Climate Change

Economic Impacts of Climate Change Likely Limited in This Century, Says New Study

Combining econometric and climate models: How lucky do you feel?


Alex Parfenov/Dreamstime

When climatologists like James Hansen look at their models, they warn that higher temperatures and rising sea levels could make the planet "practically ungovernable." The Pennsylvania State University climatologist Michael Mann claims that unabated man-made global warming will "impose enormous costs on future generations."

When economists, by contrast, peer into the entrails of their integrated assessment models, they don't forsee a climate-induced economic catastrophe—at least not in this century. Last August, for example, the Yale economist William Nordhaus and his China-based colleague Andrew Moffatt surveyed 36 different estimates (derived from 27 studies) of climate change's impact on gross world product by the year 2100. Taking their results into account, I roughly calculated that a 3°C increase in average temperature would reduce global GDP in that year from $872 trillion to $854 trillion, and income from $97,000 to $95,000 per capita.

Now a new study by the University of Sussex economist Richard Tol has come up with similar results. "Current estimates indicate that climate change will likely have a limited impact on the economy and human welfare in the twenty-first century," Tol reports.

To reach this conclusion, Tol took into account 27 published estimates of the total economic impact of climate change, taken from 22 studies. They suggest, he finds, that initial warming is positive on net, while further warming would lead to net damages. By 2100, the negative effects of warming predominate, with the consequence that "a global warming of 2.5ºC would make the average person feel as if she had lost 1.3 percent of her income."

While most income estimates stemming from an average temperature increase of 2.5ºC by 2100 are negative, some are actually positive. Considering this range of estimates, Tol offers another way to think about how climate change by 2100 will affect incomes: "The welfare change caused by climate change is equivalent to the welfare change caused by an income change of a few percent. That is, a century of climate change is about as good/bad for welfare as a year of economic growth."

Tol acknowledges that the impact of climate change on water resources, transport, migration, violent conflict, energy supply, space cooling, and tourism and recreation have not received sufficient attention. As a consequence, he rather laconically observes, "Estimates of the impact of climate change are thus incomplete."

And then there is the question of risk. Perhaps the integrated assessment models that try to combine climate change and economic change over the next 80 years are sufficiently accurate to rule out unpleasant surprises, such as much faster warming or greater shifts in weather patterns.

Joseph Majkut, the director of climate policy over at the Niskanen Center, once asked how high the risk of climate change has to be to prompt action. Majkut cites Bob Litterman, a hedge fund manager who argues that climate change is an undiversifiable risk that would command a higher risk premium. Litterman likens climate change risk to the systemic risk that investors face in the stock market. It is hard to hedge when unknown unknowns can cause the prices of all assets to decline at once.

On the other hand, the Nordhaus and Moffatt survey of studies also found "no indication from the damage estimates of a sharp discontinuity or high convexity." In other words, the studies do not identify any systemic risk, such as threshold effects in which damages from climate change will accelerate.

So the question is: How lucky do you feel?