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Climate Damages: Uncertain but Ominous, or $51 per Ton?

Posted on 13 February 2019 by Guest Author

This is a re-post from Triple Crisis by Frank Ackerman.  Second in a series of posts on climate policy.  Find Part 1 here.

According to scientists, climate damages are deeply uncertain, but could be ominously large (see the previous post). Alternatively, according to the best-known economic calculation, lifetime damages caused by emissions in 2020 will be worth $51 per metric ton of carbon dioxide, in 2018 prices.

These two views can’t both be right. This post explains where the $51 estimate comes from, why it’s not reliable, and the meaning for climate policy of the deep uncertainty about the value of damages.

A tale of three models

The “social cost of carbon” (SCC) is the value of present and future climate damages caused by a ton of carbon dioxide emissions. The Obama administration assembled an Interagency Working Group to estimate the SCC. In its final (August 2016) revision of the numbers, the most widely used variant of the SCC was $42 per metric ton of carbon dioxide emitted in 2020, expressed in 2007 dollars – equivalent to $51 in 2018 dollars. Numbers like this were used in Obama-era cost-benefit analyses of new regulations, placing a dollar value on the reduction in carbon emissions from, say, vehicle fuel efficiency standards.

To create these numbers, the Working Group averaged the results from three well-known models. These do not provide more detailed or in-depth analysis than other models. On the contrary, two of them stand out for being simpler and easier to use than other models. They are, however, the most frequently cited models in climate economics. They are famous for being famous, the Kardashians of climate models.

DICE, developed by William Nordhaus at Yale University, offers a skeletal simplicity: it represents the dynamics of the world economy, the climate, and the interactions between the two with only 19 equations. This (plus Nordhaus’ free distribution of the software) has made it by far the most widely used model, valuable for classroom teaching, for initial high-level sketches of climate impacts, and for researchers (at times including myself) who lack the funding to acquire and use more complicated models. Yet no one thinks that DICE represents the frontier of knowledge about the world economy or the environment. DICE estimates aggregate global climate damages as a quadratic function of temperature increases, rising only gradually as the world warms.

PAGE, developed by Chris Hope at Cambridge University, resembles DICE in level of complexity, and has been used in many European analyses. It is the only one of the three models to include any explicit treatment of uncertain climate risks, assuming the threat of an abrupt, mid-size economic loss (beyond the “predictable” damages) that becomes both more likely and more severe as temperatures rise. Perhaps for this reason, PAGE consistently produces the highest SCC estimates among the three models.

FUND, developed by Richard Tol and David Anthoff, is more detailed than DICE or PAGE, with separate treatment of more than a dozen damage categories. Yet the development of these damages estimates has been idiosyncratic, in some cases (such as agriculture) relying on relatively optimistic research from 20 years ago rather than more troubling, recent findings on climate impacts. Even in later versions, after many small updates, FUND still estimates that many of its damage categories are too small to matter; in some FUND scenarios, the largest cost of warming is the increased expenditure on air conditioning.

Much has been written about what’s wrong with relying on these three models. The definitive critique is the National Academy of Sciences study, which reviews the shortcomings of the three models in detail and suggests ways to build a better model for estimating the SCC. (Released just days before the Trump inauguration, the study was doomed to be ignored.)

Embracing uncertainty

Expected climate damages are uncertain over a wide range, including the possibility of disastrously large impacts. The SCC is a monetary valuation of expected damages per ton of carbon dioxide. Therefore, SCC values should be uncertain over a wide range, including the possibility of disastrously high values.

