Global Warming: a Boon for the U.S. Economy?

Published August 1, 1999

The Impact of Climate Change on the United States Economy Robert Mendelsohn and James E. Neumann, editors Cambridge University Press, June 1999 320 pages, $59.95

The impact of this book on climate policy may well be more important than the impact of climate change itself on human affairs. Yet, until one reaches the final chapter, there is little indication that this book produces a bombshell result about global warming.

The dust jacket and preface give no hint whatsoever of the book’s conclusion: that the economic impact of global warming is positive and beneficial, rather than negative and damaging. The dust jacket and preface merely claim the book “improves our understanding of key issues raised in the influential Intergovernmental Panel on Climate Change [IPCC] reports.” What an understatement!

The original IPCC report, “Economic and Social Dimensions of Climate Change,” assembled in 1995, relied on the earlier published judgments of five different authors, which were based on a small set of comprehensive sectoral studies. Their estimates concluded that doubling the levels of atmospheric greenhouse gases would result in global damages equal to from 1.5 to 2 percent of GDP. (Damages in the United States were estimated to be between 1 and 2 percent of U.S. GDP.)

These early studies, by Nordhaus [1991], Cline [1992], Fankhauser [1995], Tol [1995], and Titus [1992], gave total U.S. GDP losses ranging from $55 to $140 billion [in 1990 $], including both market and non-market impacts. But this apparent agreement, within a factor of three, is largely fortuitous. When comparing the details of the five studies, one finds the impact on agriculture ranging from -1.1 to as high as -17.5 [billion dollars]; the impact on energy from -1.1 to -10; sea level damage from -5.7 to -12.2; losses of timber from -0.7 to as much as -43.6; and the impact on water resources from -7.0 to -15.6. The IPCC authors failed to consider a number of sectors; all their non-market impacts are uniformly negative and, in many cases, greater than the market impacts.

By contrast, the new re-evaluation comes to an opposite conclusion. It re-assesses the effect on the economy, assuming that a doubling of greenhouse gases would occur and assuming that it would lead to a warming of 2.5̊C. The major change is in improved methodology, which considers among other items the possibility of adaptation.

The new studies also rely on natural climate experiments, by observing energy expenditures, leisure activities, etc. in towns that experience different temperature changes. Sectors that involve large capital stocks, such as coastal structures and timber, are treated with dynamic models. The new studies are also more comprehensive, and include commercial fishing impacts for the first time. The individual sectoral studies were designed also to be more consistent and to respond to a broader range of climate projections.

When all is said and done, the new studies detailed in Mendelsohn and Neumann’s book arrive at large positive impacts of warming for agriculture, and smaller positive impacts for timber and recreation. The remaining sectors show small negative impacts, considerably smaller than the previous IPCC estimates. Summing up, the effect of warming is found to increase the U.S. GDP by approximately 0.2 percent.

This reversal in the projected economic impact of a warming is startling, but not entirely unexpected to those who have been following the economic literature of the last few years. Individual research papers have indeed shown a large positive impact on agriculture from warming. It arises from the longer growing seasons, warmer nights, increased precipitation, and higher level of carbon dioxide, all of which improve plant growth.

The editors of the book are not yet aware that a modest warming will slow down sea level rise rather than accelerate it. It further enhances their conclusion, never explicitly stated in the book, that global warming is good for us, improving our economic well-being as well as our health. Similar conclusions apply not only to other industrialized nations, but also to the rest of the world, including to the island nations that fear sea level rise.

Will these new results lead to a change in policy, or even reverse the present drive to limit carbon dioxide emissions and curtail energy use? Politicians are unlikely to pay attention to the economic facts, nor to new scientific facts that should reverse our thinking about the basis of global warming. It does lead to some embarrassment for economists who have been engaged in cost-benefit analyses of global warming. How can one do such a study when the costs of mitigation are between 1 and 2 percent of GDP and the benefits of warming turn out to be positive?

The research project involved 26 well-known economists, mostly academics. Robert Mendelsohn is at the Yale School of Forestry and Environmental Studies; James E. Neumann is associated with Industrialized Economics, Inc. in Cambridge, Massachusetts. In addition to reviewers of individual chapters, several distinguished economists reviewed the overall project and provided comments that improved the analysis. The project was funded principally by the Electric Power Research Institute of Palo Alto, California, as part of its academic support program for climate modeling.

S. Fred Singer is professor emeritus of environmental sciences at the University of Virginia and president of the Fairfax-based Science & Environmental Policy Project, a nonprofit policy institute. He has held several academic and government positions, including as the first director of the U.S. Weather Satellite Service. He is the author of Hot Talk, Cold Science: Global Warming’s Unfinished Debate, and serves on the editorial advisory board of Regulation.