Domestic Outpui, 2050 Agriculture: % Change
4. Modeling Insights
4.3. Appropriate measures of economic impacts
Measuring changes in social welfare that result from climate change impacts is difficult. Economic modelers often rely on Gross National Product and Gross Domestic Product as proxies or "indicators" of welfare changes, even though they are not themselves welfare measures.
We suggest that in the assessment of climate change impacts, it is es- sential that measures other than GNP or GDP be used t o evaluate welfare
15Work is already underway to construct such frameworks. Of particular note is the
"Second Generation Modeln being developed by Jae Edmonds.
changes. In fact, focusing on changes in GNP may lead t o misleading con- clusions.
Consider the case of increased expenditures t o protect coastal areas against sea level rise. As in the composite case, households bear a sig- nificant share of the burden of adjustment t o the impacts of sea level rise (Figure 4). While the impacts are extremely small, the economy is affected nevertheless. T h e increase in government construction expenditures requires that resources be bid away from other production activities and redirected t o construction and its supplying sectors. This bids up the prices of all goods and services, including those facing consumers. As with agriculture, house- holds view this as a permanent reduction in real future earnings and reduce their consumption of goods, services, and leisure. T h e additional labor ser- vices offered by households are easily absorbed into the comparatively labor- intensive, construction-related industries. The drop in consumption and the rise in labor income lead to increases in household savings. In turn, these funds flow t o investment in plant and equipment by households and busi- nesses. In short, final demand is restructured away from consumer spending and toward public construction and private investment. The industrial mix of domestic output strongly reflects the consequences of this reconfiguration.
A result of our analysis is that GNP and consumption expenditures move i n opposite directions over time. GNP increases until it is 0.1 percent higher in 2050. Consumption expenditures decline a small amount so that they are below baseline levels in 2050.
This result suggests that G N P is not a reliable indicator of changes in economic welfare that may arise from climate change. As a response t o climate change, we can expect t o see a reallocation of expenditures, both intratemporally and intertemporally, and these reallocations will influence G N P and GNP growth. Whether these reallocations result in greater or lower economic welfare, cannot be proxied by changes in GNP.
To evaluate economic welfare impacts of climate change, there are no good substitutes for equivalent and compensating variation measures of will- ingness t o pay by households. One of the great advantages of a general equi- librium model that is grounded in consumer and producer theory is that it can provide estimates of changes in willingness-to-pay t o evaluate welfare changes.16 In future work, we will carry our analysis through t o this last
I6An important contribution in this area is Hazilla and Kopp (1990). They constructed an econometric general equilibrium model of the USA that estimates dynamic social costs derived from modern applied welfare economics. They also demonstrate that general equilibrium impacts of environmental quality regulations mandated by the Clean Air and Water Acts are significant and pervasive.
Table 6. Modeling insights.
The labor-leisure choice is a potentially important response to climate impacts.
Today's state-of-the-art general equilibrium models do not contain important inputs that are directly sensitive to climate change. These inputs (e.g., water, land) may link sectors.
Appropriate measures of economic impacts must be chosen. Alternatives in- clude GNP, household consumption, and equivalent and compensating varia- tion.
If consumer surplus measures are desired, a general equilibrium modeling ap- proach is appropriate.
stage to examine the welfare implications of the scenarios analyzed in this paper.17
5 . Insights for the Research Agenda
Our results suggest that macroeconomic models provide a useful tool for gaining valuable insights about the economic effects of climate change. But macro models, like many other types of models, are limited in that they only capture those effects that manifest themselves in the market (Scheraga et al., 1992). Conventional economic modeling lends itself to the assessment of costs and benefits that are manifested in the market. Macroeconomic modeling is particularly useful for programs that produce significant market interactions. Where conventional modeling fails us is in accounting for non- market costs and benefits (Table 7). These effects are important because they represent changes in social welfare which need to be considered by pol- icy makers. Estimation of these effects should be a major focus of ongoing economic research.
A second focus for future research should be on the development of improved and more meaningful damage functions. Improved damage func- tions should be derived from a dynamic, general equilibrium assessment of the effects of global warming on the US economy, rather than on static, partial equilibrium assessments. Also, researchers should focus on deriving intertemporal information on how damages evolve as temperature (and other weather variables) change, so that the assumption about the proportional- ity of damages t o the degree of temperature rise can be relaxed. Improved damage functions should also permit the identification and assessment of
17For related work, see Jorgenson, Slesnick, and Wilcoxen (1992).
Impact on Real GNP
Sea Level: % Change
Real Consumption & Investment
Sea Level: % Change in Constant $
- Consumption
-
InvestmentFigure 4. Impacts on real GNP, consumption, and investment; the case of sea level rise.
Table 7. Assessment taxonomy.
No market Visibility aesthetics Pain & suffering due to job manifestation Pain & suffering loss, increased illness, and
Existence value alcoholism resulting from Ecosystem damages environmental regulation
(health-health effects) regional climate impacts. Finally, damage functions should be derived that will permit the identification of marginal benefits associated with alterna- tive policy actions. What we have done in our work is estimate credible up- per bounds for the impacts from three climate-induced effects on economic growth. However, these estimates cannot be used to justify any policy pack- age other than one which completely eliminates all of the relevant damages.
In fact, for this type of analysis to be more useful to policy makers, marginal benefits estimates will need to be derived.
Finally, as we have already discussed, existing macroeconomic models do not include key climate-sensitive factors of production, such as water and land. There is a need to broaden the scope of macroeconomic models so that they include these inputs. One alternative is to develop a new generation of macroeconomic models that incorporate all key inputs, as well as potential feedbacks from the environment to economic activity. Another alternative is to explore linkages between narrower, more detailed sectoral models and existing macroeconomic models. For example, we expect to investigate how one might measure directly the influences of climate on production deci- sions on a sector-by-sector basis, and then use the J W model as a platform for looking at the general equilibrium effects. We also expect to examine how climate influences consumption decisions. Most economic analyses of climate change have focused on the impacts of climate on production. How- ever, virtually no work has been done to examine the value of climate as a consumption good, in and of itself. Future work should address this issue.
6. Conclusions
The goal of this project has been to assess the sensitivity of US economic ac- tivity to three particular climate-induced effects: (i) changes in agricultural
Table 8. Insights for the research agenda.
There is a need to:
r Focus on non-market impacts.
r Measure directly the influences of climate on production and consumption de- cisions.
r Derive more meaningful damage functions that will permit:
o Identification of the marginal benefits associated with any particular policy action
o Assessment of regional damages due to climate change.
Develop linkages between narrower sectoral models and macroeconomic models.
production costs, (ii) changes in electricity service costs, and (iii) changes in government expenditures to protect coastal areas from sea level rise. We have discovered that the economic impacts attributable to these climate change effects are not large as a percentage of GNP. There is a decline in consumption, although real investment rises. We have said nothing about the distribution of the consumption decline across household types, but some of our results suggest that low-income households may be differentially af- fected. However, further analysis is required before any statments can be conclusively made about the distributional effects of climate.
From a modeling perspective, we verified that climate change may lead to significant intersectoral flows of resources, which can only be adequately assessed with a general equilibrium framework. Yet, even state-of-the-art general equilibrium macroeconomic models are limited for climate change analyses because they do not contain important inputs that are directly sensitive to climate change.
Finally, our focus has been on the magnitude of climate impacts that have market manifestations (see Table 8). However, considerable work still needs to be done to investigate the potential non-market impacts of climate change. The non-market impacts of climate change may be significant, and are of considerable concern t o decision makers concerned with the formula- tion of efficient and efficacious climate change policy.
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