The economic geography of global warming

By Jose Cruz Alvarez and Esteban Rossi-Hansberg:

Our baseline results show welfare losses as large as 15% in parts of Africa and Latin America but also high heterogeneity across locations, with northern regions in Siberia, Canada, and Alaska experiencing gains. Our results indicate large uncertainty about average welfare effects and point to migration and, to a lesser extent, innovation as important adaptation mechanisms.

A few points:

1. Average global welfare loss is about six percent.  The discount rate is 0.9%, and yes those are welfare losses.  Losses as a percent of gdp are somewhat lower, because amenity costs are a factor with global warming.

2. About half of the global losses stem from the negative effects on productivity.  For Africa, amenities losses are especially important.  Overall the biggest losers are Central America, India, Brazil, and Africa.  Many colder regions are better off.

3. The model allows for many margins of adjustment, including migration.  Cheaper/freer migration is a good way of limiting the costs from global warming.

4. Subsidies to green energy don’t help very much, because of Jevons-like effects, namely that energy becomes cheaper and total energy use rises.

5. A carbon tax postpones fossil fuel use but in the long run it doesn’t help much, unless the delay in fossil fuel extraction is used to buy effective abatement measures.

Of course the assumptions in such papers always can be challenged, but this is one case where the authors think like economists throughout the entire exercise.  It seems to be one of the best such studies.

My net conclusion (not theirs) is that the paper shows why serious action has been so slow in coming.  The world as a whole might lose about two years worth of economic growth, with most of the losses concentrated in countries that are not calling the shots.  Let’s say a poor country loses fifteen percent of welfare and about ten percent of gdp.  Isn’t that somewhat similar to many of the losses caused by the current pandemic?  Circa early 2021, how many vaccines are we sending to those places?

I do fully agree that we should be more cosmopolitan, but first to fix the malady we must understand it.

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