Robert h4endelsohn
Yale School of Forestry and Environmental Studies 360 Prospect Street, New Haven, CT, USA
Abstract
This paper discusses a new systematic set of studies measuring the economic impacts of climate change on the USA. These studies develop new method- ologies that emphasize adaptation. Wit 11 fas t-moving sectors that adapt quickly, the methods focus on cross-sectional natural experiments t o mea- sure climate sensitivity. LVith capital-intensive sectors that adapt slowly, the methods focus on dynamic adjustments which take decades t o complete.
T h e set of studies also elllphasizes coinprehensive analyses of entire sectors.
Many components of sectors that were previously ignored are now included.
T h e result of including these new elements is that climate impacts on the market economy of the USA are likely t o be beneficial. Several nonmarket impacts have yet to be measured.
Although a great deal is now understood about the science of climate change, very little has yet been learned about the impacts of changing cli- mate. As scientists become more co~lviilced that anthropogenic emissiolls of greenhouse gases are disturbing the planet's climate, it is increasingly im- portant t o uilderstand what the consequences of this change may be. All the existing compreheilsive estimates of aggregate ecoilomic impacts are expert judgements (Nordhaus, 1991; Cline, 1992; Fankhauser, 1995; Tol, 1995).
These in turn are based largely on a single set of empirical studies for the USA (Smith and Tirpak, 1989), which did not estimate aggregate welfare effects.
This article reviews a new set of impact studies and empirical results for the USA. These new studies (Adams et al., 1996; Hurd et al., 1996;
Mendelsohn and Markowski, 1996; Mendelsohn et al., 1996; Morrison and Mendelsohn, 1996; Segerson and Dixon, 1996; Sohngen and Mendelsohn, 1996; Yohe et al., 1996) were coordiilated t o develop improved comprehen- sive measures of the impacts of global warming. For example, the studies examine the same climate scenarios (except timber) with the identical eco- ilomic assumptions. Consisteilt assumptioils were made about joint resources
such as la.nd, water, capital, and labor. The studies were also designed t o cover all impacted sectors and provide a more thorough analysis of each sec- tor. Two types of nonlllarket effects are also examined, outdoor recreation and nonmarket water impacts.
1. Methodology
The economic approaches employed in these parallel sector studies reflect several improven~ents in measuriilg climate sensitivity. All of these studies carefully capture adaptation. Each of the sector studies assesses the extent t o which economic actors could adapt t o climate change given current tech- nology. Farmers adjust crops in response t o changes in yields. Forest owners harvest vulnerable timber early and plant more in anticipation of new op- portunities. The owners of coastal structures make economically rational decisions about whether t o protect coastal structures from rising sea levels or gradually abandoil them over time. Homeowners and stores adjust energy needs for space conditioning as clilnate changes outside.
Several of the studies rely on natural climate experiments. Nature con- tains many examples where actors adapt t o different climates over the land- scape. By comparing behavior in one location with one climate t o that in another location with a different cliinate, we can see how people would adapt t o climate change in the long run. For example, by comparing the farming net revenue of town A (which experiences 25°C temperatures) with the net revenue of town B (wllicll experiences 30°C temperatures), one can see how a 5OC temperature increase may affect farming in town A. These are long- run comparisons that presume that people have adapted t o the local climate they experience. The models do not assume infinite foresight on the part of actors, but merely that they adapt to what they experience. The models do not assume new technology will save everyone. The models assume that people will use existing technology. but perhaps not techniques currently employed locally. For sectors that are l a o w n to adapt quickly, this long-run approach can provide accurate inlpact estimates.
Some sectors, notably coastal structures and timber, are characterized by large capital stocks that are difficult t o adjust over time. These sectors cannot immediately adjust froill one ecluilibrium t o another, because it can take decades t o change the capital stock. Because the period of adjustment can last for decades or, in the case of climate change, for centuries, it is important t o model these sectors dynamically. Comparing the equilibrium outcome today versus several centuries away provides little insight into what
will happen during the period of adjustinent. Because the period of adjust- ment is everything in these sectors, it is crucial t o capture it carefully. T h e dynamic model must explicitly treat how quickly climate changes and how quickly the sector can respond. The dynamic forestry and coastal models find t h a t these sectors are sensitive t o the rate of climate change, confirming the importance of using a dynamic approach.