Look beyond the three-model calculation, and the range of possible SCC values is extremely wide, including very high upper bounds. Many studies have adopted DICE or another model as a base, then demonstrated that minor, reasonable changes in assumptions lead to huge changes in the SCC. To cite a few examples:

  • meta-analysis of SCC values found that, in order to reflect major climate risks, the SCC needs to be at least $125.
  • study by Simon Dietz and Nicholas Stern found a range of optimal carbon prices (i.e. SCC values), depending on key climate uncertainties, ranging from $45 to $160 for emissions in 2025, and from $111 to $394 for emissions in 2055 (in 2018 dollars per ton of carbon dioxide).
  • In my own research, coauthored with Liz Stanton, we found that a few major uncertainties lead to an extremely wide range of possible SCC values, from $34 to $1,079 for emissions in 2010, and from $77 to $1,875 for 2050 emissions (again converted to 2018 dollars).
  • Martin Weitzman has written several articles emphasizing that the SCC depends heavily on the unknown shape of the damage function – that is, the details of the assumed relationship between rising temperatures and rising damages. His “Dismal Theorem” article argues that the marginal value of reducing emissions – the SCC – is literally infinite, since catastrophes that would cause human extinction remain too plausible to ignore (although they are not the most likely outcomes).

Whether or not the SCC is infinite, many researchers have found that it is uncertain, with the broad range of plausible values including dangerously high estimates. This is the economic reflection of scientific uncertainty about the timing and extent of climate damages.

How much can we afford?

As explained in the previous post in this series, deep uncertainty about the magnitude and timing of risks stymies the use of cost-benefit analysis for climate policy. Rather, policy should be set in an insurance-like framework, focused on credible worst-case losses rather than most likely outcomes. Given the magnitude of the global problem, this means “self-insurance” – investing in measures that make worst cases less likely.

How much does climate “self-insurance” – greenhouse gas emission reduction – cost? Several early (2008 to 2010) studies of rapid decarbonization, pushing the envelope of what was technically feasible at the time, came up with mid-century carbon prices of roughly $150 – $500 per ton of carbon dioxide abated.[1] Since then, renewable energy has experienced rapid progress and declining prices, undoubtedly lowering the carbon price on a maximum feasible reduction scenario.

Even at $150 to $500 per ton, the cost of abatement was comparable to or lower than many of the worst-case estimates of the SCC, or climate damages per ton. In short, we already know that doing everything on the least-cost emission reduction path will cost less, per ton of carbon dioxide, than worst-case climate damages.

That’s it: end of economic story about evaluating climate policy. We don’t need more exact, accurate SCC estimates; they will not be forthcoming in time to shape policy, due to the uncertainties involved. Since estimated worst-case damages are rising over time, while abatement costs (such as the costs of renewables) are falling, the balance is tipping farther and farther toward “do everything you can, now.” That was already the correct answer some years ago, and only becomes more correct over time.

That’s not the end of this series of blog posts, however. Three more are coming, addressing three policy problems that arise in climate advocacy: how to talk about methane and natural gas; taxes versus cap and trade systems; and the role of equity and economic obstacles to climate policy. 

Frank Ackerman is principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis.  

[1] See the Ackerman and Stanton article cited above for description of studies. Prices were reported in 2005 dollars; multiply by 1.29 to convert to 2018 dollars.

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Comments 1 to 11:

  1. A fundamental and critical point by-passed or ignored by a 'calculated cost per unit of new excess CO2 created' is that it is understandably undeniable that it is unacceptable for anyone or group/tribe to do something that creates negative consequences for another person or group/tribe. It is even unacceptable when the harmed person is desperate enough that they supposedly agree to the harmful actions (like workers unnecessarily at risk in lower cost operations that do not implement the best known and constantly improving safety and protection measures).

    What has developed clearly contradicts that understanding. But that does not mean that the moral/ethical understanding is incorrect. It means that the undeniable moral/ethical understanding that it is unacceptable to harm others is being allowed to be over-powered by other interests.

    This is a case of a portion of current day humanity wanting to benefit by doing harm to future generations (and others in the current generation). They want to operate the global economy in ways that are not sustainable and are understood to be harmful to the future of humanity.

    No math can make that acceptable. And any discounting of the future costs pretending that wealth always grows is ridiculous (in the intended definition of being deserving of ridicule). Every 'marketplace correction' that has ever occurred is proof of that understanding. And there is irreversible harm done by every one of those 'corrections' (which includes the unnecessary death of many among the proorest). The climate challenge is a matter of correction. How big and harmful it is is a matter of how the correction occurs. Who is harmed is the issue. And right now all discussion is still about how OK it is to harm the future generations as long as the 'Price is Right for the people wanting to benefit in the current generation'

    What is needed is the most rapid correction of what has developed that is possible. And that has to start by always admitting that what has developed, including the socioeconomic-political systems that developed, are incorrect. It is especially incorrect that resistance to correction of understandably harmful activity remains 'acceptable'.

