Right Now We ‘Grossly Underestimate’ Economic Damage From Climate Change, New Paper Says

Our current models “grossly underestimate” the economic damage that will be wrought by climate change, according to British climate change economist Lord Nicholas Stern. So he and a colleague just published a new preliminary paper that makes a few key updates.

Right now lots of mainstream climate research, including the Intergovernmental Panel on Climate Change (IPCC), relies on versions of the “DICE model” to project the damage climate change will do to the global economy in computer simulations. And so far, the modeling done by IPCC has predicted relatively modest hits to world economic production from climate change if global carbon emissions continue on a business-as-usual path. But the DICE model also has several well-known limitations, including an overly simplistic model of how the economy grows, too little attention to climate sensitivity, and too little attention to certain extreme risks. When Stern and Simon Dietz — colleagues at the London School of Economics’ Grantham Research Institute on Climate Change — retooled the model to address this issues, they found the modest hits ballooned into massive reductions within the next two centuries.

The updated analysis of economic growth itself didn’t change the business-as-usual path too dramatically. But when it was combined with the midrange numbers from Stern and Dietz’s updated climate sensitivity, the resulting projection shows global living standards peaking around 2150 and then dropping — leading to an overall collapse of almost two-thirds from where they would otherwise be in 2200 under the standard models. Incorporating the high-end climate sensitivity numbers and the possibilities of extreme risk, global living standards peak before 2100, then collapse down to or below where they were in 2005.

From there, Stern and Dietz determined that the price of carbon emissions should fall between $32 and $103 per metric ton in 2015, and should then rise to between $82 and $260 per metric ton by 2035.

Stern and Dietz’s updates to the DICE model focused on three areas:

A new model of how economies grow. The old DICE model looks at any point in time, measures the economy’s productive capacity, and then gauges how much climate change will dampen that productivity in that moment. But climate change can also reduce that productive capacity itself. Stronger storms can damage infrastructure; sea level rise can force people to abandon homes, businesses or equipment; and climate damage can channel more investment into repairs and away from creating new capital. Stern and Dietz account for that, and the result is a double hit: at any given moment, the effects of climate change are reducing the economy’s ability to produce wealth, but they’re also but also reducing the economy’s overall capacity to produce wealth at future moments.

Considerations of higher climate sensitivity. Other factors in modeling climate change’s economic effects are what scientists call “tipping points” — moments when global warming kicks off feedback loops in the planetary ecology that cause the effects to speed up. Examples of tipping points include the polar ice melting in a way that result in sudden huge collapses rather than gradual melting; or melting permafrost in the northern hemisphere releasing underground methane that in turn speeds up global warming even more. (They can also include second-order social effects that damage economies: drought and food scarcity kicking off wars or mass refugee movements, for instance.) A lot of research suggests tipping points are a real threat, so climate sensitivity in the models should be high. But the DICE model assumes climate sensitivity is only modest. So Stern and Dietz also included a greater range of climate sensitivity metrics that reach higher.

Considerations of extreme risk. Another key issue in the modeling is how seriously to take unlikely-but-possible cases of extreme damage from unknown and unpredictable changes as the globe heats up. The models that DICE and IPCC rely upon take a relatively simplistic approach to estimating that risk, and thus the appropriate investments to avoid it. So Stern and Dietz took an updated approach to modeling the possibility of those extreme circumstances as well.

These limitations can deliver some ridiculous results. For instance, the traditional DICE model shows a global temperature rise of 18°C would only reduce the global economy by half. But scientists agree this is obviously wrong; such an extreme rise would almost certainly render the planet uninhabitable for humans.

“It is extremely important to understand the severe limitations of standard economic models, such as those cited in the Intergovernmental Panel on Climate Change (IPCC) report, which have made assumptions that simply do not reflect current knowledge about climate change and its potential impacts on the economy,” said Stern.

“Models that assume that catastrophic damages are not possible fail to take account of the magnitude of the issues and the implications of the science.”

Stern previously oversaw the creation of a landmark report for the British government, that calculated climate change could reduce the global economy by anywhere from 5 to 20 percent. Stern later concluded that report itself likely low-balled the risks, and he’s now working on an update that will likely be published this September.