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Climate Sanity and the necessity of Fully-Burdened Cost and Benefit Analysis

August 19th, 2012 · 13 Comments

Analysis should enable more informed decision-making. Regrettably, economic and fiscal analyses too often occur in a stove-piped fashion that provides only limited perspectives as to real costs and benefits. Energy and environmental analysis, in particular, suffer from this problem. This has been true from the individual household to business to national policy level discussions where, almost, the analytical constructs tend toward exaggerating the cost(s) of action while downplaying the benefits that would accrue from taking action. While there are both legitimate and interest-party driven reasons for this tendency, the inadequate general understanding has weakened support for more effective energy/environmental options and hampered efforts to achieve informed decision-making. We face a serious decision-making challenge: opponents exaggerate costs and proponents understate benefits.

Climate change is the poster child of this problem.

There is a simple truth:

  • Acting on climate mitigation is an investment …
  • An investment, which if done right, that will have huge economic benefits.

Acting on climate mitigation is just about the smartest investment society can make — even if we put aside the economic impacts from climate chaos (such as disrupted agricultural production and higher food prices).  The entire debate about climate change, when it is in financial terms, almost (and the exceptions are extremely rare) always reverberates about whether ‘the high cost in the near term is worth the uncertain longer term benefits … if those benefits exist’.  This is a wrong-headed and erroneous framing based on stove-piped thinking and analysis.  More robust analysis changes this equation and leads to a very different understanding of the benefit streams. Very simply: investing in climate mitigation will have huge economic benefits while reducing future risks.

If nothing else from this post, remember this:

Climate-mitigation is an investment that will have huge benefit streams.

Seriously examining the systems-of-systems implications from climate mitigation (increasing energy efficiency, reduced fossil fuel use (and reduced oil imports), reduced pollution, reduced carbon emissions, … ) would show that a wide array of economic benefits that would dwarf costs of taking action in the near, mid, and long term.

Climate Change as Poster Child

“Cost” is a core voiced objection against climate-mitigation investments. In essence, the argument is that climate mitigation will impose significant and immediate economic costs for an uncertain, distant-in-the-future benefit. A dominant thread in the public debate around climate policy is that the shift away from carbon intensive fuels and efforts to reduce overall energy consumption will require sacrifices in the form of reduced standards of living and impose job-destroying costs on businesses. Related to this is the assertion that climate action will cripple the U.S. economic competitiveness in the face of developing country non-compliers (like China and India).

This story resonates with people’s basic intuition that “you can’t get something for nothing.” The intuitive response does have some basis in reality. As with any major economic shift, moving to a less carbon-intensive future will create winners and losers. Writ large, most established institutions are ‘conservative’ and prefer predictability over uncertainty. Becoming serious about climate mitigation will create disruptions and economic shifts as society transitions to a lower-carbon path.  Companies and industries that do not manage this transition well stand to lose considerably.  And, most people and institutions  prefer the known and comfortable status quo rather than change — uncertainty discomforts individuals and organizations.  Thus, inherently, opposition exists across the economy before even considering ‘special interests’.

To date, those industries profiting from fossil fuel dependency have been effective articulating and reinforcing the message that addressing climate change will create widespread economic costs. Study-after-study appears ‘proving’ that climate policy will result in massive unemployment and damage the economy for decades to come. Coupled with a message of uncertainty over the soundness of the science of climate change, this strategy has effectively undermined attempts to pass federal limits on greenhouse gas emissions.

At the same time, advocates for climate policy have unwittingly reinforced this message that climate policy must be costly. In the most recent campaign to pass climate legislation in Congress, following a Congressional Budget Office (CBO) analysis of the Waxman-Markey “American Clean Energy and Security (ACES) Act,” climate advocates gleefully announced that ACES would achieve its objectives ‘for the cost of a postage stamp a day’ per family. While clearly aimed at diffusing the notion that climate policy would be prohibitively costly, the message explicitly yielded the argument: climate action will “cost” Americans and the only argument is over how much.

