Economic impact of energy consumption change caused by global warming

Reposted from Dr. Judith Curry’s Climate Etc.

Posted on February 8, 2020 by curryja |

by Peter Lang and Ken Gregory

A new paper ‘Economic impact of energy consumption change caused by global warming’ finds global warming may be beneficial.

In this blog post we reproduce the Abstract, Policy Implications and Conclusions and parts of the Introduction, Results and Discussion. We encourage you to read the entire paper.

Abstract: This paper tests the validity of the FUND model’s energy impact functions, and the hypothesis that global warming of 2 °C or more above pre-industrial times would negatively impact the global economy. Empirical data of energy expenditure and average temperatures of the US states and census divisions are compared with projections using the energy impact functions with non-temperature drivers held constant at their 2010 values. The empirical data indicates that energy expenditure decreases as temperatures increase, suggesting that global warming, by itself, may reduce US energy expenditure and thereby have a positive impact on US economic growth. These findings are then compared with FUND energy impact projections for the world at 3 °C of global warming from 2000. The comparisons suggest that warming, by itself, may reduce global energy consumption. If these findings are correct, and if FUND projections for the non-energy impact sectors are valid, 3 °C of global warming from 2000 would increase global economic growth. In this case, the hypothesis is false and policies to reduce global warming are detrimental to the global economy. We recommend the FUND energy impact functions be modified and recalibrated against best available empirical data. Our analysis and conclusions warrant further investigation.

Introduction

There is a scientific hypothesis and political acceptance that global warming of 2 °C or more above pre-industrial times would have a negative impact on global economic growth. This hypothesis is supported by economic models that rely on impact functions and many assumptions. However, the data needed to calibrate the impact functions is sparse, and the uncertainties in the modelling results are large. The negative overall impact projected by at least one of the main models, Climate Framework for Uncertainty, Negotiation and Distribution (FUND), is mostly due to one impact sector – energy consumption. However, the projected negative impact seems to be at odds with empirical data. If this paper’s findings from the empirical energy consumption data are correct, and if the impact functions for the non-energy sectors are correct, then the overall economic impact of global warming would be beneficial. If true, the implications for climate policy are substantial.

Integrated Assessment Models (IAM) approximately reproduce the projections from the Global Climate Models (GCM) and apply impact functions to estimate the economic impacts of global warming. The impact functions are derived from and calibrated to what the developers assess are the most suitable studies of the impacts. The impact functions require many assumptions, including projections of population, gross domestic product (GDP), per capita income, elasticities and technology progress in energy provision.

Various studies conclude that the impact functions (also called damage functions) used in the IAMs are derived from inadequate empirical data. For instance, Pindyck says “when it comes to the damage function, however, we know almost nothing, so developers of IAMs can do little more than make up functional forms and corresponding parameter values. And that is pretty much what they have done.” According to Kolstad et al., the IAM damage functions “are generated from a remarkable paucity of data and are thus of low reliability”. The National Academies of Sciences, Engineering and Medicine (NAS) says FUND needs further justification for the damage functions, the adaptation assumptions for the different sectors, the regional distribution of damages, and the parametric uncertainties overall. Tol says the impact of climate change has not received sufficient attention; he says “there is either very little solid evidence, no conclusive evidence, or no quantification of welfare impacts”.

NAS  reviews the damage functions of the three main IAMs, discusses alternative approaches, reviews recent literature on damage estimation, and offers recommendations for a new damage module. It says that much of the literature on which the damage functions are based is dated and, in many cases, does not reflect recent advances in the scientific literature. For example, the FUND energy impact parameters are calibrated to reproduce the results of the 1996 papers by Downing et al.  and the income elasticity results of the 1995 paper by Hodgson and Miller.

FUND is one of the three most cited IAMs; Bonen et al., National Research Council and NAS compare them. FUND is the most complex. FUND disaggregates by sixteen world regions and eight main impact sectors (agriculture, forestry, water resources, sea level rise, ecosystems, health, extreme weather, and energy consumption). This enables analysts to conduct sensitivity analyses and to separately test individual impact functions.

Tol  used the national version of FUND3.6 to backcast the economic impact of global warming for these sectors for the 20th century and projected the impacts for the 21st century. Tol fitted the backcast results to observations of 20th century sectoral impacts. Tol  is an important study because it estimates the impacts for the most significant impact sectors, globally and by region. It also estimates the total impact on all sectors.

