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Revenue Impacts

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Revenue impacts in an unmitigated climate change scenario appear to be significant. Climate change is projected to reduce economic output in the United States and across the globe. Reduced output in the United States means lost revenue for the Federal Government. The Intergovernmental Panel on Climate Change (IPCC)’s most recent midrange projection suggests that warming of four degrees Celsius over preindustrial levels will occur by 2100 if global emissions are allowed to continue unabated. Economists’ estimates of the economic damages (in terms of reduced consumption) from this level of warming, projected using integrated assessment models (IAMs) of the climate-economy system, range from 1 to 5 percent of global gross domestic product (GDP) each year by 2100 (Nordhaus, 2013). One of the most frequently cited economic models places the estimate of annual damages from warming of four degrees Celsius at about four percent of global GDP (Nordhaus, 2010, 2013). That same model suggests that levels of warming that might occur by mid-century would result in lower annual damages—for example, an increase in 2 degrees Celsius could cause annual damages equivalent to about 1 percent of global ​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.

Global Losses
1% 2% 3% 4% 5%
U.S. Share 10% $86 ($14) $171 ($28) $257 ($42) $343 ($56) $428 ($69)
15% $128 ($21) $257 ($42) $385 ($62) $514 ($83) $642 ($104)
20% $171 ($28) $343 ($56) $514 ($83) $685 ($111) $856 ($139)

Estimates are in billions of real dollars and (in parentheses) the equivalent dollar estimates in today’s economy in terms of percent of U.S. GDP.

1 ↑ The costs in this table are not predictions of the future; they are projections of costs that would be incurred by the Federal Government given a set of assumptions that form the scenarios modeled. See each assessment for more information.

Estimates represent snapshots of average annual expenditures due to climate change in the year(s) modeled for this assessment. Topline estimates are in billions of real dollars. Below the topline estimates (in parentheses) are equivalent dollar estimates in today’s economy in terms of percent of U.S. GDP. Adjustment factors vary due to differences in years modeled.

3 ↑ 3.03.13.23.3 The range between Lo and Hi estimates reflects only a portion of the uncertainty associated with cost estimates. See relevant sections of this report for more information.

Crop insurance expenditures were only modeled for the late-century time period (2080).

While the other three assessments compare an unmitigated climate change scenario to a scenario characterized by historical weather patterns, the air quality assessment compares an unmitigated climate change scenario to a mitigation policy scenario. As discussed in the assessment, mid-century estimates may capture less than half of the full cost increase due to unmitigated climate change, while late-century estimates likely capture the vast majority of the increase.

Several likely areas of fiscal risk related to climate change have not yet been quantified.

For example, according to NOAA, nearly 1 foot of sea level rise around New York City over the last century, largely due to climate change, led to greater coastal flooding in New York and the surrounding region from Superstorm Sandy than would have occurred a century ago (Rosenzweig, 2012). Superstorm Sandy prompted more than $49 billion in appropriations to help communities rebuild. Wildland fire suppression costs have also increased as fire seasons have grown longer and the size and severity of wildland fires have increased, in part due to climate change (USDA, 2015).

A 2013 study conducted for the Federal Emergency Management Agency (FEMA) found that by 2100 the number of NFIP policies would increase by 80–100 percent and the average loss cost per policy would increase by 50–90 percent largely due to climate change (AECOM, 2013). However, legislative changes to the program since this study was conducted may reduce the ultimate fiscal impact of these effects over time.

Climate Change: The Fiscal Risks Facing The Federal Government

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