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New report finds costs of climate change impacts often underestimated

Posted on 20 November 2019 by dana1981

This is a re-post from 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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Comments 1 to 8:

  1. Regarding economic analysis getting it wrong because of: "...questionable assumptions about continued economic growth, and from an inability to account for non-monetized values."

    The reason that the economic models are failing to get it right is most likely because the powerful people with unsustainable developed perceptions of status have the ability to powerfully fight against 'the understanding of sustainability' becoming the expanded awareness and improved understanding of economics.

    Given that humanity should expect to be able to inhabit this amazing planet for about 1 billion more years, with some naturally occurring challenges through that time, it is easy to understand that unsustainable human activity cannot be continued.

    And given that a sustainable and improvable future for humans will require a robust diversity of humans to be fitting into a robust diversity of life, it is understandable that any actions compromising the robust diversity of life cannot be priced. The robust diversity of life is Invaluable.

    Continued economic growth can then be understood to only be possible through the continuation of Truly Sustainable Economic Activity and the replacement of developed activity that is unsustainable with Truly Sustainable Economic Activity.

    Sustainable Growth is understandably only achieved through effective governing of human activity to ensure that the focus is on developing Improved Sustainable Economic Activity.

    The current system of allowing unsustainable activities to compete for popularity and profitability then, understandably, has no future. Unsustainable actions are almost guaranteed to be Cheaper, Quicker, and Easier. So a system that allows those types of activities to compete will almost certainly be a declining cycle of unsustainable activity especially if misleading marketing is allowed. And it can be understood that in addition to developing unsustainable activities, such a fatally flawed system will develop powerful resistance to the correction of those activities because of the desires of people to maintain developed perceptions of status and prosperity.

    One of the most insidious aspects of the current reality is that developed perceptions of reduction of poverty are potentially unsustainable. That will be especially true if undeserving Winners get to keep their undeserved Winnings as the unsustainable reality becomes more obvious, harder to ignore or dismiss. And the slower the corrections are today, the more challenging it will be for the required corrections of economic activity to be built out of the crumbling ruins of a massively unsustainable developed global economy and its resulting increased negative future impacts.

    The solution is the achievement and improvement of the Sustainable Development Goals, all of them, the sooner the better, especially (but not exclusively) the Climate Action Goals. Admittedly that may require many current day Winners to become Losers. But many of them will remain the wealthiest after their deserved loses, if they sustainably deserve it.

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  2. Economists like Nordhaus obviously do some useful work, but they make themselves look stupid with their work on climate change. I'm not an economist, but I had most of these problems with the typical economic models figured out years ago, and have mentioned most of them on this website, as do others like OPOF.

    It's not that hard, so it makes me wonder what head space economists are in, and whether their personal interests and investments, and their obession with economic growth has introduced a bias into their work. For example its patently obvious that a warmer world must degrade economic growth because the problems climate change introduce outweigh the benefits and economic growth is a function of many things including the climate.

    Apart fom that, economists who think 3% economic growth can continue forever are deluded because this growth is based on mineral reserves that are being depleted fast to the point where extraction costs will become more expensive longer term, and theres no way of changing that. To think otherwise is magical thinking.

    Rates of economic growth has been on a declining trend in developed countries ever since the 1970's to 2019, despite massive attempts to boost this with tax cuts and money printing, and so its absurd to think we can boost these rates or maintain them indefinitely. All signs are that this downward trajectory will continue in developed countries. No doubt growth will continue or might increase a bit medium term in developing countries, but growth  will follow the downward trajectory of wealthy countries eventually. Economists need to get real.

    Economists need some proper worst case scenario models, and fast.

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  3. The discount rate its use for the climate problem needs considerable scepticism. A high discount rate assumes most of the problem can be solved easily enough with adaptation, which is a very high risk premise  A low discount rate makes more sense. 

    The purpose of the discount rate appears to be to put an ideal price on carbon when what we should be doing is putting 'a' price on carbon that the market can bear, so a moderate price, and then ramping this up as quickly as we can to reduce use of fossil fuels to zero, commensurate without causing massive inflation within the economy. There is no acceptable level of continued fossil fuel use.

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  4. On the other hand, climate change could provide a huge economic stumulus.  A bit like an arms manufacturer.  They have to have someone expending ammo and the faster the better.  Then they keep raking in profits.  Imagine the stimulus of all the buildings on Manhatten Island being flooded and rendered useless.  You have to tear them down, rebuild them somewhere else, turn the island into a park.  Jobs created without end and velocity in the economy accelerated (speed with which money circulates)

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  5. William is right mitigating climate change could be a huge economic stimulus, but I would say in the short to medium term while infrastructure is being built at a heightened pace. In the longer term climate change will degrade gdp growth or at least what growth could be achieved.

    But remember a climate related infrastructure programme will tend to borrow resources form other parts of the economy, so its a little bit of a zero sum game, but not entirely - because a big infrastructure build will promote innovation, new mineral discoveries, and some greater efficiencies. This would certainly add up and increase total economic output and it would help profitability and employment.

    A good analogy is the wartime economy during WW2 where gdp growth and productivity growth improved, and unemployment fell dramatically, although some of this was bounce back from the economic depression of the 1930's. All easily googled.

    But the other interesting thing is inflation and interest rates are is quite low right now, and there is a surplus of global capital, so its an ideal time for enhanced infrastructure building. Many media articles have discussed this in relation to the general economy.

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  6. Actions to 'adapt to climate change' will distract Leadership from, and direct wealth and effort away from, acting to sustainably improve the lives of the less fortunate.

    And failing to limit the climate change impacts, by failing to rapidly end the use of fossil fuels, makes it harder to maintain any developed perceptions of reduced poverty that have been developed to date. And since fossil fuels are non-renewable, any perceptions of reduced poverty 'because of fossil fuel use' will not be sustainable.

    And how does humanity 'build an adaptation' to climate impact losses of robust diversity of life in the Seas, Lakes, Rivers, or on Land?

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  7. The only sustainable economic benefit is the new sustainable economic activity that has to be developed consistent with achieving and improving on the Sustainable Development Goals.

    And the more rapidly the corrections of economic activity are developed the better it will be for everyone, except the people who want to continue to get away with harmfully benefiting from fossil fuel use.

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  8. In my comment @7 I obviously failed to include all the other harmful unsustainable economic activities that need to be corrected to achieve and improve on the SDGs. Rapidly ending fossil fuel use is a keystone action, action that makes it easier to achieve and improve on the other SDGs.

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