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Climate Hustle

More global warming will be worse for the economy, says Copenhagen Consensus Center

Posted on 24 January 2014 by dana1981

The Copenhagen Consensus Center (oddly, located in Massachusetts) is a think tank headed by Bjorn Lomborg that advocates for what they consider "the best ways for governments and philanthropists to spend aid and development money." The group recently released a report that attempts to quantify the economic damage caused by various global problems, including climate change. Regarding climate change and its costs, the group states,

"Climate change is real and man-made ... After year 2070, global warming will become a net cost to the world, justifying cost-effective climate action."

The climate change section was written by Richard Tol, who is one among several economists who have developed what are known as "integrated assessment models," which combine climate and economic modeling to estimate the costs of climate change. The Copenhagen Consensus Center climate costs report focuses on the impacts to global gross domestic product (GDP), and the results from Tol's FUND model are illustrated in the figure below (averages are the black curves).

climate GDP costs

The global average, minimum and maximum total annual economic impact of climate change in the 20th and 21st century.  From the Copenhagen Consensus Center report.

This figure is based on a scenario in which the average global surface temperature warms by approximately 3.6°C between 1900 and 2100, which is a scenario that would require fairly modest efforts to reduce greenhouse gas emissions.

The modeled economic benefits from climate change come from factors like more carbon dioxide in the atmosphere "fertilizing" agriculture and fewer cold-related deaths. However, there's evidence that we're approaching the point where negative climate-related impacts on plant life offset the benefits from fertilization, and there will be more heat-related deaths in a warmer world.

In the figure above, while the annual impact on the global economy from climate change remains positive until the late 21st century, the solid black curve begins to turn downward after 2025. This means that according to this report, after that date, climate change will have less and less of an annual economic benefit, until it eventually becomes a drag on the global economy. Thus to maximize the impact on the economy, we would stabilize global temperatures at 2025 levels (about 1°C warmer than 1900).

However, we're committed to global warming beyond 1°C from the greenhouse gases we've already emitted. Hence any further human greenhouse gas emissions from here on out will cost us money, according to the Copenhagen Consensus Center Report.

The report also notes that some troubling consequences are overlooked when focusing on the global average economic impact.

"Most countries benefitted from climate change until 1980, but after that the trend is negative for poor countries and positive for rich countries. The global average impact was positive in the 20th century. In the 21st century, impacts turn negative in most countries, rich and poor."

While climate change has continued to increase global average GDP, this has come at the expense of the rich getting richer and the poor getting poorer. This isn't a surprise, given that the poorest countries, who contribute the least to the climate problem, are the most vulnerable to climate change. The report attempts to account for this disparity with an "equity-weighted" economic impact of climate change, illustrated by the black dotted line in the above figure, and concludes,

"the maximum impact of climate change occurs 45 years earlier [in 1980] when equity weighted."

Thus if we weight the impact of climate change on GDP to account for the adverse impact to the economies of poorer countries, according to this report, we reached peak climate economic benefit in 1980. After about 2015, the dotted curve declines steeply.

One shortcoming of the Copenhagen Consensus Center Report is that it only considers one scenario in which we take modest steps to reduce our greenhouse gas emissions, and uses only one integrated assessment model. But what do the results look like when considering other scenarios and models? Economist Chris Hope of the University of Cambridge has another integrated assessment model, PAGE, with which he has run a similar analysis of the cost of climate change under a business-as-usual scenario and a low emissions scenario.

 

PAGE09 climate costs

Annual global climate change costs (in trillions of dollars) in low emissions (purple) and business as usual (A1B; red) scenarios.  The dashed lines represent the 5% and 95% probability range.  Source

In the PAGE model (which is equity-weighted), climate change is already a drag on the global economy today. According to the model's average result (solid lines), we're able to keep the annual global costs of climate change below $1 trillion until 2050 through adaptation measures, because there's not a big difference in temperature changes between the low and high emissions scenarios until mid-century. After that point, the costs of climate change differ dramatically between the two scenarios. However, achieving the low emissions scenario will require immediate, significant actions to reduce our greenhouse gas emissions.

