For this problem set, you will examine the economic consequences of...

For this problem set, you will examine the economic consequences of climate change on the Philippines. The Philippines is a less-developed country in Southeast Asia that is prone to being hit by hurricanes (or tropical cyclones as they are referred to more globally). Hurricanes cause an immense amount of damage and have long term consequences for growth and poverty reduction. Worse yet, climate change is predicted to increase the frequency of storms in this region. The purpose of this monetization exercise is to calculate the additional damage done to the Philippines by climate change.

To accomplish the calculations needed for this monetization, we’ll bring in sources from the scientific literature, as is the norm when doing the enumeration method. There are two papers that I will pull statistics and projections from, and both are available on Sakai. The first is Knutson et al. (2010) “Tropical Cyclones and Climate Change” and the second is Hsiang and Jina (2014) “The Causal Effect of Environmental Catastrophe on Long-Run Economic Growth: Evidence From 6,700 Cyclones”. Hsiang and Jina (2014) estimate two important facts: A hurricane with wind speed greater than 20 m/s occurs on average every 5 years (so has a 20% chance of occurring in any given year); a hurricane of this intensity permanently reduces GDP by 7.4%. Knutson et al. (2010) estimate that the frequency of hurricanes in this part of the world (West Pacific) will increase by 20% by 2100.

You are welcome to work with others on the assignment, but everyone must work on their own Excel sheet and turn in their own assignment. If you get stuck, F1 or the help icon will bring up Microsoft Office help, and of course there’s Google. I wrote this assignment using Microsoft Excel 2010. If you are using an earlier version, there could be slight differences in how you get things done, but everything can still be done. For this assignment, we will treat 2014 as the current year (just because that’s when Hsiang and Jina was published). Also, treat 2014 as the last year of baseline hurricane risk, beginning in year 2015 hurricane risk increases due to climate change, but not before then. This is likely incorrect because the climate has already begun changing, but it is a reasonable assumption, especially for the purposes of a problem set.

1.Set up an excel document with the first column being year, and have years span from 2014 to 2100. Next create a column titled ‘GDP w/out TC risk’. This will estimate what GDP would be under the counter factual that tropical cyclones (TC) never hit the Philippines. Assume that the annual growth rate of GDP is 3% and the GDP in 2014 is $272 billion. For the math, if something grows at 3%, then you multiply it by 1.03. So the GDP in year 2015 (without TC risk) is predicted to be 272*1.03. To make sure you have done this correctly, GDP should be predicted to be $3455.97 billion in year 2100 under this scenario.

2.Now create another column titled ‘GDP w/ baseline TC risk’. This column will predict what GDP would be under a scenario of standard TC risk, but without the additional risk of climate change. For every year after 2014, you will need to account for the possibility of a major TC event. (2014 has already happened, so there is no with or without TC riskdistinction, there is only realized GDP.) So there will now be two components to how GDP evolves: 1) a growth rate of 3% and 2) GDP loss based on the probability of a TC event. There is a 20% chance of 3% growth and a TC occurring causing a GDP loss of 7.4% and an 80% chance of 3% growth and no TC event occurring. So GDP (in billions) in year 2015 under this scenario would be .2*272*1.03*(1-.074)+.8*272*1.03=276.01. Importantly, GDP for subsequent years in this scenario will always reference the prior years’ GDP for this scenario, not the scenario of no TC risk. Under this scenario, what is GDP predicted to be in year 2100?

3.Now we want to create a third scenario under which the risk of a TC event occurring increases due to climate change. The first step will be to estimate how risk evolves between 2014 and 2100. Create a column titled ‘TC risk w/ CC’. In 2014, this risk is 0.2. By 2100, this risk is 20% larger, so 0.2*1.2=0.24. So the risk of a TC event goes up 4 percentage points over that time. In this column make risk go from 0.2 to 0.24 linearly, i.e., the risk goes up by the same amount each year. As a check, the risk in year 2057 should be 0.22. What is the slope of this line? Use a correct, complete sentence to communicate the slope.

4.Now using the column ‘TC risk w/ CC’, calculate the expected GDP for all years under the scenario of climate change occurring. You will use a similar formula to #2, but instead of the risk staying constant at 0.2, you use the value calculated in ‘TC risk w/ CC’, and the probability of no TC event occurring is no longer 0.8, but one minus the new risk. Also, GDP is again path dependent and relies on the prior year’s expected GDP under this scenario.

5.Create a graph showing GDP predictions for the years 2014-2100 for the three scenarios. The x-axis should be ‘Year’ and the y-axis ‘GDP (in $billions)’. Use ‘scatter with straight lines’ format. Give the graph a title and make it look nice.

6.Now create a second graph of how much GDP is lost in scenarios 2 and 3 relative to scenario 1. First create 2 columns that difference 1) predicted GDP of scenario 1 and scenario 2 (label this ‘Lost GDP due to baseline TC risk’) and 2) predicted GDP of scenario 1 and scenario 3 (label this ‘Lost GDP due to total TC risk’). Calculate the differences such that these numbers are positive. The graph should have the same axes labels as #5, and also use ‘scatter with straight lines’.

7.Scenario 1 is not realistic, so in many ways it doesn’t really make sense to compare what is expected to happen to that. Scenario 2 is the real counterfactual. Finally, create a column that is the difference in GDP between scenario 3 and scenario 2, label this ‘Lost GDP due to CC’. Calculate the difference such that the numbers are positive. Now create a graph (‘scatter with straight lines’, naturally) that shows how much GDP is lost over time due to climate change.

8.Finally, using a 1% discount rate, discount all future GDP losses to bring them back to 2014 levels. What is the total present value of lost GDP due to climate change induced hurricanes in the Philippines?