What’s the real cost of climate change, and where do all those numbers come from?
As serious governments shift the climate-change debate from whether the phenomenon exists to the best means to combat it, one of the first things officials want to know is how much economic damage it will cause — and how much measures to fight it might cost. It is the trillion-dollar question, and figures are flying everywhere. But what do these numbers really mean? And how can people who space out at the sight of so many zeroes make any sense of them?
The dwindling do-nothing crowd likes to cite the high cost of complying with the Kyoto Protocol, which is supposed to cut carbon dioxide emissions of the industrialized nations that ratified it. In the 2001 book The Skeptical Environmentalist, for example, Bjorn Lomborg put the cost of compliance at up to $350 billion per year by 2010 (in 2000 values). Even an outlay of this order, he has said, would merely delay warming for six years by the end of the century.
On the other side of the equation are those who tally the cost of inaction. Earlier this month, Sir Nicholas Stern, former chief economist of the World Bank, delivered a major report on the economics of climate change to Britain’s Chancellor of the Exchequer. Concluding that inaction would essentially reduce global GDP by at least 5 percent annually, he suggested that mitigation, by contrast, would use about 1 percent of global GDP annually. In a widely repeated warning, Stern said that climate change represents “the greatest market failure the world has ever seen.”
Many other figures are circulating as well. A 2005 study by Claudia Kemfert of the German Institute for Economic Research puts annual climate change-related costs at “up to 20 trillion U.S. dollars” in 2100 (though her paper does not sufficiently explain the assumptions underlying the model). Another 2005 study, prepared by British scientists for the European Commission’s Directorate General for the Environment, set the figure at $73 trillion by 2200 (in 2000 prices).
Both sources are cited in a well-publicized report from Tufts University [PDF], prepared for the environmental group Friends of the Earth. Inexplicably — and providing a cautionary tale about why one shouldn’t blindly trust numbers flung around the internet — the Tufts report adds an extra $1 trillion to the European Commission figure, bringing it to $74 trillion. That figure is widely cited throughout the report, but the Tufts authors admit that they muddled euros and dollars: the E.C. report clearly states a figure of 74 trillion euros, which equates — at 2000 conversion rates — to $73 trillion. Climate change apparently makes $1 trillion seem trivial, to take the charitable view.
All of these figures measure slightly different things. So which ones are right? None, most likely. If predicting changes in temperature and precipitation over the next century is difficult, it is even harder to guess the price tag. But number-crunchers on both sides of the debate will likely keep trying. If nothing else, they hope to remind the world just how much is at stake.
Variable, With a Chance of Showers
An economic figure can have almost infinite variables. Not only do the economic climate models need to predict policy shifts, population growth, and the pace and type of climate changes to come — more droughts, more severe storms, higher temperatures in some places and lower in others, etc. — but they also try to quantify things such as agricultural and forestry losses, damage from catastrophic storms, utility costs, savings from efficiency improvements, water shortages, and sometimes even the economic consequences of refugee flows. It is hard enough to put a figure on any one of those costs, let alone amalgamate them.
Whatever the exact figure, it is likely to be high. Losses from weather disasters are already well into the billions. In Texas alone, a drought that began last year has put crop and livestock losses over $4 billion, according to local economists. Losses from Hurricane Katrina have been estimated as high as $135 billion by insurer Swiss Re. These particular events may or may not be related to global warming (and, as always, such numbers should be subject to skepticism). But if global-warming predictions bear out — with more prolonged droughts, more severe storms, more flooding — then figures of this magnitude will become standard.
One of the most vexing aspects of predicting climate change, of course, is that future outcomes are highly uncertain. Most models of economic impacts discount the effect of events in the distant future, because they cannot be predicted as easily. But most do predict a range of weather scenarios, and warming watchers are eagerly awaiting next spring’s report from the Intergovernmental Panel on Climate Change. It will roll multiple models together, a useful exercise last done by IPCC in 2001. Data from the 2001 study, used by many for extrapolation, are already out of date.
Photo: International Monetary Fund
As technology and forecasting techniques improve, predictions rapidly grow stale. Stern’s report considers that “earlier models were too optimistic about warming,” as temperatures may rise by more than 2 to 3 degrees Celsius by 2100. While the IPCC’s next report should clarify that point, climate change may be moving faster than an intergovernmental panel can churn out labor-intensive reports.
