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What’s Wrong With Climate Change Economics In One Chart

By Joe Romm  

"What’s Wrong With Climate Change Economics In One Chart"

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Last week economist William Nordhaus slammed global warming deniers and explained that the cost of delaying action is $4 Trillion. As I wrote, Nordhaus’s blunt piece — “Why the Global Warming Skeptics Are Wrong” – is worth reading because, like most mainstream climate economists, he is no climate hawk.

A key reason for that, I believe, is a chronic low-balling of future temperature rise and hence future climate impacts and hence future climate damages by the mainstream economic profession. Nordhaus’s piece proves that point.  In his argument on why CO2 is a pollutant and negative externality—”a byproduct of economic activity that causes damages to innocent bystanders”– he writes:

The question here is whether emissions of CO2 and other greenhouse gases will cause net damages, now and in the future. This question has been studied extensively. The most recent thorough survey by the leading scholar in this field, Richard Tol, finds a wide range of damages, particularly if warming is greater than 2 degrees Centigrade.7 Major areas of concern are sea-level rise, more intense hurricanes, losses of species and ecosystems, acidification of the oceans, as well as threats to the natural and cultural heritage of the planet.

That highlighted sentence may strike some of you as a bit strange. After all, the chances that warming would be less than 2°C have been pretty small for quite some time even with aggressive action and essentially nonexistent without it. So I went to the original Spring 2009 paper in The Journal of Economic Perspectives, “The Economic Effects of Climate Change” (online here).

Note: Figure 1 shows 14 estimates of the global economic impact of climate change, expressed as the welfare-equivalent income gain or loss, as a function of the increase in global mean temperature relative to today. The circular dots represent the estimates (from Table 1).

Yes, a spring 2009 review of the economic impact of climate change reviewed 14 studies — and not single one of them looked at warming of more than 3°C! And Tol is, according to one of the leading scholars in the field, “the leading scholar in the field.” And that is “the most recent thorough survey.”

Who says economics is the dismal science? It’s the super-optimistic science. If you could ask climate economics to sum itself up in one word, it would be “cheerful.”

Note that if you check out Table 1, you’ll see that the 2 estimates of the impacts of 3C warming are Nordhaus himself from 1994 and 1995. Indeed, 4 of the 9 estimates of the impacts of 2.5C damage come from either 1995 or 1996. The head-exploding estimate that 2.5C warming could actually be a significant positive for welfare is from 1996 also. Way to stay up to date on the science.

As readers of Climate Progress know, the recent scientific literature has amped up the likely consequences of inaction considerably (see “An Illustrated Guide to the Science of Global Warming Impacts: How We Know Inaction Is the Gravest Threat Humanity Faces.”

A 2010 AAAS presentation on “the Asymmetry of Scientific Challenge“ concluded: New scientific findings since the 2007 IPCC report are found to be more than twenty times as likely to indicate that global climate disruption is “worse than previously expected,” rather than “not as bad as previously expected.”

Multiple independent analyses conclude that we are on track for total warming of some 5°C by century’s end and more after that.  What would be the impact of that level of warming? There is a clue inside Nordhaus’s 2008 book, A Question of Balance. Nordhaus explains that in his DICE model, atmospheric concentrations of CO2 only hit 685 ppm in 2100 and “measured mean global surface temperature …  is projected in the DICE model  to increase by 3.1°C in 2100 relative to 1900″ or a mere 2.4°C between 2005 and 2010. But he also notes that

… the DICE model’s  projected baseline increase in temperature for 2200 relative to 1900 is very large, 5.3°C. The climate changes associated with these temperature changes are estimated to increase damages by almost 3% of global output in 2100 and by close to 8% of global output in 2200.

That 8% certainly seems closer, though still low. It’d be quite interesting if somebody ran an impacts estimate using the latest science.

Now you may ask how it is that this supposedly “most recent thorough survey” was blissfully out-of-date from a scientific perspective (though not apparently an economic one) before it was even published? The answer is really that the mainstream climate economics community is generally years behind where the science is.

