Hurricane Harvey flooding
Flooding in Port Arthur, Texas during Hurricane Harvey in 2017.

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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