T h e new studies are more comprehensive than earlier research. For example, the agriculture study extends previous analyses of grains t o include effects on livestock, fruits, and vegetables. Not only does this capture a larger fraction of the agricultural sector, but it explicitly includes farming acti\.ities that predominate in warmer environments. T h e energy analysis extends earlier research in electricity t o include all fuels. Because electricity is used primarily for cooling, extending the analysis t o all fuels provides a more balanced treatment of both heating and cooling. T h e recreation study extends earlier work on skiing t o include summer outdoor recreation activities. Although warining should shortell the winter season, it should also tend t o lengthen the summer season, when most outdoor recreation occurs. These changes alter the results. Whereas earlier research focused on measuring phenomena that were damaged by warming, the parts of these sectors t h a t they omitted often benefit from warming.
T h e set of new studies was carefully designed t o be consistent across sec- tors so t h a t the results could be aggregated into a single index. For example, each study explored the same temperature and precipitation scenarios. Ef- fects across studies could then be aggregated for each scenario. Care was taken t o make consistelit assuinptiolis across shared resources. For example, as temperature rises, agriculture t.urns t o Inore irrigation and so requires a bigger share of wa.ter consumption. The projected increase in irrigation in the agricultural sector model was included in the water sector model. As forests become more productive, the forestry nlodel projects t h a t forest land will increase slightly in some marginal agricultural areas. Care was taken to protect highly valued agricultural lands, which were needed in the farming sector. Similar economic assumptions were also used across scenarios, where possible. For example, each study assumed t h a t US gross national product would grow t o $20.8 trillion by 2060 and the US population would grow t o 294 million (Houghton e t cd., 1990).
T h e scenarios examined a broad range of climatological projections. Cli- mate scenarios were chosen across the range of plausible values suggested by the Intergovernmental Panel on Climate Change (IPCC; Houghton et al., 1990). Temperature increases of 1.5, 2.5, and 5.0°C were included, whereas
previous studies focused more closely in the ileighborhood of 4.5OC temper- ature increases. As forecasts of future cliillate challge have been moderated in recent years, these other impact studies have become obsolete. However, by providing a range of responses, these new studies can adapt t o many dif- ferent forecasts. For each temperature increase, precipitation was assumed t o increase by 0%, 7%, and 15%, for a total of nine climate scenarios. For most of the studies, temperature and precipitation changes were assumed t o be uniform across the continental USA and across seasons. With the timber study, the climate predictions come from global circulation models (GCMs) that predict regional and seasonal patterns of change.
Many climate scientists do not believe that a uniform temperature in- crease is likely. consequently, they argue for using GCM predictions instead.
However, recent analyses of multiple GCM runs indicated that the expected impact from using a large set of GCMs was identical t o using a uniform climate chailge illode1 for the USA (Williams et ul., 1996). The study also indicated that a large set of GC:hls produce a wide variance in predicted impacts. Consequently, we explored using GCMs for the agriculture, energy, and recreation studies. Both of the dyilamic studies (timber and sea level rise) also specified a path of climate chailge from current t o future condi- tions. Carbon dioxide was assulned t o increase t o 530 ppm [710 ppm in the timber study, whicll was determined by assumptions in the ecological modeling (VEMAP Pvlembers, 1996)], which is consisteilt with a doubling of all greenhouse gases from preiildustrial times. The coastal study tested the impacts from rising sea levels of 0.33, 0.66, and 1.0 meter by 2100.
2. Results
Table 1 summarizes the impacts predicted for a n economy in 2060 with a cli- mate sceilario of a 2.5OC temperature increase, a 7% precipitation increase, a carbon dioxide level of 530 ppmv, and a 33-cm sea level rise. This scenario reflects the IPCC's central estimates of temperature, precipitation, and at- mospheric carbon dioxide increases (Houghton et ul., 1990). There are two important policy conclusioils t o be drawn from the results in Table 1: ( I ) the effects that will occur will be small relative t o the size of the economy, and (2) the new models and methods predict that warming will result in a net benefit t o the economy, rather than the net loss suggested by previous research.