Consider this jaw-dropper from Tol’s  supposedly definitive paper:

Fourth, estimates of the economic effects of greenhouse gas emissions have become less pessimistic over time. For the studies listed here, the estimates becomeless negative by 0.23 percent of GDP per year in which the study was done (with a standard deviation of 0.10 percent per year). There are several reasons for this change. Projections of future emissions and future climate change have become less severe over time—even though the public discourse has become shriller

Let’s set aside how that final clause made it past peer review given that it has nothing to do with economics and is based on nothing more than the author’s unintentionally revealing preconceptions.

It may be true in a very narrow sense that “estimates of the economic effects of greenhouse gas emissions have become less pessimistic over time” but that is mainly another unintentional critique of how out of touch the economic modelers he cites are. Of course, folks like Nicholas Stern who projected a far, far higher hit to GDP back in October 2006 (!) don’t count for Tol, since the Stern review’s conclusions alone would invalidate that statement. I suppose it should have read “estimates of the economic effects of greenhouse gas emissions (that the author believes) have become less pessimistic over time.”

It is not true that “Projections of future emissions and future climate change have become less severe over time.” That is BS. In fact, long before spring 2009, the reverse was obviously true.

First, it’s worth noting that the IPCC’s Fourth Assessment projected warming for this century (2090-2099 vs 1980-1999) finds the “best estimate for the low scenario (B1) is 1.8 C (likely range of 1.1 to 2.9 °C)” and the “best estimate for the high scenario” (A1FI) is 4.0°C (likely range of 2.4 to 6.4°C).

That was winter 2007 — plenty of time for economists to do an analysis of the high scenario rather than living in the rosy-colored world of 1 to 2.5C warming. It was clear even by, say, 2008 that we weren’t anywhere near on track for the low scenario. Heck, even a physicist like me who only did a concentration in economics at MIT, figured out and published in Nature online an analysis showing that we were on track for 1000 ppm (A1FI) by 2100.

By September 2008, a major paper found projected sea level rise would “most likely” be 0.8 to 2.0 meters by 2100 — a huge jump from the IPCC lowball estimate  that essentially ignored ice loss from the great ice sheets.

By December 2008, Dr. Vicky Pope, the head of climate change predictions at the Met Office’s Hadley Centre warned that:

In a worst-case scenario, where no action is taken to check the rise in Greenhouse gas emissions, temperatures would most likely rise by more than 5°C by the end of the century.

She said, “This would lead to significant risks of severe and irreversible impacts,” though no doubt she used her shrill voice.

And Climate Progress readers know that by early 2009, it was so obvious that emissions were running at A1FI levels that the Copenhagen Climate Science Congress, attended by 2000 scientists, which concluded with this Key Message #1:

Recent observations confirm that, given high rates of observed emissions, the worst-case IPCC scenario trajectories (or even worse) are being realized. For many key parameters, the climate system is already moving beyond the patterns of natural variability within which our society and economy have developed and thrived. These parameters include global mean surface temperature, sea-level rise, ocean and ice sheet dynamics, ocean acidification, and extreme climatic events. There is a significant risk that many of the trends will accelerate, leading to an increasing risk of abrupt or irreversible climatic shifts.

Darn you, shrill climate scientists!

By February 2009, “M.I.T. doubled its projection of global warming by 2100 to 5.1°C.”

And in spring 2009 the definitive NOAA-led study of U.S. climate impacts warns of scorching 9 to 11°F warming over most of inland U.S. by 2090 with Kansas above 90°F some 120 days a year — and that isn’t the worst case, it’s business as usual! And that was mostly a review of literature written before 2009.

But to this date, the “most recent survey” of economic impacts is stuck in the 20th century. Indeed Nordhaus himself, along with two other leading (center-right) economists — Nicholas Z. Muller and Robert Mendelsohn — are stuck there.  They published a major article in Ocotober that found “Oil and Coal-Fired Power Plants Have Air Pollution Damages Larger Than Their Value Added.” Here’s how out of date their CO2 price was:

We use the social cost of carbon for the year 2000. This cost will rise over time as greenhouse gases accumulate and marginal damages increase. We assume that the central estimate of the social cost of carbon is $27 per ton of carbon (Nordhaus 2008b).

The actual social cost of carbon today is at least 5 times that price and more than 10 times that in the near future (or now, see here).  The International Energy Agency (IEA) noted back in 2008 that just to stabilize at 550 ppm (roughly 3°C or 5.4F warming), you’d need a price of “$90/tonne of CO2 in 2030,” which is to say $330 a metric ton of carbon.