‘Traditional’ analysis has essentially looked at required investment streams to achieve policy objectives, savings from reduced energy use, job destruction in fossil-fuel reliant industries, and employment implications from implementing clean-energy programs. Opponents of action deliberately exaggerate costs and understated benefits. Proponents seek more accurate discussions but end up understating benefits for a range of understandable challenges such as reliance on industry for cost-to-deploy/comply information (often exaggerated costs), uncertainty over how to assess future technological (and business process) developments (e.g, how much will wind turbines cost in 2025 and what impact will IT advances have on the economy and …), and outright difficult analytical challenges (such as evaluating second and third-order impacts).

The truth: substantial economic benefits will accrue from climate-mitigation investments.

A full-systems examination of the affects of increasing energy efficiency, reduced fossil fuel use, and reduced carbon emissions would likely show that the wide array of economic benefits would dwarf costs of taking action in the near, mid, and long term.

Most economic assessments of climate policy and clean energy investments have largely ignored significant benefit streams. Even the “McKinsey Study, ” which is perhaps the most widely cited study used to refute claims of high costs of climate policy explicitly overlooks major benefit streams:

The project … did not examine economy-wide effects … Did not attempt to address other societal benefits from abatement efforts, such as improved public health from reducing atmospheric pollution or improving national security. (pp. xvii-xviii)

While the McKinsey study is a seminal work in many ways, notable for laying out low-cost emissions abatement options, these few sentences put aside some of the most significant benefit streams from climate mitigation investments. To be clear, the McKinsey study is not unique as this caveat is present in one form or another in nearly every economic assessment of climate policy options.

Considering other benefit streams

In addition to traditionally analyzed arenas, taking proactive policy and business actions that reduce carbon and other greenhouse gas emissions can yield economic benefits in a number of largely discounted areas, including:

  • Health Care: The National Academies of Sciences estimated that burning fossil fuels costs the U.S. economy roughly $120 billion dollars annually primarily in health costs.
  • Systems-of-systems Interactions: Individual actions to reduce climate related emissions can interact in ways that together reduce emissions far more than simply the sum of the individual actions. For example, a cool roofs initiative to switch from asphalt to white roofs not only reduces air conditioning costs to participating buildings but also helps reduce the heat island effect, lowering overall ambient air temperatures and thus overall cooling demands which provides benefits beyond the impact of each ‘cool roof’ considered in isolation.
  • Business impacts: Rising mean temperatures will directly and indirectly impact business costs such as increased refrigeration costs for the food industry and reduced rail speeds due to track integrity issues during heat waves. (E.g., that cool roofing will have the benefit of reducing the risk of business disruption due to extreme temperatures in urban areas.)
  • Productivity: Analysis of ‘greening’ programs (schools, offices, and manufacturing facilities) show significant productivity impacts. As a rule of thumb, in the average office building, salaries are roughly 100 times energy costs per square foot. One study, that didn’t consider energy-savings benefits nor reduced maintenance costs nor improved rental income (e.g., which is explicit that they are not covering all the financial benefit streams from greening), showed a five-percent productivity bump across 100s of ‘green’ offices even as energy savings would add to the value from “greening”. The economic value of increased productivity dwarfs the energy savings that the projects were designed to achieve.
  • Environmental Services: Climate mitigation efforts to protect ecosystems such as wetlands and marshes provide economic benefits (such as reduced storm damages from flood events) even as climate mitigation reduces the likelihood of future disruptive weather events.
  • Economic Stability: Every major recession since 1970 has been preceded by a significant and rapid increase in global oil prices. Reducing dependence on oil (and on other volatile fossil fuel prices) reduces our economic vulnerability not only to the long term upward trend in oil prices but also, and perhaps more importantly, to volatility in global oil prices that have both helped cause and contributed to the severity of economic downturns.
  • Risk and Insurance: Climate mitigation investment represents, in part, insurance against very high impact even if lower probability climate chaos scenarios. Rather than simply examining scenarios that look to a few percent cost against global GDP at the end of the century, economic analysis should value in how making climate change investments provides some insurance against such ‘worst-case’ outcomes as the risk of massive (and sudden) climate disruption (massive climate chaos) leading to a near-extinction event for humanity.  (The question: what is the value of reducing the risk of civilization essentially disappearing?)

