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Biting Commentary about Infinity, and Beyond!

« No Giggle Factor In Asia | Main | What's Good About Atheism »

The One Percent Solution

Arnold Kling has an interesting alternative to the preferred solution of many European bureaucrats (deindustrialization) to global warming, and it's one that would warm the hearts of space enthusiasts.

I think it would be a mistake to get the NSF involved, though. This is a job for engineers, not scientists. I'd work with the engineering societies (e.g., AIAA) instead. And I wouldn't let NASA anywhere near it.

Posted by Rand Simberg at November 02, 2006 05:23 AM
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The present value of $400B/year is between $2T and $4T. We could probably take everyone off Earth and move them to Mars for that! We could definately orbit a large mirror for that - which has the added advantage of helping us during the next ice age as well. (Of course to caculate the true present value of 1% GDP per year, you must account for excpeted GDP growth as well as a reasonable discount rate - so it would be more like $4T-$8T. If it grows much more, we may be talking some real money here...)

And, of course, there is the little fact that 1% of GDP now is actually worse than 20% of GDP 50 years from now. Economically, money has a discount rate - I will use 15%. This reflects that a bird in the hand is worth two in the bush, and is the way economists, businesses and governments make decisions. So the 2000 world GDP (in 1990 dollars) is $41T. The GDP in 1950 (in 1990 dollars) was $5.4T. So one can estimate that the world GDP in 2050 will be $320T. So we are talking about spending $400B a year (starting now) or spending $60T a year (starting in 2050). But in order to make a rational decision, you have to apply the discount rate of 15% to that $60T over 50 years - so that $60T has a present value of $0.84T, while the $400B per year version has a present value of $2.7B - so the lower cost solution is 20% of GDP, 50 years in the future.

So why is a European economist (who obviously knows all this) so concerned? Well, the EU does not have the US's economy (do primarily to listening to liberals, but we'll ignore that...), so they have to apply a lower discount rate to reflect the lower growth of their economy, say 10%. At a 10% discount rate, the 1% GDP version costs them $4T present value, while the 20% GDP version costs then $5.2T.

So Europe is rational for wanting to spend the money now. The US is rational for wanting to spend the money later (many people use a 20% discount rate for the US, by the way). Europe, however, is irrational in expecting the US to agree with them. For Europe to get the US to do something that is against US interests but in Europe's interests, a deal must be struck. And looking at the numbers, the US would lose about $1.9T present value, while Europe would gain $1T present value - so this deal would be a very hard sell (Europe can only reasonably give up $1T, whereas the US needs $1.9T to be made whole).

Of course, the response from Europe is to say that this debate is not about reason, it is about emotion - which has some validity to it, really.

Posted by David Summers at November 2, 2006 08:59 AM

Not only was Stern's study entirely misleading, but everyone is unreasonable about wanting to spend money to combat global warming:

http://taoist.wordpress.com/2006/11/02/lets-deal-with-real-measurable-solveable-problems-first/

Posted by taoist at November 2, 2006 10:06 AM

$400 billion/year...how many emissions-free nuke power plants will that buy?

Posted by Alan K. Henderson at November 3, 2006 03:39 AM

(That's *atmospheric* emissions - the solid "emissions" can be recycled into more nuke fuel.)

Posted by Alan K. Henderson at November 3, 2006 03:40 AM


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