    That understanding should be the preface/basis for any discussion like this one about 'pragmatic actions that are hoped to create sustainable adequate corrections in the current systems'. I personally doubt any significant correction will occur without corrections to the systems. I consider such efforts to be like the classic definition of insanity. But I admit I could be mistaken (but I highly doubt it based on what has happened so far).

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  2. Great article. The economic models are based around a few things such as climate change damages. I'm not an economist, but it does not take much to see that the damages outweigh the benefits as below.

    And this list does not even include the distinct possibility of some abrupt and severe form of change to global atmospheric or ocean circulation patterns. Regardless of whether an abrupt change is towards abrupt warming or some peverse form of cooling, such a change would indisputably be hard to adapt to due to its abrupt nature.

    And this needs repeating. The article says estimates of net damages keep increasing while mitigation costs are falling. Very important idea.

    And the modelling is based around discount rates and rates of future wealth creation. Discount rates assume an investment today will grow in value in the future, and nobody disputes this has been the pattern thus far historically, but we are always in a situation of "assuming" such a pattern would continue. It is never a "given" and is always based on assumptions. So are the typical assumptions made sensible? One assumption is the economy will improve its quality of output, and this seems  reasonable but is a different thing to quantity and this is what is most relevant to a discount rate. Another assumption is efficiency would improve. Its reasonable to assume we would waste less and be smarter about things, but reducing waste comes up against an obvious limit fairly quickly.

    It's assumed that population will grow giving economies of scale, but many trends are already towards lower population growth (and this is ultimately no bad thing anyway). Its assumed that technology will perpetually improve at past rates, but some evidence suggests rates of technological innovation have actually already slowed (even although this appears counter intuitive). Its reasonable to assume innovation will continue in renewable energy for some decades, and prices will drop but even that will have limits.

    It is assumed that there will be perpetual economic growth at rather high rates of 3% per annum. This is implausible, because resource scarcity, the need for sustainablity, combined with market saturation and climate impacts all suggest economic growth will relentlessly slow in coming decades and centuries, and probably fall, so those who optimistically count on high economic growth offsetting the climate problem are delusional.

    This is not to say economic growth will stop tomorrow. It's likely it will continue and greatly help lift people out of poverty, but there are limits on the timescales relevant to the climate problem. 

    Therefore those counting on future wealth creation bailing us out of the problem are delusional. Those assuming a high discount rate are delusional. They just aren't very smart. They are pollyanahs.

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  3. You can't put a per ton price on carbon emissions if the likely result of such emissions is to trash our economy and ecology (which seems more than likely).  We simply need to adopt Hansen's suggestion and put a small tax on carbon coming out of the ground or accross our boarders and send every cent of the collected money to every registered tax payer by cheap electronic transfer.  But that is not the whole story.  The important part is that the per ton tax must rise each year by a pre-determined amount.  The inevitability of such a rise is the critical factor.  Think of the effect on our investments long before the actual amount of the tax is an economic factor.

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  4. Evaluations of the 'cost of carbon' that identify a higher cost, like the 'insurance approach' are helpful. But pricing the creation of new excess carbon is only part of the required corrective actions. What is required is implementing 'price/fee/penalty' mechanisms that will most rapidly curtail the pursuit of benefit from the burning of fossil fuels by the most fortunate, and assist the less fortunate so that they do not suffer additional harm. And other actions that deter the harmful behaviour and reward helpful behaviour are also required, because the most rapid correction will be the best result for the future of humanity.

    The required corrective actions do not depend upon a calculated cost for carbon. But an identification of a higher cost should improve awareness a understanding of the need to terminate the activity that a 'higher calculated cost' would develop (and also developed increased resistance to correction by the Usual Suspects who have a history of preferring to do less to help the future of humanity, who would actually prefer to be able to do more harm to the future of humanity).