The bottom panel of Figure 1 suggests that an increase of up to around 4 °C Global Mean Surface Temperature (GMST) above pre-industrial times would be beneficial for the total of all sectors if the projected energy impacts for 2000–2100 are excluded. Energy consumption is projected to have a substantial negative impact during the 21st century; in fact, its negative impact exceeds the total impact of all other sectors, which is positive, from about 2080.

The striking change in trend of the energy impact at the turn of the century inspired this study. The trend was positive as GMST increased by 0.61 °C during the 20th century but FUND projects it will be substantially negative for the 21st century as GMST is projected to increase further. That is, whereas the observations for 1900–2000 show the impacts were positive, FUND projects continued global warming would have negative impacts for the global economy.

Contrary to the FUND energy projection for the period 2000–2100, the US Energy Information Administration (EIA) empirical data appear to indicate that global warming would reduce US energy expenditure and, therefore, contribute positive economic impacts for the USA. The paper infers that the impacts of global warming on the US economy may be indicative of the impacts on the global economy.

If the economic impact of energy is near zero or positive, and if the total of the sectoral projections in Figure 1, other than for energy consumption, is approximately correct, global warming would be beneficial up to around 3 °C relative to 2000, and 4 °C relative to pre-industrial times. The significance of these findings for climate policy is substantial. For instance, policies that aim to reduce global warming would not be economically justifiable. Therefore, the economic impact of energy consumption projected in Tol, and by FUND3.9, warrants investigation if FUND is to be used for policy.

This paper tests the validity of the FUND energy impact functions against US empirical data. It examines EIA data for the USA to investigate whether the impact of global warming on US energy consumption would reduce or increase US economic growth and compares the results with the energy projections. Next it investigates the projections for FUND’s 16 world regions. Lastly, it discusses some policy implications.

Results

Figure 9 compares the projected US energy expenditure impacts against the impacts calculated from the EIA empirical data.

Figure 9: Economic impact of US energy expenditure as functions of GMST change, relative to 2000. Pink solid line is the Julia FUND3.9 projection. Pink dashed line is the projection with non-temperature drivers constant at 2010 values. The orange dashed line is from the EIA data.

Figure 9: Economic impact of US energy expenditure as functions of GMST change, relative to 2000. Pink solid line is the Julia FUND3.9 projection. Pink dashed line is the projection with non-temperature drivers constant at 2010 values. The orange dashed line is from the EIA data.

Figure 9 shows the projected impacts are substantially negative whereas the EIA data shows they are positive.

Discussion

Figure 15 plots the global economic impacts by sector as a function of GMST change from 2000 to 2100 projected by FUND3.9 with non-temperature drivers included. The total of all impact sectors, and the total excluding energy, are also shown.

Figure 15: FUND3.9 projected global sectoral economic impact of climate change as a function of GMST change from 2000. Total* is of all impact sectors except energy.

Figure 15: FUND3.9 projected global sectoral economic impact of climate change as a function of GMST change from 2000. Total* is of all impact sectors except energy.

With energy impacts excluded, FUND projects the global impacts to be +0.2% of GDP at 3 °C GMST increase from year 2000. With the energy impact functions misspecifications corrected, and all other impacts are as projected, the projected total economic impact may be more positive.

The conclusion that 3 °C of global warming may be beneficial for the global economy depends, in part, on the total of the non-energy impact projections being correct, or more positive. Whether this is the case needs to be tested.

Policy Implications

The economic impact of climate policies is likely to be substantial. It is the sum of the economic impact of the policies and the cost of implementing and maintaining the policies. If global warming is beneficial, as this study indicates may be the case, then the total economic impact is the sum of the forgone benefits of the avoided global warming plus the cost of policies to mitigate warming.

Our analysis suggests that the overall impact of global warming may be positive – that is, it would increase global economic growth. If this is correct, then the positive impacts can be maximised and the negative impacts minimised by increasing wealth, but not by reducing global warming. Tol  concludes that the negative impacts of global warming can be reduced by reducing global warming and/or reducing poverty. However, if global warming is beneficial, then polices aimed at reducing global warming are reducing global economic growth.

According to Lomborg  any reductions in temperature resulting from the Paris Agreement promises would be minimal but at high cost. For example, Lomborg says that all Paris promises 2016–2030 will reduce global temperatures by just 0.05 °C in 2100, and by 0.17 °C if they continue to 2100. He estimates the most likely cost would be $1,848 billion per year in 2030. This is about 2% of projected world GDP in 2030, and this estimate does not include all costs of the climate change industry.