Economic predictions, it should be noted, are just as vulnerable to time as weather predictions. If the United States miraculously institutes a carbon tax tomorrow, all the models that predict climate-change costs under “business as usual” scenarios will be immediately obsolete. Similarly, studies such as Stern’s that predict the costs of mitigating climate change are also quickly outdated unless action is immediately taken.
Do the Math
If you’re still reading, and not entirely scared off, consider a closer inspection of Stern’s numbers. His calculations derive partly from 2001 IPCC numbers: he believes that business as usual is likely to “imply a rise of 4 to 5 degrees C or more above pre-industrial levels within the next 100 or 150 years.” The study suggests that will lead to an “average reduction in global per-capita consumption of at least 5 percent, now and forever.”
But Stern’s objective was to find a range of possible outcomes, and 5 percent is at the low end. There are several things that number does not include. It does not take systematic account of “direct impacts on the environment and human health” — things such as mortality from extreme events like heat waves or tsunamis, for instance. Were these included, Stern says, they could push the cost of ignoring climate change higher, from 5 percent to 11 percent of global per-capita consumption.
He also separately considers two other issues: increased “feedback loops,” the sort of catch-22 of climate change — for example, melting permafrost releasing more carbon dioxide into the atmosphere — and the disproportionate impact on the poor. Adding these on, Stern pushes the global-consumption impact number up to 20 percent.
As for the economic impact of mitigating climate change, Stern’s 1 percent of GDP calculation rests upon an assumption of stabilization of emissions in the next 10 to 20 years, which he says would make a temperature rise above 4 degrees Celsius unlikely. Even the 1 percent figure is an estimate: It derives from two economic models, one of which shows a range from a 3.5 percent loss of GDP to a 1 percent increase, and the other of which shows a range of a 2 percent loss to a 5 percent gain.
The ranges reflect factors that include “the pace of technological innovation and the efficiency with which policy is applied across the globe: the faster the innovation and the greater the efficiency, the lower the cost.” The future benefit of acting today to control emissions, Stern concludes, would be on the order of $2.3 trillion to $2.5 trillion.
Whose Coulds These Are I Think I Know
Stern’s conclusions have stirred up severe criticism. Jerry Taylor of the Cato Institute thinks his assumptions show signs of cherry-picking: the report used “upper-bound estimates for warming” (i.e., a rise higher than 2 to 3 degrees Celsius), but lower-bound estimates for the economic cost of reducing emissions. Another problem, says Taylor, is that Stern assigns probabilities that are too high to extreme weather events — for example, the Gulf Stream turning Britain into an ice cube. “We haven’t the faintest idea of whether the Gulf Stream will do anything,” he says.
In early November, Lomborg challenged the Stern conclusions in The Wall Street Journal, terming them “fear-mongering arguments” that have been “sensationalized.” Among his contentions is that Stern “assumes we will continue to pump out carbon far into the 22nd century — a rather unlikely scenario given the falling cost of alternative fuels.” Lomborg also challenges Stern for pegging the social cost of carbon dioxide — meaning the net present value of the long-term impacts of one ton of carbon dioxide emitted today — at $85 per ton, while William Nordhaus, a Yale professor and a respected authority on the subject, has put it at $2.50 per ton. (Lomborg’s swipe seems to reveal yet another discrepancy: Stern used metric tons, while Lomborg’s article referred to the short tons familiar to the U.S.)
It bears noting that scientists who have followed climate change for years have drawn grimmer conclusions as new data have trickled in. Among them is Nordhaus.
In 1999, Nordhaus and a colleague, Joseph Boyer, estimated that the impact of warming would amount to around 2 percent of global output for a 3-degree Celsius rise. This summer, a paper published in The Proceedings of the National Academy of Sciences put forward a scenario whereby if carbon dioxide concentrations doubled, impacting temperature as well as precipitation, global output could be reduced by 3 percent. Though his model is, by his own admission, somewhat simplistic, Nordhaus says his conclusions reflect an estimated impact from global warming that is “larger than most existing estimates of market damages.”
In the end, any calculations such as those put forth by Stern, Nordhaus, Lomborg, or others are enormously complex. They are bound to be subject to criticisms both valid and unreasonable. But are they useless? No.
As Jonathan Pershing of the World Resources Institute puts it, such studies “tend to help you frame your policy ideas,” by forcing policymakers to think about different circumstances that might arise from climate change. In other words, we might not know all the answers, but at least we’re working on the problem.