    The following is another way to express my earlier comment:

    • The developed socioeconomic-political systems/cultures have produced streams of harmful unsustainable results, because harmful unsustainable actions have a competitive advantage if they can be gotten away with.
    • Those systems/cultures have also developed powerful resistance to the correction of harmful unsustainable activity that was allowed to become profitable and popular. The developed perceptions of status from getting away with harmful unsustainable activity often get 'popularly' declared to 'need to be protected'.
    • One aspect of the developed resistance to correction is arguing/debating about how to calculate how expensive the harmful unsustainable activity should be.
    • The reality is that the harmful unsustainable activity needs to be rapidly curtailed. Immediate curtailment of the harmful activity is the ideal (immediately ending the harm done to Others). A quicker ending of harm to future generations is better, no matter how unpopular the measures may be with those who have developed undeserved perceptions of status due to getting away with benefiting from the harmful unsustainable activity (particularly through the past 30 years).
    • The rapid curtailing needs to be done in a way that 'costs people who have developed perceptions of status due to benefiting from the harmful unsustainable activity', without negatively affecting the efforts to improve the living conditions of the least fortunate. The Sustainable Development Goals establish a comprehensive set of objectives that all need to be achieved (none of the SDGs can be compromised or sacrificed in attempts to achieve any other goals). The New Green Deal is well aligned with that holistic understanding.
    • The major culture/system change required is growth of the understanding of the Primacy of the Universal Moral principle of helping to develop sustainable improvements for the future of humanity, and doing no harm to others in those pursuits. Tribal leaders who abuse tendencies for people to like Loyalty, Liberty, Subservience to Hierarchy, Perceptions of Tribal Purity, or Fairness as levers to overpower the Universal Understanding to not harm Others, Are The Problem that needs to be corrected. Ideally global leaders - every more fortunate person needs to be expected to be a helpful global leader - would act to help achieve the SDGs globally. As an example, USA First is only acceptable when the actions do not negatively affect achieving and improving on the SDGs.
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  5. It seems that one impediment to a proper price on carbon and good climate mitigation in general is politicians. They mostly  no doubt enter parliament with good intentions, then meet the corporate lobby groups, campaign funders and other politicians unfriendly towards mitigation on ideological grounds.

    Switzerland has bypassed this a little. It some interesting and quite comprehensive climate policies here, and recently they had a public referendum on subsidies for renewable energy and nuclear power here,  which went in favour of the subsidies and no new nuclear power plants. It had broad bipartisan support.  The point is not so much the policies (which seem ok) but the fact they had a referendum on a big climate issue, as the Swiss typically do on big issues. Cuts out the politicians to some extent. If only more countries did this.

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  6. Public Referendums can produce Good Results in nations where the leadership generally and significantly try to improve the awareness and understanding of the total population, evaluating different perspectives about how to achieve a common understood helpful objective based on that constantly improving common sense understanding.

    Switzerland also has a very active public gun culture that works because in their culture it would be unacceptable to try to carry a loaded gun in public or have a loaded gun handy at home for persoanl protection.

    A Referendum on Climate Action in the current USA would be a divisive misleading marketed nightmare capable of producing very Bad Results, like their Free-for-all claim making, gerrymandered, vote suppression politics has repeatedly done.

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  7. His “Dismal Theorem” article argues that the marginal value of reducing emissions – the SCC – is literally infinite, since catastrophes that would cause human extinction remain too plausible to ignore (although they are not the most likely outcomes).

    The word "likely" seems to refer to the prior probability in the Bayesian sense: the likelihood of an extinction outcome based on a purely terrestrial perspective: what we know so far of planet Earth and humanity's interaction with it. However, a cosmological perspective suggests things might be much worse. One plausible resolution of the Fermi paradox raises the extinction probability of nascent technological civilizations to nearly 1.0. Namely, we can account for our failure to observe any extraterrestrial intelligence by hypothesizing that whenever technological intelligence evolves in the universe, it destroys itself before escaping its home planet on a large scale and reaching Kardashev Type II or Type III civilizations that would be visible across interstellar and intergalactic distances, respectively. If true, this would mean the so-called Great Filter lies just ahead of us, rather than behind us.

