New Report Finds Costs of Climate Change Impacts Often Underestimated

Yves here. Steve Keen provided a ferocious debunking of William Nordhaus’ remarkable claims on how modest the cost of climate change would be. This post is a more polite rendering of some of the arguments Keen made.

By Dana Nuccitelli. Originally published at Yale Climate Connections

Climate economics researchers have often underestimated – sometimes badly underestimated – the costs of damages resulting from climate change. Those underestimates occur particularly in scenarios where Earth’s temperature warms beyond the Paris climate target of 1.5 to 2 degrees C (2.7 to 3.6 degrees F).

That’s the conclusion of a new report written by a team of climate and Earth scientists and economists from the Earth Institute at Columbia University, the Potsdam Institute for Climate Impact Research, and the Grantham Research Institute on Climate Change and the Environment. It’s a conclusion consistent with the findings of numerous recent climate economics studies.

Once temperatures warm beyond those Paris targets, the risks of triggering unprecedented climate damages grow. However, because the rate and magnitude of climate change has entered uncharted territory in human history, the temperature thresholds and severity of future climate impacts remain highly uncertain, and thus difficult to capture in climate economics models. Put simply, it’s difficult to project the economic impacts resulting from circumstances which are themselves unprecedented.

For example, if the science community does not know the temperature at which various “tipping points” might occur – things like accelerated ice sheet collapse or large carbon releases from the warming oceans or melting permafrost – then economics models will exclude the associated impacts (rapid sea-level rise or accelerated climate change).

Additionally, climate change economic cost estimates have traditionally suffered from questionable assumptions about continued economic growth, and from an inability to account for non-monetized values.

The challenges of unprecedented climate change

Research has shown that humans are warming the climate at a rate 20 to 50 times faster than some of Earth’s fastest natural climate change events. Global temperatures may already be hotter than they have been during all of human civilization, and they continue to rise rapidly.

Continuing on this rapid warming path will create a “rising probability that major thresholds in the Earth’s climate system will be breached as global mean surface temperature rises, particularly if warming exceeds 2°C above the pre-industrial level,” according to the authors of the new study. Some of these thresholds include even more severe extreme weather events (e.g. drought, heat, floods, and hurricanes), destabilizing ice sheets and the resulting sea-level rise, destruction of biodiversity, and collapsing ecosystems.

Climate models incorporate these impacts as best as they can – some better than others – but as Earth’s climate enters a state unprecedented in human history, the range and severity of damages become increasingly difficult to accurately account for. Climate economics modelers like recent Nobel Laureate William Nordhaus incorporate these climate damages into their models through what’s called the “damage function.” However, as Nordhaus has noted, “estimates of damage functions are virtually non-existent for temperature increases above 3°C. … The damage function needs to be examined carefully or re-specified in cases of higher warming or catastrophic damages.”

For example, Nordhaus’ model suggests that global warming of 6 degrees C (about 11 degrees F) – which would have catastrophic impacts on society and ecosystems – would reduce global income by only 8.5 percent. A 2010 paper led by the late economist Frank Ackerman found that not until global warming reached 19 degrees C (34 degrees F – a global temperature that is virtually incompatible with life) did the model yield a 50% reduction in economic output.

Continued Economic Growth: How Reliable?

One problem is that these climate economic models tend to assume that the global economy will continue to grow reliably regardless of the magnitude of climate change. As climate historian Naomi Oreskes and British economist Nicholas Stern recently wrote in the New York Times, the models “approach climate damages as minor perturbations around an underlying path of economic growth, and take little account of the fundamental destruction that we might be facing because it is so outside humanity’s experience.” As Stern and economist Simon Dietz concluded in a 2015 paper, these models have “in‐built assumptions on growth, damage and risk, which together result in gross underassessment of the overall scale of the risks from unmanaged climate change.”

Numerous recent climate economics research papers have concluded that, as one might expect, continued climate change will indeed hamper economic growth. For example, that is the conclusion of
– a 2012 study led by Melissa Dell at MIT;
– a 2015 paper by Frances C. Moore and Delavane B. Diaz at Stanford;
– a 2015 study by Marshall Burke, Solomon M. Hsiang, and Edward Miguel at Stanford and Berkeley; and
– a 2018 working paper by economists at the Federal Reserve Bank of Richmond that focused on the American economy.

