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Calculating the true cost of global climate change

Researchers disagree about what the economic costs of climate change will be over the coming decades. But the answer to that question is fundamental in deciding how urgent it is to take action to reduce emissions.

When climate legislation died last summer in Congress, one cause was the powerful drumbeat of claims that the bill would bring economic disaster. The legislation would amount to a massive tax hike, devastating an already crippled economy and throwing more people out of work, charged Senator James Inhofe (R-Ok) and Glenn Beck. It would be “the final nail in the coffin of the American middle class,” proclaimed an ad from the Conservative Society of America. Despite supporters’ protests that the price tag of greenhouse gas curbs would be modest, voters’ fear of hits to their pocketbooks forced even many Democrats to backpedal.

The heated argument about economic costs, however, barely touched one vitally important issue: the costs of NOT taking action on climate. What if last summer’s Russian heat wave and drought, which destroyed one third of the country’s wheat crop, or the catastrophic floods in Pakistan and China, or category 5 hurricanes like Katrina are just glimpses of future havoc from warming left unchecked? As Kevin Trenberth, head of the Climate Analysis Section at the National Center for Atmospheric Research, observes, “Certain events would have been extremely unlikely to have occurred without global warming, and that includes the Russian heat wave and wild fires, and the Pakistan, Chinese, and Indian floods.”

The economic costs of such disasters could make even inflated estimates of the legislation’s price tag look small, says University of California, Berkeley, economist Michael Hanemann. Yet Congress didn’t seem to care. “The question of damages from climate change never penetrated the debate in Washington,” Hanemann says.

Why not? Partly, it was a conscious political calculation. Polls show that scare tactics work better to block legislation than to bring sweeping change. The Obama Administration and environmentalists decided to tout the clean energy industries that could be created and boosted by the climate bill, rather than warn of withered crops or drowned cities from heat and rising sea levels. “The assumption has been that focusing on short-term job creation would be a more compelling political argument,” says Dan Lashof, director of the Natural Resources Defense Council’s climate center.

More importantly, there’s a deeply rooted perception that the U.S. economy will suffer little damage from climate change. That view dates back to work from the mid-1990s by the influential Yale University economist William Nordhaus. Nordhaus took what was known about the science of climate change, then constructed an economic model to estimate the monetary harm. The model put the economic cost to the U.S. of raising global temperatures by 2.5 to 3 degrees C (expected by about 2100) at about ¼ to ½ percent of GDP. “There are both good and bad impacts, but they offset each other,” explains Robert O. Mendelsohn, professor of forest policy and economics at Yale University and a frequent collaborator with Nordhaus.

The original economic model wasn’t complete, Nordhaus readily acknowledges. It didn’t include some sectors of the economy or “non-market” damages — effects that economists can’t easily quantify, such as loss of species. “We basically guessed on those, and that got us up to between 1 and 2 percent of GDP,” says Nordhaus — still relatively small. Since then, Nordhaus has worked extensively on the analysis, but the general conclusion is the same. There’s little threat to U.S. GDP. “Do I think that the measured GDP of the U.S. or Britain or Japan is seriously at risk from global warming over the next 100 years?” Nordhaus asked in an interview. “No,” though he adds that “GDP is a poor indicator of economic welfare.”

Other experts see the hit to GDP as much greater. “We did a survey of top economists in the country, asking what they think about the costs and benefits of climate legislation,” says Michael Livermore, executive director of the Institute for Policy Integrity at New York University School of Law. “They said that climate change is a clear threat to America and the global economy.” Adds Berkeley’s Hanemann: “I don’t want to be Dr. Gloom, but our complacency in the U.S. is wrong.”

