The economic impacts of climate change – Richard Tol

Mr Robert E.T. Ward BSc, Policy and Communications Director of the Grantham Research Institute on Climate Change and the Environment, recently published a piece about my work under the title “Flawed analysis of the impacts of climate change”. Mr Ward raises two main objections, first, to the conclusion that “the overall impacts of unmitigated climate change this century could be positive, even if global average temperature rises by more than 2°C above its pre-industrial level” and, second, to the conclusion that “the welfare change caused by climate change is equivalent to the welfare change caused by an income change of a few percent”.

I am grateful to the Grantham Institute for extending me the courtesy of a reply.

Let us consider Mr Ward’s objections in turn. Climate change will have many, diverse impacts and it will affect different people in different ways. Some of these impacts are negative, some may be negative or positive, and some are positive. The three key positive impacts are a reduction in the costs of winter heating – a particular boon to the poor in temperate and cold climates – a reduction in cold-related mortality and morbidity – a particular boon to the old and frail in temperate and cold climate change – and an increase of carbon dioxide fertilization – a particular boon to those dependent on water-stressed agriculture. The last effect is more immediate because it depends on the atmospheric concentration of carbon dioxide rather than the consequent climate change.

Twenty-two studies of the total impact of climate change on human welfare have been published and four of these – by the late Professor Ralph d’Arge, Professor Robert Mendelsohn, myself, and Professor David Maddison – show that the net impact of modest global warming may be beneficial. Mr Ward’s protestations notwithstanding, this finding is well accepted in the academic literature – and indeed Mr Ward fails to cite a single dissenting paper.

More important than the question whether the total impact is positive or negative, is the question when the incremental impacts turn negative. My latest estimate puts that at 1.1°C global warming relative to pre-industrial times, or some 0.3°C warming from today. That cannot be avoided – unless we believe that the climate sensitivity is much lower than commonly found, and we believe that governments are secretly plotting much more drastic emissions cuts than those announced. The initial benefits are thus sunk. The corresponding policy intervention is a Pigou tax, rather than a Pigou subsidy. Greenhouse gas emissions should be reduced.

Mr Ward’s second objection is equally unfounded, and again he does not cite any study that contradicts what I wrote. The twenty-two studies cited above all agree that the impact of climate change is small relative to economic growth. This was found in studies by Professor William Nordhaus and Professor Samuel Fankhauser. It was confirmed by the Intergovernmental Panel on Climate Change from its Second Assessment Report, in a chapter led by the late Professor David Pearce, to its Fifth Assessment Report, in a chapter led by me. Even the highest estimate, the 20% upper bound by Lord Professor Nicholas Stern of Brentford, has that a century of climate change is not worse than losing a decade of economic growth.

Over the years, many people have objected to these estimates. Tellingly, not a single one of these people have published an estimate that strongly deviates from existing estimates. On the contrary, a number of people have set out to prove Nordhaus and Fankhauser wrong, only to find estimates of a similar magnitude.

In sum, climate change is a problem but not the biggest problem in the world. It is good to keep perspective. At the heart of the current problems at Volkswagen lies a system of regulations that prioritizes one problem – carbon dioxide emissions – at the expense of another – particulate emissions. Environmentalists’ relentless focus on a single simple message may be an excellent strategy for fund-raising, but it makes for poor public policy. Incomplete and imperfect as our understanding of climate change and its impacts may be, Mr Ward’s dismissal of the evidence is not the best way forward.

Richard S. J. Tol is a professor of economics at the University of Sussex.


Response from Bob Ward:

I am grateful to Professor Tol for his contribution above to the discussion about the economic impacts of climate change, which follows my commentary about his blog. However, he makes a number of claims that need to be challenged.

Professor Tol claims in his blog that there are four studies which show that “the net impact of modest global warming may be beneficial”. In fact, if one consults Table 1 of Professor Tol’s working paper one can see that only two studies found a net positive impact from global warming, as I pointed out in my original commentary. The study by Maddison (2003) calculated the impact of a warming of 2.5°C would change net global welfare by the equivalent of 0.0 per cent of GDP, while d’Arge (1979) estimated the impact of cooling by 1°C, and not warming. Hence Professor Tol’s claim of a net benefit from global warming essentially rests on only two out of 26 data points, particularly one that he published in 2002, and which, he admits, omitted many impacts of climate change.

Professor Tol also claims that he was justified to conclude in his blog that “the impact of climate change is small relative to economic growth”. This is only a reasonable conclusion if one ignores both the acknowledged shortcomings of the economic studies from which he draws, and the evidence provided by scientific research into the impacts of climate change, as I pointed out in my commentary. In particular, there is an assumption that the damage that climate change would cause, even a warming of much more than 2°C, would be be relatively small and would not affect the drivers of economic growth. But Chapter 10 of the contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change does not echo Professor Tol’s view, and instead states: “The literature on the impact of climate and climate change on economic growth and development has yet to reach firm conclusions. There is agreement that climate change would slow economic growth, by a little according to some studies and by a lot according to other studies. Different economies will be affected differently. Some studies suggest that climate change may trap more people in poverty.”

When these shortcomings are taken into account, one does not need a PhD in economics to recognise the flaws in Professor Tol’s argument.