By Mark John
November 22 (Reuters) – Ahead of international climate talks in Dubai this month, economists are updating estimates of the impact of global warming on the world economy, sometimes calculating to the nearest decimal place the hit to production in coming decades.
But critics say those numbers are the product of economic models that are inadequate to capture the full extent of climate damage. As such, they can provide an alibi for political inaction.
Record temperatures, droughts, floods and wildfires this year have caused billions of dollars in damage, even before emissions start to heat up. beyond the 2015 Paris Agreement limit of 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial levels.
However, some economist models conclude – improbably, critics say – that by the turn of the century, warming will cause less damage to the world economy than COVID-19, or hit global stocks less than in the 2007-2009 financial crisis. .
Nobel-winning American economist William Nordhaus sparked controversy in 2018 with a model that found that the climate policies that best balanced the costs and benefits from an economic point of view would result in warming of more than 3C by 2100.
A year earlier, the Trump administration cited similar models to justify replacing the Obama-era Clean Power Plan with one allowing higher emissions from coal-burning plants.
Many policymakers acknowledge the model’s limitations: European Central Bank executive Isabel Schnabel said in September that it could reduce the impact. Others go further, saying the whole approach is flawed.
It’s about the “integrated assessment models” (IAM) that economists use to draw conclusions about anything from output losses to financial risk or the prices of carbon markets.
They rely on a theory of how demand, supply and prices interact throughout an economy to find a new equilibrium after an external shock—the so-called “general equilibrium” model developed by 19th-century French economist Leon Walras.
“But climate change is fundamentally different from other shocks because once it hits, it doesn’t go away,” said Thierry Philipponnat, author of a report by Finance Watch, a Brussels-based public interest NGO on financial issues.
“And if the fundamental assumption is flawed, all the rest makes little sense – if any,” he told Reuters.
Another issue is that IAMs have for years used a “quadratic function” to calculate GDP losses which involves squaring the temperature change – ignoring other methods such as the exponential function which is more appropriate for rapid change.
Critics say that this choice is doomed to reduce the likely impact – especially if the planet hits a medium tipping points in which damage is not only irreversible but occurs at an increasingly rapid rate.
THE FLOWER TEST
Adding to the confusion, IAMs produce sharply different results depending on their specific design and the variables they choose to include, making interpretation difficult.
The 2023 update of Nordhaus’ model, described on his website as the “most widely used climate change IAM”, estimates damages of 3.1% of global GDP when 3C warming is reached.
By contrast, the latest run of the model used by the Network for Greening the Financial System (NGFS) – a group of central banks – calculates the path to 2.9C of warming in its “current policy” scenario by 2050 would cause 8% of lost output of hazards such as drought, heat waves, floods and cyclones.
Finance Watch also pointed to a 2020 study by the G20-backed Financial Stability Board (FSB), which cited economists’ estimates that 4C of warming could shave as much as 2.9% off the average value of global financial assets by the year 2105.
“None of the assumptions made by this relatively small group of economists about global warming ‘pass the smell test,'” University College London professor Steve Keen wrote in a paper this year on the need for economists. check their results against common sense. and prevailing climate science.
Nordhaus did not respond to an email request for comment.
The FSB said its 2020 paper highlighted how estimates of the hit to financial assets varied and that it was working with others to help authorities better understand the risks.
“To that end, the FSB has been working on the development of conceptual frameworks and metrics for monitoring climate-related vulnerabilities,” FSB Deputy Secretary General Rupert Thorne said in an emailed statement.
Livio Stracca, the ECB official who chairs the NGFS’s work on climate scenarios, said in an email that it openly accepted that, like any model, they have “certain limitations”. NGFS secretary general Jean Boissinot said the body wants to work with the academic community to resolve the issues.
But while advocates of IAMs say they are getting better, others like Nicholas Stern of the LSE/Grantham Research Institute said their focus is inherently too narrow to understand the extreme risks posed by climate change.
“They are misrepresenting the problem in terms of risk and in terms of what we need to know and do,” Stern told Reuters.
“We will have to look at energy models, cities, natural capital – and that is serious, deep economics around structural change,” he said, adding that this method would better guide the investment decisions needed to tackle climate change.
Finance Watch’s Philipponnat said the European Union, which sees itself as a leader on climate issues, would have an opportunity to embrace a broader approach with a major study on climate risks it planned for early 2025.
“Our main message is: ‘Economists, talk to climate scientists and come up with results that make sense,'” he said.
How big is the damage from a warming planet? Depends on your model
(Writing and reporting by Mark John; Editing by Barbara Lewis)
((mark.john@thomsonreuters.com;))
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