CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENT
GDP—though there are many fewer estimates of climate damages for likely mid-century temperature increases (Nordhaus 2013).
A number of factors affect the magnitude and the known uncertainties of such estimates. For example, the estimates do not account for important factors that remain difficult to quantify in physical terms and are inherently difficult to monetize, such as biodiversity loss, ocean acidification, changes in weather related to changes in ocean circulation, increased severity of certain extreme events, tipping points associated with non-linear changes in the climate, and heightened political instability as a result of climate impacts. In addition, current models factor in economic damages over time but treat the rate of economic growth as if it is unaffected by climate change. A current debate in economics examines whether higher temperatures will decrease the rate of GDP growth in some countries (Dell et al. 2012, Burke and Emerick 2016, Heal and Park 2016). If that is the case, the estimates from IAMs discussed above could significantly understate the potential impact of climate change on global GDP over the long run. Additional research suggesting that economic productivity is nonlinear relative to temperature changes—that there are significant negative temperature threshold effects on productivity in affected sectors—also indicates that the IAM estimates of economic damages from climate change may be conservative (Burke et al. 2015).
The uncertainty of economic damage projections is compounded when attempting to estimate the associated potential for lost U.S. Federal revenue. The exercise relies on difficult assumptions about the U.S. share of global economic losses, the impact of economic losses on U.S. GDP, and Federal revenue as a share of U.S. GDP. For example, while economic losses are commonly expressed as a percent of global output, some portion of those losses occur in the form of non-market losses (e.g., premature mortality or biodiversity loss) that may not directly translate into lost GDP—or Federal revenue.
One simple approach to the first assumption—the U.S. share of global losses from climate change—is to assume that this share would be approximately equivalent to the U.S. share of global GDP (~22 percent of nominal global GDP in 2015). While the U.S. economy is growing faster than most other advanced economies, the U.S. share of global GDP is declining gradually over time, a trend expected to continue (IMF, 2016). In addition, although the United States has significant exposure to the physical impacts of climate change (Melillo et al., 2014), relative to many other strongly affected countries, high income and well-developed institutions (such as insurance markets, as well as public and private resources for emergency preparedness and disaster response) will help the United States to manage those impacts (Kellenberg and Mobarak, 2007). Both of these factors suggest that the U.S. share of climate change damages in mid- and late-century (expressed in terms of GDP) is likely to be lower than the current U.S. share of global GDP.
For illustrative purposes, the figure below shows outcomes for lost Federal revenue in late-century under a range of assumptions about global economic losses and the U.S. share of global losses, holding Federal revenue constant as a share of U.S. GDP and assuming all economic losses translate into lost GDP. At the commonly cited four percent global economic loss estimate at four degrees Celsius warming, lost Federal revenue ranges from roughly $340 to $690 billion per year depending on the portion of global losses that occur in the United States—equivalent to approximately $60-$110 billion per year in today’s economy. These estimates are the product of a simple extrapolation from leading economic loss projections and should be interpreted as indicative of the order of magnitude of potential lost revenue, rather than precise estimates.