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November 09, 2005

The Cost of Kyoto.

Via Clive Davis and the BBC an interesting report on the costs to the UK economy of meeting the Kyoto targets.

The economy will suffer from a loss of output as real GDP shrinks 1.1% (22 billion Euros) below base case levels during the 2008-12 budget period. In 2025, real GDP could be 1.2% or 2.5% (34 billion to 72 billion Euros) below the baseline level depending on whether Case 1 or Case 2 has to be achieved.

Just to take the lowest case there. 34 billion euros off the economy in 2025. That is, of course, an annual figure (growth once lost stays lost). Multiply by 75 to get the cost to the end of the century. 2.5 trillion euros.

Just to give you some idea of the size of that. 2.5 trillion euros is larger than the entire economy at present. Much larger in fact. So the deal on offer is that our grandchildren give up the entire production of this country at present in order to delay adaptation by 6 years.

Wow! what a deal! Where do I sign up?

Net effect of Kyoto? Postponing the warming likely by 6 years.

Right. So this is a good deal, yes? Postponing the cost of adaptation to the coming temperature rise by 6 years is worth 2.5 trillion euros to the UK economy alone? 

November 9, 2005 in Climate Change | Permalink


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but in the words of St Bob, "we must do something, even if it doesn't work"

Posted by: Mark Tm | Nov 9, 2005 11:45:27 AM


I suggest a closer reading with a critical cap on.

They (the international council for capital formation - a highly renowned think tank - not) estimate a total reduction needed relative to baseline in 2010 of 62 million tonnes of CO2. Let us assume to begin with that all this is achieved by buying permits internationally. At an international permit price of €39 euros (the figure they put in the report) - the maximum net cost to the UK economy could be 39 * 62 million = € 2.5 billion pa.In reality, because some domestic actions would be cheaper than buying permits internationally (again - their assumption) the net cost should be lower. So - less than € 2.5 billion per annum. Which is significantly less than 1% of GDP I think.

So - I'm not entirely sure where they get figures for a loss of GDP of more than 1% from in 2010. They simply seem to assume them in the report. But I suspect the sleight of hand is as follows : what they have done is take the overall estimated size of the market for permits in 2010 (more than 20 billion) and use this as a gross estimate of by how much prices would rise across the economy and thus, by inference, real GDP to fall. The problem is, of course, is that it is simply not correct in accouting terms. Because the permit market has both buyers and sellers - you can't just count the costs to buyers in your analysis. That's cheating. You have to net off the gains to the sellers.

In other words - sub standard analysis. I'm not saying of course that Kyoto is the bee's knees. But this report seems not to be worth the paper it is written on.

Posted by: rjw | Nov 9, 2005 11:48:28 AM