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

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

ClimateChangeQuestionAlexParfenovDreamstimeAlex Parfenov/DreamstimeWhen 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?

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  • Domestic Dissident||

    "I gots to know!"

  • sarcasmic||

    Why is it assumed that the economic impact must be negative?

    Seems like some textbook question begging to me.

  • JFree||

    I think that's a safe assumption. Whatever the impact is, it will be different than now. Which means that whatever has been invested in what IS now will become less useful and new investments will be required to get any benefit from what BECOMES in future. It's basically similar to Bastiat's broken window - but a different way of incurring the opportunity cost and capital waste.

    And it's a VERY safe assumption that we today will screw over those generations that have to make those decisions then

  • sarcasmic||

    I dunno. What if increased CO2 results in greater crop yields? Is that negative? What if warming opens up areas that are currently frozen all year long to exploration for natural resources, farming or tourism? Bastiat's broken window illustrates the unseen vs the seen. You talk of the seen. What about the unseen?

  • Sevo||

    More than the seen/un-seen, the 'broken window' shows capital being diverted to return to an existing condition, not to take advantage of other opportunities.

  • sarcasmic||

    Like capital being diverted from known technology to politically favored groups in order to save the planet from the climate boogeyman?

  • Sevo||

    "Like capital being diverted from known technology to politically favored groups in order to save the planet from the climate boogeyman?"

    JFree is arguing that future investment in opportunities is 'broken window', when his proposed solution is massive expenditures to 'get back to where we were'; exactly the opposite.

  • Sevo||

    "I think that's a safe assumption. Whatever the impact is, it will be different than now. Which means that whatever has been invested in what IS now will become less useful and new investments will be required to get any benefit from what BECOMES in future."
    Yes, but there is no reason to believe that those investments won't pay off more than the current situation.

    "It's basically similar to Bastiat's broken window - but a different way of incurring the opportunity cost and capital waste."
    Responding to changing conditions and other opportunities is NOT fixing a broken window.

    "And it's a VERY safe assumption that we today will screw over those generations that have to make those decisions then"
    Yes, if we allow the government to direct the economy now, we most certainly WILL screw out decedents.

  • BYODB||

    None of your assumptions are true. Just because something is 'different' in the future it doesn't necessarily follow that what is invested now will become less useful. If that's how it worked, investing would not be a thing in any shape or form.

    Do you logic?

  • Kivlor||

    It's assumed that the impact must be negative because the people in charge of the narrative are primarily pagan Gaia worshipers, and their eschatology calls for Gaia to strike us down in anger.

    For those who have a more reasonable outlook, it seems safe to presume that rising temperatures will have some negative and some positive effects. A warmer world will in general be better for crops, both due to temperatures being more conducive, but also due to increased moisture in the atmosphere. As someone else pointed out, exploration of the poles for resources may become possible.

    No one knows if it will be positive or negative on the whole. The real issue is the black swan events that will inevitably arise. Will they benefit us, or harm us?

  • buybuydandavis||

    "So the question is: How lucky do you feel?"

    Pretty damn lucky. I'm living at a time when I'll conceivably make it to longevity escape velocity.

    2100 is well past revolutions in AI, robotics, nanotech, and genomics. I'm much more skeptical of economic models out to 2100 than I am of climate models.

    Singularity is Coming Soon!

  • Kivlor||

    I remain pretty skeptical of Kurzweil and his predictions for longevity. All of the breakdowns I've seen indicate that although the average lifespan has been on the rise in accordance with his models, what has not changed at all is maximum life span. People just seem to have an expiration date, and so far we haven't been able to alter it. What we've become exceedingly successful at is reducing the number of people who die well in advance of that date, especially the very young.

  • Sevo||

    "People just seem to have an expiration date, and so far we haven't been able to alter it."

    Agreed.
    It is a fact that there is no single biologic system which breaks and causes death; any number of them can. Fixing one means the other it gonna getcha.
    But I'm not opposed to fixing them so long as I can afford to do so and choose to do so.

  • Fist of Etiquette||

    Speak for yourselves. I've been combining the DNA of the Heterocephalus glaber with my own which should add to my longevity. And obviously I've been transfusing the blood of teens on a regular basis. If all that fails to increase my lifespan, I will, of course, just like all of you, take the rather pedestrian step of uploading my consciousness into an automaton.

  • BYODB||

    There's something called a telomere that is one limiter on the human lifespan. Eventually, you genetic code starts cutting off important bits of information instead of a telomere which causes any number of unpleasant deaths.

    DNA doesn't infinitely replicate itself in humans, or I guess it's more correct to say that it does but at some point it stops replicating accurately.

  • silver.||

    I think it's fine to examine climate change from another angle, but as the article said, both climate change and economics have a lot of "unknown unknowns." Models for both could be wildly inaccurate. That said, I think there's a lot of reason for optimism about human versatility.

  • Sevo||

    The proposed alternative attempts, yet one more time, to make centralized planning work; a triumph of optimism over historical fact.
    Besides which, I've yet to see one of the suggested techniques, or a combination, even come close to achieving what is claimed to be required.
    So we're offered a strategy which has shown itself to be a resounding (and dangerous) failure, to try techniques which are by all accounts are bound to fail.
    All at tremendous cost.

  • BYODB||

    A lot of people like to forget that economics isn't a hard science for some reason. Climate 'science' pretends to be one, but it's more of a bullshit amalgam that pretends there's some grand unified theory of physics that doesn't exist.

  • Microaggressor||

    When climatologists like James Hansen look at their models, they warn that higher temperatures and rising sea levels could make the planet "practically ungovernable."

    Well, I'm sold. All we have to do to achieve libertopia is idle our cars and burn lots of wood.

  • Alcibiades||

    More bad news.

  • JWatts||

    "...would make the average person feel as if she had lost 1.3 percent of her income."

    It's the global climate patriarchy oppressing her, duh!

  • Alcibiades||

    I 'm hoping Ron will give us his take on this paper linked in this essay:

    http://www.nationalreview.com/.....stribution

  • GroundTruth||

    If the "best" "cure" for climate change were scientifically shown to be something that increased global prosperity and liberty, it would not get anywhere as much traction as a plan of action that calls for more centralization of control, less personal freedom, and (finally, at long last!!!!) a reduction in the standard of living in the (terrible) developed countries.

    References to this paper will be buried on page 37 of the NY Times until clearer minds publish a paper showing that it contains errors in every paragraph.

  • Colossal Douchebag||

    About a third of the words in this column need air quotes, starting with "study".

  • ecology research paper||

    It was predicted that climate change would likely result in pronounced non-market impacts. Most of impacts were predicted to be negative. The literature assessment suggested that climate change would cause substantial negative health impacts in developing countries. It wasnoted that few of the studies they reviewed had adequately accounted for adaptation. In a literature assessment, it was found that in the studies that had included health impacts, those impacts contributed substantially to the total costs of climate change.

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