Prominent Yale economist William Nordhaus also runs an integrated assessment model called DICE. In a 2013 paper in the Journal of Economic Literature, Nicholas Stern compared the results of all three models.

 

Stern (2013) Figure 1

Annual Consumption Loss as a Fraction of Global GDP in 2100 due to an Increase in Annual Global Temperature in the DICE, FUND, and PAGE Models, from Stern (2013).

Nordhaus' DICE model agrees well with Hope's PAGE model regarding the negative impacts of climate change on the global economy for 0 to 2°C average global surface warming, after which they only disagree on just how quickly climate change will badly hurt the economy. In his paper, Stern also warned against underestimating the dangers of climate change,

"There are very strong grounds for arguing that [integrated assessment models] grossly underestimate the risks of climate change, not simply because of the limitations of climate and impact models ... but because of the further assumptions built into the economic modeling on growth, damages and risks, which come close to assuming directly that the impacts and costs will be modest, and close to excluding the possibility of catastrophic outcomes."

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Comments

Comments 1 to 11:

  1. These evaluations are not as helpful as they could be. A recognition of the unacceptability of creating any impact or potential impact on others, particularly future generations, is required for humanity to develop a sustainable better future for all life on this amazing planet.

    As compelling as these evaluations appear to be, they are still fundamentally flawed in a fairly obvious way. The situation is far less acceptable than is being presented. The evaluations ignore the blatant illegitimacy of one group getting benefit at the expense of others. They identify that nations benefiting less from unsustainable and damaging activities suffer more. However, they ignore the unfairness of prior generations benefiting at the expense of future generations. Some of them probably even ‘discount the costs faced by future generations’.

    Investors comparing their options will discount future potential costs because, from their perspective, money earned sooner is worth more than money earned later. That can be a legitimate way for an investor to choose between options when they will be the ones suffering any and all consequences of their decision and actions. It is unacceptable to extend that type of evaluation to this type of an issue. It is inappropriate to weight the benefit that one group of people get against the consequences faced by another group (a future generation).

    That type of evaluation continues to be used to build false justifications for all types of unsustainable and damaging activities. Obama mentioned it as a fundamental consideration regarding the potential approval of the Keystone XL Pipeline. They really did the math of what they think future generations will face, discounted it, and then compared it to what they thought the benefit would be for a portion of the current generation. The Alberta and Canadian Governments used exactly the same unacceptable evaluation as justification for approving the expansion of the admittedly damaging Shell Jackpine Oil Sands operation.

    Until these erroneous methods of 'determining and assigning value' are ended, the socioeconomic system will continue to develop unhealthy unsustainable and damaging economic activities, activities. The greedy among us will never stop trying to get away with benefiting unacceptably and illegitimately. It needs to be harder for them to 'get popular support' for suggestions that unsustainable and damaging activities people enjoy benefiting from are 'justified'. And they really should not be able to have any ‘value’ obtained from an unsustainable and damaging activity.

    For humanity to have a future, it is essential that actions by one person or group are not allowed to potentially negatively impact others, particularly not impact future generations. And they should not be able to benefit in a way that all others cannot also benefit from, forever. Until that fundamental requirement is globally achieved we will continue to see the success of leaders in industry, finance and politics whose actions are ultimately unsustainable and damaging.

    Greed and the actions it can motivate people to try to get away with are not good, but they can be ‘popular’, The potential popularity of inconsiderate attitudes and actions is the fundamental problem.

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  2. I just wonder what is the chance that the damages due to climate change , as a % of global GDP, will at some point be greater than the so-often mentioned GDP growth , resulting in a shrinking GDP that, among other things, imply a negative discount rate.


    Have anyone predicted a global-warming driven global recession?

    This kind of recession would be, unlike the 1930s and late 2000s ones, not a temporary one driven by a reversible process (a financial crisis), but one driven by an irreversible increase in costs (climate-related damages) that might last centuries if not millennia.


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  3. It is a distinct moral failure to use a positive discount rate when weighing the economic costs of mitigation and adaption  as compared to the current economic benefits of fossil fuels and future climate cost impacts.

    These people have no love for their children or grandchildren.

