Date created: 7/11/04
Last modified:7/11/04
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John Quiggin

Doubters warm to detail

Australian Financial Review

12 August 2004

One of the difficulties of the modern world is that important public policy decisions turn on technical issues that are difficult, if not impossible for the lay person to understand.

Before we make decisions about policies to mitigate global warming, for example, it is necessary to have a reasonable basis for concluding that temperatures are rising, that this change is due to human activity, and that the continuation of this trend will be harmful to the environment and the economy.

Every aspect of this analysis raised complex problems. For example, the assessment of temperature trends in the lower troposphere involves complex statistical estimates of the behavior of weather satellites, including their orbital decays and diurnal cycles.

In the end there is little alternative but to rely on the consensus of expert opinion. All qualified climate scientists agree that the global climate is warming to some extent, and nearly all agree that human activity is at least partially responsible. Even a relative sceptic like John Christy, who has argued for a conservative interpretation of satellite data, on which he is one of the leading experts, has said he “is convinced that human activities are the major cause of the global warming that has been measured”

As with everything else related to climate change, the economic issues have been the subject of vigorous debate. The starting point is the modelling exercises undertaken for the International Panel on Climate Change. These exercises were designed to provide projections of carbon dioxide emissions and tailored for an audience of natural scientists. The result, from the viewpoint of an economist, was not a thing of beauty.

The modelling was based on aggregate-level ‘scenarios’ in which the main parameters were growth in output and the energy-intensity of economic activity. There was no detailed analysis of equilibrium outcomes as in a standard economic modelling framework. Nevertheless, the range of results seemed plausible enough.

The most prominent challenge to the IPCC results has been put forward on purely technical grounds. Ian Castles and David Henderson have criticized the IPCC modellers for using market exchange rates (MER) to convert national GDP numbers into common values (US dollars).

As Castles and Henderson note, because nontraded goods are cheaper in poor countries, comparisons based on exchange rates tend to understate living standards in poor countries and overstate them in rich countries. The gap between the two is overestimated. For this reason, comparisons of living standards are normally undertaken using measured based on estimates of Purchasing Power Parity (PPP).

But this shouldn’t make any difference in an aggregate exercise like that undertaken by the IPCC, where the crucial issue is the rate of growth of energy consumption. In such an exercise, the use of different income measures, implies a different relationship between income and energy consumption and these differences cancel out. In the end, if poor countries catch up with rich ones, their energy consumption will also catch up, and this is true however income is measured. The IPCC models allow for partial convergence over the next century.

The validity of this point seems to have been generally accepted. However, the choice of income measure may make a difference in more disaggregated economic models. The first study of this question was undertaken by Alan Manne and Richard Richels for the Brookings Institution. They concluded that the choice of income measure made only a minor difference.

More recently, a team led by Warwick McKibbin of ANU and Brookings has examined the same question, coming up with larger numbers. This result has been presented as validating the Castles-Henderson critique. However, such a claim fails for two reasons.

First, though larger than that estimated by Manne and Richels, the divergence in emissions found by McKibbin only amounts to a difference of 20 per cent by 2050. This divergence is much smaller than the range of variation among the IPCC scenarios. It is also smaller than the margin of error for economic projections of any kind going out to 2050.

Second the pattern of divergence is inconsistent with the Castles-Henderson critique. This critique implies that use of MER income measures should overstate emissions growth in poor countries and understate it (or perhaps have no effect) in rich countries. In McKibbin’s model, the MER estimates are higher for both groups.

Many people wish that the whole problem of climate change would magically vanish, and some have seized on the Castles-Henderson critique to bolster their faith. They will have to look elsewhere.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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