And, there are other arenas — avoided costs of disaster relief missions due to disrupted weather, avoided opportunity costs as societies and people spend resources (time, money, material goods) addressing mounting climate chaos rather than making other use of these resources, etc …

Huge Benefits vs Low Cost

So, we now know that the generally understood financial analysis of the “costs” of climate mitigation are wrong.  By exaggerating costs and understating benefits (whether maliciously, sloppily, or due to the huge complexity of the issues), nearly every ’serious’ analysis has skewed the equation toward understating the value of climate mitigation.  With all its problems (and there were many), the Waxman-Markey ACES bill would have had huge value streams that didn’t make it into the ‘general’ cost-benefit discussion.  Trying to assess these suggests that arenas excluded from analysis in 2009 might have amounted to over $1 trillion (or some $3,000 per capita) in benefit to the U.S. economy – annually – without even valuing the climate risk reduction insurance. Honest discussion and more serious understanding of the full benefit streams could shift the debate about climate mitigation investment streams from 2009’s ‘low’ versus ‘high’ cost to tomorrow’s discussion of industry hacks asserting ‘cost’ while rigorous analysis lay out ‘huge benefits”.

When it comes to climate mitigation investment, the reality is that our investments will have huge benefits.

And, understanding this could help shift the economic debate from “cost — high or low” to “fossil foolish advocates assert a low cost but analysis shows huge benefits”.

Ask yourself: would that frame help foster an environment more conducive to climate mitigation investments?

Related posts include

“externalities” are priced into analyses. Everything that does not get monetized essentially does get monetized, just at $0. Thus, what are some of the things that are monetized with a $0 value in the economic analysis of climate legislation? … Americans’ health … Value of beach front property …Agricultural productivity … Biodiversity …New Orleans and other American ports potentially threatened by rising seas and stronger storms …And, so on …

As they say, Lies, Damned Lies, and Statistics … Of course, we need to add a fourth category: Statistics Spouted by Global Warming Deniers.

Tags: Global Warming · analysis · climate change · environmental economics

13 responses so far ↓

  • 1 Slow Warming Trend (electricity bills: 44% higher than average since June 1) || Conservation Minnesota // Aug 20, 2012 at 3:23 am

    [...] too expensive for us to do anything about”. Here’s an excerpt from a recent post at getenergysmartnow.com: “…To date, those industries profiting from fossil fuel dependency have been effective [...]

  • 2 Florida Flood Potential (remembering Hurricane Andrew, nearly 20 years ago) // Aug 20, 2012 at 4:05 am

    [...] too expensive for us to do anything about”. Here’s an excerpt from a recent post at getenergysmartnow.com: “…To date, those industries profiting from fossil fuel dependency have been effective [...]

  • 3 Warming Trend (hurricane potential early next week for Florida?) || Conservation Minnesota // Aug 21, 2012 at 3:11 am

    [...] too expensive for us to do anything about”. Here’s an excerpt from a recent post at getenergysmartnow.com: “…To date, those industries profiting from fossil fuel dependency have been effective [...]

  • 4 100 / 100 / 100: Some hot renewable energy news … // Oct 25, 2012 at 7:52 am

    [...] carbon footprint might seem like tall leaps but these are necessary, achievable, and even profitable paths to take for individuals, companies, communities, nations, and the global economy. We should [...]