An earlier version of this debate flared into public view and the media for a short time in 2006. A report prepared for the British government by economist Sir Nicholas Stern found that the cost of unconstrained global warming would be huge — up to a 20 percent drop per year in the world’s GDP by 2050. The widely disparate conclusion compared to Nordhaus’, however, turned largely on one single factor: Stern put a higher value on costs far out in the future — and on the future return from climate change reduction investments made today — than Nordhaus did. Or in economists’ jargon, he used a lower discount rate. “You can change the discount rate and get a totally different answer,” explains NRDC’s Lashof.

Who’s right? The late climate scientist Stephen Schneider liked to ask economists if they really do value their grandchildren far less than their children, as implied by a higher discount rate. Nordhaus, who dismissed the Stern report in a 2007 book as “political in nature,” with “advocacy as its purpose,” says that’s not a fair comparison. “The argument is not how we value our grandchildren, it’s primarily about the return on capital,” he says. “My view is that the return on capital is high, so that the threshold is pretty high if we are going to compete with other uses of our investment dollars.” That makes efforts to fight global warming seem less cost-effective.

But the tiff over discount rates is really a sideshow. There are now new critiques of the low estimates of the costs of climate change that challenge core details of how those damages were calculated, such as whether the analyses correctly included the costs of heat waves, more intense hurricanes, and other extreme events predicted to become more common. The original work “has been enormously influential, but for a number of reasons, I think the analysis is profoundly wrong,” says Hanemann.

One issue cited by the critics is that the models assume that many of the costs of climate change in the U.S. are balanced by benefits — or that it will be easy to adapt. For instance, heat waves in summer mean higher energy costs and more deaths from heat. However, warmer winters save fuel and lives, so in the economic models, the two generally balance out. And sure, if temperature rises above 95 degrees F, corn pollination starts to fail. But defenders of the models figure cornfields could just move to cooler areas. “If you take adaptation into account, this turns out not be such a big effect,” argues Mendelsohn.

The critics say these conclusions are far too optimistic. Hanemann points out that summer air conditioning requires expensive daytime peak power, while the winter savings come from much cheaper nighttime baseload power. So the overall costs must be higher. Similarly, damages to agriculture from heat waves and droughts are likely to swamp benefits from milder winters and longer growing seasons — and moving crops to better climes may be costly or difficult. Nordhaus partly agrees. “The damages will differ by crop and by region,” he says. “I think the numbers will be large for some regions, such as those now bordering on desertification.”

The models also calculate future harms using predicted average increases in temperature or precipitation. But scientists don’t believe temperatures and precipitation will be uniformly average around the planet. Instead, they foresee more — and more severe — extreme events: more powerful hurricanes and storms, record floods, searing heat waves and droughts, bigger wildfires. In fact, the U.S. has already experienced a higher-than-average amount of warming. A graph showing these events would not only have a long tail (i.e. the events are more extreme), but the tail would also be fatter (i.e. more events). “The damages grow much worse as we get more extreme events,” explains Hanemann. “We need to pay more attention to the tail.”

Nordhaus says that his model doesn’t neglect the idea of extreme events. “It’s completely wrong to say we’ve ignored it,” he says. But even supporters acknowledge that not everything is in the models, including a full treatment of extreme events. “Nordhaus’ model was never intended to be the kitchen sink,” says Mendelsohn.

Critics say that’s a serious flaw. “Many, many of the costs associated with climate change are not included in the models,” says NYU’s Livermore. Additional examples include acidification of the oceans from the absorption of carbon dioxide, which could threaten ocean food chains; loss of glaciers, which could cause water shortages and reduce hydropower; sea level rise, which could flood coastal cities; and mass migrations and increased global tensions, as people move away from regions hit harder by of the effects of climate change. The military takes these possibilities seriously, noting that climate change is a “threat multiplier.”

Harvard economist Martin Weitzman even suggests that the economic costs of a catastrophic event, however unlikely it might be, would be so enormous that it would overwhelm the whole analysis. “Perhaps in the end the climate-change economist can help most by not presenting a cost-benefit estimate for what is inherently a fat-tailed situation with potentially unlimited downside exposure,” he writes.

