"Shadow Price" of Each Person's Lifetime Economic Cost to Society Takes into Account Global Warming, Other Factors
When figuring the cost of raising a child to adulthood, most parents think in terms of ballet slippers, baseball gloves, and college tuition. Two Yale economists have taken the concept a step further by figuring the lifetime cost to society of each person in terms of impact on living standards and the environment. Costs are substantial, ranging from more than $100,000 per person in high-income countries to about $2,500 per person in the lowest-income countries.
“There is a deep dispute about the impact of population growth on future living standards,” said William D. Nordhaus, economics professor at Yale University, a leader in attempts to estimate the future economic impacts of global warming. “We calculate three ways an extra person affects the economy – he or she consumes natural resources, requires a share of capital resources such as buildings and computers, and generates carbon emissions that contribute to global warming. These are societal costs beyond what a parent pays to raise a child.”
Using variants of two economic models he developed to analyze global warming costs, Nordhaus estimates the “shadow price” of a person – the economic cost that an additional person and his or her descendants impose on society. “For countries at all income levels, the annuitized shadow price of a person comes out to about 30 percent of per capita Gross Domestic Product,” said Nordhaus, who developed the index with Yale graduate student Joseph Boyer.
Nordhaus reported his findings on Feb. 15 at the annual meeting of the American Association for the Advancement of Science in Philadelphia in a talk titled “What are the External Costs of More Rapid Population Growth? Theoretical Issues and Empirical Estimates.”
The Yale economic model, which is the first to include global warming in estimating costs of population growth, is relevant to policy debates about such issues as family planning assistance for developing countries and the child tax credit. “Before the model is used to influence policy or to make value judgments, however, more research needs to be done on ways to estimate these costs,” Nordhaus cautioned.
Surprisingly, most of the external costs in the shadow price come from conventional considerations of capital and land use. Estimates of climate change costs are relatively small, Nordhaus said. Moreover, of the overall external costs, only 1 to 4 percent constitute genuine costs that transcend national boundaries and can be considered shared global expenses. Global warming falls into that category, he explained.
To estimate the external costs of a larger population, the Yale scientists used computerized, dynamic, general equilibrium models of the economy and climate changes. These models come in both an aggregate version (the “DICE” model) and a regional model (the “RICE” model), Nordhaus said.
The DICE model (Dynamic Integrated model of Climate and the Economy) is a globally aggregated model of the world economy that integrates economic activity with the consequences of greenhouse-gas emissions and climate change. The RICE model (Regional Integrated model of Climate and the Economy) is a version of the DICE model that looks individually at 13 different countries or major regions of the world.
The DICE and RICE models integrate the climate-related sectors with the economic model. The environmental sectors contain a number of geophysical relationships that link together the different forces affecting climate change and greenhouse-gas emissions. “The impacts of climate change are estimated from a number of different studies, but it must be recognized that this is the most uncertain part of the model,” Nordhaus said.