Calculating the true cost of global climate change

The models also calculate future harms using predicted average increases in temperature or precipitation. But scientists don’t believe temperatures and precipitation will be uniformly average around the planet. Instead, they foresee more - and more severe - extreme events: more powerful hurricanes and storms, record floods, searing heat waves and droughts, bigger wildfires. In fact, the US has already experienced a higher-than-average amount of warming. A graph showing these events would not only have a long tail (i.e. the events are more extreme), but the tail would also be fatter (i.e. more events). “The damages grow much worse as we get more extreme events,” explains Hanemann. “We need to pay more attention to the tail.”

Nordhaus says that his model doesn’t neglect the idea of extreme events. “It’s completely wrong to say we’ve ignored it,” he says. But even supporters acknowledge that not everything is in the models, including a full treatment of extreme events. “Nordhaus’ model was never intended to be the kitchen sink,” says Mendelsohn.

Critics say that’s a serious flaw. “Many, many of the costs associated with climate change are not included in the models,” says NYU’s Livermore. Additional examples include acidification of the oceans from the absorption of carbon dioxide, which could threaten ocean food chains; loss of glaciers, which could cause water shortages and reduce hydropower; sea level rise, which could flood coastal cities; and mass migrations and increased global tensions, as people move away from regions hit harder by of the effects of climate change. The military takes these possibilities seriously, noting that climate change is a “threat multiplier”.

Harvard economist Martin Weitzman even suggests that the economic costs of a catastrophic event, however unlikely it might be, would be so enormous that it would overwhelm the whole analysis. “Perhaps in the end the climate-change economist can help most by not presenting a cost-benefit estimate for what is inherently a fat-tailed situation with potentially unlimited downside exposure,” he writes.

True, the models don’t include all possible costs or catastrophes, Nordhaus and Mendelsohn respond. For one thing, the models calculate the damages from climate change only in terms of economic activity. They don’t assess damages from non-market effects like loss of species. Take ocean acidification, which makes climate change more worrisome than it appeared to be in the 1990s, Nordhaus says. The direct economic damages from acidification are negligible. “We know the actual economic impacts are almost sure to be small because they involve fisheries, which are already pretty small, and they involve only ocean fisheries that are sensitive to carbon,” Nordhaus says.

Similarly, the calculated damages from extreme events are small, Nordhaus and Mendelsohn say. While the estimated cost of Hurricane Katrina topped $150 billion, hurricanes don’t actually hurt the economy, as measured by GDP. “If your million-dollar house blows away tomorrow, it would not affect GDP,” explains Nordhaus. The reason: spending to rebuild stimulates the economy. “This is one of the ways in which GDP is a flawed measure,” Nordhaus adds. Mendelsohn has spent years trying to figure out what the additional damages from extreme events might be - and he argues that they don’t amount to much. “As long as we didn’t measure this number, the perception was that it was huge,” he says. “But when we actually measure it, it turns out not to be big.”

That assertion is a matter of fierce debate, however. The damages are far higher, Hanemann and others believe. In Hanemann’s analysis, the economic toll from unconstrained climate change in the US is three to four times higher than Nordhaus’ model calculates.

Other new analyses have similar results. Livermore and his colleagues looked at the economic benefits of the Waxman-Markey legislation passed by the House of Representative last year, including the avoided harm from climate change, and compared those benefits to the price tag for the bill. “The benefits outweighed the costs by nine to one,” says Livermore.

The US Environmental Protection Agency is also expected to conclude that inaction is costly. With climate legislation apparently dead, regulation under the Clean Air Act is the only remaining pathway to federal curbs on greenhouse gases. To bolster its case in the face of strong opposition, the agency is working on a more detailed analysis of the costs and benefits of regulation, sources say. Past Administration efforts to assess the economic toll used Nordhaus’ basic approach. But because of the limitations of the economic models, the agency is also planning to examine scenarios of possible climate change, and expects that it will find a large economic toll. “We think the costs of not acting will be huge,” says one EPA official.

Nordhaus acknowledges that the small hit to the GDP of rich nations from climate change predicted by his model is just part of the overall story. “I’ve been working on this a long time,” he says. “The facts have changed, and my view has changed.” For example, “emissions and temperatures are rising faster than earlier models thought and the geophysical impacts look more serious,” he says. So even if direct economic impacts are small, “ecologists and biologists have made a pretty serious case that other things are at risk,” he says. “I think the non-market impacts have turned out larger than I thought and what the community [of economists] thought.” Those non-market impacts don’t show up in the results of the economic models.

In addition, Nordhaus says he now has a greater appreciation for the unknowns, including potential catastrophes. “The uncertainties are enormous,” he says. “If you include them, you can say almost nothing about the second half of the century.”

Nordhaus’ own conclusion is that action on climate is needed, especially since his analysis also shows that the economic costs of reasonable policies are relatively small. Indeed, there’s no longer a debate among economists that action should be taken, says Mendelsohn: “The debate is how much and when to start. If you believe there are large damages, you would want more dramatic immediate attention. The Nordhaus camp, however, says we should start modestly and get tougher over time.”

Regardless of the role played by economists in the global warming debate, the view that climate change is not to be feared has contributed to the delay in the world’s response. Even Nordhaus says he’s “stunned” by the lack of progress in tackling climate change. “It doesn’t matter if I, or Weitzman, or Hanemann are right on this,” says Nordhaus. “We’ve got to get together as a community of nations and impose restraints on greenhouse gas emissions and raise carbon prices. If not, we will be in one of those gloomy scenarios.”