The 2015 study led by Burke found evidence of an optimal temperature for economic activity. Regions with average temperatures around 13 degrees C (55 degrees F, like the U.S., Japan, China, and much of Europe) have the strongest economies. As temperatures warm beyond that sweet spot, economic productivity weakens, which is especially problematic for poorer countries nearer to the equator that already have sub-optimally hot climates.

In short, economic models assuming that the global economy will continue to hum along with only relatively minor climate perturbation will inevitably underestimate the economic impacts of severe climate change. The economy has consistently grown in the past, but that doesn’t mean it must continue to grow rapidly in the future in the face of potentially extreme changes to the climate and widespread societal impacts.

Undervaluing Future Wellbeing and Non-Monetary Factors

Another complication lies in what economists call the “discount rate.” Simply put, because saved money accrues interest (because of historically reliable economic growth), it’s assumed to be worth more in the future than money spent today. However, it’s easy to see where this assumption can go wrong in a world with unprecedented climate change. Saving money today rather than spending it to curb global warming could lead to severe future impacts on the economy and society. As the new report puts it, “Inappropriate discounting by economists can lead to very significant future impacts … to be treated as if they are relatively trivial compared with current impacts.”

And finally, it’s easy to forget that not everything can be evaluated based on economic costs alone. As a recent Special Report by the Intergovernmental Panel on Climate Change noted, “Many impacts, such as loss of human lives, cultural heritage, and ecosystem services are difficult to value and monetize.” A powerful hurricane might have a relatively small economic impact, but the lost lives, homes, stability, and other intangibles can carry significant non-monetary value and create trauma and suffering. For example, one study found that nearly half of low-income parents impacted by Hurricane Katrina experienced post-traumatic stress disorder.

Unless it addresses these shortcomings, economic forecasting is likely to continue to underestimate the true costs of climate change. In 2013, Stanford’s Jonathan Koomey published a paper suggesting that instead of relying on economic cost-benefit analyses, climate policy should be shaped by “working forward toward a goal” like the Paris climate targets. In this framework, economics would be used for evaluating the most cost-effective policies to meet the targets, rather than for setting goals or arguing that all policies are too expensive so humans should instead just learn to adapt to the changing climate. A substantial amount of research has shown that approach of simple adaptation will be the costliest option of all.

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  1. Synoia

    One problem is that these climate economic models tend to assume

    There’s that word again. Assume.

    Research has shown that humans are warming the climate at a rate 20 to 50 times faster than some of Earth’s fastest natural climate change events.

    I predict not for long. The new temporary stable equilibrium will be established when enough humans stop warming the planet.

    Key word “enough.”

      1. Ignacio

        So, according to your excellent analysis the solution is… kill the termites!
        So simple! Please, come to Madrid next month and point this in the COP summit. They are not aware.

    1. Ignacio

      I think that you correctly identify the biggest flaw of our approach on ClCh. We assume to many things, and not only economists. We all tend to think that everything goes on as usual and will do in the future. As a collective we are reluctant to change things. The more accomodated we are, the more resistant. But it is not only economists. In this sense Nordhaus’ job, while addressing a disruptive problem, it is yet reassuring because it assumes that we are solidly resistant to whatever to come, we can cope with it and that makes us all enough happy to give him a prize he deserves for being so reassuring. Please, keep on dancing, everything is under control.

  2. GM

    If you are approaching the issue in monetary terms, you have already failed completely.

    This is not an economic problem, it is a biophysical one.

    And survival has no price

    1. diptherio

      What you said.

      “This planet has – or rather had – a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.” ~Douglas Adams, The Hitchhiker’s Guide to the Galaxy

    2. Math is Your Friend

      “This is not an economic problem, it is a biophysical one. ”

      It is a physical, ecological, biological, economic, industrial, scientific, political, sociological, psychological, mathematical, individual and military problem.