Other studies also indicate that the cost of policies to reduce global warming is high. For example, Climate Change Business Journal  estimates put the climate change industry in 2013 at $1,405 billion, about 1.9% of world GDP. Further, Insurance Journal says that the ‘climate change industry’ grew at 17–24% annually 2005–2008, 4–6% following the recession, and 15% in 2011. These growth rates are much higher than the growth rate of the world economy implying that, if they continue, which is likely with international protocols, accords and agreements such as Kyoto, Copenhagen and Paris, the cost of climate policies will continue to escalate.

Conclusions

This study tests the validity of the FUND energy impact functions by comparing the projections against empirical space heating and space cooling energy data and temperature data for the USA. Non-temperature drivers are held constant at their 2010 values for comparison with the empirical data. The impact functions are tested at 0° to 3 °C of global warming from 2000.

The analysis finds that, contrary to the FUND projections, global warming of 3 °C relative to 2000 would reduce US energy expenditure and, therefore, would have a positive impact on US economic growth. FUND projects the economic impact to be -0.80% of GDP, whereas our analysis of the EIA data indicates the impact would be +0.07% of GDP. We infer that the impact of global warming on energy consumption may be positive for the regions that produced 82% of the world’s GDP in 2010 and, by inference, may be positive for the global economy.

The significance of these findings for climate policy is substantial. If the FUND sectoral economic impact projections, other than energy, are correct, and the projected economic impact of energy should actually be near zero or positive rather than negative, then global warming of up to around 3 °C relative to 2000, and 4 °C relative to pre-industrial times, would be economically beneficial, not detrimental.

In this case, the hypothesis that global warming would be harmful to the global economy this century may be false, and policies to reduce global warming may not be justified. Not adopting policies to reduce global warming would yield the economic benefits of warming and avoid the economic costs of those policies.

The discrepancy between the impacts projected by FUND and those found from the EIA data may be due to a substantial proportion of the impacts (37% for the US and 67% for the world) being due to non-temperature drivers, not temperature change, and to some incorrect energy impact function parameter values.

We recommend that the FUND energy impact functions be modified and recalibrated against best available empirical data. Further, we recommend that the validity of the non-energy impact functions be tested.

23 thoughts on “Economic impact of energy consumption change caused by global warming

  1. The graph above shows the worst case effect of energy on GDP as less than 1%. That should let us do discounted cash flow analysis. I’m not an investor or an economist so I could be wrong but my understanding is that we can use the discount rate to calculate how many dollars we can spend now in order to prevent that 1% loss. Spending more than that amount of money would be a net money loser.

    Most countries invest less than one percent of GDP in renewable technologies (with the exception of South Africa and Chile, which make an impressive contribution at 1.4 percent). When normalised to GDP, China remains one of the largest investors, at 0.9 percent. Interestingly, despite being the second largest investor in absolute terms, the United States invested only 0.1 percent of its GDP in 2015. link

    As far as I can tell, China, South Africa and Chile are wasting their money.

  2. The key question remains unanswered. Is there any evidence that levels of CO2 have any impact on climate whatsoever. Until and unless this question is answered, any policy actions regarding CO2 or costs and benefits related thereto are irrelevant. Does climate change have costs and benefits that can be calculated? Sure, but that is not relevant to any policy regarding CO2 if such “change”is not of human origin but a natural effect of global climate variation. There is no signal, folks. If there is one, show me. As any true scientist should, I’m from Missouri on that one.

  3. America uses a lot of energy just for export and, the rest of the world uses a lot more energy to keep American consumers happy.
    Americas top 10 exports…
    https://www.evansdist.com/americas-top-10-exports/

    “The United States is the 3rd largest export economy in the world and the 7th most complex economy according to the Economic Complexity Index (ECI). In 2017, the United States exported $1.25T and imported $2.16T, resulting in a negative trade balance of $910B. In 2017 the GDP of the United States was $19.4T and its GDP per capita was $59.5k.”
    https://oec.world/en/profile/country/usa/

  4. In the proper basic meaning, in and as per the academic stand, both global warming and climate change mean basically and directly, AGW man-made warming and or man-made climate, or as else addressed academically, the climate change.

