A group of economists has released a new estimate of the future cost of climate change that is making headlines. Consulting firm Deloitte says runaway climate change could cost the global economy dearly $178 trillion over the next 50 years.
Although climate change is hurting economies, there are plenty of problems with long-term estimates like this.
New technologies arrive and evolve. Human behaviors are changing. For example, who would have thought before the COVID-19 pandemic that a large percentage of the population would stop driving to the office and instead work from home?
I am a microeconomist who studies the causes and consequences of climate change. When I think about the challenge of climate change in 2040 and beyond, I anticipate many “known unknowns” about our future. Thus, I am amazed to read accurate estimates of climate costs such as those published by economic consultants like Deloitte and McKinsey & Co..
Deloitte new estimate predicts that the damage caused by greenhouse gas emissions, with global temperatures rising 3 degrees Celsius (5.4 F) above pre-industrial times, would slow growth in all regions and could reduce global GDP by 7.6% in 2070 alone compared to a world without climate change. This includes damages such as loss of productivity during heat waves and crop failure.
Figures like these are widely used to encourage action by governments, companies and individuals. Economists agree that climate change, if left unchecked, will harm economies. But these estimates are produced using formal models that have many assumptions, any of which could significantly disrupt the accounting, leaving the estimates extremely high or low.
While people might think they want “accuracy”, precise predictions increase the risk of transmitting too much certainty in an ever-changing world.
The challenge of prediction
Climate economic models seek to answer several prediction questions, such as:
- “What will we gain economically by reducing greenhouse gas emissions?
- “What will be the economic and quality of life impact if we do nothing and just let greenhouse gas emissions increase as ‘business as usual’?”
To answer these complex questions, climate economists make a series of assumptions that are “built into” their mathematical models.
First, economists need to predict the average global income per person for each coming year.
Macroeconomists faced challenges predict the timing and duration of recessions. Predict the future economic growth over 30 or 40 years requires predicting how the quantity and quality of the global workforce and our technology will change over time. Forecasting the growth of the world population is also a difficult exercise, because the increase in urbanization, women’s access to education, and improvements in birth control are all associated with reductions in fertility.
Second, they need to make an educated guess about what technologies will exist in the future regarding our sources of electricity generation and the energy we use in transportation. If they can estimate the future level of world population, income level, and technology, then they can measure the amount of additional greenhouse gas emissions the world produces each year.
Third, they use a climate science model to estimate the additional risk of climate change caused by producing greenhouse gas emissions. This is usually measured by the increase in global average surface temperature.
Fourth, they must take a position on how the output of our future economy will be affected by the growing risk of climate change. Ideally, these models also tell us how releasing more greenhouse gas emissions increases the probability of disaster scenarios.
By combining all of these equations with their own respective assumptions, a research team generates a unique number.
The “art” of predicting future emissions
Economists estimate future global greenhouse gas emissions by multiplying the projected global gross national product – the total value of goods and services – by the average emissions per dollar of gross national product.
If the world succeeds in ending the use of fossil fuels, this last figure could be close to zero. Innovation and deployment of low-carbon technologies — think electric vehicles and solar farms — can dramatically alter the costs and benefits that economists try to quantify.
Many factors determine this trajectory of technological advance, including investment in research and development. International politics does not always take climate economic models into account either. For example, if China chooses to become more insular, will it increase its consumption of coal because the nation is endowed with coal? Conversely, could China chooses to use its powerful state push the green technology sector to create a booming future export market that greens the global economy?
Prediction of future impacts of climate change
Mathematical economic models summarize the impact of climate change into a single algebraic equation called a “climate damage function”. In my book “Adapting to climate change”, I give several examples to explain why this function changes continuously and is therefore very difficult to predict.
For example, many companies develop climate risk rating systems to educate property buyers about the various future climate risks that specific properties will face, such as wildfires or floods.
Suppose this emerging industry of climate risk assessment makes progress in identifying less risky areas to live in, and zoning codes are changed to allow more people to live in these safer areas. The damage Americans suffer from climate change would lessen as people “literally move to higher ground.”
The confident climate modeler cannot capture this dynamic with inflexible algebra.
Prediction under uncertainty
Climate economics models can play a “Paul Revere” role in informing policy makers and the public about the likely risks ahead. As economists build these models, they need to be honest about his limits. A model that generates “the answer” can lead decision-makers astray.
Although everyone would like a concrete answer to the cost of climate change and the fight against climate change, we will have to live with uncertainty.