The mainstream economics community has a long way to go to catch up to the reality of emissions trends and climate science.

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20 Responses to What’s Wrong With Climate Change Economics In One Chart

  1. Paul Magnus says:

    There’s low-balling of impacts even for expected temperature rise.

    • Bill G says:

      NASA’s climate scientist James Hansen says eventually global heating will kill everybody.

      Has anyone figured the economic impact of that? In dollars?

      We should get busy on a figure – just for fun.

      • Chris Winter says:

        That’s not a bad idea. Estimates of the economic value of a human life vary, but $7 million is a reasonable choice.

        http://en.wikipedia.org/wiki/Value_of_life#Estimates_of_the_value_of_life

        Thus (assuming the human population is then 9 billion, the loss becomes

        $7×10^6 * 9×10^9 = $6.3×10^16

        or ten thousand trillion dollars. That’s not chump change.

        Of course, there wouldn’t be anyone around lamenting the loss. (There would be some humans left, but economics would be far from uppermost in their minds.)

      • Pangolin says:

        Oh, c’mon. There would be lots of dollars and stacks of precious metals still around in heavy safes and strong rooms. Just because there won’t be any humans around to open them doesn’t mean thats bad for the economy.

  2. The incorrect notion that benefit-cost analysis is an appropriate tool for assessing the climate problem is the underlying issue here. Economists haven’t faced the fact that it is impossible in principle to accurately calculate costs and benefits decades hence, and so this particular tool (which has been useful in analyzing some environmental problems, like sulfur emissions) fails miserably for the climate problem.

    For more details on this line of argument, check out chapters 3 and 4 of Cold Cash Cool Climate, as well as Decanio’s book on economic modeling for climate.

    Koomey, Jonathan G. 2012. Cold Cash, Cool Climate: Science-Based Advice for Ecological Entrepreneurs. Burlingame, CA: Analytics Press. [http://www.analyticspress.com]

    DeCanio, Stephen J. 2003. Economic Models of Climate Change: A Critique. Basingstoke, UK: Palgrave-Macmillan.

  3. Solar Jim says:

    The model is DICEY, we are headed toward the poorhaus and us naked apes are way out of balance.

    The good professor’s book should be read along with annotation by Lewis Carroll. Six feet of sea level rise, no problem (since it only inundates a smidgen of economic productive capacity in his fantasy future).
    He can take seven dollars per ton and I’ll take the seven angels on that pin over there.

    Wasn’t petroleum discovered at Yale? Or was it the Bush family? Seems it was something to do about a silly man.

  4. Spike says:

    The total economic impact is only part of the picture as well – I am concerned about the impact on life sustaining global basics. It’s no good GDP being propped up by frantic production of air conditioners and repairing storm damaged cities if food production and potable water supplies have collapsed.

  5. fj says:

    The real problem with economics is the valuing of life like that old Jack Benny comedy routine where Jack Benny’s thing is claiming that he’s only 39 many years ongoing and being extremely cheap:

    Where a mugger confronts him saying “Your money or your life.”

    And of course, Jack Benny has to think about it.

    Obviously, there’s a major disconnect between lots of silly economics and the true value of things.

    Economist Jeff Sachs in many ways seems to be going against trend advocating the UN millennium goals and ultimately the complete eradication of global poverty. And, he might get a real chance at it if he becomes president of the World Bank.

    (Hope a hope a hope.)

  6. Venky says:

    Dear Joe: Economists are not trained in physics, chemistry, and biology, the three crucial and fundamental subjects necessary to understand climate change.

  7. Richard Tol says:

    The 14 estimates are all those published in the peer-reviewed literature by 2009. Number 15 was published more recently.

    There are 2 further estimates published in the gray literature by Hohmeyer and Betz. I excluded those for reasons of quality control.

    This paper is about the impact beyond 3K warming: http://ideas.repec.org/p/esr/wpaper/wp382.html

    Stern’s benckmark estimate is the average of Fankhauser and Tol. Both studies are included already.

    There is weak empirical evidence for a trend in the total economic impact. The same trend, though, can be found in the marginal cost estimates of which there are many more.