There are several explanations for the more optimistic results of the cur- rent study in comparisoil with previous work. The new, more comprehensive
Table 1. The econonlic iillpacts of clima.te change in 2060a
"Positive numbers represent benefits and 11egative numbers represent
damage. Estimates based on 530 ppinv of COz and uniform expected vegetable crops in a.griculture, hea,ting in energy, summer activities in recre- ation). T h e new studies do a illore complete job of including adaptation.
Adaptation increa.ses benefits a,ild reduces da,nlage. T h e sectors dependent on the ecosystem benefitted from carbon fertilization and were not seriously damaged by warming. Agroilomic studies suggest that carbon fertilization is likely t o offset some, if not all, of the damage from warming. Forest ecology models suggest t h a t the ilortheri~ expansion of productive south- ern pines more than offsets reductioi~s in productivity per hectare (VEMAP Members, 1996). Dynamic micro-a.nalyses of the coastal and timber sectors predict damage would be smaller than earlier static analyses. Finally, es-
however, will take many deca.des. The 1990 economy will have transformed to the 2060 economy (or a. la,ter economy) by the time a 2.5OC temperature change materializes. Because some sectors grow and others do not, the impacts in 2060 could be quite different than those in 1990. Furthermore, the plausibility that the economy will have adjusted in 2060 t o a small climate change is far more credible than if the change were t o occur spontaneously.
T h e warming scenario benefits the US market economy by about $37 billion. The farming, timber, and commercial energy sectors all benefit from warming. In contrast, the coastal structures, residential energy, and water sectors are all damaged. The largest effect by far occurs with respect t o farming, which enjoys a vast increase in supply from carbon fertilization.
Overall, however, the effect is small compared with the projected US econ- only in 2060. The total benefit from warming t o the economy is only 0.2%
of the economy.
Warming has different effects on the two studied nonmarket sectors:
water quality and outdoor recreation. Water quality is harmed by warming because of predicted reductions in mean runoff. Recreation largely bene- fits from warming because of the rela.tively large increases in fishing and boating benefits associated with prolonged summer seasons. These two sec- tors largely offset each other. Little call be concluded about the effect of warming on quality of life from these water and recreation analyses, because several other important llonlnarket inlpacts (health, species loss, and human amenities) have yet t o be q~a~ntified.
T h e results reported in Table 1 are conditional on the selected climate and economic scenario tested. Alterna.tive climate scenarios and economic projections lead t o a wide range of impacts. With more severe climate scenarios, damage increases and benefits shrink. The slower the economic growth, the smaller the impa.ct. All the climate sensitivity estimates are empirical and thus uncertain. Policy responses by the government call inhibit efficient responses, which would increase damage. New technologies may be better able t o adapt t o changing conditions, which would decrease damage and increase benefits. The impact of climate change on other countries may be different from the effects on the USA. Foreign impact can affect US welfare through trade. If other countries increase their productivity, prices could fall, resulting in gains for domestic consumers and losses for domestic producers. If other countries have lower productivity because of warming, prices would rise, which would hurt doinestic consumers and help domestic producers.
T h e improvemeilts described a,bove in the economic modeling of climate change impacts suggest that inodest warming would result in small but ben- eficial impacts t o the American economy. These results are more optimistic than previous analyses and should be incorporated into ongoing efforts t o determine the optimal policy respoilse t o greenhouse warming. T h e results strongly suggest t h a t aggregate market impacts in the USA are not a moti- vating factor for near-term action t o reduce emissions of greenhouse gases.
These market studies, however, do not address all potential impacts from climate change, including some potentially large impacts from human health, species loss, and aesthetic changes. T h e optimal response t o greenhouse warming will depend on the magnitude of these effects, as well. T h e study also does not address the climate sensitivity of t h e economies of other coun- tries, especially developing countries. Given the worldwide consequences of greenhouse gases, it is importailt t o measure impacts beyond US bound- aries. Many of the methods demonstrated in this US study, particularly t h e less data-intensive "natural experiments," could be applied directly in other developed countries and, with careful adjustment, t o developing countries.
This research was funded by the Electric Power Research Institute and the US Department of Energy. We thank Jim Neumann, Tom Wilson, A. Myrick Freeman 111, John Houghton, William Nordhaus, Roger Sedjo, Joel Smith, and Robert Unsworth for their comments.
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