    They also have no concept of what the gross societal impacts will be from CURRENT CO2 atmospheric levels.  The most recent reports indicate that subtropical low clouds/fog will dissapear as the earth warms, and that our 2XCO2 Equilibrium Climate Sensitivity is closer to 4.3C.  This means that we will pass the atmospheric threshold of 2C by 2100 within the next 10 years.  It also means that we will likely suffer a catastrophic global economic collapse within the next 50.

    This economic collapse will destroy future economies and proves that the current A2r emissions pathway we are on deserves a NEGATIVE discount rate when weighing the the economic costs of mitigation and adaption as compared to the current economic benefits of fossil fuels and future climate cost impacts.

    A more realistic analysis of the current trajectory would prove that, even without a negative discount rate, the current global carbon budget, in terms of societal costs, is actually about equal to the global annual GDP. 

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  4. jja @3 the discount rate accounts for several things.  One is the pure rate of prefference for present with respect to future gains.  To the extent that that is rational, it is based on an estimate of the probability that we will survive to enjoy the future gains.  A pot of gold now is twice as valuable as four pots of gold in 40 years if we only have a 12.5% chance of surviving the 40 years to recieve the gold.  There is, of course, more to it than that, but that is the gist.  Increasing the discount rate to account for this factor represents an implicit devaluation of future generations, and is morally objectionable.

    In addition, however, there is a discount to allow for the average expected rate of return.  That is, if we invest a trillion dollars now to mitigate global warming, would we have gained more if we had instead invested in economic growth?  Low discount rates (3% or less) are generally justified on this basis.

    There is a problem with even this.  It assumes ongoing economic growth with unmitigated global warming.  Given the ecological effects likely with unmitigated global warming, that is far from a certain proposition.  Indeed, if we were certain that unmitigated global warming would reverse economic growth (and we are not), that would require a negative discount rate.

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  5. The (social) discount rate (ignoring risk) is given by the Ramsey rule:

    r = δ +γ g

    Where:

    • r is the discount rate,
    • δ is the so-called "impatience rate",
    • g is the growth rate of comsumption (a.k.a. "economic growth") and
    • γ is a proportionality constant called "relative aversion to intertemporal inequality"

    δ for intergenerational matters must be zero (unless you value future generations less than the current one, a completely immoral prejudice), leaving the discount rate just as a function of economic growth.

    A positive intergenerational discount rate makes sense if and only if you assume that future generations will be richer than the current one, because a given damage is less serious if your wealth is bigger (i.e if you have a wealth of 10 000 $ and lose 5 000 $ you have a relatively bigger damage (half your wealth) than losing the same 500 $ out of lets say, 100 000 $ ("just" a 5% loss)).

    This is however a really bold assumption. No one knows for certain what the future wealth of people will be, and if Climate Change is really as serious as the evidence suggests, the economic growth could be offset by a growing economic climate-related damages.

    Now "growth" is a few % of GDP. When climate damages approach, as a fraction of GDP, that number, overall economic growth indices will have an ominous "-" sign, and the discount rate given above will be negative.

    Will that happen? I don't know, but I strongly suspect that it will. What do you think?

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  6. oops!

    I should have written:

    "if you have a wealth of 10 000 $ and lose 5 000 $ you have a relatively bigger damage (half your wealth) than losing the same 5000 $ out of lets say, 100 000 $ ("just" a 5% loss)"

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  7. Tom@4

    Agreed.  on almost all points.

    when you say "we" you are referring to a large body of individuals, some of whom are type-1 error avoidance biased and others are type-2 error avoidance biased. 

    This is the origin of the conflict of the discussion.

    Anyone of reputation in the field of economics or evnironmental studies who believes that a 4C rise in temperatures in the next 60 years won't cause negative economic growth should be disregarded as an ideological actor and not worth listening to.

    This, of course, assumes we aren't taking fault with the concept of GDP as a measure of prosperity nor of the abject failure of assigning value as one attempts to substitute for massively expanding desertification, the collapse of the amazon rainforest, the burning of the boreal forests, global-scale extinction events of niche species, fishery collapses and the probability that these feedbacks herald at tipping-point mechanism that will result in a 350 year feedback loop that will eventually result in a p-tr event global extinction.