    • Joe Romm says:

      Yes, well, that’s my point. The whole economics profession is studying the wrong thing!

  8. John Gibbons says:

    Richard Tol recently left Ireland after spending several years spinning yarns from our state-funded Economic & Social Research Institute (ESRI). Among the utter gems of mendacity he produced during his stint there include a short ‘Research Bulletin’ entitled ‘Why Worry about Climate Change?’ Among his curious insights:

    “Just because something is new and different does not make it wrong. Climate change will take us into uncharted territory, but so do many other things”

    and even stranger:

    “Note that impacts (of climate change) do not exceed 1.3 per cent of GDP in the 21st century”

    and

    “Studies that have been subject to peer-review tend to be more optimistic about climate change than studies that have had no quality control. That is, a lot of the scaremongering is not based on sound science. The Stern Review is the best-known example of pseudo-scientific exaggeration”

    To support this confection, Tol impressively supplies eight references, as follows: 1. Tol et al. 2) Tol. 3) Tol 4) Tol 5) Tol et al. 6) Tol et al. 7) Tol et al. 8) Tol et al.

    Tol is a very able scholar, but as a human being, he is the living embodiment of the idiot savant: “departments of economics are graduating a generation of idiots savant, brilliant at esoteric mathematics yet innocent of actual economic life” (JK Galbraith and Wassily Leontief).

    He did considerable damage to the efforts of the handful of us in Ireland battling to have climate change taken seriously and addressed as a top national priority. Click below for a detailed take-down on Tol and his sophistry, with many of the best lines actually contributed by…Tol himself:
    http://www.thinkorswim.ie/?p=1000

    • Solar Jim says:

      Thank you John Gibbons. The thinkorswim site is a goldmine of context and perspective across the pond from the American plutocracy.

  9. John Gibbons says:

    For anyone interested in reading Tol’s little Research Bulletin in full, link is below:
    http://www.esri.ie/UserFiles/publications/20090421154843/RB20090101.pdf

  10. Pangolin says:

    Have the world’s “leading economists” been right about anything in the last ten years? Go pick up a Wall Street Journal from 2005. 2007, 2009 and 2011 and read whatever pronouncements the economists of that day are making. They will be wrong. Almost without exception.

    The pretense that economists are anything but astrologers with spreadsheets instead of horoscope charts needs to be abandoned. They can’t even agree on what happened in restrospect much less tell us anything about the future.

    Why do they have any weight here?

  11. Donald Brown says:

    Ethics would require identification of all potential harms avoided even if they are low probability. By selecting one climate sensitivity (3 degrees) and then virtually hiding the implications of sensitivity assumed in the economic analysis is deeply troublesome. In addition there are many, many other clear ethical limitations with cost/benefit analysis (CBA) when used for climate change. They include problems of distributive justice, reducing everything to commodity value or variations of willingness-to-pay, ignoring the significance of human rights violations, failing to consult with the victims of climate change on how valuations are done and whether they should be put at risk, ignoring the no-harm and polluter pays principle in international law, ignoring the promise that all nations made in the UNFCCC to take steps to prevent dangerous climate change, the arrogance of one country using a CBA as a prescriptive tool for non-action on climate change (something the US did on Kyoto), and huge ethical problems with discounting future benefits, and on an on. The issue is whether one should use CBA for this problem and almost all ethical theories would say categorically no. Cost is relevant to finding the cheapest solution to climate change and therefor cost-effectiveness is perfectly OK but CBA is clearly the wrong prescriptive analytical tool for climate change as a matter of ethics. This conclusion does not even deal with the additional concern of how do you put a price on the potentially devastating and catastrophic impacts of climate change, an issue which according to one economist is “terra incognita” for the human race. Some leading economists such as Kenneth Arrow have acknowledged that CBA is not the appropriate proscriptive tool for climate change but most economists have alarmingly ignored these limitations. Donald A. Brown, Associate Professor, Environmental Ethics, Science, ans Law Penn State

  12. Dick Smith says:

    A concentration in economics, huh. I’ll be damned. We may just have a chance as the merchants of doubt shift their focus from the science to the economics.

  13. Jack says:

    I have never considered Tol as a leader in the field. Since I don’t trust what he does, I do not cite his papers without thoroughly checking his results, which most of the time I fined fiddled with bias.