    A mechanism for intelligent self-destruction seems obvious enough, just from observing our own behavior. Intelligence initially evolves to increase individual reproductive fitness, by enabling the individual (and later groups of individuals) to extract more energy and resources from their environment. This frees the newly intelligent species from the constraints of natural selection which limit all other species from wrecking their home planet. (Before humans, no other species on Earth had by itself caused a mass extinction of other species.) Since no species ever had to worry about over-consuming its entire planet, there was no selective pressure for self-restraint. Thus the newly intelligent species must develop an ethic of self-restraint quickly enough to take up the slack for having thrown off natural selection. But the entire evolutionary history of the newly intelligent species was driven by self-interest, and evolution has no foresight. Evolution cannot foresee that getting smarter and smarter and better and better at consuming more resources will ever cause a problem. Our evolutionary psychology therefore becomes a serious obstacle to our sustainability. We've been selected for our ability to grab as many resources as possible from a world in which resources were essentially infinite, but our ability for obtaining them was scarce.

    Given the rapid compounding effects of exponential growth, the newly intelligent species must evolve a culture of restraint at a pace thousands of times faster than its instincts of greed and selfishness were shaped by natural selection. Humans show virtually no sign of evolving this culture of restraint. Nearly everyone wants more money, and individual wealth is the main predictor of individual carbon footprint. Were humans psychologically equipped to become a spacefaring species (as far as we can tell, we'd be the very first in our light cone), we would see an inverse correlation between individual wealth and environmental destructiveness, instead of the current positive one.

    Even worse, an unfolding climate disaster would only tend to increase selfishness, since having more money enables a person to avoid being the first to die. We've seen this on a small scale with weather disasters such as Hurricane Katrina, in which the wealthy were better able to escape by burning fossil fuels.

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  8. Putting a price on carbon sounds like a good idea, but it suffers from a serious flaw: it works by trying to harness selfishness, which is the root cause of man-made climate change in the first place. The only solution to a problem whose root cause is selfishness is to somehow make people less selfish. Trying to appeal to selfishness to fix a problem caused by selfishness is rife with potential for backfire effects. It's like trying to solve the drug problem by harnessing the urge to take drugs.

    For example, consider a person who only cares about money, which is to say a person who only cares about benefit to self. If you impose a Pigovian tax on that person, s/he can respond in one of two ways:

    1. Behave differently so as to consume less of the taxed commodity (the policymaker's intended outcome), or:
    2. Try to subvert or abolish the tax.

    If the players in the game are purely selfish, then they will consider all the costs to themselves and choose option 2 whenever the cost of subverting or abolishing the tax is less than the cost of complying with it.

    The election of Donald Trump in the USA, and the similar electoral catastrophe unfolding in Brazil, assures us that option 2 is viable.

    Even if we somehow get James Hansen's fully refunded fee-and-dividend scheme, for the carbon tax to be effective at fighting climate change, it has to inconvenience somebody. The inconvenience must be severe enough to re-wire the entire global economy - that is, to redirect all the massive effort we currently direct toward coal mining, oil drilling, airport building, road building, and all the other things we do with fossil fuels. All those inconvenienced will then, if they are selfish (and we know they are because they're raping the planet right now with fossil fuels), look at how much the carbon tax is costing them, and see if they can get more for their money by using it to buy politicians and fund anti-science propaganda.

    It's easy to understand the problem by comparing hardened criminal inmates of a maximum security prison to the general population of law-abiding people. In the maximum security prison, inmates must be powerfully incentivized to behave somewhat like law-abiding people behave mostly without the need for external enforcement. No conceivable structure of external nudges and incentives can get the prison population to behave as civilly as law-abiding people behave. The moral compass is cheaper and more effective than any system of coercion. The moral compass is actually a kind of very powerful distributed computing system, constantly weighing up vast numbers of individual actions and their consequences. Trying to coerce amoral people requires a vast rubric of laws, expanding endlessly to plug loopholes that keep opening up.

    Unfortunately, our moral compass is generally blind to the harm caused by burning fossil fuels. Most people literally care more about the welfare of a single cat than they care about the harm they are doing to the entire biosphere by driving their cat to the veterinarian. Until the vast majority of people come to view contributing to climate change as morally wrong for them, humanity will remain on its path to not become the first intelligent species that doesn't destroy itself.

