO’s climate damage SWAG.  In my initial calculation, I started out with $35 billion in 2017.  I incrementally grew the annual increase from $12 billion in 2018 to $112 billion in 2100.  I compounded the damage by adding the annual increase to the previous year’s damages.  This resulted in damage equivalent to 4% of US GDP in 2060, higher than the GAO’s upper SWAG range.  I re-ran the calculations using a constant baseline of $35 billion.

Ct = net cash inflow during the period t  $           8,086,000,000,000
Co = total initial investment costs  $           7,480,000,000,000
r = discount rate, and 7%
t = number of time periods 83
 $                 29,436,094,543
NPV  $         (7,450,563,905,457)

This leads to a -$7.5 trillion NPV at a 7% discount rate.  The NPV is negative even at a 3% discount rate in this scenario.

Ct = net cash inflow during the period t  $           8,086,000,000,000
Co = total initial investment costs  $           7,480,000,000,000
r = discount rate, and 3%
t = number of time periods 83
 $               695,415,051,803
NPV  $         (6,784,584,948,197)

Addendum 2

A comment by Craig:

David, in your example, I think you discounted the whole $161T back from 2100. To calculate the NPV, each annual cash flow is discounted to present for the appropriate number of years and the individual discounted cash flows are summed, for example, 2018 is discounted for 1 year, 2019 is discounted for 2 years, etc. It will make a huge difference in your result. Excel has a formula (NPV) that makes it easy.

Yep.  I did discount the entire cash flow back from 2100.  I also realized that 2017-2100 has 84 intervals, not 83.  So, I went back and applied the NPV formula to each year, using the static baseline, and ran NPV’s for discount rates of 7%, 5%, 3%, 1% and 0.25% and never obtained a positive NPV.

Ct = net cash inflow during the period t
Co = total initial investment costs $7,480,000,000,000
r = discount rate, and 7%
T = number of time periods                                              84
Undiscounted Cash Flow $8,086,000,000,000
Discounted Cash Flow $884,761,102,227
NPV ($6,595,238,897,773)
Ct = net cash inflow during the period t
Co = total initial investment costs $7,480,000,000,000
r = discount rate, and 5%
T = number of time periods                                              84
Undiscounted Cash Flow $8,086,000,000,000
Discounted Cash Flow $1,335,842,279,142
NPV ($6,144,157,720,858)
Ct = net cash inflow during the period t
Co = total initial investment costs $7,480,000,000,000
r = discount rate, and 3%
T = number of time periods                                              84
Undiscounted Cash Flow $8,086,000,000,000
Discounted Cash Flow $2,344,891,536,915
NPV ($5,135,108,463,085)
Ct = net cash inflow during the period t
Co = total initial investment costs $7,480,000,000,000
r = discount rate, and 1%
T = number of time periods                                              84
Undiscounted Cash Flow $8,086,000,000,000
Discounted Cash Flow $5,050,177,743,850
NPV ($2,429,822,256,150)
Ct = net cash inflow during the period t
Co = total initial investment costs $7,480,000,000,000
r = discount rate, and 0.25%
T = number of time periods                                              84
Undiscounted Cash Flow $8,086,000,000,000
Discounted Cash Flow $7,148,802,502,752
NPV ($331,197,497,248)

I still get a negative NPV at almost any discount rate above zero-point-zero.

CONTINUE READING –>

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