Market Exchange Rates or Purchasing Power Parity: Does the Choice Make a Difference to the Climate Debate?

In the year 2000, the Intergovernmental Program on Climate Change (IPCC) published its Special Report on Emission Scenarios (SRES). The scenarios were defined by alternative assumptions concerning the demographic, economic, and technological driving forces, which, in large part, determine greenhouse gas (GHG) and sulfur emissions. The full set of scenarios produced a higher range of global mean temperature change over the 21st century than were contained in previous IPCC assessments. Recently, the validity of the SRES Scenarios has been questioned. Critics have expressed concern about the way that economic indicators, such as gross domestic product (GDP), are converted from domestic currencies into a common currency such as dollars. In short, they charge that the use of market exchange rates (MER), rather than purchasing power parity (PPP), has led to an upward bias in emission projections. This, in turn, has resulted in unrealistically high temperature projections. In this note, we estimate the differences in key climate-related variables that might result from choosing one approach over the other. Whereas the use of PPP for dealing with the volatility of exchange rates has been the subject of debate among economists and others for some time, we find that the choice of conversion factor makes only a small difference when projecting future temperature change.