What's Wrong With Climate Change Economics In One Chart

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”

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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