True, the models don’t include all possible costs or catastrophes, Nordhaus and Mendelsohn respond. For one thing, the models calculate the damages from climate change only in terms of economic activity. They don’t assess damages from non-market effects like loss of species. Take ocean acidification, which makes climate change more worrisome than it appeared to be in the 1990s, Nordhaus says. The direct economic damages from acidification are negligible. “We know the actual economic impacts are almost sure to be small because they involve fisheries, which are already pretty small, and they involve only ocean fisheries that are sensitive to carbon,” Nordhaus says.

Similarly, the calculated damages from extreme events are small, Nordhaus and Mendelsohn say. While the estimated cost of Hurricane Katrina topped $150 billion, hurricanes don’t actually hurt the economy, as measured by GDP. “If your million-dollar house blows away tomorrow, it would not affect GDP,” explains Nordhaus. The reason: spending to rebuild stimulates the economy. “This is one of the ways in which GDP is a flawed measure,” Nordhaus adds. Mendelsohn has spent years trying to figure out what the additional damages from extreme events might be — and he argues that they don’t amount to much. “As long as we didn’t measure this number, the perception was that it was huge,” he says. “But when we actually measure it, it turns out not to be big.”

That assertion is a matter of fierce debate, however. The damages are far higher, Hanemann and others believe. In Hanemann’s analysis, the economic toll from unconstrained climate change in the U.S. is three to four times higher than Nordhaus’ model calculates.

Other new analyses have similar results. Livermore and his colleagues looked at the economic benefits of the Waxman-Markey legislation passed by the House of Representative last year, including the avoided harm from climate change, and compared those benefits to the price tag for the bill. “The benefits outweighed the costs by nine to one,” says Livermore.

The U.S. Environmental Protection Agency is also expected to conclude that inaction is costly. With climate legislation apparently dead, regulation under the Clean Air Act is the only remaining pathway to federal curbs on greenhouse gases. To bolster its case in the face of strong opposition, the agency is working on a more detailed analysis of the costs and benefits of regulation, sources say. Past Administration efforts to assess the economic toll used Nordhaus’ basic approach. But because of the limitations of the economic models, the agency is also planning to examine scenarios of possible climate change, and expects that it will find a large economic toll. “We think the costs of not acting will be huge,” says one EPA official.

Nordhaus acknowledges that the small hit to the GDP of rich nations from climate change predicted by his model is just part of the overall story. “I’ve been working on this a long time,” he says. “The facts have changed, and my view has changed.” For example, “emissions and temperatures are rising faster than earlier models thought and the geophysical impacts look more serious,” he says. So even if direct economic impacts are small, “ecologists and biologists have made a pretty serious case that other things are at risk,” he says. “I think the non-market impacts have turned out larger than I thought and what the community [of economists] thought.” Those non-market impacts don’t show up in the results of the economic models.

In addition, Nordhaus says he now has a greater appreciation for the unknowns, including potential catastrophes. “The uncertainties are enormous,” he says. “If you include them, you can say almost nothing about the second half of the century.”

Nordhaus’ own conclusion is that action on climate is needed, especially since his analysis also shows that the economic costs of reasonable policies are relatively small. Indeed, there’s no longer a debate among economists that action should be taken, says Mendelsohn: “The debate is how much and when to start. If you believe there are large damages, you would want more dramatic immediate attention. The Nordhaus camp, however, says we should start modestly and get tougher over time.”

Regardless of the role played by economists in the global warming debate, the view that climate change is not to be feared has contributed to the delay in the world’s response. Even Nordhaus says he’s “stunned” by the lack of progress in tackling climate change. “It doesn’t matter if I, or Weitzman, or Hanemann are right on this,” says Nordhaus. “We’ve got to get together as a community of nations and impose restraints on greenhouse gas emissions and raise carbon prices. If not, we will be in one of those gloomy scenarios.”

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