A watershed moment for estimates of the economic impacts of climate change
Bob Ward explains why the conclusions about economic impacts in the most recent report of the Intergovernmental Panel on Climate Change are refreshing and necessary.
Earlier this year, the Intergovernmental Panel on Climate Change (IPCC) published its much awaited report Climate Change 2022: Impacts, Adaptation and Vulnerability. Its main findings on the intensifying impacts and risks the world faces have been analysed in some detail already. In this commentary I explain why the report could particularly mark a watershed moment for research on the economic consequences of rising greenhouse gas levels.
Fifth and Sixth Assessment Reports: contrasting approaches
The report, a contribution by IPCC Working Group II to the Sixth Assessment Report (AR6), avoided citing any quantification of the potential economic impacts of climate change, acknowledging the high level of uncertainty and disagreement among researchers. It is a welcome, but belated, admission that estimates promoted in the research literature are unreliable and that the current methods and models used to generate them are simply not fit for purpose.
The 2022 report’s ‘Summary for Policymakers’ states:
“Projected estimates of global aggregate net economic damages generally increase non-linearly with global warming levels (high confidence). The wide range of global estimates, and the lack of comparability between methodologies, does not allow for identification of a robust range of estimates (high confidence). The existence of higher estimates than assessed in AR5 [the Fifth Assessment Report] indicates that global aggregate economic impacts could be higher than previous estimates (low confidence). Significant regional variation in aggregate economic damages from climate change is projected (high confidence) with estimated economic damages per capita for developing countries often higher as a fraction of income (high confidence). Economic damages, including both those represented and those not represented in economic markets, are projected to be lower at 1.5°C than at 3°C or higher global warming levels (high confidence).” [Paragraph SPM.B.4.6]
Chapter 16 of the full report documents the extent of uncertainty and disagreement between researchers which meant that a robust qualitative or quantitative estimate was not possible.
This contrasts with the approach and conclusions of the contribution of Working Group II to the Fifth Assessment Report (AR5) in 2014. It stated:
“Global economic impacts from climate change are difficult to estimate. Economic impact estimates completed over the past 20 years vary in their coverage of subsets of economic sectors and depend on a large number of assumptions, many of which are disputable, and many estimates do not account for catastrophic changes, tipping points, and many other factors. With these recognized limitations, the incomplete estimates of global annual economic losses for additional temperature increases of ~2°C are between 0.2 and 2.0% of income (±1 standard deviation around the mean) (medium evidence, medium agreement). Losses are more likely than not to be greater, rather than smaller, than this range (limited evidence, high agreement). Additionally, there are large differences between and within countries. Losses accelerate with greater warming (limited evidence, high agreement), but few quantitative estimates have been completed for additional warming around 3°C or above. Estimates of the incremental economic impact of emitting carbon dioxide lie between a few dollars and several hundreds of dollars per tonne of carbon (robust evidence, medium agreement). Estimates vary strongly with the assumed damage function and discount rate.” [p. 19]
Promoting underestimates of the impacts
The summary from 2014 was based on a controversial section of Chapter 10 of the full report, which in turn was based on the flawed work of Professor Richard Tol, who was one of the two Coordinating Lead Authors. The estimates of economic damages made in AR5 were relatively low and as such were seized on by ‘lukewarmers’ such as Dr Bjorn Lomborg and other opponents of climate action, who ignored the caveats that the figures do not include important impacts, particularly the potential consequences of breaching climate thresholds and ‘tipping points’.
These opponents have also drawn attention to the work of Professor William Nordhaus of Yale University, who shared the Nobel Memorial Prize in Economic Sciences for 2018. Professor Nordhaus used outputs from his ‘dynamic integrated climate‐economy’ (DICE) model to argue that “optimal policy” would result in global warming of about 3°C by 2100 and 4°C by 2150.
These figures for the potential economic impacts have been shown by Nicholas Stern to be serious underestimates resulting from fundamental shortcomings of the methods used to generate them, and particularly the use of integrated assessment models by Professor Nordhaus and others.
Several other authors have drawn attention to these problems, and some even warned the IPCC to avoid relying too heavily on model estimates in its Sixth Assessment Report.
Improving the economic models
There is widespread acknowledgement among economists that the models have serious limitations. A recent paper by researchers at the Grantham Research Institute laid out in the journal Ecological Economics an analysis of the ways in which economic methods could be improved to provide better estimates of climate change impacts. Indeed, new research has sought to improve them, for instance by providing better estimates of the consequences of breaching climate thresholds and tipping points.
Economists point out that estimating the impacts is inherently difficult because they have to draw not only on scientific assessments of physical risks but also on analyses of the potential social and economic responses to them. They stress that they do not ignore evidence but instead that the information they need to produce more accurate estimates is simply not available at present. It is difficult to include impacts that they cannot quantify, hence leading to lower estimates.
Applauding the IPCC’s honest assessment of the models
Fortunately, although the first draft of the contribution of Working Group II to the Sixth Assessment Report did cite Professor Tol’s more recent work – which despite being updated since AR5 has also been shown to contain errors – subsequent versions moved away from reliance on these figures and instead recognised the strong disagreements about the value of the model outputs.
The IPCC set up a working group to assess the literature on estimating the potential global aggregate economic costs of climate change and the social cost of carbon (SCC).
In Chapter 16 it states:
“Critiques and commentaries of global estimation methods include, among other things, concerns about statistical methods estimating weather but not climate relationships, making out-of-sample extrapolations, and model specification uncertainty, concerns about the observational grounding of structural modelling, overall concerns about the lack of adaptation consideration, as well as representation and evaluation of potential large-scale singular events such as ice sheet destabilisation or biodiversity destruction, some questioning the ability to generate robust estimates (i.e. estimates insensitive to reasonable alternative inputs and specifications), and general concerns about methodological details, transparency, and justification”.
“Additional methodological challenges to address include how to capture and represent uncertainty and variability in potential damage responses for a given climate and societal condition, combine estimates from different methods and sources (including aggregating independent sectoral and regional results), assess sensitivity and evaluate robustness of estimates (including sensitivity to model specification), capture interactions and spillovers between regions and sectors, estimate societal welfare implications (versus GDP changes) of market and non-market impacts, consider distributional effects, represent micro and macro adaptation processes (and adaptation costs), specify nongradual damages and non-linearities, and improve understanding of potential long-run economic growth effects. Note that, the treatment of time preference, risk aversion, and equity considerations have important welfare implications for the aggregation of both potential economic impacts and climate change mitigation costs.”
This honest assessment of the many challenges preventing robust estimates of the potential economic costs of climate change should give impetus to those researchers who are seeking to advance this area of study. It should also serve as a warning to policymakers that they should be sceptical of current estimates, particularly those promoted by opponents of climate action.