  • 5 Climate Mitigation Advocates Systematically Understate Case — yet another example … // Dec 4, 2012 at 6:16 am

    [...] Systematically, for numerous issues, those advocating for action to mitigate our headlong rush over the Catastrophic Climate Chaos Cliff understate the case. The scientific community, notably the International Panel for Climate Change (IPCC), is ‘conservative’ — taking a very measured (scientific, one might say) approach with use solely of already published peer-reviewed literature which makes the IPCC reports dated by years the moment they’re released. Advocates for action on environmental issues often overestimate the costs of action in part because it so difficult to assess the dynamic nature of technological, policy, and cultural response to mandates to reduce pollution. And, supporters for action typically understate the benefits from action due to, in part, the difficult analysis to assess systems-of-systems benefits. There are very understandable (even defendable) reasons for this, but (even though we can find the examples that break this rule) remember a systemic truth: Advocates for climate action are understating the costs of inaction, overstating the costs of action…. [...]

  • 6 s katz // Jan 20, 2013 at 10:46 am

    Adam, very well broken down into points that make clear why change is needed now.

    But each Federal agency has its own bailiwick and set of stats. Up to the Cabinet level you’ve got competing visions and goals that vary from Dept of Interior, Commerce, AG, Energy, HHS and Transportation. It’s not bad to have healthy competition within the government for advocacy, but within the Executive Branch it would be great to see a unifying focal point - and I just don’t see this as a priority in this present administration.

    As for the effects of climate change now, I see that we’re out of time to adopt critical changes to stop it, we’re already shifted in some Cabinet agencies to reactive mode .

  • 7 The President’s Climate Speech: Everyone will exaggerate costs, understate benefits // Jun 25, 2013 at 5:41 am

    [...] to the second, there are a myriad of reasons why people get the cost-benefit calculation wrong that range from outright deceit to cautiousness about the power of [...]

  • 8 Don’t worry, be happy: “5 Reasons Why 2013 Was The Best Year In Human History” // Dec 12, 2013 at 2:27 pm

    [...] the quite serious implications about unchecked climate change can mute understanding of the huge value streams to be gained from climate mitigation (and, as well, [...]

  • 9 Pres. Obama’s Truck Efficiency is a W6+ solution: Win-Win-Win-Win-Win-Win+ // Feb 18, 2014 at 12:34 pm

    [...] This sounds tremendous … however … as is the case far too often, the proponents of action are yet again understating the full value of action. [...]

  • 10 Steer-ing the climate conversation to sanity re economic analysis // Feb 21, 2014 at 10:18 am

    [...] climate change (an insurance value) as opposed to discussing the direct benefits from action. Analysis that doesn’t stove-pipe issues — that forthrightly seeks to tackle the ‘w… — e.g., a set of investments that will provide massive [...]

  • 11 The power of passive … // May 5, 2014 at 8:58 am

    [...] Brandon Shollenberger, Richard Tol and Wild Imaginations Note 2: The issue of economic analysis of climate change risks and costs along with the benefits and costs for mitigation/adaptation investments is a difficult arena, with great complexity.  Perhaps the most distressing element, however, is the systematic overestimation of costs and under assessments of benefit streams. [...]

  • 12 Reasons to apply a skeptical mindset to claims of disaster due to @EPA regulation … // Jun 2, 2014 at 9:25 am

    [...] simple truth, even proponents of action on environmental issues typically overstate costs and understate benefits for a number of understandable [...]

  • 13 When it comes to Climate: Inaction costs, Action benefits // Jun 24, 2014 at 7:04 am

    [...] Simply put, the economic analysis related to climate change issues used in public debates has systematically gotten things wrong.  The very nature of the analytical process fosters an exaggerated projection of costs and an understatement of benefits from climate mitigation and adaptation investments.  This fosters a discussion of the “costs” of action, rather than a more honest and meaningful discussion of the extent and nature of the “climate mitigation return on investment”.  Fully-burdened cost-benefit analysis would highlight the huge return to be secured from sensible cli…. [...]

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