Any economists out there?

The other day I was flicking idly through the channels on the telly when I chanced upon BBC Parliament, which was showing recorded coverage of Adair Turner's evidence to the Environment Food and Rural Affairs Committee. This is not something any self-respecting citizen should be watching, of course, but  it represented a welcome respite from the children.

During his evidence, Lord Turner said something which appeared to my untutored ear to be a load of old codswallop. He seemed to be saying that the Stern review had stated that reducing carbon emissions by 60 - 80 % would only reduce GDP by 2.5% - ie a one-off hit of 2.5%. On the face of it, this is highly implausible, but it none of the MPs picked him up on it. I made a note to look into it when I got the chance.

I've now located the transcript. While it's uncorrected, what I read there is pretty much as I recall from the television. This is what he said:

I think there is a very compelling case which is set out in Lord Stern's report and other reports that the developed, rich economies, and ultimately the whole world, can run on a fraction of the carbon emissions that they have at the moment. They can reduce it by 60 or 80 per cent from present per capita levels in, for instance, Europe, and the estimates that he produced are that the cost of that might be between minus 0.5 per cent, ie you do a set of things and we are actually better off at the end of the day, through to plus 2.5 per cent, ie we do all these things and the GDP in 2050 and ever thereafter is 2.5 per cent below what it would otherwise be but, as I made the point earlier, that simply means that you have slipped by a year the rate of increase.

[Emphasis mine] Can this possibly be right? Doesn't he mean that the rate of growth in GDP will be 2.5% less than it would have been otherwise?

Here is an excerpt from the conclusions of the Stern Review:

This is a major challenge, but sustained long-term action can achieve it at costs that are low in comparison to the risks of inaction. Central estimates of the annual costs of achieving stabilisation between 500 and 550ppm CO2e are around 1% of global GDP, if we start to take strong action now.

[Again, emphasis added]. This looks pretty damning to me, but I'd prefer a trained economist to confirm that I'm understanding this correctly.

Mind you, Lord Turner is a trained economist too (as he states elsewhere in his evidence). If he has got it wrong, I'm not sure what excuses might be available to him.

Comments

[Kit]

Don't make me read Stern again!

[Frederick Davies]

This should be a simple compound interest calculation:

Let's say your GDP is 100 in 2010, and your annual GDP growth is 2% (very close to the actual average GDP growth over the whole XX century). In 2050 (40 years), your expected GDP should be 220.8; that is a 40-year-period growth of 120.8%.

Let's say that we do a Stern and your annual GDP growth is reduced by 1% of GDP, that is, it is reduced to 1% annual growth for 40 years; your expected GDP in 2050 is now 148.89. That means your 40-year-period growth is 48.89%.

Such is the power of compound interest... and Lord Turner needs a better calculator!

[Tim Worstall]

No, Turner's quoting Stern accurately. A one off hit of 1%, not lower growth by 1% p.a.

However, Stern is the one in error: various highly dodgy assumptions are made to get to that figure.
William Nordhaus has called Stern "absolutely crazy".

[Bishop Hill]

Tim

But the quote I've referred to above talks about 1% annual cost.

[CountingCats]

I was going to suggest ask Tim Worstall, but I guess I am a bit late.

[Frederick Davies]

The 2007 UK GDP is around 2,700,000 million dollars; 1% of that is 27,000 million dollars (27 billion dollars). The UK has probably spent that much already in wind farms and the like!