The Gap Between Climate Science And Economics Is A Chasm

Why does society seem incapable of grappling with the destructive threat of global warming? From the perspective of climate scientists, the question of whether fossil fuel pollution puts modern civilization in jeopardy is a solved problem. Now scientists are spending their efforts on observing the results of the global experiment, tracking just how the increase in climatic entropy disrupts the planet’s ecosystem, and arguing whether we’ve passed tipping points into runaway global warming (thus necessitating doomsday geo-engineering exercises) or whether there’s still time to limit the damage (to a few thousand species and a dozen low-GDP nations) by the complete elimination of fossil fuels within a few decades.

The consensus economic view, however, is profoundly different. Nobel Prize-winning economist Paul Krugman inadvertently shows the sorry state of the understanding by economists of global warming in a recent blog post, in which he writes down a “toy model that hopefully clarifies the issues” of climate policy:

See! The problem can be boiled down to three straight lines, intersecting at the optimal balance of economic and environmental impacts. This level of understanding is about as developed as recognizing that burning fossil fuels could heat up the atmosphere, which physicists realized in 1896, 114 years ago.

Unfortunately, Krugman’s toy is actually better than most economic thinking.

Business-as-usual projections used by the federal government, such as the Energy Information Administration, the Environmental Protection Agency, the Department of Labor, and the Congressional Budget Office, don’t take into account climate disruption, which comes in the form of temporary, regional catastrophes (a flood, storm, hurricane, heat wave, wildfire), widespread catastrophes (collapse of coral reefs and forests, decadal drought), and possibly global catastrophe (several feet of sea level rise, permanent El Nino, permafrost melt). The International Energy Agency has only begun to do so in its most recent world energy outlook.


Popular economic models for climate policy, such as Dr. William Nordhaus’s DICE model, use climate damage formulas that have no basis in reality, maxing out at 10% reductions in GDP under runaway global warming ten times what has already been experienced. Citing such models, Congressional Budget Office chief Doug Elmendorf testified that the U.S. economy would be “relatively insulated from climate effects” from 4–6°C warming — at least 500% more warming than present. His “pessimistic estimate” of the damages? Three percent of GDP.

Krugman also writes about the work of Harvard economist Martin Weitzman:

As for the welfare sensitivity: Marty Weitzman has managed to scare me, by pointing out that there’s a pretty plausible case that a rise of 5 degrees C — which is no longer an outlandish prediction — would be utterly catastrophic. You don’t have to be sure about this; just a significant probability is enough.

Climate scientists have come to the consensus that a rise of more than 2 degrees C — about three times present warming — would be utterly catastrophic, and repeatedly caution that even that threshold is not necessarily safe. It is frankly baffling that even the best economists studying climate policy have the fantasy that modern human civilization has a reasonable possibility of sustaining 5 degrees C of warming without suffering on an unprecedented scale.

There are beginning efforts by the federal government to at least include some assessment of the cost of carbon pollution in its analyses, using a “social cost of carbon” in new energy regulations. But even this crude mechanism isn’t factored into policy where it’s really needed, such as the Departments of Treasury and Defense.


That said, Paul Krugman is orders more brilliant than I can even fathom, and back-of-the-napkin calculations can be a powerful tool, if the scribbles are the result of a brilliant mind. For example, climate scientist Stephen Schneider praises the effectiveness of “simple simulations of complex models” in his excellent book “Science as a Contact Sport.” Schneider, by the way, has been considering the prospect of doomsday geoengineering since 1996.


In line with Krugman’s thought experiment, The Economics for Equity and Environment Network describes how to reconfigure the DICE model assumptions to deliver results consistent with climate scientist recommendations:

The DICE default value for climate sensitivity is3°C. The second parameter determines the effect of temperature increases on the economy. DICE assumes, onthe basis of little or no evidence, that climate-related economic damages depend on the square of temperatureincreases. We explore the alternate assumptions of damages based on the cube, fourth, or fifth power oftemperature increases. With the assumption of 6°C climate sensitivity and a damage exponent of 4 or 5, DICE recommends something close to the Hansen scenario: all carbon emissions are eliminated before the middle of this century; peak temperature increases are one degree or less; and atmospheric concentrations of CO2 are 360 ppm or less at the beginning of the next century.


,Economist James Barrett emails:

There are only really 2 lines in that graph. The third (the two sets of arrows pointing toward the intersection of the other two) is actually just an indicator of the dynamic path toward equilibrium.

Most of economics boils down to the weighing of costs and benefits in one way or another. It’s the warp drive of economics. You can build as fancy a ship around it as you want, but buried in the middle is something doing this balancing. Krugman has stripped it down to it’s barest elements and made it transparent, but it’s the same basic reasoning that dates back to Adam Smith in 1776, or maybe Alfred Marshall in 1890.

All Krugman has done is to re-arrange the process of weighing costs and benefits in a way that makes more sense to him and is readily adaptable to two important variables, the passage of time and the difference between the stock of carbon in the atmosphere and the flow of carbon into the atmosphere. (I think inverting the capital accumulation decision is a pretty elegant way of doing this. Anyone who is facile with those models can use this easily. I wouldn’t have done it this way, but I’m not a serious student of that field.)

I think Krugman’s big mistake in all this is the statement that “there doesn’t seem to be much disagreement about the economic costs of carbon abatement.” The damage function is something of a red herring to me. The real problem I have with Nordhaus’s model is not that it underestimates the damage that climate change will create, but rather that it presents a view of the economy as a very rigid beast. You have to bludgeon it with an extremely painful price signal to get it to change course, and carrots are very nearly useless. In that sense, it doesn’t matter whether you have to change course a little to get to 550ppm or a lot to stay below 350, moving this thing off the path to 750 is just too damn hard. The conventional economic wisdom is that you need a really high carbon price to move the carbon needle and that high price will put the hurt on the economy. Part of the reason why the CW ends up here is that some very old and incorrect economic assumptions are buried deep, below the level that Krugman exposes in his toy model, so that even he ends up in the wrong place.