Nov 22 (Reuters) – Ahead of international climate change talks in Dubai this month, economists are updating their estimates of the impact of global warming on the world economy, and in some cases for decades to come. The hit to production is calculated to the decimal place.
But critics say these numbers are the product of economic models that are ill-suited to capturing the full extent of climate damage. They can therefore provide an alibi for policy inaction.
This year’s record temperatures, droughts, floods and wildfires are even before emissions warming exceeds 2 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels, the upper limit of the 2015 Paris Agreement. Caused billions of dollars in damage.
Still, some economist models suggest that, incredibly, by the end of this century, global warming will be less harmful to the global economy than COVID-19, and that global stock prices will be hit less than in 2007-2009. They conclude that it will be smaller than the financial crisis. .
Nobel Prize-winning American economist William Nordhaus published a model in which the climate policy that best balances costs and benefits from an economic perspective would lead to global warming of more than 3 degrees Celsius by 2100. It sparked controversy in 2016.
A year ago, the Trump administration cited a similar model to justify replacing the Obama-era Clean Power Plan with one that would allow for higher emissions from coal-fired power plants.
Many policymakers have acknowledged the limitations of modeling, with European Central Bank board member Isabel Schnabel saying in September that modeling could underestimate the impact. Still others argue that the entire approach is flawed.
At issue are integrated assessment models (IAMs), which economists use to draw conclusions about everything from production losses to financial risks to carbon market pricing.
They are a theory of how demand, supply, and prices interact across an economy to find a new balance after an external shock, a theory developed by the 19th century French economist Léon Walras. It relies on the so-called “general equilibrium” model.
“But climate change is fundamentally different from other shocks because once it occurs, it doesn’t go away,” said Thierry Philippona, author of the report for Finance Watch, a public interest NGO based in Brussels. Ta.
“If the basic assumptions are flawed, then everything else has little, if any, meaning,” he told Reuters.
Another problem is that for many years IAM has used a “quadratic function” to calculate GDP loss that involves the square of temperature change, ignoring other methods such as exponential functions that are better suited to rapid changes. That’s what I’m doing.
Critics say this choice is doomed to underestimate possible impacts, especially if the Earth reaches an environmental tipping point and the damage is not only irreversible but accelerating. .
smell test
IAM produces widely different results depending on its specific design and the variables you choose to include, making it difficult to interpret and adding to the confusion.
The 2023 latest version of Nordhaus’ model, described on its website as “the most widely used climate change IAM,” estimates that reaching 3°C of warming would cost 3.1% of global GDP. It is estimated that it will reach %.
In contrast, the latest run of a model used by the Network for Greening the Financial System (NGFS), a group of central banks, found that its “current policy” scenario would cause 8% warming by 2050. The path to 2.9 degrees of global warming has been calculated. Loss of production due to disasters such as droughts, heat waves, floods and cyclones.
Finance Watch also pointed to a 2020 study by the G20-backed Financial Stability Board (FSB), which found that 4°C of warming could reduce the average value of global financial assets by just 2.9 degrees by 2105. He cited estimates by economists that the economy could be cut by only 1.9%.
“None of the assumptions made by this relatively small group of economists about global warming ‘pass the smell test,'” Steve Keene, a professor at University College London, wrote in a paper this year. The paper stated that academics need to check their results against common sense. and popular climate science.
Nordhaus did not respond to an emailed request for comment.
The FSB said its 2020 document highlighted how estimates of the hit to financial assets vary and that it was working with other institutions to help authorities better understand the risks.
“To that end, the FSB has been working to develop a conceptual framework and indicators to monitor climate-related vulnerabilities,” FSB Deputy Director-General Rupert Thorne said in an emailed statement.
Livio Stracca, the ECB official who chairs the NGFS work on climate scenarios, said in an email that he freely accepted that the NGFS, like any model, has “certain limitations.” NGFS Secretary General Jean Boissino said NGFS is keen to work with the academic community to solve problems.
But while proponents of IAM argue that it is constantly being improved, others, such as Nicholas Stern of the LSE/Grantham Institute, argue that their focus is inherently too narrow. He said he could not understand the extreme risks posed by climate change.
“They misrepresent the problem in terms of risk and in terms of what we need to know and act on,” Stern told Reuters.
“We need to look at energy models, cities and natural capital. This is serious, deep economics of structural change,” he said, adding that this approach will better inform the investment decisions needed to address climate change. He added that he would guide them appropriately.
Finance Watch’s Filipona says the European Union, which sees itself as a leader on climate, has an opportunity to adopt a broader approach with a major study on climate risks expected in early 2025. He said it would be.
“Our main message is, ‘Economists, talk to climate scientists and come up with an outcome that makes sense,'” he said.
(This story has been modified to correct attribution from GRAPHIC to ANALYSIS)
Written and reported by Mark John.Editing: Barbara Lewis
Our standards: Thomson Reuters Trust Principles.