      Any ‘solution’ which ignores one of these is likely to fail. Any ‘solution’ that ignores several of these is pretty much guaranteed to fail.

  3. Susan the Other

    It is not even an argument that we will have to adapt. It goes without saying. Let’s all watch Venice over the coming year and see how they practice “simple” adaptation. It will be at great expense. And it’s probably baked in the strategy that as it gets more and more expensive, those “costs” will have to disappear into the nonsense in order not to demolish the security blanket of modern economics. Like reverse externalization. Koomey’s suggestion that it is most cost effective to work toward a goal (in anticipation) is just common sense. The great leveler might be that when all is lost everything looks like profit. As it should. Sometimes I think there is already a huge effort underway to meet the Paris goal and prepare for the worst. We are living in strange times. That we are given econo-speak irrelevant analysis in dribbles is just preparing us for the inevitable. But we should not get high-centered on the spin.

  4. Sol

    It’s bothersome that we’re all supposed to panic – but not in a noisy way, because we’re also supposed to carry on, go to work, while experts nibble at the edges.

    No thanks. Let’s go ahead and panic. ‘Unsustainable’ isn’t a word inclined to wait until the status quo finds it convenient. Adaptation is a human survival trait – let’s trot it out and get to work.

  5. Anon

    Let me mention that most coastal sewage treatment plants are near the ocean and near sea level. Any substantial rise in sea level is problematic. Treatment plants are complex, costly infrastructure. They are not easily relocated. Unless cities find new locations and begin construction soon, there is likely to be a period of “non-avalability” of sewage treatment. The disease implications are enormous. Most folks won’t know how to cope and cholera, hepatitus, and other disease causing elements are likely to decimate (or worse) some communities.

    The people who can flee these inundated communities will likely place new pressure on the capacity of other communities infrastructure. And soon everyone runs out of money to live in a style to which they are accustomed.

    1. Janie

      Re: anon’s last sentence, running out of money may not be the biggest problem; it’s the time lag. We are a few decades behind in preparing for even moderate climate change. Even if you can spend ten times the cost of the project, it won’t be ready in one-tenth the time.

      Too bad we can’t join Douglas Adams’s dolphins. When humans failed to understand their warnings, they left the planet, saying “So long and thanks for all the fish”.

  6. Math is Your Friend

    “climate policy should be shaped by “working forward toward a goal” like the Paris climate targets. In this framework, economics would be used for evaluating the most cost-effective policies to meet the targets, rather than for setting goals”

    In other words, start a deeply flawed analytical process by arbitrarily assuming key conclusions.

    This way lies madness, or at least extremely bad policies, maybe both.

  7. The Rev Kev

    A physicist, using the laws of thermodynamics projecting along current trends, worked out that in 400 years time the surface of the earth will be hot enough to boil water.
    An economist, using this projection, worked out that the economy will only be 10% of what it is currently. However, he also worked out that the world population will only be 5% of what it is presently.
    Thus the economist has then worked out that because of these two factors, people will be twice as better off economically than they are presently.

    1. Zamfir

      You mentioned that article about the boiling point before. I looked at it, I think it has some large flaws – are you interested in my remarks on it?

    2. xkeyscored

      Long before we reach 100 degrees, we’ll have been replaced by stuff like AI, bots, and self-designing robots that build their own auto-evolving offspring. These entities will produce whatever, and trade with each other. For example, 3-D printed wardrobes will signal their choices to sewbot factories which will notify drone farming equipment to grow cotton or fracking wells to produce their stuff …, and before long 5G-integrated robocleaners will remove the by now out of fashion items from the wardrobe and send them for recycling, while algorithms shuttle money around accordingly. You get the idea.
      No humans necessary, and GDP can grow forever. Why worry?

  8. Ignacio

    This is off topic but occuring while trying to read this entry. In the right lateral ad cage (a big one) there was an aggresive advertising by the Israel government directing to a report that is said to “expose the antisemitism of the BDS”. Aggresive because it has movement in black and white that distracts the attention from the post. In this sense it is well designed, too well designed, to attract the attention. This is the first time I see a purely politically motivated advertisement.


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