Calculating the true cost of global climate change

When climate legislation died last summer in Congress, one cause was the powerful drumbeat of claims that the bill would bring economic disaster. The legislation would amount to a massive tax hike, devastating an already crippled economy and throwing more people out of work, charged Senator James Inhofe (R-Ok) and Glenn Beck. It would be “the final nail in the coffin of the American middle class”, proclaimed an ad from the Conservative Society of America. Despite supporters’ protests that the price tag of greenhouse gas curbs would be modest, voters’ fear of hits to their pocketbooks forced even many Democrats to backpedal.

The heated argument about economic costs, however, barely touched one vitally important issue: the costs of NOT taking action on climate. What if last summer’s Russian heat wave and drought, which destroyed one third of the country’s wheat crop, or the catastrophic floods in Pakistan and China, or category 5 hurricanes like Katrina are just glimpses of future havoc from warming left unchecked? As Kevin Trenberth, head of the Climate Analysis Section at the National Center for Atmospheric Research, observes, “Certain events would have been extremely unlikely to have occurred without global warming, and that includes the Russian heat wave and wild fires, and the Pakistan, Chinese, and Indian floods”.

The economic costs of such disasters could make even inflated estimates of the legislation’s price tag look small, says University of California, Berkeley, economist Michael Hanemann. Yet Congress didn’t seem to care. “The question of damages from climate change never penetrated the debate in Washington,” Hanemann says.

Why not? Partly, it was a conscious political calculation. Polls show that scare tactics work better to block legislation than to bring sweeping change. The Obama Administration and environmentalists decided to tout the clean energy industries that could be created and boosted by the climate bill, rather than warn of withered crops or drowned cities from heat and rising sea levels. “The assumption has been that focusing on short-term job creation would be a more compelling political argument,” says Dan Lashof, director of the Natural Resources Defense Council’s climate center.

More importantly, there’s a deeply rooted perception that the US economy will suffer little damage from climate change. That view dates back to work from the mid-1990s by the influential Yale University economist William Nordhaus (PDF 78KB). Nordhaus took what was known about the science of climate change, then constructed an economic model to estimate the monetary harm. The model put the economic cost to the US of raising global temperatures by 2.5 to 3 degrees C (expected by about 2100) at about ¼ to ½ per cent of GDP. “There are both good and bad impacts, but they offset each other,” explains Robert O. Mendelsohn, professor of forest policy and economics at Yale University and a frequent collaborator with Nordhaus.

The original economic model wasn’t complete, Nordhaus readily acknowledges. It didn’t include some sectors of the economy or “non-market” damages - effects that economists can’t easily quantify, such as loss of species. “We basically guessed on those, and that got us up to between 1 and 2 per cent of GDP,” says Nordhaus - still relatively small. Since then, Nordhaus has worked extensively on the analysis, but the general conclusion is the same. There’s little threat to US GDP. “Do I think that the measured GDP of the US or Britain or Japan is seriously at risk from global warming over the next 100 years?” Nordhaus asked in an interview. “No,” though he adds that “GDP is a poor indicator of economic welfare”.

Other experts see the hit to GDP as much greater. “We did a survey of top economists in the country, asking what they think about the costs and benefits of climate legislation,” says Michael Livermore, executive director of the Institute for Policy Integrity at New York University School of Law. “They said that climate change is a clear threat to America and the global economy.” Adds Berkeley’s Hanemann: “I don’t want to be Dr Gloom, but our complacency in the US is wrong.”

An earlier version of this debate flared into public view and the media for a short time in 2006. A report prepared for the British government by economist Sir Nicholas Stern (PDF 65KB) found that the cost of unconstrained global warming would be huge - up to a 20 per cent drop per year in the world’s GDP by 2050. The widely disparate conclusion compared to Nordhaus’, however, turned largely on one single factor: Stern put a higher value on costs far out in the future - and on the future return from climate change reduction investments made today - than Nordhaus did. Or in economists’ jargon, he used a lower discount rate. “You can change the discount rate and get a totally different answer,” explains NRDC’s Lashof.

Who’s right? The late climate scientist Stephen Schneider liked to ask economists if they really do value their grandchildren far less than their children, as implied by a higher discount rate. Nordhaus, who dismissed the Stern report in a 2007 book as “political in nature,” with “advocacy as its purpose,” says that’s not a fair comparison. “The argument is not how we value our grandchildren, it’s primarily about the return on capital,” he says. “My view is that the return on capital is high, so that the threshold is pretty high if we are going to compete with other uses of our investment dollars.” That makes efforts to fight global warming seem less cost-effective.

But the tiff over discount rates is really a sideshow. There are now new critiques of the low estimates of the costs of climate change that challenge core details of how those damages were calculated, such as whether the analyses correctly included the costs of heat waves, more intense hurricanes, and other extreme events predicted to become more common. The original work “has been enormously influential, but for a number of reasons, I think the analysis is profoundly wrong,” says Hanemann.

One issue cited by the critics is that the models assume that many of the costs of climate change in the US are balanced by benefits - or that it will be easy to adapt. For instance, heat waves in summer mean higher energy costs and more deaths from heat. However, warmer winters save fuel and lives, so in the economic models, the two generally balance out. And sure, if temperature rises above 95 degrees F, corn pollination starts to fail. But defenders of the models figure cornfields could just move to cooler areas. “If you take adaptation into account, this turns out not be such a big effect,” argues Mendelsohn.

The critics say these conclusions are far too optimistic. Hanemann points out that summer air conditioning requires expensive daytime peak power, while the winter savings come from much cheaper night time baseload power. So the overall costs must be higher. Similarly, damages to agriculture from heat waves and droughts are likely to swamp benefits from milder winters and longer growing seasons - and moving crops to better climes may be costly or difficult. Nordhaus partly agrees. “The damages will differ by crop and by region,” he says. “I think the numbers will be large for some regions, such as those now bordering on desertification.”