    Instead, of the tiny minority of people who bother to engage with climate change at all, most try to frame the problem in purely impersonal terms, as if their own contributions to climate change are irrelevant.

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  9. OPOF @6, you are right in that a referendum in america would come up against a lot of marketing spin, especially from the side opposed to renewable energy, but I think have a bit more faith in the the public. Polling does show a desire for more action on climate change despite years of denialist spin. Whats the worst the denialists can do? They have already fired all their ammunition. 

    And could it do worse than the current approach?

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  10. The following is a fundamental observation regarding the economic modelling and evaluations used to determine a 'Carbon Price'. I believe it is aligned with the comments by Nigel and Daniel.

    The economic evaluations are incorrect because they do not accurately incorporate the complex reality of the behaviour of people, particularly the way many people can be tempted to allow Helpfulness to Others to be overpowered by basic drives related to things mistakenly considered to be moral objectives that can be allowed to compromise the Helpfulness (do not harm) Moral driver:

    • Perceptions that Their Tribe is Superior to or Purer than Others
    • Tribal Loyalty
    • Unquestioned Subservience to, or Respect for, Hierarchy in Their Tribe
    • Perceptions that being corrected is Unfair to their Tribe
    • And desires for the Liberty to believe whatever they want as justification for whatever they want to do.

    It appears that economic models are based on the belief that competition in the games will internally promote and reward helpful sustainable developments and naturally effectively identify and correct harmful unsustainable developments.

    The reality is that human behaviour that is not governed by the Universal Principle Objective of "Helping to develop sustainable improvements for humanity - As a minimum, Doing No Harm to Others" has a history of developing very damaging results that also develop powerful resistance to correction.

    That reality is ignored by many economists because requiring external governing of all economic activity for Helpfulness (and preventing harm to Others) is 'contrary to their preferred beliefs'.

    The Religious Adherents of that type of flawed economic thinking and its harmful compromising of Helpful social and political actions are in serious need of correction, and serious limits of their ability to impact what is going on until they are corrected.

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  11. Daniel Mocsny @7, I agree with a lot of that. You appear to be arguing greed and materialism is deep in our genes, but our intelligence gives us an awareness of the destructive side of this, but is thus far failing us in terms of the climate issue.

    However humanity has made short term financial sacrifices to fix quite a few environmental (and social) problems successfully. Insurance policies are another example. So intelligence does sometimes triumph over our baser instincts. And we have made some progress with the climate problem. The climate problem has to be mother of all environmental problems in terms of scale and complexity and I suspect this is slowing down our response, and of course theres been a concerted denialist campaign on a massive scale.

    There are other factors. We are psychologically hardwired to respond most acutely to short term threats rather than slowly unfolding more distant dangers. But intelligence gives us a mechanism to transcend this, and we have to start rationally thinking about such future risks.

    Daniel Mocsny @8

    You are sceptical of things like carbon taxes. Granted they are not the ideal solution, and people will try to find ways around them or might not spend all the dividend wisely, but Britain has a carbon tax and is doing well with renewable energy, and Australia had a carbon tax at one point, and when it did use of renewable energy increased sharply. So while some people subvert the system many don't.

    We don't want to make the perfect the enemy of the good. And your better idea is what exactly?

    Regarding morality. A few genuinely amoral people (sociopaths) are irelevant to the climate issue unless they get to be President...or leaders of corporations. But the moral majority outweigh the amoral minority.

    I agree climate change has an obvious personal moral dimension. For example one can conclude it's wrong to pollute and cause others harm, however people internalise morals and dont always live up to them, even if they genuinely believe in the morals. Most people probably believe its morally wrong to speed in a car but they still do on ocassion. Moral codes have to be enforced in some way. A carbon tax is a gentle way of enforcing the morality.

    Half the problem is the need for a 21st century energy grid. Only governments and corporations can really provide this, not joe bloggs in the street. But as interested individuals we have to put pressure on government, and this means we have to first accept an individual understanding of the moral dimension of the climate issue.

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