    Any clause of considering a beneficial outcome or a beneficial impact as per such as, it simply means an acceptance by default of such condition being considered as real, regardless of all else there.

    Any approach as per consideration of a benefit or a gain due to global warming pins down AGW and
    man-made climate, aka the climate change, as real, very real by default, clearly so,
    technically meaning an acceptance of such a condition as real… just like that… by default.

    So in the end of the day, whatever way you may consider it, under such an approach,
    still likes of Mann and Karl are right, or happen to be right… simply by default.
    So the same goes for the likes of John and Dana, where all these climate Nazis are and happen to be right too…
    by default.

    Even Hillary, Sanders and AOC got to be considered as knowing better than you, and happen to be considered also very right in principle and basics of it all… as per such as beneficial consideration of AGW or climate change.

    The benefit of AGW… and climate change !!!

    Economical or otherwise, the benefit, still when in economics the reach goes far beyond billions of whatever currency in consideration…
    the very economical and power benefit due to the academic clause of global warming,,,
    still such benefit may stand;
    as a benefit to whom really???.

    Definitely not to me, or likes of me, or the most or almost the whole of humanity at large there,

    Who really benefits there from this all?
    Definitely not you mate… who ever you could be.
    Either economically or otherwise.

    No one has ever benefit it, or will ever benefit from what does not even exist in reality.
    There is no value in the fake or the fakery.
    In the realm of fake, even the wildest imagination has no any value whatsoever…
    neither dreams or nightmares have any meaning or value, or a propagation in such as a realm of fake and falsity.

    cheers

  5. This kinda does an end around on the EPA’s Endangerment Finding by undercuting its base assumption of harm.

  6. Since our forecast for tonight is for 20 below zero F., yes, a slight moderation in temps would be beneficial.

    • “-20F”

      Ouch! We’re (Oklahoma) supposed to hit about 20 degrees F *above* zero tonight. That’s about the coldest we have been this winter. Nice winter around here, so far. It wouldn’t be unusual for us to get a big blast of arctic air through here before spring, though. It wouldn’t hurt my feelings if it missed us this year.

  7. “The comparisons suggest that warming, by itself, may reduce global energy consumption. If these findings are correct, and if FUND projections for the non-energy impact sectors are valid, 3 °C of global warming from 2000 would increase global economic growth”

    What about impacts of agw warming? The marine heat waves that will kill off the fish for example.

    https://tambonthongchai.com/2020/01/30/ohw/

  8. Sheltering indoors due to 4” of fresh Gorebull Warming on the ground, I can’t help but wonder how we are going to reverse the long term geologic decline in atmospheric CO2 levels that left plants starving near the end of the last period of glaciation with only 180ppm! I still have not heard a single CAGW cult member acknowledge the significance of this decline and how they propose to prevent it from destroying most forms of life on Earth! I’m sure some microbes and anaerobes would survive but I prefer life forms with feathers, fur and scales to the microscopic. Call me old-fashioned, but if there may be a net benefit to the economy and we can’t even explain the CO2 decline why are we wasting so much time and money on a non-issue?

  9. Hey, Joel! The period when the CO2 dropped was primarily the Devonian, the Age of Fishes. I sure part of the decline was due to the abundant ammonites, coral reefs and numerous armored species that deposited CaCO3 for shelter and protection. Since I am a firm believer in multiple working hypotheses, I am interested in any other possible explanation for this precipitous drop from 4,000ppm to around current levels in only ~50M years! I’m not sure how fast trees can run (haven’t found any ents so far) but I will try to keep your comment in mind! Especially since the CAGW cultists are trying to drive civilization over a cliff!

  10. The economic needle has only nudged positive so far from very significant CO2 plant feeding and from the Climate becoming milder.

    There have been no measurable negatives (hurricanes, droughts, floods, tornados are markedly less, sea level rise is constant and slow, ) unless you believe the 4 to 8 hour increase in the length of heat waves even exists. Heat waves by all historical accounts are less frequent and far milder now compared to the first half of the 20th century (1930’s were peak). We would all be freaking out if we were in another Dust Bowl period…whatever caused that, it wasn’t CO2.

    This is the beginning of the Modern Climate Optimum.

    That’s the opposite of a Climate Crisis.

    • BINGO!

      The notion that a warmer climate is worse than a colder climate is one of the biggest lies the Climate Fascists are peddling.

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