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  8. what do we exactly mean when we say economic growth? Growth of what? The problem with capitalism' is that short term profits always out trumps long term outcomes, as externalities are never factored into"free market" calculations.

    here are some suggestions to begin the long path in address this  that you wont see discused in our media or implemented by our so called leaders  and "captains of industry" unless we force them.

    five-economic-policy-changes-for-2014-that-could-boost-employment-and-reduce-climate-disruption

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  9. My understanding is that in addition to the economic injustices described above, economic bean counters often count damage from AGW as enhancing economic activity.  Say Hurricane Katrina causes $100 billion in damage to houses.  This is not counted as part of GDP.  People come in and rebuild half the houses destroyed at a cost of $50 billion.  This is counted as an increase in GDP.  People end up with houses worth $50 billion less than they started with and GDP increases $50 billion.  If damage from AGW counted against GDP we would already see measurable affects to lower GDP.  Is this understanding correct?

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  10. As dire as these predictions are, they may be highly optomistic.   Over the past few years we have had little rumbles in the agricultural production of Northern Hemisphere countries (and Australia, this year, by the way).  The Jet stream reminds me of a top that is slowing down and wobbling, just before it falls over.  In the past with the continents, basically in the same positions that they are now, there were trees right up to the shores of the Arctic ocean.  If our climate shifts rapidly or even worse, if it flickers back and forth between the present situation and the new one, with climate zones radically shifted northward in the new one, we will have massive crop failures.  You can fill in the rest of the scenario following even one year of crop failure.

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  11. It is important to keep the big picture in mind when you are looking into any detail.

    There are many other impacts from the activities related to burning of fossil fuels that need to be understood and included in the evaluation, similar to the way that reducing the burning of fossil fuels would reduce other harmful emissions, not just excess CO2 emissions. The bigger picture must not be ignored when looking into a discrete consideration like this evaluation of Global Warming impacts on the future vs. GDP benefit obtained today.

    Another important fundamental aspect of 'speculation about the future value of the economy' is that any unsustainable activity, like the consumption of non-renewable resources, simply cannot be continued let alone 'grow'. Any consumption of non-renewable resources that creates accumulating damage to the diversity or profusion of 'life' is even less able to continue, let alone 'grow'.

    There are also many unacceptable social consequences of the pursuit of benefit from unsustainable damaging activities. The ‘limited opportunity for benefit’ from unsustainable and damaging activities leads to fighting over that limited opportunity. This creates horrible human tragedy as a direct result, or collateral damage, of attempts by powerful people to ‘get more benefit’ any way they can get away with. It even diverts human brilliance and effort into damaging military and ‘security’ actions. That ‘fighting for more’ has been the cause of things like wars, invasions, overthrown governments, buying elections, international financial punishment, and propping up horrible leaders. It has also led to some nations deliberately trying to get away with economic competitive advantage by fighting against measures that would meaningfully restrict them obtaining benefit from burning fossil fuels.

    The USA, Canada and Australia have clearly tried to ‘prolong and maximize’ their national advantage by fighting against global restrictions that would meaningfully and properly reduce the ‘false unsustainable value’ they are able to get away with obtaining from the burning of fossil fuels (including their benefit from expanded unacceptable activities in places like China). But it isn’t ‘those nations’ that are the problem. The real problem is the people who will try to get benefit any way they can get away with, including using their wealth to obtain control of governments in those nations through the popular appeal of getting away with unacceptable and damaging activities.

    Many European economies are stepping back from their progress toward sustainable activity because they are losing competitive advantage to those ‘winners’. The European’s stepping back is declared to prove that their progress was unsustainable. That is clearly absurd since the stepping back is what is clearly unsustainable, yet it is a very popular belief.

    Also, the fighting over limited opportunity means that many people must never be fortunate. Only a limited percentage can be fortunate in a battle over limited opportunity. The lack of boundless (sustainable) opportunity ensures poverty. Global GDP has grown many times quicker than global population yet desperate poverty persists.

    Just like reducing CO2 emissions would reduce other unacceptable emissions, there is far more benefit to be obtained from reducing the ability of people to benefit from burning fossil fuels than the reduced impacts of excess CO2.

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